IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
BALTIMORE DIVISION
In re: *
USINTERNETWORKING, INC., et al., * Case No.: 02-5-0215-SD
Through 02-5-0219-SD
Debtors. * Chapter 11
(Jointly Administered
* under Case No.: 02-5-0215-SD)
* * * * * *
DISCLOSURE STATEMENT FOR
DEBTORS' SECOND AMENDED JOINT CHAPTER 11 PLAN OF REORGANIZATION
March 19, 2002
WILLKIE FARR & GALLAGHER
787 Seventh Avenue
New York, NY 10019
(212) 728-8000
and
WHITEFORD, TAYLOR & PRESTON L.L.P.
Suite 1400
Seven Saint Paul Street
Baltimore, MD 21202
(410) 347-8700
Co-Counsel for the Debtors
IMPORTANT NOTICE
THIS DISCLOSURE STATEMENT AND ITS RELATED DOCUMENTS ARE THE ONLY DOCUMENTS
AUTHORIZED BY THE BANKRUPTCY COURT TO BE USED IN CONNECTION WITH THE
SOLICITATION OF VOTES TO ACCEPT THE PLAN. NO REPRESENTATIONS HAVE BEEN
AUTHORIZED BY THE BANKRUPTCY COURT CONCERNING THE DEBTORS, THEIR BUSINESS
OPERATIONS OR THE VALUE OF THEIR ASSETS, EXCEPT AS EXPLICITLY SET FORTH IN THIS
DISCLOSURE STATEMENT.
UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS DISCLOSURE
STATEMENT HAVE THE MEANINGS GIVEN TO THEM IN THE PLAN OR, WHERE EXPRESSLY
INDICATED HEREIN, A RELEVANT MOTION FILED WITH THE BANKRUPTCY COURT.
THE DEBTORS RESERVE THE RIGHT TO FILE AN AMENDED PLAN AND DISCLOSURE
STATEMENT FROM TIME TO TIME.
THE DEBTORS URGE YOU TO READ THIS DISCLOSURE STATEMENT CAREFULLY FOR A
DISCUSSION OF VOTING INSTRUCTIONS, RECOVERY INFORMATION, CLASSIFICATION OF
CLAIMS, THE HISTORY OF THE DEBTORS AND THE CHAPTER 11 CASE, THE DEBTORS'
BUSINESSES, PROPERTIES AND RESULTS OF OPERATIONS, HISTORICAL AND PROJECTED
FINANCIAL RESULTS AND A SUMMARY AND ANALYSIS OF THE PLAN.
THE PLAN AND THIS DISCLOSURE STATEMENT HAVE NOT BEEN REQUIRED TO BE
PREPARED IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAWS OR OTHER APPLICABLE
NONBANKRUPTCY LAW. THIS DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY
COURT AS CONTAINING "ADEQUATE INFORMATION"; HOWEVER, SUCH APPROVAL DOES NOT
CONSTITUTE ENDORSEMENT OF THE PLAN OR DISCLOSURE STATEMENT BY THE BANKRUPTCY
COURT AND NONE OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR SIMILAR PUBLIC, GOVERNMENTAL OR REGULATORY AUTHORITY HAS APPROVED
THIS DISCLOSURE STATEMENT, THE PLAN OR THE SECURITIES OFFERED UNDER THE PLAN,
NOR HAS ANY SUCH ENTITY PASSED ON THE ACCURACY OR ADEQUACY OF THE STATEMENTS IN
THIS DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE. PERSONS TRADING IN OR OTHERWISE PURCHASING, SELLING OR TRANSFERRING
SECURITIES OF THE DEBTORS SHOULD EVALUATE THE PLAN IN LIGHT OF THE PURPOSES FOR
WHICH IT WAS PREPARED.
THIS DISCLOSURE STATEMENT CONTAINS ONLY A SUMMARY OF THE PLAN AND CERTAIN
RELATED AGREEMENTS AND DOCUMENTS. THIS DISCLOSURE STATEMENT IS NOT INTENDED TO
REPLACE A CAREFUL AND DETAILED REVIEW AND ANALYSIS OF THE PLAN, AND IS ONLY TO
AID AND SUPPLEMENT SUCH INDEPENDENT REVIEW. THIS DISCLOSURE STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN AND THE EXHIBITS ATTACHED
THERETO AND THE AGREEMENTS AND DOCUMENTS REFERRED TO IN THE PLAN OR SUCH
EXHIBITS. IF THERE IS A CONFLICT BETWEEN THE PLAN OR ANY SUCH ATTACHED EXHIBIT
OR REFERENCED AGREEMENT OR DOCUMENT AND THIS DISCLOSURE STATEMENT, THE
PROVISIONS OF THE PLAN AND SUCH EXHIBIT OR REFERENCED AGREEMENT OR DOCUMENT
SHALL GOVERN. YOU ARE ENCOURAGED TO REVIEW THE FULL TEXT OF THE PLAN AND ALL
EXHIBITS AND REFERENCED AGREEMENTS AND DOCUMENTS, BEFORE DECIDING HOW TO VOTE
WITH RESPECT TO THE PLAN.
EXCEPT AS OTHERWISE INDICATED, THE STATEMENTS IN THIS DISCLOSURE STATEMENT
ARE MADE AS OF MARCH 19, 2002, AND THE DELIVERY OF THIS DISCLOSURE STATEMENT
WILL NOT, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED IN THIS
DISCLOSURE STATEMENT IS CORRECT
2
AT ANY TIME AFTER MARCH 19, 2002. ANY ESTIMATES OF CLAIMS OR INTERESTS IN THIS
DISCLOSURE STATEMENT MAY VARY FROM THE FINAL AMOUNTS OF CLAIMS OR INTERESTS
ALLOWED BY THE BANKRUPTCY COURT.
YOU SHOULD NOT CONSTRUE THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL,
BUSINESS, FINANCIAL OR TAX ADVICE. YOU SHOULD CONSULT WITH YOUR OWN LEGAL,
BUSINESS, FINANCIAL AND TAX ADVISERS AS TO ANY SUCH MATTERS IN CONNECTION WITH
THE PLAN, THE SOLICITATION OF VOTES ON THE PLAN AND THE TRANSACTIONS
CONTEMPLATED BY THE PLAN.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT IS NOT, AND IS IN NO EVENT TO BE
CONSTRUED AS, AN ADMISSION OR STIPULATION. INSTEAD, THIS DISCLOSURE STATEMENT
IS, AND IS FOR ALL PURPOSES TO BE CONSTRUED AS, SOLELY AND EXCLUSIVELY A
STATEMENT MADE IN SETTLEMENT NEGOTIATIONS.
IF THE PLAN IS NOT CONFIRMED OR THE EFFECTIVE DATE DOES NOT OCCUR, NOTHING
CONTAINED IN THE PLAN, IN DOCUMENTS FILED IN CONNECTION WITH THE PLAN, OR IN
THIS DISCLOSURE STATEMENT, SHALL BE DEEMED AN ADMISSION OR RELEASE BY THE
DEBTORS OR ANY OTHER PERSON OR ENTITY WITH RESPECT TO ANY MATTER SET FORTH
HEREIN.
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TABLE OF CONTENTS
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I. INTRODUCTION AND SUMMARY.................................................................................3
A. The Solicitation................................................................................4
B. Summary of Plan Provisions......................................................................5
1. Overview of Claims Addressed in the Plan...............................................5
2. Overview of Plan Classification........................................................9
3. Reclamation Claims.....................................................................9
4. Unexpired Leases and Executory Contracts..............................................10
5. Management Agreement..................................................................10
6. Management and Board of Directors.....................................................10
7. Reorganization of Reorganized Debtors.................................................11
8. Plan Releases.........................................................................11
C. Summary of Classification and Treatment of Claims and Interests................................12
D. Conditions to the Occurrence of the Effective Date of the Plan.................................22
1. Commitment............................................................................22
2. Reorganized USi.......................................................................22
3. Payment of the Subscription Price.....................................................22
4. Delivery of Documents.................................................................22
5. Trust Indenture Act...................................................................22
E. Voting on the Plan.............................................................................22
F. Confirmation Hearing...........................................................................27
II. BACKGROUND..............................................................................................28
A. The Debtors....................................................................................28
B. Events Leading to Chapter 11...................................................................29
1. General...............................................................................29
2. Market Conditions.....................................................................29
3. Capital Markets.......................................................................30
4. Available Credit Facilities...........................................................30
5. Erosion of Client Base................................................................31
6. Cost Reductions.......................................................................31
7. New Investment by the Investor........................................................31
C. Potential Acquiror.............................................................................33
1. Overview..............................................................................33
2. History...............................................................................34
3. Employees.............................................................................34
4. Facilities............................................................................34
5. Potential Benefits of a Merger........................................................34
D. Recent Financial Performance...................................................................35
III. THE CHAPTER 11 CASE.....................................................................................36
A. Continuation of Business; Stay of Litigation...................................................36
B. Significant Events During the Chapter 11 Case..................................................36
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1. First Day Motions.....................................................................36
2. Retention of Professionals............................................................37
3. Prepetition Wage and Benefits Order...................................................37
4. Appointment of Official Committee.....................................................37
5. Assumption or Rejection of Leases.....................................................37
6. Bar Date..............................................................................38
7. Plan Procedures Motion................................................................38
8. Retention, Severance and Bonus Plans..................................................38
9. Disclosure Statement Notice Order.....................................................39
IV. THE PLAN................................................................................................39
A. General........................................................................................39
B. Valuation......................................................................................40
C. Classification and Treatment of Claims and Interests Under the Plan............................42
1. Treatment of Administrative Expenses and Certain Priority Claims......................43
(a) Administrative Expenses......................................................43
(b) Priority Tax Claims..........................................................44
2. Class 1 - Equipment Lease Secured Claims..............................................44
(a) Alternative A................................................................45
(b) Alternative B................................................................46
(c) Equipment Leases as True Leases..............................................47
(d) Satisfaction of Section 507(b) and Section 365(d)(10) Rights.................47
3. Class 2 - Miscellaneous Secured Claims................................................47
(a) Treatment....................................................................47
(b) Preservation of Rights.......................................................48
(c) Specific Treatment for Certain Miscellaneous Secured Claims..................48
4. Class 3 - Miscellaneous Priority Claims...............................................48
5. Class 4 - General Unsecured Claims....................................................48
(a) Treatment....................................................................49
(b) Option for Substitute Payment Schedule.......................................49
(c) Effect of Allowance of Reclamation Claims....................................49
6. Class 5 - Senior Creditor Claims......................................................49
(a) Allowance of Claims..........................................................50
(b) Treatment....................................................................50
(c) Option for Substitute Payment Schedule.......................................50
7. Class 6 - Convertible Subordinated Note Claims........................................50
(a) Allowance of Claims..........................................................50
(b) Treatment and Limited Enforcement of Subordination...........................50
(c) Limited Subordination Enforcement as Essential Element.......................51
8. Class 7 - Convenience Claims..........................................................51
(a) Treatment....................................................................51
(b) Election of Treatment........................................................51
9. Class 8 - Convertible Subordinated Note Section 510(b) Claims.........................52
10. Class 9 - Interdebtor Claims..........................................................52
11. Class 10 - Interests in USi and LLC Interests.........................................52
12. Class 11 - Section 510(c) Claims......................................................53
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D. Reclamation Claims.............................................................................53
E. Unexpired Leases and Executory Contracts.......................................................53
1. General...............................................................................53
2. The Plan..............................................................................54
F. Vesting of Property in the Reorganized Debtors.................................................55
G. Administration of the Plan.....................................................................55
H. Reorganization of the Reorganized Debtors......................................................56
I. Issuance of New Common Stock; Use of Proceeds..................................................56
1. Issuance of New Common Stock..........................................................56
2. Use of Proceeds.......................................................................56
3. Assumption of Plan Obligations........................................................56
J. Commitment.....................................................................................57
1. General...............................................................................57
2. Covenants.............................................................................57
3. Conditions Precedent..................................................................59
4. Termination Provisions................................................................61
5. Liability Limitation Provisions.......................................................62
K. Management Agreement...........................................................................62
L. Operations and Management of Reorganized Debtors...............................................63
M. Effects of Plan Confirmation...................................................................63
1. Discharge and Termination.............................................................63
2. Complete Satisfaction.................................................................64
3. Binding Effect........................................................................64
4. Release and Injunction................................................................64
(a) Certain Bankruptcy Causes of Action..........................................64
(b) Causes of Action Against Directors and Officers..............................64
(c) Causes of Action Against Representatives.....................................64
5. Exculpation...........................................................................65
6. Subordination.........................................................................65
7. Injunction............................................................................66
N. Termination of Indemnification Obligations.....................................................66
O. Preservation of Insurance......................................................................66
P. Deemed Consolidation...........................................................................67
Q. Distributions Under the Plan...................................................................67
1. Initial Distributions.................................................................67
2. Periodic Distributions................................................................68
3. Final Distributions...................................................................68
4. No Adjustments or Claims for Excess Initial or Periodic Distribution..................69
5. Limitation on Plan Distribution.......................................................69
6. Limitation on Secondary Plan Distribution B...........................................69
7. Limitation of Substitute Plan Distribution Amount.....................................69
8. Secondary Plan Distribution A.........................................................69
9. Timing of Other Distributions.........................................................70
10. Subsequent Payments on Plan Notes and Substitute Plan Notes...........................70
11. Compliance With Tax Requirements......................................................70
12. Persons Deemed Holders of Registered Securities.......................................70
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13. Distribution of Unclaimed Property....................................................71
14. Allowance of Claims Subject of Section 502(d); Right of Setoff........................71
R. Cash in lieu of De Minimis New Warrant Distributions to Class 6................................71
S. Fractional Warrants............................................................................71
T. Retention of Distribution Agent................................................................71
U. Cancellation of Securities.....................................................................71
V. Surrender of Cancelled Securities..............................................................72
W. Procedures for Resolving Disputed Claims and Payments Under the Plan...........................72
X. Retention of Jurisdiction......................................................................73
Y. Amendments and Modifications to the Plan.......................................................73
Z. Withdrawal of the Plan.........................................................................73
AA. Conditions to Occurrence of Effective Date of the Plan.........................................73
1. Commitment............................................................................73
2. Reorganized USi.......................................................................73
3. Payment of the Subscription Price.....................................................74
4. Delivery of Documents.................................................................74
5. Trust Indenture Act...................................................................74
BB. Dissolution of Official Committee..............................................................74
V. CONFIRMATION OF THE PLAN................................................................................74
A. Confirmation Generally.........................................................................74
B. Voting Standards...............................................................................75
C. Acceptance.....................................................................................75
D. Confirmation and Consummation..................................................................75
1. The Best Interests Test...............................................................77
2. Financial Feasibility.................................................................77
3. Cram Down.............................................................................78
4. Subordination Enforcement.............................................................79
VI. OFFICIAL COMMITTEE......................................................................................80
VII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN...............................................80
A. Liquidation Under Chapter 7....................................................................80
B. Alternative Plan...............................................................................81
VIII. RISK FACTORS............................................................................................81
A. Business Risks.................................................................................81
1. There can be no assurance that the industry
conditions under which the Reorganized Debtors will
operate would enable them to achieve the revenues, or
the gross margins thereon, which the Debtors have
relied upon to project the Reorganized Debtors future
business prospects....................................................................81
2. The growth in demand for outsourced business software applications is now beginning,
but the future is still uncertain.....................................................82
3. Technology may change faster than Reorganized USi can update its network and
technology............................................................................82
4. Network outages could negative affect Reorganized USi's revenues......................82
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5. Reorganized USi may not be able to deliver its iMAP
offerings if third parties do not provide it with key
components of its infrastructure......................................................82
6. Reorganized USi will need to perform software upgrades for
its customers, and any inability to successfully perform
these upgrades could cause interruptions or errors in its customers'
software applications, which could increase its costs and delay
market acceptance of its services.....................................................83
7. The markets USi serves are highly competitive and many of its
competitors have much greater resources...............................................83
8. Others may seize the market opportunity USi has identified
because it may not effectively execute its strategy...................................84
9. Reorganized USi will be controlled by Investor and other affiliates
of Bain as long as they own the majority of the common stock of
Reorganized USi, and any other stockholders will be unable to
affect the outcome of stockholder voting during such time.............................84
10. Reorganized USi may not be able to achieve its projected financial results............84
11. The bankruptcy filing may further disrupt the Debtors' and Reorganized USi's
operations............................................................................85
12. The Debtors have had significant net losses and anticipate future losses
through the year ending December 31, 2003.............................................85
13. Reorganized USi may not be able to meet its post-reorganization debt
obligations, operating expenses, working capital and other
capital expenditures..................................................................85
14. Reorganized USi may have limited ability to fund its working
capital requirements..................................................................86
15. Reorganized USi may not have sufficient cash flow to repay existing debt
or have access to sufficient financing to refinance such debt at
or prior to maturity..................................................................86
16. The Plan Notes, Secondary Plan Notes and Substitute Plan Notes are illiquid
and it is unlikely that a trading market for the Plan Notes, the
Secondary Plan Notes or the Substitute Plan Notes will develop in the
foreseeable future....................................................................86
17. The New Warrants are illiquid and subject to additional restrictions on transfer......87
18. The estimated valuation of the Reorganized Debtors and the New Warrants and
the estimated recoveries to Holders of Claims, is not intended to represent
the trading values of the Claims or the New Warrants..................................87
19. Resale of the Plan Securities may be restricted by law................................87
20. If the Debtors and the Investor do not reach agreement as to the terms
and conditions of Investor's additional investment of $25.0 million in
Reorganized USi, then the Commitment may not be consummated or the Investor
will not have any obligation to make the $25.0 million investment,
which could adversely affect the financial condition of Reorganized USi...............88
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21. If Reorganized USi fails to meet certain financial targets, the Investor
and/or Bain Fund will not be obligated to make an additional
investment of $25.0 million in Reorganized USi, and the
financial condition of Reorganized USi could be adversely affected.....................88
22. Because Reorganized USi, or its successor or parent, will have no
obligation to provide financial or other information to the public,
it may be difficult to value any of the securities issued by
Reorganized USi, which may adversely affect their value and transferability............88
B. Bankruptcy Risks................................................................................89
1. Parties in interest may object to the Debtors' classification of Claims................89
2. The commencement of the Chapter 11 Case may have negative implications
under certain contracts of the Debtors.................................................89
3. The Debtors may not be able to secure confirmation of the Plan or
consummation of the Commitment.........................................................89
4. The Commitment may not be consummated..................................................90
5. Debtors may object to the amount or classification of your claim.......................90
C. Combination Risks...............................................................................90
1. In the event that Reorganized USi is acquired by Investor indirectly
through Interpath, there can be no assurance that the benefits of a
combination of Reorganized USi and Interpath can or will be realized...................90
2. If consummated, the acquisition of Reorganized USi indirectly through
Interpath could have a negative impact on the entities' financial
performance and ability to meet their respective financial obligations
to their employees, customers, vendors and creditors...................................91
IX. DESCRIPTION OF NEW SECURITIES............................................................................91
A. New Common Stock................................................................................91
B. Plan Notes......................................................................................91
C. Substitute Plan Notes...........................................................................92
D. Secondary Plan Notes............................................................................92
E. Form of Plan Notes, Substitute Plan Notes and Secondary Plan Notes..............................93
F. New Warrants....................................................................................94
X. FINANCIAL AND LEGAL ADVISERS; FEES AND EXPENSES..........................................................95
XI. EXEMPTIONS FROM SECURITIES ACT REGISTRATION..............................................................95
XII. ABSENCE OF PUBLIC TRADING MARKET; AVAILABLE INFORMATION; FILINGS WITH THE COMMISSION AND
RELATED MATTERS..........................................................................................98
XIII. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.............................................................98
A. In General......................................................................................98
B. Tax Consequences to Creditors...................................................................99
1. General................................................................................99
(a) Tax Securities................................................................99
(b) "Fair Market Value"...........................................................99
(c) Character of Gain or LoSection...............................................100
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(d) Consideration Allocable to Interest.........................................100
(e) Market Discount.............................................................100
(f) Original Issue Discount.....................................................100
(g) Backup Withholding..........................................................101
2. Treatment of Certain Creditors.......................................................101
(a) General Unsecured Claims, Senior Creditor Claims............................101
(b) Convertible Subordinated Note Claims........................................101
(c) Convenience Claims..........................................................102
C. Tax Consequences to Equity Holders............................................................102
D. Tax Consequences to the Debtors...............................................................102
1. Cancellation of Debt.................................................................102
2. Effects on Net Operating Loss Carryforwards and Other Tax Attributes.................103
(a) Reduction of Tax Attributes.................................................103
(b) Code Section 382 - In General...............................................103
(c) Application of Code Section 382 to the Debtors..............................103
XIV. CONCLUSION...............................................................................................104
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APPENDICES
Appendix A - Debtors' Second Amended Joint Chapter 11 Plan of Reorganization
Appendix B - Financial Projections
Appendix C - Liquidation Analysis
Appendix D - Combined Financial Projections
viii
USINTERNETWORKING, INC. ("USi"), ADMIRAL MANAGEMENT COMPANY, LLC, GEMC
PROPERTIES, LLC, RIVA CANYON LLC and SHORE SERVICES LLC (collectively, the
"Debtors"), as debtors and debtors in possession under Chapter 11 of Title 11 of
the United States Code (the "Bankruptcy Code"), hereby propose and file this
Disclosure Statement (the "Disclosure Statement") to accompany Debtors' Second
Amended Joint Chapter 11 Plan of Reorganization dated March 19, 2002 (as may be
further amended, the "Plan"), a copy of which is included as Appendix A to this
Disclosure Statement.
The Plan implements the restructuring of the Debtors contemplated by the
Conditional Subscription Agreement dated as of January 7, 2002, as amended (the
"Commitment") between USi and USinternetworking Holdings, Inc. (the "Purchaser"
or "Investor"), an affiliate of Bain Capital Fund VII, L.P. (the "Bain Fund").
The Bain Fund is advised by Bain Capital Partners, LLC ("Bain"), a private
investment firm. Bain advises several pools of capital including private equity,
high-yield assets, mezzanine capital and public equity with over $12 billion in
assets under management. The Commitment (as more fully described in Section IV.J
below) provides for the Purchaser's purchase of all of the outstanding shares of
the New Common Stock of Reorganized USi in consideration for Cash in the amount
of $81.25 million. Both the Plan and the Commitment are the product of extensive
negotiations among the Debtors, certain of their creditors, including both
secured and unsecured creditors, and the Purchaser. The Debtors have received
non-binding executed plan support agreements from Holders of Equipment Lease
Claims holding in excess of approximately 56.6% of the aggregate dollar amount
of estimated Allowed Equipment Lease Deficiency Claims, and four Holders of
Convertible Subordinated Note Claims holding in excess of approximately 62.2% of
the aggregate dollar amount of estimated Allowed Convertible Subordinated Note
Claims. One such Holder of Convertible Subordinated Note Claims is Credit Suisse
First Boston Corporation ("CSFB") which holds approximately 24% of such claims.
The Debtors estimate that the Plan would provide the following recoveries
to parties in interest: (a) existing Equipment Leases and Equipment Lease Claims
will be restructured to provide an estimated 85% effective recovery through the
distributions to be made on the Equipment Lease Secured Claims and the Equipment
Lease Deficiency Claims (after giving effect to the Subordination Provisions of
the Convertible Subordinated Note Indenture); (b) Holders of Allowed General
Unsecured Claims will receive an estimated 34.34% recovery on their Claims in
the form of Plan Notes or Substitute Plan Notes (as elected by such Holders);
(c) Holders of Allowed Convertible Subordinated Note Claims will receive an
estimated 13.76% recovery on their Claims in the form of a combination of Cash,
Secondary Plan Notes and New Warrants; and (d) existing Interests in USi and LLC
Interests will be cancelled.
The Debtors believe that the Plan is fair in light of the relative rights
of the creditors; represents not only the best, but the only, opportunity to
emerge from Chapter 11; and will maximize recoveries to creditors.
The Plan is an integrated set of compromises and agreements, many of which
the Debtors believe are highly beneficial to the Estate and should strengthen
the Reorganized Debtors if the Plan is confirmed. The Plan may not be confirmed,
however, if the Bankruptcy Court decides that the Plan fails to satisfy any of
the confirmation standards set forth in the Bankruptcy Code or declines to
approve any of the compromises set forth in the Plan. Because the Plan is
structured as an integrated whole, the Bankruptcy Court's failure to confirm the
Plan on any of the foregoing bases would delay the Debtors' emergence from
bankruptcy and would increase the risks to the Debtors' busineSection There can
be no assurance that an alternative confirmable plan of reorganization could be
negotiated if the Bankruptcy Court declines to confirm the Plan.
THE DEBTORS STRONGLY URGE ALL HOLDERS OF CLAIMS IN IMPAIRED CLASSES WHO ARE
ENTITLED TO VOTE ON THE PLAN TO ACCEPT THE PLAN.
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS APPOINTED IN THE CASE URGES
ALL HOLDERS OF CLAIMS IN IMPAIRED CLASSES WHO ARE ENTITLED TO VOTE ON THE PLAN
TO VOTE TO ACCEPT THE PLAN.
THIS DISCLOSURE STATEMENT IS DESIGNED TO PROVIDE ADEQUATE INFORMATION TO
ENABLE HOLDERS OF CLAIMS AGAINST THE DEBTORS TO MAKE AN INFORMED JUDGMENT ON
WHETHER TO ACCEPT OR REJECT THE PLAN. ALL HOLDERS OF CLAIMS ARE HEREBY ADVISED
AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY
BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. THE PLAN SUMMARY AND STATEMENTS MADE
IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
PLAN, WHICH IS INCLUDED HEREWITH AS APPENDIX A, OTHER APPENDICES INCLUDED
HEREWITH AND OTHER DOCUMENTS REFERENCED AS FILED WITH THE BANKRUPTCY COURT.
FURTHERMORE, THE PROJECTED FINANCIAL INFORMATION CONTAINED HEREIN HAS NOT BEEN
THE SUBJECT OF AN AUDIT. SUBSEQUENT TO THE DATE HEREOF, THERE CAN BE NO
ASSURANCE THAT (A) THE INFORMATION AND REPRESENTATIONS CONTAINED HEREIN WILL
CONTINUE TO BE MATERIALLY ACCURATE; AND (B) THIS DISCLOSURE STATEMENT CONTAINS
ALL MATERIAL INFORMATION.
ALL HOLDERS OF IMPAIRED CLAIMS SHOULD READ AND CONSIDER CAREFULLY THE
MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT AS A WHOLE, INCLUDING THE SECTION
ENTITLED "RISK FACTORS" PRIOR TO VOTING ON THE PLAN. IN MAKING A DECISION TO
ACCEPT OR REJECT THE PLAN, EACH CREDITOR MUST RELY ON ITS OWN EXAMINATION OF THE
DEBTORS AS DESCRIBED IN THIS DISCLOSURE STATEMENT AND THE TERMS OF THE PLAN,
INCLUDING THE MERITS AND RISKS INVOLVED. IN ADDITION, CONFIRMATION AND
CONSUMMATION OF THE PLAN ARE SUBJECT TO CONDITIONS PRECEDENT THAT COULD LEAD TO
DELAYS IN CONSUMMATION OF THE PLAN. ALSO, THERE CAN BE NO ASSURANCE THAT EACH OF
THESE CONDITIONS WILL BE SATISFIED OR WAIVED OR THAT THE PLAN WILL BE
CONSUMMATED. EVEN AFTER THE EFFECTIVE DATE, DISTRIBUTIONS UNDER THE PLAN MAY BE
SUBJECT TO SUBSTANTIAL DELAYS FOR CREDITORS WHOSE CLAIMS ARE DISPUTED.
[THIS DISCLOSURE STATEMENT HAS BEEN APPROVED BY ORDER OF THE BANKRUPTCY
COURT AS CONTAINING ADEQUATE INFORMATION OF A KIND AND IN SUFFICIENT DETAIL TO
ENABLE HOLDERS OF CLAIMS TO MAKE AN INFORMED JUDGMENT WITH RESPECT TO VOTING TO
ACCEPT OR REJECT THE PLAN. HOWEVER, THE BANKRUPTCY COURT'S APPROVAL OF THIS
DISCLOSURE STATEMENT DOES NOT CONSTITUTE A RECOMMENDATION OR DETERMINATION BY
THE BANKRUPTCY COURT WITH RESPECT TO THE MERITS OF THE PLAN.]
NO PARTY IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS
WITH RESPECT TO THE PLAN OTHER THAN THAT WHICH IS CONTAINED IN THIS DISCLOSURE
STATEMENT. NO REPRESENTATIONS OR INFORMATION CONCERNING THE DEBTORS, THEIR
FUTURE BUSINESS OPERATIONS OR THE VALUE OF THEIR PROPERTIES HAVE BEEN AUTHORIZED
BY THE DEBTORS
2
OTHER THAN AS SET FORTH HEREIN. ANY INFORMATION OR REPRESENTATIONS GIVEN TO
OBTAIN YOUR ACCEPTANCE OR REJECTION OF THE PLAN WHICH ARE DIFFERENT FROM OR
INCONSISTENT WITH THE INFORMATION OR REPRESENTATIONS CONTAINED HEREIN AND IN THE
PLAN SHOULD NOT BE RELIED UPON BY ANY CREDITOR IN VOTING ON THE PLAN.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125
OF THE BANKRUPTCY CODE AND RULE 3016(C) OF THE FEDERAL RULES OF BANKRUPTCY
PROCEDURE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAWS OR OTHER
APPLICABLE NONBANKRUPTCY LAW. PERSONS OR ENTITIES HOLDING OR TRADING IN OR
OTHERWISE PURCHASING, SELLING OR TRANSFERRING CLAIMS AGAINST, OR SECURITIES OF,
THE DEBTORS SHOULD EVALUATE THIS DISCLOSURE STATEMENT IN LIGHT OF THE PURPOSE
FOR WHICH IT WAS PREPARED.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS SUCH COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
WITH RESPECT TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER PENDING
OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT AND THE INFORMATION CONTAINED
HEREIN SHALL NOT BE CONSTRUED AS AN ADMISSION OR STIPULATION, BUT RATHER AS
STATEMENTS MADE IN SETTLEMENT NEGOTIATIONS GOVERNED BY RULE 408 OF THE FEDERAL
RULES OF EVIDENCE AND ANY OTHER RULE OR STATUTE OF SIMILAR IMPORT.
THIS DISCLOSURE STATEMENT SHALL NOT BE CONSTRUED TO BE ADVICE ON THE TAX,
SECURITIES OR OTHER LEGAL EFFECTS OF THE PLAN. EACH CREDITOR SHOULD, THEREFORE,
CONSULT WITH ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISERS AS TO ANY SUCH
MATTERS CONCERNING THE SOLICITATION, THE PLAN OR THE TRANSACTIONS CONTEMPLATED
THEREBY.
This Disclosure Statement, the Plan included herewith as Appendix A (and
the other appendices hereto), the accompanying form of Ballot, and the related
materials delivered together herewith are being furnished to Holders of Impaired
Claims entitled to vote on the Plan pursuant to Section 1125 of the Bankruptcy
Code, in connection with the solicitation of votes to accept or reject the Plan
(anD the transactions contemplated thereby), as described herein. Whenever the
words "include," "includes" or "including" are used in this Disclosure Statement
they are deemed to be followed by the words "without limitation."
I. INTRODUCTION AND SUMMARY
The following introduction and summary is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
statements and notes thereto appearing elsewhere in this Disclosure Statement.
The purpose of this Disclosure Statement is to provide the Debtors' known
creditors with adequate information of a kind, and in sufficient detail, as far
as is reasonably practicable in light of the nature and history of the Debtors,
upon which to base an informed decision regarding whether to accept or reject
the Plan.
3
This Disclosure Statement:
o describes how Claims against and Interests in the Debtors will be
treated under the Plan and the terms of the securities to be issued
under the Plan (Section IV);
o explains how to vote on the Plan and who is entitled to vote (Section
I.E);
o estimates the recoveries for Holders of Claims and Interests (Section
I.C);
o provides certain financial information about the Reorganized Debtors,
including operating and financial projections through fiscal year 2005
(Section II.D and Appendix B);
o gives estimated enterprise valuations of the Reorganized Debtors
(Section IV.B);
o presents a liquidation analysis of the Debtors (Appendix C);
o explains certain legal and practical aspects of implementation of the
Plan (Section IV.M);
o notes certain risk factors that creditors should consider before
voting (Section VIII);
o discusses the procedure for confirming the Plan (Section V);
o describes how the Reorganized Debtors will be governed when the Plan
becomes effective (Sections IV.K and IV.L);
o discusses the businesses of the Debtors and the reasons they commenced
the Chapter 11 Case (Section II);
o summarizes significant events that have occurred in the Chapter 11
Case (Section III);
o explains how distributions under the Plan will be made and the manner
in which disputed claims will be resolved (Sections IV.Q and IV.W);
and
o summarizes certain federal tax considerations (Section XIII).
A. THE SOLICITATION
The Debtors are hereby soliciting votes for acceptance of the Plan under
the Bankruptcy Code from the Holders of (i) Equipment Lease Secured Claims, (ii)
General Unsecured Claims, (iii) Senior Creditor Claims, (iv) Convertible
Subordinated Note Claims and (v) Convenience Claims (the "Solicitation"). The
Debtors are not soliciting votes from Holders of Miscellaneous Secured Claims,
Miscellaneous Priority Claims and Interdebtor Claims, which are not Impaired by
the Plan; nor are the Debtors soliciting votes from Holders of Convertible
Subordinated Note Section 510(b) Claims, Interests in USi and LLC Interests and
Section 510(c) Claims, which are conclusively presumed to have rejected the Plan
under the Bankruptcy Code. The Bankruptcy Court has fixed the close of business
(prevailing Eastern
4
Time) on March 22, 2002 as the record date for the determination of those
Holders of Claims entitled to vote on the Plan. The procedures for voting during
the Solicitation are set forth in Section I.E below.
B. SUMMARY OF PLAN PROVISIONS
Set forth below is a summary of certain significant provisions of the Plan.
1. OVERVIEW OF CLAIMS ADDRESSED IN THE PLAN
The Plan recognizes several groups of Impaired creditors that may be
entitled to distributions of Cash, Plan Notes, Secondary Plan Notes and
Substitute Plan Notes of Reorganized USi, and/or New Warrants of the ultimate
corporate parent (but in all events in such corporation in which Bain Fund holds
its investment) of Reorganized USi after giving effect to the issuance of the
New Common Stock to the Investor on the Effective Date: the Holders of Equipment
Lease Secured Claims, General Unsecured Claims, Senior Creditor Claims,
Convertible Subordinated Note Claims and Convenience Claims. The Holders of
Equipment Lease Secured Claims are parties to the approximately 141 individually
scheduled master Equipment Leases identified in Attachment 3 to the Plan. The
Holders of General Unsecured Claims fall into two primary categories: trade
creditors and other general unsecured creditors, including parties to rejected
executory contracts and leases. The Holders of Senior Creditor Claims are
primarily Conklin & Conklin and those parties to Equipment Leases that also hold
Equipment Lease Deficiency Claims. The Holders of Convertible Subordinated Note
Claims are the record holders of such notes as of March 22, 2002. The Holders of
Convenience Claims are the Holders of General Unsecured Claims in the amount of
$2,500 or less, or who elect to reduce their claims to $2,500. For the purposes
of their calculations, the Debtors assumed that the Allowed amount of these
Claims would be as follows: (a) Equipment Lease Secured Claims of approximately
$13.4 million; (b) General Unsecured Claims of approximately $17.4 million(1);
(c) Senior Creditor Claims of approximately $52.1 million; and (d) Convertible
Subordinated Note Claims of $125.0 million plus accrued interest through the
Filing Date of approximately $5.8 million (collectively, the "Estimates").
In connection with the Plan, the Debtors determined the total enterprise
value ("Total Enterprise Value") of the Reorganized Debtors with the assistance
of Conway, Del Genio, Gries & Co., LLC ("CDG"), the Debtors' financial adviser.
In this regard, the Debtors determined that the Total Enterprise Value of the
Reorganized Debtors would be $97.0 million. See Section IV.B, "Valuation."
Distributions under the Plan are as follows:(2)
EQUIPMENT LEASE SECURED CLAIMS. Holders of Equipment Lease Secured Claims
(i) voting to accept the Plan or (ii) failing to timely vote on the Plan shall
be deemed to have elected to be treated in accordance with Alternative A of
Section 5.01(I) of the Plan ("Alternative A"). Holders of
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(1) This estimate is inclusive of Allowed Convenience Claims.
(2) The Claim estimates contained herein are based upon the Debtors'
examination of their books and records. The Bankruptcy Court has
established March 11, 2002 as the Bar Date. Because recoveries under the
Plan are directly linked to the amount and value of the Allowed Claims, any
change in the Debtors' Claims estimates resulting from an analysis of the
proofs of claim filed as of the Bar Date will impact their predictions of
recoveries under the Plan. In accordance with Section 11.04 of the Plan,
the Debtors have the right to seek a Bankruptcy Court order establishing
Claims estimates for purposes of effectuating distributions under the Plan
and avoiding undue delay in the administration of the Estate.
5
Equipment Lease Secured Claims voting to reject the Plan shall be deemed to have
elected to be treated in accordance with Alternative B of Section 5.01(II) of
the Plan ("Alternative B").
Under Alternative A, the Equipment Lease Secured Claims will be Allowed in
the amounts set forth in Attachment 3 to the Plan (less, in the case of each
Equipment Lease Secured Claim, all Adequate Protection Payments made on account
of such Claim, if any), and the Equipment Lease Deficiency Claims (if any) held
by the Holders of such Equipment Lease Secured Claims will be Allowed in the
amounts set forth in Attachment 3 to the Plan.(3) Each Holder of an Allowed
Equipment Lease Secured Claim deemed to elect Alternative A will receive, on
account of such Claim, the obligation of Reorganized USi to pay such Holder
deferred Cash payments equal to the Allowed amount of such Claim, with interest
from the Effective Date at a fixed per annum interest rate (based on a year
consisting of twelve 30-day months), as set forth in Attachment 3, with respect
to the applicable lessor of each schedule of the Equipment Lease related to such
Claim, and otherwise on the terms set forth in an Amended Equipment Lease
Agreement. Commencing on the one-month anniversary of the Effective Date,
payments shall be made in equal monthly installments of principal and interest
over a term of months equal to the number of months (counting a partial month as
a whole month) remaining unexpired on the Filing Date on the lease term under
each schedule of the applicable Equipment Lease.
On or before the Effective Date, a Holder of an Equipment Lease Secured
Claim electing or deemed to have elected Alternative A may, at its option by
delivering written notice to Reorganized USi, elect a substitute payment
schedule and interest rate under a Substitute Equipment Lease Agreement, in lieu
of the treatment set forth in Section 5.01 I.(b)(1) and (2) of the Plan, as
follows: (i) the Equipment Lease Secured Claim bearing interest from the
Effective Date at a fixed per annum rate (based on a year consisting of twelve
30-day months) equal to 10%, (ii) 50% of the Equipment Lease Secured Claim to be
paid in Cash on or as soon as practicable after the Effective Date, (iii)
current monthly interest to be paid on the unamortized portion of the unpaid
amount of the Equipment Lease Secured Claim to be paid commencing on the date
that is the last day of the first full month that occurs after the Effective
Date through December 31, 2003 and (iv) the principal balance of the Equipment
Lease Secured Claim to be amortized on a straight-line basis over a 48-month
period commencing on January 1, 2004 and payable (1) in 18 consecutive monthly
installments of principal and interest combined, commencing on January 31, 2004
and (2) with a balloon payment of the remaining principal balance to be made on
June 30, 2005. The substitute payment schedule and interest rate will be
pursuant to the terms of a Substitute Equipment Lease Agreement. Under the
Substitute Equipment Lease Agreement, the Holder of the Equipment Lease Secured
Claim will retain, as security for its obligations under such agreement, its
security interest in the equipment leased under the applicable Equipment Lease.
Holders of Equipment Lease Secured Claims that have elected a substitute payment
schedule and interest rate as provided in Section 5.01, I (d) of the Plan may
elect, by delivering written notice to Reorganized USi on or before the
Effective Date, to deem payments under Substitute Plan Notes received in respect
of any Equipment Lease Deficiency Claim of such Holders under the Equipment
Leases as additional rent under the Substitute Equipment Lease Agreements.
Reorganized USi will have the right to prepay amounts due under such substitute
payment schedule by paying the remaining balance thereof, with accrued interest
through the date of payment, in Cash at any time on or after the Effective Date,
without premium or penalty.
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(3) The Equipment Lease Secured Claim amounts set forth in Attachment 3 to the
Plan were determined by stratifying each lessor's collateral, by sub-lease,
by the age of the subject equipment and applying the following percentages
to the original equipment cost: (a) for items less than one year in age -
15 %; (b) for items between one and two years of age - 10%; and (c) for
items over two years of age - 5%. Such figures were determined based on the
Debtors' recent experience in the sale of certain technology assets, input
from technical experts at the Debtors, and the Debtors' financial advisor's
experiences in similar situations. The total claims of the equipment
lessors are based on the books and records of the Debtors.
6
Under Alternative A, extensions of credit under Amended Equipment Lease
Agreements or Substitute Equipment Lease Agreements, as applicable, will be
deemed to be secured financings and not true leases. Notwithstanding the
foregoing, if an Equipment Lease that gives rise to an Equipment Lease Secured
Claim is a "true lease" (as opposed to a secured financing) and Reorganized USi
files a petition or consents to an order for relief under the Bankruptcy Code
after the Effective Date (a "Subsequent Bankruptcy Case"), such Holder may at
its option reinstate its Equipment Lease as a true lease by notifying
Reorganized USi of such election in writing. Upon such election, (i) the
original terms of such Equipment Lease will be reinstated except that (a) the
term of such Equipment Lease will extend until the later of the end of the term
of the Amended Equipment Lease Agreement or Substitute Equipment Lease Agreement
applicable to such Equipment Lease and the maturity date of the Plan Notes or
Substitute Plan Notes (as applicable) issued in respect of the Equipment Lease
Deficiency Claim of such Holder, and (b) the sole payments due under such
Equipment Lease will be payments in amounts and at times required under the
Amended Equipment Lease Agreement or Substitute Equipment Lease Agreement
applicable to such Equipment Lease and under the Plan Notes or Substitute Plan
Notes (as applicable) issued in respect of the Equipment Lease Deficiency Claim
of such Holder, (ii) all payments received by such Holder in respect of the
Amended Equipment Lease Agreement or Substitute Equipment Lease Agreement (as
applicable) and the Plan Notes or Substitute Plan Notes (as applicable) issued
in respect of the Equipment Lease Deficiency Claim of such Holder will be
credited as payments under the Equipment Lease so reinstated, (iii) the Amended
Equipment Lease Agreement or Substitute Equipment Lease Agreement applicable to
such Equipment Lease and the Plan Notes or Substitute Plan Notes (as applicable)
issued in respect of the Equipment Lease Deficiency Claim of such Holder will be
cancelled, and (iv) the Equipment Lease so reinstated will be deemed to be a
true lease in the Subsequent Bankruptcy Case.
Under Alternative B, each Equipment Lease Secured Claim will be Allowed in
an amount equal to the value of the collateral securing such Claim as of the
Filing Date, as agreed by the Debtors or Reorganized USi (as applicable) and
such Holder, or as determined by the Bankruptcy Court, less all Adequate
Protection Payments made on account of such Claim, if any. Each Holder of an
Allowed Equipment Lease Secured Claim deemed to elect Alternative B will, on
account of such Claim, at the option of Reorganized USi: (i) receive return of
the collateral securing such Claim or return of a portion of the collateral
securing such Claim (with the balance of the Allowed Equipment Lease Secured
Claim to be treated as provided in the Plan) with the amount of any Allowed
Equipment Lease Secured Claim and any unsecured Equipment Lease Deficiency Claim
in Class 4 to be as agreed by Reorganized USi and such Holder or as determined
by the Bankruptcy Court; (ii) (a) receive equal annual Cash payments commencing
on the first anniversary of the Effective Date and continuing through the fifth
anniversary of the Effective Date in an aggregate amount equal to the Allowed
amount of such Claim, plus interest at a fixed rate as agreed by Reorganized USi
and such Holder or as determined by the Bankruptcy Court (provided, however,
that Reorganized USi will have the right to pay any such Claim in full by paying
the remaining principal balance thereof, with accrued interest through the date
of payment, in Cash at any time on or after the Effective Date, without premium
or penalty), and (b) retain the liens securing such Claim to the extent of the
Allowed amount of such Claim pursuant to Section 1129(b)(2)(A)(i) of the
Bankruptcy Code; or (iii) receive such other treatment as will provide for
realization of the indubitable equivalent of such Claim pursuant to Section
1129(b)(2)(A)(iii) of the Bankruptcy Code.
ANY HOLDER OF AN EQUIPMENT LEASE CLAIM DEEMED TO ELECT ALTERNATIVE B MAY
REQUEST THE DEBTORS TO IDENTIFY THE SPECIFIC TREATMENT PROPOSED BY THE DEBTORS
WITH RESPECT TO ITS CLAIM BY MAKING A WRITTEN REQUEST TO COUNSEL TO THE DEBTORS
(WILLKIE FARR & GALLAGHER, 787 SEVENTH AVENUE, NEW YORK, NY 10019, ATTENTION:
MARC ABRAMS, ESQ. AND WHITEFORD, TAYLOR & PRESTON L.L.P., SEVEN SAINT PAUL
7
STREET, SUITE 1400, BALTIMORE, MD 21202, ATTENTION: MARTIN FLETCHER, ESQ.) SO AS
TO BE RECEIVED AT LEAST TEN DAYS PRIOR TO THE VOTING DEADLINE. THE DEBTORS SHALL
RESPOND TO ANY SUCH REQUEST AND IDENTIFY THE PROPOSED TREATMENT AT LEAST FIVE
DAYS PRIOR TO THE VOTING DEADLINE.
Under Alternative B, if the holder of an Equipment Lease is deemed to elect
Alternative B and the Equipment Lease is determined by the Bankruptcy Court to
be a "true lease" (as opposed to a secured financing) subject to rejection
pursuant to Section 365 of the Bankruptcy Code, USi will be entitled to seek
assumption or rejection of such lease (or any separate lease schedules thereof)
at any time on or before the date that is 30 days after such determination
becomes a Final Order and if USi fails timely to seek assumption of such lease
(or any separate schedules thereof) or notifies the applicable lessor of
rejection of the lease (or any separate schedules thereof), the lease (or any
separate schedules thereof not assumed) will be deemed rejected without further
order of the Bankruptcy Court. In the event of rejection of such Equipment Lease
(or any separate lease schedules thereof), any rejection damage claim, which
will remain subject to allowance, must be filed on or before the date that is 30
days after the later of the Effective Date or such later rejection date and will
be a Senior Claim only to the extent that Reorganized USi agrees or the
Bankruptcy Court determines that such claim is entitled to the benefit of the
Subordination Provisions.
MISCELLANEOUS SECURED CLAIMS. On the Effective Date, at Reorganized USi's
option, either (i) the Reorganized Debtors shall assume an Allowed Miscellaneous
Secured Claim and the legal, equitable and contractual rights to which an
Allowed Miscellaneous Secured Claim entitles the Holder of such Claim shall not
be altered by the Plan, or (ii) the Reorganized Debtors shall provide such other
treatment in respect of such Claim as will cause such Claim not to be Impaired;
provided, however, that the Allowed Miscellaneous Secured Claim portion of the
Conklin & Conklin Note Claims shall be treated pursuant to Section 5.02(c)(i) of
the Plan (i.e., will be paid in full in Cash on the Effective Date of the Plan).
GENERAL UNSECURED CLAIMS. According to the Estimates, Holders of Allowed
General Unsecured Claims should receive Plan Notes and/or Substitute Plan Notes
in principal amount of approximately $6.0 million, which represents a recovery
of approximately 34.34% on such Claims.
SENIOR CREDITOR CLAIMS. According to the Estimates, Holders of Allowed
Senior Creditor Claims should receive (i) Plan Notes and/or Substitute Plan
Notes in principal amount of $12.7 million on account of their Allowed
deficiency claims, and (ii) Plan Notes and/or Substitute Plan Notes in principal
amount of $31.0 million in accordance with and in enforcement of the
Subordination Provisions of the Convertible Subordinated Note Indenture, which
represents an approximately 81.22% recovery on such Claims.(4)
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(4) Under the Plan, existing Equipment Leases and Equipment Lease Claims
treated under Alternative A will be restructured to provide an aggregated
estimated 85% effective recovery through the distributions to be made on
the Equipment Lease Secured Claims and Equipment Lease Deficiency Claims.
This recovery gives effect to the Subordination Provisions of the
Convertible Subordinated Note Indenture. In order to provide the Holders of
Equipment Lease Claims an effective 85% aggregate recovery on account of
their Equipment Lease Secured Claims and Equipment Lease Deficiency Claims,
the Debtors estimated the percentage recovery on the Equipment Lease
Deficiency Claims (including through the enforcement of the Subordination
Provisions) that would need to be provided in addition to the 100% recovery
on the Equipment Lease Secured Claims to effectuate the 85% aggregate
recovery. Based upon the Debtors' estimates, it was determined that a
23.66% distribution to Holders of Equipment Lease Deficiency Claims and
Convertible Subordinated Note Claims, with
8
CONVERTIBLE SUBORDINATED NOTE CLAIMS. The Holders of Convertible
Subordinated Note Claims will receive (i) Cash in the amount of $6.25 million,
(ii) Secondary Plan Notes in principal amount of $11.25 million, and (iii) New
Warrants to purchase shares of common stock of the ultimate corporate parent
(but in all events in such corporation in which Bain Fund holds its investment)
of Reorganized USi after giving effect to the issuance of the New Common Stock
to the Investor on the Effective Date, having an aggregate value of $812,500 at
the Confirmation Date for an aggregate exercise price of $812,500. In the
aggregate, the Debtors estimate that this represents an approximately 13.76%
recovery on these Claims.(5)
CONVENIENCE CLAIMS. According to the Estimates, the Holders of Allowed
Convenience Claims will receive Cash equal to 34.34% on such Claims.
2. OVERVIEW OF PLAN CLASSIFICATION
The Plan classifies the following eleven classes of Claims and Interests:
Class 1 (Equipment Lease Secured Claims), Class 2 (Miscellaneous Secured
Claims), Class 3 (Miscellaneous Priority Claims), Class 4 (General Unsecured
Claims), Class 5 (Senior Creditor Claims), Class 6 (Convertible Subordinated
Note Claims), Class 7 (Convenience Claims), Class 8 (Convertible Subordinated
Note Section 510(b) Claims), Class 9 (Interdebtor Claims), Class 10 (Interests
in USi and LLC Interests) and Class 11 (Section 510(c) Claims).
In accordance with Bankruptcy Code Section 1123(a)(1), under the Plan,
Allowed Administrative Expenses (other than Ordinary CoursE Administrative
Expenses and Approved Chapter 11 Liabilities) will be paid in full and in Cash
on or before the latest of the Effective Date, the date that is 30 days after
the date such Administrative Expenses become Allowed, or another date agreed by
the Debtors or Reorganized USi and the Holder of such Administrative Expense.
The Reorganized Debtors shall assume and pay each Allowed Ordinary Course
Administrative Expense and each Allowed Approved Chapter 11 Liability on the
date on which payment is due or would otherwise be permitted to be made in
accordance with the terms and conditions of the particular transaction and any
agreements relating thereto. Priority Tax Claims will be paid in accordance with
Section 1129(a)(9)(C) of the Bankruptcy Code.
3. RECLAMATION CLAIMS
Under the Plan, a Claim for reclamation that would, if Allowed, be
converted to an Administrative Expense pursuant to any order of the Bankruptcy
Court under Section 546(c) of the Bankruptcy Code will be Allowed only to the
extent either (i) Reorganized USi anD the Holder of the Reclamation Claim agree
upon the amount thereof in a stipulation approved by the Bankruptcy Court, or
(ii) at least ten days before the Confirmation Hearing, the Holder files with
the Bankruptcy Court and serves on
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the latter being turned over to the Holders of Equipment Lease Deficiency
Claims in accordance with the Subordination Provisions, on account of the
Plan Distribution was necessary to achieve the 85% estimated recovery
percentage.
(5) The Indenture Trustee has indicated that it intends to deduct and apply the
amount of its fees and expenses, pursuant to sections 8.9 and 8.10 of the
Convertible Subordinated Note Indenture, from the $6,250,000 Cash portion
of Secondary Plan Distribution A prior to distributing the balance of the
distribution to which Holders of Convertible Subordinated Note Claims are
entitled under the Plan. The Indenture Trustee estimates that its fees and
expenses will not exceed $100,000. The percentage distribution is
calculated prior to the reduction for the Indenture Trustee's fees and
expenses.
9
Reorganized USi a motion requesting payment of such Reclamation Claim and a
Final Order is entered granting such motion. Any Allowed Reclamation Claim will
be paid in full in Cash.
4. UNEXPIRED LEASES AND EXECUTORY CONTRACTS
Under the Plan, any unexpired lease or executory contract that has not been
expressly rejected or assumed by the Debtors with the Bankruptcy Court's
approval on or prior to the Effective Date will be deemed to have been assumed
by the applicable Debtor as of the Effective Date unless (i) such lease or
contract has then been rejected, (ii) there is then pending before the
Bankruptcy Court a motion to assume, a motion to reject or a motion to assume
and assign such lease or contract, (iii) such lease or contract is identified on
a "Schedule of Leases and Contracts to be Rejected" filed at least ten days
before the date of the Confirmation Hearing (as such schedule may be amended on
or prior to the date of the Confirmation Hearing), or (iv) such lease or
contract is rejected following entry of an order regarding and fixing the amount
of a disputed cure amount as provided in Section 7.02 of the Plan.
At the Confirmation Hearing, the Debtors may request the Bankruptcy Court
to approve the assumption and assignment of certain of their unexpired leases
and executory contracts. The Debtors will file and serve a schedule of such
leases and contracts with the Bankruptcy Court at least ten days prior to the
Confirmation Hearing.
Any lease of nonresidential real property that was assigned by the Debtors
prior to the Filing Date shall be treated as being neither executory nor
unexpired and shall be deemed neither assumed nor rejected pursuant to the Plan.
Under the Plan, the Debtors reserve all rights accorded to them under Section
365 of the Bankruptcy Code, including all rights under Section 365(f) of the
BankrupTcy Code with respect to the assignment of any or all of their executory
contracts and unexpired leases.
The provisions of the Plan relating to the treatment of unexpired leases
and executory contracts do not apply to the Equipment Leases and Indemnification
Contracts.
5. MANAGEMENT AGREEMENT
The Investor has entered into a Management Agreement dated January 7, 2002
with an affiliate of Bain, which provides for a fee to be paid to the Bain
affiliate of $3 million whether or not a Closing (as defined in the Commitment,
the "Closing") is consummated; provided, however that if the Closing occurs
prior to May 31, 2002, only $2 million of the fee shall then be payable and
$500,000 of the fee shall be payable on each of the first and second
anniversaries of the Closing. The Management Agreement also provides for an
annual management fee of $1 million for the first two years following the
Closing and $1.5 million thereafter in exchange for consulting services. The
Management Agreement provides for full indemnification and expense reimbursement
in favor of Bain and its affiliates. If a Closing is consummated, Reorganized
USi will become a party to the Management Agreement at the Effective Date. If a
Closing is not consummated, neither the Debtors nor the Reorganized Debtors
shall have any liability or obligation in respect of the Management Agreement.
6. MANAGEMENT AND BOARD OF DIRECTORS
Under the Plan, from and after the Effective Date, Reorganized USi will be
managed under the direction of its board of directors in accordance with the
applicable provisions of the Delaware General Corporate Law ("DGCL"), the
Amended Certificate of Incorporation and the Amended Bylaws. On or prior to the
date which is 15 days prior to the date of the Confirmation Hearing, the
Investor, subject to
10
the consent of USi, will designate five directors of Reorganized USi and notify
the Debtors in writing of such designation. On or before the date of the
Confirmation Hearing, the Debtors will file with the Bankruptcy Court a schedule
setting forth the names of these designated directors of Reorganized USi
pursuant to Section 8.03 of the Plan. Upon the Effective Date, subject to
appointment of the persons named in such schedule as directors of Reorganized
USi and acceptance of such designation by such persons, (i) the directors of
Reorganized USi will thereafter be appointed or elected in accordance with the
DGCL, the Amended Certificate of Incorporation and the Amended Bylaws, as they
may from time to time be amended, and (ii) the authority, power and incumbency
of the persons then acting as directors of the Debtors will be terminated and
such directors will be deemed to have resigned. See Section IV.L, "Operations
and Management of Reorganized Debtors." It is anticipated that the Debtors'
current officers will remain with the Reorganized Debtors in their current
positions following the Effective Date and such officers will have substantially
the same compensation as in effect prior to the Effective Date.(6) It is also
anticipated that some of the current officers will be employed under employment
agreements with Reorganized USi, and one or more of such officers may become
investors in Reorganized USi.(7) A number of USi's current directors have also
expressed an interest in investing in Reorganized USi.
7. REORGANIZATION OF REORGANIZED DEBTORS
The Reorganized Debtors will be reorganized and discharged on the Effective
Date. The Amended Certificate of Incorporation will (i) authorize the New Common
Stock, and (ii) prohibit the issuance of non-voting equity securities, except as
permitted by Section 1123(a) of the Bankruptcy Code. The Reorganized Debtors
will hold the assets and be subject to the liabilities of the Debtors as
provided in the Plan and will pay the Cash and issue and distribute the New
Common Stock, the Plan Notes, the Secondary Plan Notes, the Substitute Plan
Notes and the New Warrants as provided in the Plan.
The Amended Bylaws will be substantially in the form attached as Exhibit C
to the Plan. The Amended Certificate of Incorporation will be substantially in
the form attached as Exhibit D to the Plan. The Amended Certificate of
Incorporation will provide, among other things, (a) that the directors of
Reorganized USi will not be personally liable to Reorganized USi or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except in certain cases, including where liability is mandated by the
DGCL, and (b) for indemnification of officers and directors to the full extent
permitted by the DGCL, as amended from time to time.
8. PLAN RELEASES(8)
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(6) The salaries of the four most highly compensated officers of USi for 2001
are as follows: Andrew A. Stern, Chief Executive Officer, $325,000; William
H. Washecka, Executive Vice President and Chief Financial Officer,
$275,000; Stephen E. McManus, Senior Vice President, Worldwide Sales,
$250,000; Michael S. Harper, Senior Vice President and Chief Marketing
Officer, $250,000.
(7) The employment agreements referred to herein have not yet been drafted or
negotiated. They will be subject to review and approval by the Board of
Directors of Reorganized USi.
(8) The SEC staff has taken the position that a release of third-party claims
against third-party non-debtors under a plan of reorganization is generally
not allowed, may be challenged in connection with confirmation of the Plan
and generally may not be approved by a bankruptcy court under applicable
law. To the extent that applicable law does not allow all or part of the
releases contemplated by Section 12 of the Plan, only those provisions of
the release that are enforceable under applicable law (if any) would be
effected by Section 12 of the Plan.
11
If the Plan becomes effective, each of the Debtors, in its individual
capacity and as Debtors in Possession, for and on behalf of the Estate, and the
Reorganized Debtors will release and discharge, absolutely, unconditionally,
irrevocably and forever, any and all Causes of Action, other than and excepting
Reserved Causes of Action, (i) that may be enforceable by the Debtors or Debtors
in Possession under SectionSection 510, 544, 547, 548 and 550 of the Bankruptcy
Code, (ii) against any Directors and Officers in their capacity as such from (a)
any claim or Cause of Action arising from the beginning of time through the
Confirmation Date related to acts or omissions to act (including but not limited
to, any claims or Causes of Action arising out of any alleged fiduciary or other
duty) or (b) which might at any time after the Confirmation Date arise out of or
relate, directly or indirectly, to any pre-Confirmation Date acts or omissions,
and (iii) against any Representative arising from or related to such
Representative's acts or omissions to act in the Chapter 11 Case or in
connection with the Transactions, except that Representatives shall not be
released from liability relating to acts or omissions to act of gross negligence
or willful misconduct. The Debtors have not undertaken an investigation of the
Causes of Action against the Directors and Officers and Representatives that are
being released under the Plan; however, the Debtors are unaware of any claims
against such parties except with respect to certain notes under which certain
Directors and Officers are obligors, which obligations are not being released
under the Plan. All Causes of Action of the Debtors not expressly released by
the Debtors are preserved by the Plan.
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH HOLDER OF A CLAIM
(WHETHER OR NOT ALLOWED) AGAINST OR INTEREST IN THE DEBTORS, THE ESTATE OR THE
REORGANIZED DEBTORS SHALL BE ENJOINED FROM COMMENCING OR CONTINUING ANY ACTION,
EMPLOYMENT OF PROCESS OR ACT TO COLLECT, OFFSET OR RECOVER AND SHALL BE DEEMED
TO RELEASE ANY CLAIM AGAINST (A) ANY DIRECTORS AND OFFICERS IN THEIR CAPACITY AS
SUCH ARISING FROM THE BEGINNING OF TIME THROUGH THE CONFIRMATION DATE OR WHICH
MIGHT AT ANY TIME AFTER THE CONFIRMATION DATE ARISE OUT OF OR RELATE, DIRECTLY
OR INDIRECTLY, TO ANY PRE-CONFIRMATION DATE ACTS OR OMISSIONS RELATED TO HIS OR
HER ACTS OR OMISSIONS TO ACT (INCLUDING, BUT NOT LIMITED TO, ANY CLAIMS ARISING
OUT OF ANY ALLEGED FIDUCIARY OR OTHER DUTY), OR (B) ANY REPRESENTATIVE ARISING
FROM OR RELATED TO SUCH REPRESENTATIVE'S ACTS OR OMISSIONS TO ACT IN THE CHAPTER
11 CASE OR IN CONNECTION WITH THE TRANSACTIONS. SEE "THE PLAN -- EFFECTS OF PLAN
CONFIRMATION -- RELEASE AND INJUNCTION -- CAUSES OF ACTION AGAINST
REPRESENTATIVES."
C. SUMMARY OF CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
The Plan contemplates that Reorganized USi will remain a Delaware
corporation and will possess substantially all of the assets of the Debtors and
certain liabilities of the Debtors, as set forth in the Plan. Reorganized USi
will issue all of the outstanding shares of New Common Stock to the Investor in
consideration for the payment of the Subscription Price pursuant to the
Commitment (substantially in the form of Attachment 2 to the Plan). Reorganized
USi will be the issuer of the Plan Notes, Secondary Plan Notes and the
Substitute Plan Notes to be distributed pursuant to the Plan and will distribute
the New Warrants(9) and all Cash and other consideration provided for in the
Plan.
- ---------------------
(9) Pursuant to the Plan, the New Warrants shall be exercisable for shares of
common stock to be issued by the ultimate corporate parent (but in all
events such corporation in which Bain Fund holds its investment) of
12
The Plan categorizes the Claims against and Interests in the Debtors into
eleven classes. The Plan also provides that Administrative Expenses incurred by
the Debtors during the Chapter 11 Case will be paid in full and specifies the
manner in which the Claims and Interests in each Class are to be treated. To the
extent that the terms of this Disclosure Statement vary from the terms of the
Plan, the terms of the Plan will be controlling. The table below provides a
summary of the classification and treatment of Claims and Interests under the
Plan:
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TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
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N/A Administrative The Reorganized Debtors shall assume and pay each Allowed Administrative
Expenses Expense, other than Ordinary Course Administrative Expenses and Approved Chapter
11 Liabilities, in full and in Cash on or before the latest of (i) the Effective
Date, (ii) the date that is 30 days after the date on which such Administrative
Expense becomes Allowed, and (iii) a date agreed by Reorganized USi or the
Debtors, as the case may be, and such Holder. The Reorganized Debtors shall assume
and pay each Allowed Ordinary Course Administrative Expense and each Allowed
Approved Chapter 11 Liability (other than the DIP Financing, if any) on the date
on which payment is due or would otherwise be permitted to be made in accordance
with the terms and conditions of the particular transaction and any agreements
relating thereto. The Reorganized Debtors shall pay any DIP Financing Payout on or
prior to the Effective Date.
Estimated Recovery as percentage of Allowed Claim: 100%.
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N/A Priority Tax Claims Except to the extent that a Holder of an Allowed Priority Tax Claim agrees to a
different treatment, at the sole option of the Reorganized Debtors, each Holder
of an Allowed Priority Tax Claim will receive, in full and complete settlement,
satisfaction and discharge of its Allowed Priority Tax Claim: (i) Cash in an
amount equal to such Allowed Priority Tax Claim on, or as soon thereafter as is
reasonably practicable, the later of the Effective Date and the first Business
Day after the date that is 30 calendar days after the date such Priority Tax
Claim becomes an Allowed Priority Tax Claim, or (ii) equal annual Cash payments
in an aggregate amount equal to such Allowed Priority Tax Claim, together with
simple interest at a fixed rate of 6% per annum (or upon such other terms
determined by the Bankruptcy Court to provide Holders of Allowed Priority Tax
Claims with deferred Cash payments having a value, as of the Effective Date,
equal to the Allowed amount of such Claims), over a period not exceeding six
years after the date of assessment of such Allowed Priority Tax Claim, which
will begin on, or as soon thereafter as is reasonably practicable, the later of
the Effective Date and the first Business Day after the date that is 30 calendar
days after the date such Priority Tax Claim becomes an Allowed Priority Tax
Claim. The Reorganized Debtors will have the right to pay any Allowed Priority
Tax Claim, or the remaining balance of any Allowed Priority Tax Claim, in full
at any time on or after the Effective Date, without premium or penalty. Holders
of Allowed Priority Tax Claims will
- -------------- -------------------- ----------------------------------------------------------------------------------
- ----------------------------
Reorganized USi after giving effect to the issuance of New Common Stock to
the Investor on the Effective Date.
13
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TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
not be entitled to receive any payment on account of any penalty arising with
respect to or in connection with such Allowed Priority Tax Claim. Any such Claim
for a penalty will not be Allowed, and the Holder of an Allowed Priority Tax
Claim will not assess or attempt to collect such penalty from Reorganized USi or
its property.
Estimated Recovery as percentage of Allowed Claim: 100%.
- -------------- -------------------- ----------------------------------------------------------------------------------
1 Equipment Lease Impaired. This class is actually a group of subclasses, depending upon the
Secured Claims applicable Equipment Lease at issue and the underlying property securing such
Allowed Claims, and each subclass is treated as a distinct class for voting and
distribution purposes. The separate subclasses consist severally of each of the
Equipment Lease Secured Claims listed on Attachment 3 to the Plan. Holders of
Equipment Lease Secured Claims (i) voting to accept the Plan or (ii) failing to
timely vote on the Plan shall be deemed to have elected to be treated in
accordance with Alternative A. Holders of Equipment Lease Secured Claims voting
to reject the Plan shall be deemed to have elected to be treated in accordance
with Alternative B. See Section I.E, "Voting on the Plan."
Alternative A. The Equipment Lease Secured Claims will be Allowed in the amounts
set forth in Attachment 3 to the Plan (less, in the case of each Equipment Lease
Secured Claim, all Adequate Protection Payments made on account of such Claim),
and the Equipment Lease Deficiency Claims (if any) held by the Holders of such
Equipment Lease Secured Claims will be Allowed in the amounts set forth in
Attachment 3 to the Plan. Each Holder of an Allowed Equipment Lease Secured
Claim deemed to elect Alternative A will receive, on account of such Claim, the
obligation of Reorganized USi to pay such Holder deferred Cash payments equal to
the Allowed amount of such Claim, with interest from the Effective Date at a
fixed per annum interest rate (based on a year consisting of twelve 30-day
months) as set forth in Attachment 3 with respect to the applicable lessor of
each schedule of the Equipment Lease related to such Claim, and otherwise on the
terms set forth in an Amended Equipment Lease Agreement. Commencing on the
one-month anniversary of the Effective Date, payments shall be made in equal
monthly installments of principal and interest over a term of months equal to
the number of months (counting a partial month as a whole month) remaining
unexpired on the Filing Date on the lease term under each schedule of the
applicable Equipment Lease. Reorganized USi shall have the right to pay any such
Claim in full by paying the remaining principal balance thereof, with accrued
interest through the date of payment, in Cash at any time on or after the
Effective Date, without premium or penalty, and the Holder of such Claim will
retain, as security for such obligation on the terms set forth in such Amended
Equipment Lease Agreement, its security interest in the equipment leased to the
Debtors under the applicable Equipment Lease.
On or before the Effective Date, a Holder of an Equipment Lease Secured
- -------------- -------------------- ----------------------------------------------------------------------------------
14
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TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
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Claim electing or deemed to have elected Alternative A may, at its option by
delivering written notice to Reorganized USi, elect a substitute payment
schedule and interest rate under a Substitute Equipment Lease Agreement, in lieu
of the treatment set forth in Section 5.01 I.(b)(1) and (2) of the Plan, as
follows: (i) the Equipment Lease Secured Claim bearing interest from the
Effective Date at a fixed per annum rate (based on a year consisting of twelve
30-day months) equal to 10%, (ii) 50% of the Equipment Lease Secured Claim to be
paid in Cash on or as soon as practicable after the Effective Date, (iii)
current monthly interest to be paid on the unamortized portion of the unpaid
amount of the Equipment Lease Secured Claim to be paid commencing on the date
that is the last day of the first full month that occurs after the Effective
Date through December 31, 2003 and (iv) the principal balance of the Equipment
Lease Secured Claim to be amortized on a straight-line basis over a 48-month
period commencing on January 1, 2004 and payable (1) in 18 consecutive monthly
installments of principal and interest combined, commencing on January 31, 2004
and (2) with a balloon payment of the remaining principal balance to be made on
June 30, 2005. The substitute payment schedule and interest rate will be
pursuant to the terms of a Substitute Equipment Lease Agreement. Under the
Substitute Equipment Lease Agreement, the Holder of the Equipment Lease Secured
Claim will retain, as security for its obligations under such agreement, its
security interest in the equipment leased under the applicable Equipment Lease.
Holders of Equipment Lease Secured Claims that have elected a substitute payment
schedule and interest rate as provided in Section 5.01, I (d) of the Plan may
elect, by delivering written notice to Reorganized USi on or before the
Effective Date, to deem payments under Substitute Plan Notes received in respect
of any Equipment Lease Deficiency Claim of such Holders under the Equipment
Leases as additional rent under the Substitute Equipment Lease Agreements.
Reorganized USi will have the right to prepay amounts due under such substitute
payment schedule by paying the remaining balance thereof, with accrued interest
through the date of payment, in Cash at any time on or after the Effective Date,
without premium or penalty.
Extensions of credit under Amended Equipment Lease Agreements or Substitute
Equipment Lease Agreements (as applicable) will be deemed to be secured
financings and not true leases. Notwithstanding the foregoing, if an Equipment
Lease that gives rise to an Equipment Lease Secured Claim is a "true lease" (as
opposed to a secured financing) and Reorganized USi files or consents to a
Subsequent Bankruptcy Case, such Holder may at its option reinstate its
Equipment Lease as a true lease by notifying Reorganized USi of such election in
writing. Upon such election, (i) the original terms of such Equipment Lease will
be reinstated except that (a) the term of such Equipment Lease will extend until
the later of the end of the term of the Amended Equipment Lease Agreement or
Substitute Equipment Lease Agreement applicable to such Equipment Lease and the
maturity date of the Plan Notes or Substitute Plan Notes (as
- -------------- -------------------- ----------------------------------------------------------------------------------
15
- -------------- -------------------- ----------------------------------------------------------------------------------
TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
applicable) issued in respect of the Equipment Lease Deficiency Claim of such
Holder, and (b) the sole payments due under such Equipment Lease will be
payments in amounts and at times required under the Amended Equipment Lease
Agreement or Substitute Equipment Lease Agreement applicable to such Equipment
Lease and under the Plan Notes or Substitute Plan Notes (as applicable) issued
in respect of the Equipment Lease Deficiency Claim of such Holder, (ii) all
payments received by such Holder in respect of the Amended Equipment Lease
Agreement or Substitute Equipment Lease Agreement (as applicable) and the Plan
Notes or Substitute Plan Notes (as applicable) issued in respect of the
Equipment Lease Deficiency Claim of such Holder shall be credited as payments
under the Equipment Lease so reinstated, (iii) the Amended Equipment Lease
Agreement or Substitute Equipment Lease Agreement applicable to such Equipment
Lease and the Plan Notes or Substitute Plan Notes (as applicable) issued in
respect of the Equipment Lease Deficiency Claim of such Holder will be
cancelled, and (iv) the Equipment Lease so reinstated will be deemed to be a
true lease in the Subsequent Bankruptcy Case.
Estimated Recovery as percentage of Allowed Equipment Lease Secured Claim: 100%.
Alternative B. Each Equipment Lease Secured Claim will be Allowed in an amount
equal to the value of the collateral securing such Claim as of the Filing Date,
as agreed by the Debtors or Reorganized USi (as applicable) and such Holder or
as determined by the Bankruptcy Court, less all Adequate Protection Payments
made on account of such Claim. Each Holder of an Allowed Equipment Lease Secured
Claim deemed to elect Alternative B will, on account of such Claim, at the
option of Reorganized USi: (i) receive return of the collateral securing such
Claim or return of a portion of the collateral securing such Claim (with the
balance of the Allowed Equipment Lease Secured Claim to be treated as provided
in the Plan) with the amount of any Allowed Equipment Lease Secured Claim and
any unsecured deficiency claim in Class 4 to be as agreed by Reorganized USi and
such Holder or as determined by the Bankruptcy Court; (ii)(a) receive equal
annual Cash payments commencing on the first anniversary of the Effective Date
and continuing through the fifth anniversary of the Effective Date in an
aggregate amount equal to the Allowed amount of such Equipment Lease Secured
Claim, plus interest at a fixed rate as agreed by Reorganized USi and such
Holder or as determined by the Bankruptcy Court (provided, that, Reorganized USi
shall have the right to pay any such Claim in full by paying the remaining
principal balance thereof, with accrued interest through the date of payment, in
Cash at any time on or after the Effective Date, without premium or penalty),
and (b) retain the liens securing such Equipment Lease Secured Claim to the
extent of the Allowed amount of such Claim pursuant to Section 1129(b)(2)(A)(i)
of the Bankruptcy Code; or (iii) receive such other treatment as will provide
for realization of the
- -------------- -------------------- ----------------------------------------------------------------------------------
16
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TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
indubitable equivalent of such Equipment Lease Secured Claim pursuant to Section
1129(b)(2)(A)(iii) of the Bankruptcy Code.
With respect to any Holder of an Equipment Lease Secured Claim who wishes to
understand the basis on which Reorganized USi will select the applicable form of
compensation under Alternative B, such Holder shall make a written request for
such information to Reorganized USi at least ten days prior to the Voting
Deadline, and Reorganized USi will respond to such request at least five days
prior to the Voting Deadline.
If the holder of an Equipment Lease is deemed to elect Alternative B and the
Equipment Lease is determined by the Bankruptcy Court to be a "true lease" (as
opposed to a secured financing) subject to rejection pursuant to Section 365 of
the Bankruptcy Code, USi will be entitled to seek assumption or rejection of
such lease (or any separate lease schedules thereof) at any time on or before
the date that is 30 days after such determination becomes a Final Order and if
USi fails timely to seek assumption of such lease (or any separate schedules
thereof) or notifies the applicable lessor of rejection of the lease (or any
separate schedules thereof), the lease (or any separate schedules thereof not
assumed) will be deemed rejected without further order of the Bankruptcy Court.
In the event of rejection of such Equipment Lease (or any separate lease
schedules thereof), any rejection damage claim, which will remain subject to
allowance, must be filed on or before the date that is 30 days after the later
of the Effective Date or such later rejection date and will be a Senior Claim
only to the extent that Reorganized USi agrees or the Bankruptcy Court
determines that such claim is entitled to the benefit of the Subordination
Provisions.
Estimated Recovery as percentage of Allowed Equipment Lease Secured Claim: 100%.
Reorganized USi reserves all of its rights in respect of Holders of Equipment
Lease Claims deemed to elect Alternative B, including the right to assert (i)
Reserved Causes of Action against such Holders in respect of such Claims and/or
(ii) that Equipment Leases are "true leases" subject to rejection and as to
which Equipment Lease Deficiency Claims are not Senior Claims entitled to the
benefit of the Subordination Provisions.
The distributions to Holders of Equipment Lease Secured Claims deemed to elect
Alternative A or Alternative B shall be in full satisfaction of any and all
rights of such Holders under Section 507(b) and Section 365(d)(10) of the Bankruptcy
Code.
- -------------- -------------------- ----------------------------------------------------------------------------------
2 Miscellaneous Unimpaired. On the Effective Date, at Reorganized USi's option, either (i) the
Secured Claims Reorganized Debtors shall assume an Allowed Miscellaneous Secured Claim and the
legal, equitable and contractual rights to which an Allowed Miscellaneous
Secured Claim entitles the Holder of such Claim
- -------------- -------------------- ----------------------------------------------------------------------------------
17
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TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
shall not be altered by the Plan, or (ii) the Reorganized Debtors shall provide
such other treatment in respect of such Claim as will cause such Claim not to be
Impaired; provided, however, that the Allowed Miscellaneous Secured Claim
portion of the Conklin & Conklin Note Claims shall be treated pursuant to
Section 5.02(c)(i) of the Plan (i.e., will be paid in full in Cash on the
Effective Date of the Plan). The Debtors' failure to object to any such
Miscellaneous Secured Claim during the pendency of the Chapter 11 Case shall not
prejudice, diminish, affect or impair Reorganized USi's right to contest or
defend against such Claim in any lawful manner or forum when and if such Claim
is sought to be enforced by the Holder thereof. Each Miscellaneous Secured Claim
and all liens lawfully granted or existing on any property of the Estate on the
Filing Date as security for a Miscellaneous Secured Claim shall (a) survive the
confirmation and consummation of the Plan, the Debtors' discharge under Section
1141(d) of the Bankruptcy Code and Section 12.01 of the Plan, and the vesting of
the property of the Estate in the Reorganized Debtors, (b) remain enforceable
against the Reorganized Debtors in accordance with the contractual terms of any
lawful agreements enforceable by the Holder of such Claim on the Filing Date
until the Allowed amount of such Claim is paid in full, and (c) remain subject
to avoidance by the Reorganized Debtors under the Bankruptcy Code.
Preservation of Rights. Notwithstanding the foregoing, on or as soon as
reasonably practicable after the later of the Effective Date and the date that
is thirty (30) calendar days after a Miscellaneous Secured Claim becomes
Allowed, Reorganized USi may elect to provide the Holder of a Miscellaneous
Secured Claim with (i) Cash in an amount equal to 100% of the unpaid amount of
such Claim, (ii) the proceeds of the sale or disposition of the collateral
securing such Claim to the extent of the value of the Holder's secured interest
in such Claim, (iii) the collateral securing such Claim, (iv) a note with
periodic Cash payments having a present value equal to the Allowed amount of
such Claim, or (v) such other distribution as necessary to satisfy the
requirements of the Bankruptcy Code. In the event Reorganized USi treats a Claim
under clause (i) or (ii) of above, the liens securing such Claim shall be deemed
released.
Estimated Recovery as percentage of Allowed Miscellaneous Secured Claim: 100%.
- -------------- -------------------- ----------------------------------------------------------------------------------
3 Miscellaneous Unimpaired. Each Holder of an Allowed Miscellaneous Priority Claim shall
Priority Claims receive, on account of such Claim, payment of the Allowed amount of such Claim
in full and in Cash.
Estimated Recovery as percentage of Allowed Miscellaneous Priority Claim: 100%.
- -------------- -------------------- ----------------------------------------------------------------------------------
4 General Unsecured Impaired. Each Holder of an Allowed General Unsecured Claim will receive, on
Claims account of such Claim, its Ratable Share (determined as if no elections to
receive Substitute Plan Notes had been made) of (i) the Plan
- -------------- -------------------- ----------------------------------------------------------------------------------
18
- -------------- -------------------- ----------------------------------------------------------------------------------
TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
Distribution determined based on the Plan Distribution Ratio, and (ii) the
Secondary Plan Distribution B.
On or before the Effective Date, a Holder of a General Unsecured Claim may, at
its option by delivering written notice to Reorganized USi and in lieu of
receiving Plan Notes, elect to receive an amount equal to its Ratable Share of
the principal amount of Plan Notes that would have been distributed pursuant to
the Plan Distribution and the Secondary Plan Distribution B, had no election to
receive Substitute Plan Notes been made (such amount, together with an amount
equal to the principal amount of Substitute Plan Notes to be issued in
accordance with Section 5.05(c) of the Plan, the "Substitute Plan Distribution
Amount"), in the form of Substitute Plan Notes.
If any Holder of a General Unsecured Claim holds or asserts a Reclamation Claim,
such General Unsecured Claim shall not be Allowed until such Reclamation Claim
is Allowed, disallowed or otherwise resolved, and when Allowed, such General
Unsecured Claim shall be reduced by the Allowed amount of the Reclamation Claim.
Estimated Recovery as percentage of Allowed General Unsecured Claim: 34.34%.
- -------------- -------------------- ----------------------------------------------------------------------------------
5 Senior Creditor Impaired. Each Holder of an Equipment Lease Deficiency Claim deemed to elect (i)
Claims Alternative A will hold an Allowed Senior Creditor Claim in the amount set forth
in Attachment 3 to the Plan, and (ii) Alternative B will be an Allowed Senior
Creditor Claim only to the extent and in the amount agreed upon by the Debtors
and the respective Holder of such Equipment Lease Deficiency Claim or, if such
status, extent and amount cannot be mutually agreed upon, as determined by the
Bankruptcy Court. A portion of the Conklin & Conklin Claims will be Allowed as a
Senior Creditor Claim in the amount of $1.9 million. No other Claim shall be
Allowed as a Senior Creditor Claim unless (i) the Holder of such Claim delivers
to the Debtors, no later than 20 days prior to the Confirmation Hearing or any
earlier date fixed by order of the Bankruptcy Court, a demand for Allowance of
such Claim as a Senior Creditor Claim accompanied by the written opinion of
independent legal counsel acting for such Holder, addressed to the Debtors and
Reorganized USi, stating that the Holder is entitled to the benefit of the
Subordination Provisions and (ii) the Debtors approve or, at or prior to the
Confirmation Hearing, the Bankruptcy Court orders classification of the Allowed
amount of such Claim as a Senior Creditor Claim. Each Holder of an Allowed
Senior Creditor Claim shall receive, on account of such Claims, its ratable
share of (a) a portion of the Plan Distribution determined based on the Plan
Distribution Ratio, calculated as if no elections to receive Substitute Plan
Notes had been made; and (b) in enforcement of the Subordination Provisions, an
additional portion of the Plan Distribution (being that portion that otherwise
would be distributed to Holders of Allowed Convertible
- -------------- -------------------- ----------------------------------------------------------------------------------
19
- -------------- -------------------- ----------------------------------------------------------------------------------
TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
Subordinated Note Claims) determined by applying the Plan Distribution Ratio to
the Allowed amount of the Convertible Subordinated Note Claims.
On or before the Effective Date, a Holder of a Senior Creditor Claim may, at its
option by delivering written notice to Reorganized USi and in lieu of receiving
Plan Notes, elect to receive an amount equal to its Ratable Share of the
principal amount of Plan Notes that would have been distributed pursuant to the
Plan Distribution, calculated as if no elections to receive Substitute Plan
Notes had been made, in the form of Substitute Plan Notes.
Estimated Recovery as percentage of Allowed Senior Creditor Claim: 81.22%.(10)
- -------------- -------------------- ----------------------------------------------------------------------------------
6 Convertible Impaired. The Convertible Subordinated Note Claims shall be Allowed in the
Subordinated Note amount of $125.0 million plus interest accrued through the Filing Date of
Claims approximately $5.8 million. In accordance with and in enforcement of the
Subordination Provisions, all distributions which the Holders of Convertible
Subordinated Note Claims would otherwise be entitled to receive under the Plan
on account of the Plan Distribution shall be delivered to the Holders of the
Allowed Senior Creditor Claims and provision therefor is made in Section
5.05(b)(2) of the Plan. Notwithstanding the Subordination Provisions, each
Holder of an Allowed Convertible Subordinated Note Claim shall be entitled to
receive, on account of such claim, its ratable share of Secondary Plan
Distribution A based upon the amount of Convertible Subordinated Notes held by
each Holder. Holders of Allowed Class 6 Claims in an amount less than $500,000
in principal amount will receive Cash in lieu of their proportionate share of
the New Warrants, and the aggregate amount of New Warrants will be reduced to
reflect such Cash payments, if any. Whether or not Class 6 or any individual
Holder of a Convertible Subordinated Note Claim has accepted the Plan, the
Subordination Provisions will be enforced without exception, through the
consummation of the Plan as an essential element thereof, as to (i) the Plan
Distribution and (ii) except with respect to Secondary Plan Distribution A, any
and all other distributions or property that the Holders of Allowed Convertible
Subordinated Note Claims are, would or might otherwise be entitled to receive
from the Debtors or the Estate or in the case on account of Convertible
Subordinated Note Claims. All such portions of the Plan Distribution and, except
with respect to Secondary Plan Distribution A, other distributions and property
will be delivered by the Debtors and Reorganized USi directly to the Holders of
Senior Creditor Claims pursuant to the Subordination Provisions.
- -------------- -------------------- ----------------------------------------------------------------------------------
- ----------------------
(10) Existing Equipment Leases and Equipment Lease Claims treated under
Alternative A will be restructured to provide an aggregated estimated 85%
effective recovery through the distributions to be made on the Equipment
Lease Secured Claims and the Equipment Lease Deficiency Claims (after
giving effect to the Subordination Provisions of the Convertible
Subordinated Note Indenture).
20
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TYPE OF CLAIM OR
CLASS INTEREST TREATMENT
- -------------- -------------------- ----------------------------------------------------------------------------------
Estimated Recovery as percentage of Allowed Convertible Subordinated Note Claim:
13.76%.(11)
- -------------- -------------------- ----------------------------------------------------------------------------------
7 Convenience Claims Impaired. The Holders of Convenience Claims shall receive Cash equal to 34.34%
of the unpaid amount of such Allowed Claim. Any Holder of an Allowed General
Unsecured Claim whose Allowed General Unsecured Claim is equal to or less than
$2,500 shall receive treatment of its Allowed Claim under Section 5.07(a) of the
Plan in full settlement, satisfaction, release and discharge of such Allowed
Claim. Any Holder of an Allowed General Unsecured Claim whose Allowed General
Unsecured Claim is more than $2,500, and who timely elects to reduce the amount
of such Allowed Claim to $2,500 in accordance with the terms of Section 5.07(b)
of the Plan also shall receive treatment of its Allowed Claim, as so reduced,
under Section 5.07(a) of the Plan in full settlement, satisfaction, release and
discharge of such Allowed Claim. Election of treatment in Class 7 must be made
on such Holder's ballot for voting on the Plan and be received by the Debtors on
or prior to the deadline for voting established by the Bankruptcy Court. Any
election of Convenience Claim treatment made after such deadline shall not be
binding upon the Debtors or the Reorganized Debtors unless the deadline is
expressly waived, in writing, by the Debtors or the Reorganized Debtors, as the
case may be. The exercise of such an election shall in no way preclude the
Debtors or the Reorganized Debtors from objecting to such Claim.
Estimated Recovery as percentage of Allowed Convenience Claim: 34.34%
- -------------- -------------------- ----------------------------------------------------------------------------------
8 Convertible Impaired. The Holders of Allowed Convertible Subordinated Notes Section 510(b) Claims
Subordinated Note shall receive no distribution under the Plan. On the Effective Date, all
Section 510(b) Convertible Subordinated Notes Section 510(b) Claims shall be cancelled and forever
Claims terminated and discharged.
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9 Interdebtor Claims Unimpaired. Interdebtor Claims shall be unimpaired.
- -------------- -------------------- ----------------------------------------------------------------------------------
10 Interests in USi Impaired. The Holders of Allowed Interests in USi and/or Allowed LLC Interests
and LLC Interests shall receive no distribution under the Plan. On the Effective Date, all such
Interests in USi and LLC Interests shall be cancelled and forever terminated and
discharged.
- -------------- -------------------- ----------------------------------------------------------------------------------
11 Section 510(c) Impaired. The Holders of Allowed Section 510(c) Claims shall receive no
Claims distribution under the Plan.
- -------------- -------------------- ----------------------------------------------------------------------------------
For a more detailed description of the treatment of the foregoing
classes of Claims and Interests, see Section IV.C, "THE PLAN -- Classification
and Treatment of Claims and Interests Under the Plan."
- ---------------------------
(11) The percentage distribution is calculated prior to the reduction for the
Indenture Trustee's fees and expenses. See Footnotes 5 and 14 hereof.
21
D. CONDITIONS TO THE OCCURRENCE OF THE EFFECTIVE DATE OF THE PLAN
The Plan will not become effective, and no obligations and rights set forth
in the Plan as of the Effective Date or thereafter will come into existence,
unless each of the following conditions is met on the Effective Date:
1. COMMITMENT. All conditions set forth in the Commitment will have been
satisfied or waived, including the condition that the Confirmation Order shall
be a Final Order.
2. REORGANIZED USi. Reorganized USi will remain as a Delaware corporation
existing in good standing under the DGCL. The Amended Certificate of
Incorporation and the Amended Bylaws will be its sole governing documents.
Reorganized USi shall have duly authorized, executed and delivered all New
Common Stock, Amended Equipment Lease Agreements, Substitute Equipment Lease
Agreements, Plan Notes, Secondary Plan Notes, Substitute Plan Notes and New
Warrants to be issued, delivered or distributed pursuant to the Plan. The
consummation of the Plan will not be in any respect restrained by order of any
court of competent jurisdiction.
3. PAYMENT OF THE SUBSCRIPTION PRICE. The Investor will have tendered to
Reorganized USi concurrent payment of the Subscription Price for the shares of
New Common Stock.
4. DELIVERY OF DOCUMENTS. All documents required to be executed and
delivered on or prior to the Effective Date under the Plan or under the
Commitment will have been executed and delivered (as applicable) by the parties
thereto.
5. TRUST INDENTURE ACT. The New Indentures pursuant to which the Plan
Notes, the Secondary Plan Notes and the Substitute Plan Notes are to be issued
shall have been qualified under the Trust Indenture Act of 1939, as amended (the
"TIA").
A HEARING TO CONSIDER CONFIRMATION OF THE PLAN HAS BEEN SCHEDULED FOR MAY
7, 2002 AT 10:00 A.M., EASTERN TIME.
The Debtors believe that all conditions to the Effective Date of the Plan
will likely be satisfied within ten days of the Confirmation Date, and that the
Effective Date of the Plan could occur as early as May 18, 2002.
E. VOTING ON THE PLAN
Each Holder of a Claim of a Class that is "Impaired" under the Plan, but is
not deemed to have rejected the Plan, will receive (a) a copy of that certain
Order dated March 22, 2002, (i) approving the manner of notice of the disclosure
statement hearing, (ii) establishing a record date, (iii) approving the
Disclosure Statement, (iv) establishing notice and objection procedures for
confirmation of the Plan, (v) approving solicitation packages and procedures for
distribution, (vi) approving forms of ballots and (vii) establishing procedures
to determine cure amounts and objections for certain executory contracts and
unexpired leases to be assumed by the Debtors (the "Voting Procedures Order");
(b) notice of the Confirmation Hearing; (c) the approved form of Disclosure
Statement (with the Plan annexed as an exhibit thereto); and (d) a ballot or
master ballot (as applicable) with instructions. Any Holder of a Claim against
or Interest in the Debtors whose legal, contractual or equitable rights are
altered, modified or changed by the proposed treatment under the Plan, or whose
treatment under the Plan is not provided for in Section 1124 of the Bankruptcy
Code, is considered "Impaired." Each Holder of a Claim of a Class that is
22
deemed to accept or reject the Plan will receive the Voting Procedures Order,
notice of the Confirmation Hearing, the Plan, this Disclosure Statement and a
notice of non-voting status in the form approved by the Bankruptcy Court, but
will not receive a ballot and will not be eligible to vote on the Plan. Holders
may also obtain copies of these documents by mailing a written request for such
materials to Logan & Company, Inc. (the "Voting Agent").
-------------------------------------------------------------
WHICH CLASSES OF CLAIMS ARE ENTITLED TO VOTE ON THE PLAN?
Holders of Classes of Claims are entitled to vote on the
Plan as follows:
Holders of Claims in Classes 1, 4, 5, 6 and 7 are Impaired
and entitled to vote on the Plan.
Holders of Claims in Classes 2, 3 and 9 are Unimpaired under
the Plan, are deemed to have accepted the Plan and will not
be entitled to vote on the Plan.
Holders of Claims in Classes 8 and 11 and Interests in Class
10 will receive no distribution under the Plan, are deemed
to have rejected the Plan and will not be entitled to vote
on the Plan.
-------------------------------------------------------------
The Bankruptcy Court has fixed March 22, 2002 as the voting record date
(the "Voting Record Date"). To be eligible to vote on the Plan, persons with
Claims that belong to the Voting Classes must have held them on the Voting
Record Date.
Under the Bankruptcy Code, the Plan will be deemed accepted by an Impaired
Class of Claims if the Voting Agent receives votes accepting the Plan
representing at least:
o two-thirds of the total dollar amount of the Allowed Claims in the
Class that cast votes; and
o more than one-half of the total number of Allowed Claims in the Class
that cast votes.
The Voting Procedures Order establishes which Claims are "Allowed" for
purposes of voting and designates the form of ballot to be used by each Voting
ClaSection For more information on voting procedures, please consult the Voting
Procedures Order.
All properly completed ballots received by the Voting Agent before 5:00
p.m., Eastern Time, on April 26, 2002 (the "Voting Deadline"), will be counted
in determining whether each Impaired Class entitled to vote on the Plan has
accepted the Plan. Any ballots received after the Voting Deadline will not be
counted. All ballots must contain an original signature to be counted. No
ballots received by facsimile or electronic mail will be accepted.
23
-------------------------------------------------------------
VOTING ON THE PLAN
WHEN DOES THE VOTE NEED TO BE RECEIVED? The Voting Deadline
for the receipt by the Voting Agent of properly completed
ballots is 5:00 p.m., Eastern Time, on April 26, 2002. If you
are a member of Class 6 and are required to send your ballot
to an Intermediary for inclusion in a Master Ballot (as
defined below), the Intermediary must receive your properly
completed ballot by 5:00 p.m., Eastern Time, on April 24,
2002.
WHICH CLASSES MAY VOTE? Persons may vote to accept or reject
the Plan only with respect to Allowed Claims that belong to a
Class that is Impaired under the Plan and is not deemed to
have rejected the Plan. These are Classes 1, 4, 5, 6 and 7
only.
WHICH MEMBERS OF THE IMPAIRED CLASSES MAY VOTE? The Voting
Record Date for determining which members of Impaired Classes
may vote on the Plan is March 22, 2002. Persons may vote on
the Plan only with respect to Claims that were held on the
Voting Record Date.
HOW DO I VOTE ON THE PLAN? For a vote to be counted, the
Voting Agent must receive an original signed copy of the
ballot form approved by the Bankruptcy Court. Faxed copies and
votes sent on other forms, including electronic mail, will not
be accepted.
WHOM SHOULD I CONTACT IF I HAVE QUESTIONS OR NEED A BALLOT?
You may contact the Voting Agent at the address or phone
number listed below.
-------------------------------------------------------------
-------------------------------------------------------------
EQUIPMENT LEASE SECURED CLAIMS
If you are the Holder of an Equipment Lease Secured Claim in
Class 1 and (i) are voting to accept the Plan or (ii) fail to
timely vote on the Plan, you will be deemed to have elected to
be treated in accordance with Alternative A pursuant to
Section 5.01(I) of the Plan. If you are the Holder of an
Equipment Lease Secured Claim in Class 1 and are voting to
reject the Plan, you will be deemed to have elected to be
treated in accordance with Alternative B pursuant to Section
5.01(II) of the Plan.
-------------------------------------------------------------
24
This Disclosure Statement, the annexed appendices and the Plan are the only
materials that you should use in determining how to vote on the Plan. Pursuant
to the Plan, the Debtors' existing indebtedness will be cancelled and exchanged
for Cash, the Plan Notes, the Secondary Plan Notes, the Substitute Plan Notes
and/or the New Warrants, in each case to be distributed in accordance with the
terms of the Plan. The Debtors believe that approval of the Plan is their best
opportunity to emerge from the Chapter 11 Case and return their businesses to
financial viability.
-------------------------------------------------------------
VOTING RECOMMENDATIONS
The Debtors believe that the Plan presents the best
opportunity for Holders of Claims to maximize their recoveries
and for the business operations of the Debtors to succeed. The
Debtors encourage Holders of Claims to vote to accept the
Plan.
The Official Committee of Unsecured Creditors appointed in the
Case believes that the Plan provides the best opportunity for
Holders of Claims to maximize their recoveries and for the
business of the Debtors to succeed, and therefore also
encourage Holders of Claims to vote to accept the Plan.
-------------------------------------------------------------
The ballots have been specifically designed for the purpose of soliciting
votes on the Plan from each Class entitled to vote. For this reason, in voting
on the Plan, please use only the ballot(s) sent to you with this Disclosure
Statement. If you hold Claims in more than one Class, you must use a separate
ballot for voting with respect to each Class of Claims that you hold. If you
believe you have received the incorrect form of ballot, you need another ballot
or have any questions concerning the form of ballot, please contact the Voting
Agent.
Please complete and sign your ballot and return it in the enclosed
pre-addressed envelope to the Voting Agent. All correspondence in connection
with voting on the Plan should be directed to the Voting Agent at the following
address:
-------------------------------------------------------------
VOTING AGENT
USi Balloting Center
c/o Logan & Company, Inc.
546 Valley Road, 2nd Floor
Upper Montclair, NJ 07043
Phone: (973) 509-3190
-------------------------------------------------------------
The Voting Agent will prepare and file with the Bankruptcy Court a
certification of the results of the voting on the Plan on a Class-by-Class
basis.
25
Additional copies of the ballots, this Disclosure Statement and the Plan
are available upon request made to the Voting Agent. Please contact the Voting
Agent with any questions relating to voting on the Plan.
-------------------------------------------------------------
YOUR VOTE IS IMPORTANT
Your vote on the Plan is important because:
Under the Bankruptcy Code, a plan of reorganization can be
confirmed only if certain majorities in dollar amount and
number of claims (as described above) of each Impaired Class
under the plan vote to accept the plan, unless the "cram down"
provisions of the Bankruptcy Code are used.
Under the Bankruptcy Code, only the votes of those holders of
claims or interests who actually submit votes on a plan are
counted in determining whether the specified majorities of
votes in favor of the plan have been received.
If you are eligible to vote with respect to a Claim and do not
deliver a properly completed ballot relating to that Claim by
the Voting Deadline, you will be deemed to have abstained from
voting with respect to that Claim and your eligibility to vote
with respect to that Claim will not be considered in
determining the number and dollar amount of ballots needed to
make up the specified majority of that Claim's Class for the
purpose of approving the Plan.
-------------------------------------------------------------
The Debtors are seeking to "cram down" the Plan on certain non-accepting
Classes of Claims and Interests. See Section V.D.3 below for a discussion of the
"cram down" procedures under the Bankruptcy Code.
In accordance with Bankruptcy Rule 3017(d), the Debtors will send ballots
to transfer agents, registrars, servicing agents, or other intermediaries
holding Claims for, or acting on behalf of, beneficial Holders of Claims
(collectively, the "Intermediaries"). Each Intermediary will be entitled to
receive, upon request to the Debtors, a reasonably sufficient number of ballots
to distribute to the beneficial owners of the Claims for which it is an
Intermediary, and the Debtors will be responsible for and pay each such
Intermediary's reasonable costs and expenses associated with the distribution of
ballots to the beneficial owners of such Claims and tabulation of the ballots.
Additionally, each Intermediary must receive returned ballots by 5:00 p.m.,
Eastern Time, on April 24, 2002, so that it can tabulate and return the results
to the Voting Agent in a summary "master" ballot in a form approved by the
Bankruptcy Court (the "Master Ballot") indicating the number and dollar amount
of cast ballots in the group of Claim Holders for which it is an Intermediary.
The Intermediaries must certify that each beneficial Holder has not cast more
than one vote with respect to any given Claim for any purpose, including both
for determining the number of votes and the amount of the Claim, even if such
Holder holds securities of the same type in more than one account. However,
persons who hold Claims in more than one voting Class will be entitled to one
vote in each such Class, subject to the applicable voting rules.
26
-------------------------------------------------------------
VOTING BY INTERMEDIARY
TIMING: If your vote is being processed by an Intermediary,
please allow time for transmission of your ballot to your
Intermediary for preparation and delivery to the Voting Agent
of a Master Ballot reflecting your vote and the votes of other
Claims tabulated by the Intermediary.
Your vote must be received by your Intermediary by April 24,
2002 at 5:00 p.m., Eastern Time to be counted.
Receipt by the Intermediary on or close to the Voting Deadline
may not allow sufficient time for the Intermediary to include
your vote in the Master Ballot that it prepares and delivers
to the Voting Agent by the Voting Deadline.
QUESTIONS ON VOTING PROCEDURES: If you have a question
concerning the voting procedures, please contact your Intermediary
or the Voting Agent.
-------------------------------------------------------------
F. CONFIRMATION HEARING
The Bankruptcy Court will hold the Confirmation Hearing at the following
time and place:
-------------------------------------------------------------
CONFIRMATION HEARING
DATE AND TIME: 10:00 a.m., Eastern Time, on May 7, 2002.
PLACE: United States Bankruptcy Court, District of Maryland,
Baltimore Division, 909 U.S. Courthouse, 101 West Lombard
Street, Baltimore, Maryland 21201.
JUDGE: Bankruptcy Judge E. Stephen Derby.
The Confirmation Hearing may be adjourned by the Debtors from
time to time upon announcement in the Bankruptcy Court on the
scheduled date for the hearing. No further notice will be
required to adjourn the hearing.
-------------------------------------------------------------
At the Confirmation Hearing, the Bankruptcy Court will:
o determine whether sufficient majorities in number and dollar amount
from each Class entitled to vote on the Plan have delivered properly
executed votes to accept the Plan;
o hear and determine objections, if any, to the Plan and to confirmation
of the Plan that have not been previously disposed of;
27
o determine whether the Plan meets the confirmation requirements of the
Bankruptcy Code; and
o determine whether to confirm the Plan.
Any objection to confirmation of the Plan must be in writing and filed and
served as required by the Bankruptcy Court under the order approving this
Disclosure Statement (i.e. the Voting Procedures Order). That order requires any
objections to the confirmation of the Plan to be served so as to be received on
or before 4:00 p.m., Eastern Time, on April 26, 2002 by the following persons:
o The Office of the United States Trustee for the District of Maryland,
Baltimore Division, 300 W. Pratt Street, Suite 350, Baltimore,
Maryland 21201, Attn: Mark A. Neal, Esq.;
o Co-counsel for the Debtors, Willkie Farr & Gallagher, 787 Seventh
Avenue, New York, New York 10019, Attn: Marc Abrams, Esq.;
o Co-counsel for the Debtors, Whiteford, Taylor & Preston L.L.P, Seven
Saint Paul Street, Baltimore, Maryland 21202, Attn: Martin Fletcher,
Esq.;
o General Counsel to the Debtors, William T. Price, Esq.,
USinternetworking, Inc., One USi Plaza, Annapolis, Maryland
21401-7478;
o Co-counsel to the Official Committee of Unsecured Creditors of the
Debtors (the "Official Committee"), Cleary, Gottlieb, Steen &
Hamilton, One Liberty Plaza, New York, NY 10006-1470, Attn: Lindsee P.
Granfield, Esq.;
o Co-counsel to the Official Committee, Hunton & Williams, 1751 Pinnacle
Drive, Suite 1700, McLean, Virginia 22102, Attn: Scott D. Field, Esq.;
and
o Counsel to the Investor, Ropes & Gray, One International Place,
Boston, Massachusetts 02110, Attn: R. Newcomb Stillwell, Esq.
II. BACKGROUND
This Disclosure Statement discusses the Debtors' financial condition and
results of operation. You should refer also to USi's Form 10-K for the fiscal
year ended December 31, 2000, and to Form 10-Q for the fiscal quarter ended
September 30, 2001, which have been filed with the Securities and Exchange
Commission ("SEC" or "Commission") and are available on USi's web page at
www.usi.net or the SEC's web page at www.sec.gov.
A. THE DEBTORS
Formed in 1998, USi is a full-service, enterprise application services
provider ("ASP") that delivers, as a service, the latest best-of-breed
enterprise, sales force automation, customer support, human resources, financial
management, e-business and managed web-hosting software applications to
customers over the Internet or through its proprietary platform. USi's ASP
services give clients a competitive advantage by providing them with the use of
advanced software applications and web-based technologies in a cost-effective
manner. USi provides "full service" in that it takes total responsibility for
28
delivering the latest enterprise, e-business, and managed web hosting solutions
over its proprietary global service platform ("GSP"). USi's GSP is housed in
three secure, fully redundant data centers that USi controls and operates, and
from which it provides around-the-clock monitoring and support.
USi's ASP services are primarily delivered as Internet Managed Applications
Provider ("iMAP") offerings, through which USi integrates hardware, software,
network security, and around-the-clock client care. USi backs its iMAP offerings
with some of the highest service level guarantees in the industry.
USi's subsidiary, Admiral Management Company, LLC ("Admiral"), is a
Delaware limited liability company of which USi is the sole member. Formed in
2000, Admiral manages non-residential real property located at 175 Admiral
Cochrane Drive, Annapolis, Maryland.
USi's subsidiary, GEMC Properties, LLC ("GEMC Properties"), is a Delaware
limited liability company of which USi is the sole member. Formed in 2000, GEMC
holds title to, and is landlord to seven tenants (one of which is USi) at,
non-residential real property located at 175 Admiral Cochrane Drive, Annapolis,
Maryland.
USi's subsidiary, Riva Canyon LLC ("Riva"), is a Delaware limited liability
company of which USi is the sole member. Formed in 2000, Riva holds title to
certain personal property.
USi's subsidiary, Shore Services LLC ("Shore"), is a Delaware limited
liability company of which USi is the sole member. Formed in 2000, Shore acts as
agent for Riva and manages Riva's personal property.
B. EVENTS LEADING TO CHAPTER 11
1. GENERAL
Formed in 1998, USi effectively created the ASP industry. Nonetheless, USi
is still in its formative stage. The formative stage of any company is typically
characterized by rapid growth and high operating expenses that exceed revenue
until sufficient size and corresponding economies of scale are realized, at
which time the growth slows to a sustainable level and operating expenses as a
percentage of revenue decrease rapidly. USi is no exception. USi's revenues grew
from $4.1 million in 1998 to $109.5 million in 2000, and, during the first nine
months of 2001, this trend continued as revenue grew 39% over the first nine
months of 2000. USi's operating expenses as a percentage of revenue in 2000 was
less than a third of what it had been in 1998; however, USi's operating expenses
continue to exceed revenues. In 2000, USi had a net loss of $175.0 million; and
during the first nine months of 2001, USi had a net loss of $134.5 million.
The result of USi's continuing losses has been a decrease in USi's
liquidity. Because of the promise of USi's business and the availability of the
capital markets, from 1998 through 2000, USi had been able to address its
liquidity needs through common stock, private equity and debt offerings.
Economic conditions in 2001, however, ultimately made such offerings
unavailable.
2. MARKET CONDITIONS
In 2001, there was a significant increase in competition in the ASP market.
By the end of 2001, the number of competitors - that is, the number of companies
calling themselves "application service providers" - had increased to
approximately 500. Although each of these competitors offers some of the
services that USi does, none delivers all of the services provided under USi's
full-service model.
29
Also in 2001, increased competition coincided with economic recession and
market uncertainty. USi witnessed an economic slowdown in its markets, which
included a reduction in capital expenditures and technology and associated
discretionary spending by its clients and potential clients. In addition, many
clients and potential clients were themselves in financial distreSection
Accordingly, many potential clients either retained their IT functions in-house
or substituted best-of-breed enterprise applications and full-service ASPs for
less powerful but cheaper solutions.
3. CAPITAL MARKETS
USi's full-service ASP model is capital-intensive. To serve its clients,
USi must outfit the necessary redundant data centers and invest in hardware and
labor. This investment is recouped only over time through a client's payment of
monthly fees.
In April 1999, USi issued shares of its common stock to the public in its
initial public offering. In October and November 1999, USi issued to
institutional investors in a private placement $125.0 million principal amount
of 7% Convertible Subordinated Notes due November 1, 2004, payable semi-annually
on May 1 and November 1 of each year. USi subsequently exchanged such notes for
identical notes which were registered with the SEC. In February and March 2000,
USi issued additional shares of its common stock to the public.
Although capital market liquidity was adequate to meet USi's needs until
2001, an uncertain business environment and the declining equity value of
high-tech companies contributed to undermine investor confidence. As a result,
previously available capital markets were no longer available to address USi's
capital needs.
USi common stock began trading on the Nasdaq's National Stock Market (the
"Nasdaq") in April 1999. As of April 2, 2001, there were 143,969,328 shares of
USi common stock issued and outstanding, which were beneficially held by 66,888
shareholders of record. On January 7, 2002, in response to the Debtors' Chapter
11 filing, the Nasdaq halted trading of USi common stock. In turn, USi's Board
of Directors agreed to voluntarily delist USi from the Nasdaq. USi was formally
delisted from the Nasdaq on January 22, 2002.
4. AVAILABLE CREDIT FACILITIES
On January 2, 2001, USi entered into a $50.0 million revolving line of
credit with a group of lenders led by GE Capital. On September 30, 2001, USi was
not in compliance with certain covenant requirements under that revolving line
of credit. Therefore, these debt agreements were reclassified as current debt in
the September 30, 2001 financial statements. On October 5, 2001, USi retired the
outstanding balance of $10.3 million and subsequently terminated the revolving
line of credit.
USi elected not to pay the $4.4 million semi-annual interest payment due on
November 1, 2001 on its $125 million Convertible Subordinated Notes due November
1, 2004. Consequently, USi is in default of the Convertible Subordinated Note
Indenture, and the default cure period expired on December 1, 2001.
In November 2000, USi entered into an equity draw-down agreement with Acqua
Wellington North American Equities Fund Ltd., which permits USi to sell shares
of its common stock to Acqua Wellington at its sole discretion, depending upon
its needs. To date, Acqua Wellington has purchased $5 million of shares of USi
common stock under this agreement. The agreement provides that Acqua Wellington
is committed to purchase up to $60.8 million of shares of USi common stock over
28 months.
30
If shares of USi common stock trade below $1.00 per share, however, Acqua
Wellington is not obligated to purchase any shares of USi common stock. USi's
stock price has been below $1.00 since August 2001, and consequently USi has
been precluded from selling shares of its common stock pursuant to this
agreement.
On November 2, 2001, USi entered into a $25.0 million revolving credit
facility with Foothill Capital for general corporate purposes. USi terminated
this facility and had no outstanding balances thereunder as of the Filing Date.
5. EROSION OF CLIENT BASE
The economic downturn in 2001, including the lack of access to the capital
markets, caused: (i) an erosion in USi's client base as companies began to
suffer from their own declining revenues and lack of available capital; and (ii)
a reduction in USi's ability to attract new business, as potential clients opted
not to buy ASP services or reduced their technology budgets. This combination
led to a decline from quarter to quarter in USi's gross revenue. The loss of
clients has a material economic impact on USi because USi incurs the majority of
its costs at the beginning of a client engagement. Replacing existing clients
with new clients means incurring additional costs without any matching offset in
additional revenue. Consequently, retaining clients remains USi's highest
priority.
6. COST REDUCTIONS
Throughout 2001, USi aggressively cut costs, most significantly in the
number of its employees. USi reduced its work force from 1,160 employees as of
January 1, 2001 to 550 employees as of December 31, 2001, which resulted in a
decrease in monthly payroll and benefits expenses from approximately $12.6
million in January 2001 to approximately $4.5 million in December 2001. USi also
improved the efficiency of its operations and revised its business model to be
less capital-intensive. Despite these efforts, USi's need for cash could not be
met by its available sources.
7. NEW INVESTMENT BY THE INVESTOR
In addition to these cost reductions, USi requires significant additional
investment to continue its operations and ensure long-term viability and client
stability. To that end, in July 2001, USi engaged CSFB to assist USi in
obtaining additional and more permanent sources of capital and in evaluating
strategic alternatives. CSFB promptly began a search for potential investors and
strategic partners. Throughout the summer and into the fall of 2001, CSFB spoke
with 90 potentially interested parties. Out of those 90 parties contacted by
CSFB, two strategic and 17 financial bidders conducted due diligence on USi.
In August 2001, USi also retained CDG, who along with USi's management,
began discussions with USi's debt holders and other creditors regarding the
restructuring of its obligations. CDG worked with USi and CSFB to restructure
USi's balance sheet in order to attract investors.
On September 17, 2001, a group formed by a Director of USi informed USi of
its intention to submit an investment proposal, subject to its ability to secure
financing, and commenced due diligence and discussions with potential sources of
funding. On October 4, 2001, the group announced that it would not submit a
proposal.
31
On September 28, 2001, Bain submitted a bid to cause an affiliate to invest
a total of $100 million in USi, subject to certain conditions including
additional due diligence and a satisfactory restructuring of USi's balance
sheet. CSFB informed other interested parties conducting due diligence that
USi's Board would meet on October 5, 2001 to consider its alternatives and
encouraged each to submit a proposal prior to that date.
On October 4, 2001, Bain submitted a revised bid that did not contain, as a
condition to closing, a requirement for further business due diligence. On
October 5, 2001, when USi's Board met to consider alternatives, only Bain had
submitted a proposal. Two other parties also had indicated an interest in
submitting an investment proposal and requested until October 8, 2001 to
complete their preparations. Accordingly, USi's Board adjourned until October 8,
2001.
To assist one of those additional parties in preparing its bid, USi and
CSFB sent it significant due diligence materials and made the USi management
team available for questions. On October 7, 2001, this party indicated that it
would not be able to submit a bid in time for the Board's consideration; the
other party also did not submit a proposal.
Accordingly, out of the 19 potential investors contacted by CSFB who
conducted due diligence on USi, only Bain submitted a proposal. On October 8,
2001, USi accepted Bain's proposal and entered into a letter of intent with
Bain, providing for an equity investment of up to $100 million, of which an
affiliate of Bain would initially invest $75 million, with an additional $25
million available upon achievement of certain business milestones. In this
letter of intent, USi agreed to a 30-day exclusivity period during which USi
agreed to pay Bain's reasonable expenses incurred in connection with the
potential investment, and agreed further not to solicit alternative proposals
from third parties. Bain's investment was contingent upon a number of
conditions, including, among others, a mutually agreeable restructuring of USi's
obligations, execution of definitive documentation, and any necessary regulatory
approvals. USi and Bain commenced negotiating and documenting the terms of the
transaction.
During the next 30 days, USi and Bain and their respective advisers
actively engaged in negotiating the potential structure and terms of the
proposed transaction. On November 8, 2001, the exclusivity period expired
without an agreement as to terms or definitive documentation of the proposed
transaction, and USi and Bain entered into a second letter of intent providing
for a 20-day extension of the exclusivity period, which would expire on November
28, 2001. While USi, Bain and their advisers continued to actively negotiate
potential terms and document the transaction, by November 28, 2001 no agreement
had been reached.
On November 28, 2001, upon expiration of the exclusivity period, one of the
other two parties that had previously expressed an interest in submitting a
proposal indicated that it would be interested in submitting such an alternative
proposal to invest $50 million in USi, subject to additional due diligence. On
December 4, 2001, this party informed CSFB that it had decided not to submit an
alternative investment proposal to USi.
On December 18, 2001, in connection with the services CSFB provided to USi
in its efforts to obtain additional and more permanent sources of capital and in
evaluating its strategic alternatives prior to the Filing Date, USi entered into
an agreement with CSFB (superseding an earlier agreement with CSFB), pursuant to
which USi agreed that CSFB shall earn a fee of $4.0 million (the "CSFB Fee")
upon execution of a definitive agreement for the sale of USi, with such fee
being paid upon consummation of
32
the sale.(12) Correspondingly, on that date, CSFB and the Investor entered into
an agreement pursuant to which the Investor will pay the CSFB Fee if it has not
been paid by USi within one business day after consummation of the sale. It is
contemplated by the Investor that, to the extent the CSFB Fee has not been
otherwise paid, it will cause Reorganized USi to pay the CSFB Fee out of the
consideration being paid by the Investor under the Commitment or the Investor
will pay the CSFB Fee and then cause Reorganized USi to reimburse the Investor
for the payment of this fee. The Debtors do not intend to seek Bankruptcy Court
approval to pay and/or reimburse the Investor for the CSFB Fee.
On January 7, 2002, the Debtors commenced the Chapter 11 Case, and USi and
Bain's affiliate, the Investor, executed the Commitment, a copy of which is
attached to the Plan as Attachment 2. Pursuant to the Commitment, subject to the
terms and conditions described therein, the Investor agreed to invest $81.25
million upon the Effective Date in consideration for all of the outstanding
shares of New Common Stock. The Commitment contemplates that on the Effective
Date the Investor also will execute a subscription agreement among the Investor,
Reorganized USi and the Bain Fund with respect to an additional $25.0 million
investment by the Bain Fund, such investment to be subject to Reorganized USi
meeting financial targets to be negotiated among Reorganized USi, the Investor
and the Bain Fund. It is currently contemplated that these financial targets may
be based various measures of Reorganized USi's performance, such as EBITDA and
EBITDA minus capital expenditures. For more information, see Section IV.J,
"Commitment."
C. POTENTIAL ACQUIROR
The Bain Fund may invest in the Investor directly or, in the alternative,
it may invest indirectly through Interpath Communications, Inc. ("Interpath"), a
Bain affiliate that is a competitor of USi, as permitted by the Letter Agreement
(see Section IV.J.5 of this Disclosure Statement for additional information
regarding the Letter Agreement). In this event, Interpath would INVEST $81.25
million in the Investor, who would purchase all of the outstanding shares of
Reorganized USi. As of the Effective Date, or at a later time, the Investor
and/or Reorganized USi may combine with Interpath by merger or other means. The
acquisition of Reorganized USi indirectly through Interpath would be intended to
enhance the financial performance of Reorganized USi and Interpath and their
combined long-term strategic position in the ASP marketplace.
1. OVERVIEW
Like USi, Interpath is an ASP, offering software application hosting,
development, and integration solutions to assist customers in reducing costs and
enhancing the performance of mission-critical applications. Interpath hosts,
manages and delivers leading enterprise resource planning, customer relationship
management, e-commerce and other applications.
Headquartered in Research Triangle Park in North Carolina, Interpath
manages two data centers, one in Research Triangle Park and the other in
Columbus, Ohio, which are monitored 24 hours a day by its trained, on-site
staff. Interpath has targeted its service offerings to Fortune Global 1000 and
mid-enterprise customers, which it defines as companies and divisions of larger
companies with revenues of between $100 million and $1.5 billion. Of Interpath's
more than 350 customers, no single customer currently accounts for more than 10%
of revenues.
- ----------------------
(12) Prior to the Petition Date, USi paid to CSFB approximately $109,203.69 in
out-of-pocket expenses on account of USi's engagement of CSFB in July 2001
(as discussed above) to assist USi in obtaining additional financing and
evaluating strategic alternatives.
33
2. HISTORY
Interpath is a privately-held affiliate of the Bain Fund and was
incorporated in Delaware in May 2000. In July 2000, Carolina Power & Light
Company (now known as Progress Energy, Inc.) contributed substantially all of
the business and assets of Caronet, Inc., its wholly-owned subsidiary, and
certain cash consideration to Interpath in exchange for approximately 35% of
Interpath's common stock. In connection with this transaction, the Bain Fund and
other investment funds affiliated with Bain subscribed for approximately 63% of
Interpath's common stock, with certain third-party minority investors
subscribing for the remainder of Interpath's common stock.
In July 2001, Interpath acquired the enterprise resource planning division
of Interliant, Inc.
3. EMPLOYEES
As of December 31, 2001, Interpath employed approximately 186 persons,
including 103 in engineering and operations, 36 in marketing, business
development and sales, 21 in application management and implementation services,
and 26 in finance and administration. Interpath is not subject to any collective
bargaining agreements.
4. FACILITIES
Interpath's facilities in Research Triangle Park consist of approximately
120,000 square feet containing its principal executive offices, a sales office
and operations center, which are sub-leased from Progress Energy under leases
with terms extending into 2008. Interpath's facilities in Columbus, Ohio consist
of approximately 25,000 square feet containing an operations center,
implementation organization center for PeopleSoft and other applications, and a
sales office, all of which are leased from Interliant, Inc. under a lease with a
term extending into 2003. In addition to sales offices in Research Triangle
Park, and Columbus, Ohio, Interpath has established other offices in California,
Georgia, Maryland, Massachusetts, Texas and New Jersey.
5. POTENTIAL BENEFITS OF A MERGER
The acquisition of Reorganized USi indirectly through Interpath would be
intended to enhance the financial performance of Reorganized USi and Interpath
and their combined long-term strategic position in the ASP marketplace. The
potential benefits of this combination could include the following:
o Accelerated scaling of business; through the combination of the two
companies' assets and customer bases, Reorganized USi and Interpath
would benefit from the following:
o Operational synergies from the consolidation of back-end
processes and facilities targeted at reducing excess capacity at
both companies; and
o Leveraging of fixed costs (such as telecommunications and
facilities) and economies of scale in purchasing supplies and
services (such as software and hardware maintenance and
telecommunications);
o Reduction of spending in redundant areas (such as advertising,
promotion and other general administrative categories);
o Enhanced stability from a combined customer base and exchange of best
practices;
34
o Expansion of product offerings and deepening of experience levels in
common product categories (such as Peoplesoft);
o New revenue growth potential through an expanded sales organization,
greater market coverage and a broader customer pipeline; and
o Immediate improvement of the cash flows and cash profile of the
combined busineSection
For pro forma financial information with respect to what a possible
combination of Reorganized USi and Interpath would look like, please see the
Combined Financial Projections, annexed hereto as Appendix D.
D. RECENT FINANCIAL PERFORMANCE
Revenue. USi generates revenue from iMAP services and related professional
services. Service fees are the consideration paid for clients' access to USi's
network of Enterprise Data Centers, hosting application software, and the
implementation and management of that software. iMAP contracts generally have a
three to five-year term, and revenues are recognized ratably over that term.
For the nine months ended September 30, 2001, USi generated $100.56 million
in revenue. This amount includes (i) revenue recognized in 2001 for contracts
signed in fiscal year 2000; (ii) upgrades and cross-sales to existing clients;
(iii) sales to new clients; and (iv) one-time fees totaling $6.2 million in
early-termination fees.
Costs and expenses. USi incurs operating costs and expenses for (i) the
direct cost of services; (ii) network and infrastructure; (iii) general and
administrative; (iv) sales and marketing; (v) product research and development;
(vi) non-cash stock compensation; and (vii) depreciation and amortization.
USi incurs a number of its costs at the beginning of client engagements,
i.e., before receiving the corresponding revenue on client contracts. Product
research and development costs and the cost to operate its network and data
centers are recognized as period costs. Costs related to the acquisition of
hardware are capitalized and depreciated over the estimated useful life of the
hardware of five years. Costs related to the acquisition of software licenses
are capitalized and amortized over the lesser of either three years or the term
of the client contract, depending on the terms of the software license agreement
between USi and the licensor. Amortization is recorded on a straight-line basis
over the remaining useful life. Direct costs related to the integration of
software applications for a client on USi's network are capitalized and
amortized over the related contract period.
Contracts. As of December 31, 2001, USi had 183 signed contracts with 124
clients accounting for total revenue under contract, assuming full payment over
the life of each contract, of over $370 million. This amount is approximately
$10 million lower than the amount of total revenue under contract as of December
31, 2000. The reduction is mainly the consequence of contract terminations by
clients in financial distreSection
Selected financial data for nine-month period ended September 30, 2001 (all
dollar amounts in thousands except for per-share amounts).
Revenue......................................... $ 100,557
----------
Costs and expenses:
Direct cost of services....................... 51,186
Network and infrastructure costs.............. 20,395
Selling, general and administrative........... 74,699
35
Non-cash stock compensation expense........... 16,302
Depreciation and amortization................. 57,513
----------
Total costs and expenses................... 220,095
----------
Operating loSection................................. (119,538)
Other income (expense):
Interest income............................... 4,111
Interest expense.............................. (19,112)
----------
(15,001)
----------
Net loSection.................................. $ (134,539)
===========
Basic and diluted loss per common share
attributable to common stockholders........... $ (0.96)
===========
III. THE CHAPTER 11 CASE
A. CONTINUATION OF BUSINESS; STAY OF LITIGATION
On January 7, 2002, the Debtors commenced the Chapter 11 Case. Since the
Filing Date, the Debtors have continued to operate as debtors-in-possession
subject to the supervision of the Bankruptcy Court in accordance with the
Bankruptcy Code. Thus, the Debtors' management has remained in place and
continued to manage the Debtors' affairs. The Debtors are authorized to operate
in the ordinary course of busineSection Transactions outside the ordinary course
of business require Bankruptcy Court approval.
An immediate effect of the filing of the bankruptcy petition is the
imposition of the automatic stay under the Bankruptcy Code which, with limited
exceptions, has enjoined the commencement or continuation of all collection
efforts by creditors, enforcement of liens against the Debtors and litigation
against the Debtors. This injunction remains in effect, unless modified or
lifted by order of the Bankruptcy Court, until consummation of a plan of
reorganization.
B. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE
1. FIRST DAY MOTIONS
On the Filing Date, the Debtors filed numerous traditional "first day
motions." Certain of these motions were granted after a hearing in the
Bankruptcy Court, including, among others:
o an order directing the joint administration of the Debtors'
Chapter 11 Case;
o an order appointing Logan & Company, Inc., as official noticing
and claims agent;
o an order authorizing the Debtors to pay certain prepetition
employee wages and reimbursable expenses and honor employee
benefits policies and directing financial institutions to honor
all checks drawn on the Debtors' accounts for such purposes (the
"Wage Order");
o an order authorizing the Debtors to maintain their prepetition
bank accounts, business forms, and cash management system,
approving the Debtors' proposed investment guidelines, and
authorizing continuation of intercompany transactions and
according superpriority status to all postpetition intercompany
claims;
36
o an order extending the time within which the Debtors are required
to file certain information, including schedules of assets and
liabilities, statements of financial affairs, and lists of equity
security holders;
o an interim order determining adequate assurance of payment for
future utility services and restraining utility companies from
discontinuing, altering or refusing service; and
o an order authorizing the employment and compensation of
professionals utilized by the Debtors in the ordinary course of
busineSection
2. RETENTION OF PROFESSIONALS
Subsequent to the Filing Date, the Bankruptcy Court signed orders approving
the employment and retention of (a) Willkie Farr & Gallagher and Whiteford,
Taylor & Preston L.L.P., each as Debtors' counsel, on January 15, 2002; (b)
Latham & Watkins, as special counsel to the Debtors, on February 14, 2002; and
(c) CDG, as Debtors' financial adviser, on February 22, 2002. A motion will be
filed to approve the employment and retention of Ernst & Young, as the Debtors'
auditor.
3. PREPETITION WAGE AND BENEFITS ORDER
As set forth above, the Bankruptcy Court approved the Wage Order on the
Filing Date. The Wage Order (i) authorized the Debtors to pay certain
prepetition employee wages, salaries and other compensation, (ii) authorized the
Debtors to honor certain employee benefit policies and practices, including
disability and health insurance and (iii) directed applicable banks and
financial institutions to honor checks in respect of employee-related
obligations. The Debtors believe such relief was necessary to avoid serious
disruption to their business at a critical juncture in the Debtors'
reorganization. Payments made pursuant to the Wage Order will reduce the amount
of Miscellaneous Priority Claims and General Unsecured Claims payable by the
Debtors on the Effective Date.
4. APPOINTMENT OF OFFICIAL COMMITTEE
On January 15, 2002, the United States Trustee for the District of
Maryland, Baltimore Division, appointed the Official Committee, which currently
consists of: CSFB, The Bank of New York, Conklin & Conklin, Inc. and Lloyd I.
Miller. On February 21, 2002, the Bankruptcy Court approved the retention of
Cleary, Gottlieb, Steen & Hamilton and Hunton & Williams, as co-counsel. The
Official Committee has filed an employment application for Trenwith Securities
LLC to serve as its financial adviser.
5. ASSUMPTION OR REJECTION OF LEASES
On the Filing Date, the Debtors filed a motion to reject approximately
thirty unexpired leases that the Debtors determined to be burdensome. Having
considered the lease rejections on a lease-by-lease basis, by February 14, 2002,
the Bankruptcy Court approved the rejection of all of these leases by consent
orders. The Debtors also obtained an order extending the time within which the
Debtors must assume or reject their remaining unexpired nonresidential real
property leases until such time as the Bankruptcy Court enters an order granting
or denying confirmation of the Plan.
The Debtors are continuing to analyze their remaining unexpired leases and
executory contracts and will make determinations regarding the assumption or
rejection of such obligations under the terms of
37
the Plan. Under the Plan, any unexpired lease or executory contract that has not
been expressly rejected or assumed by the Debtors with the Bankruptcy Court's
approval on or prior to the Effective Date will be deemed to have been assumed
by the Debtors as of the Effective Date unless (i) such lease or contract has
then been rejected, (ii) there is then pending before the Bankruptcy Court a
motion to assume, a motion to reject or a motion to assume and assign such lease
or contract, (iii) such lease or contract is identified on a "Schedule of Leases
and Contracts to be Rejected" filed at least ten days before the date of the
Confirmation Hearing (as such schedule may be amended on or prior to the date of
the Confirmation Hearing), or (iv) such lease or contract is rejected following
entry of an order regarding and fixing the amount of a disputed cure amount as
provided in Section 7.02 of the Plan.
6. BAR DATE
In accordance with Bankruptcy Rules 3003(c) and 9029, by order dated
January 22, 2002, the Bankruptcy Court established March 11, 2002 (the "Bar
Date") as the final date for filing proofs of claims against the Debtors,
subject to certain exceptions. Pursuant to Bankruptcy Rule 3003(c)(2), any
creditor: (i) whose Claim (a) was not scheduled by the Debtors or (b) was
scheduled as disputed, contingent or unliquidated, and (ii) who failed to file a
proof of claim on or before the Bar Date, will not be treated as a creditor with
respect to that Claim for purposes of voting on the Plan or receiving a
distribution under the Plan. As of the Bar Date, approximately 650 claims had
been timely filed.
The Debtors may object to all Claims filed after the Bar Date and intend to
object to duplicate, excessive or otherwise meritless Claims.
7. PLAN PROCEDURES MOTION
On January 14, 2002, the Debtors filed their "Motion for Authorization and
Approval of Conditional Subscription Agreement by and between Debtors and
USinternetworking Holdings, Inc., Including Payment of Purchaser Expenses and a
Transaction Fee, and Related Commitment Letter" (the "Plan Procedures Motion"),
which seeks approval of, among other things, (i) the Commitment, (ii) the
January 7, 2002 letter agreement related thereto (see Section IV.J.5 for
additional information), and (iii) USi's agreement to pay certain fees and
expenses of the Investor pursuant to the September 7, 2002 letter agreement
(including a termination fee and expense reimbursement) and to provide the
Investor with other customary "stalking horse" protections. The Bankruptcy Court
approved the Plan Procedures Motion on February 7, 2002.
8. RETENTION, SEVERANCE AND BONUS PLANS
To retain valued members of the Debtors' management, on February 8, 2002,
the Debtors filed a motion seeking an order of the Bankruptcy Court authorizing
the Debtors to implement a retention plan (the "Retention Plan"), a spot bonus
pool (the "Spot Bonus Pool"), a revised sale force retention policy (the "Sales
Force Retention Policy"), a revised solution engineer retention policy (the
"Solution Engineer Retention Policy") and a severance plan (the "Severance
Plan"). On February 26, 2002, the Bankruptcy Court approved the Retention Plan,
the Spot Bonus Pool, the Sales Force Retention Policy and the Severance Plan.
Pursuant to the Retention Plan, up to $2.5 million shall be available for
the payment of base retention bonuses (the "Base Retention Bonus"). Up to an
additional $1 million in supplemental retention bonuses may be paid to
participants, at the Debtors' sole discretion ("Discretionary Retention Bonus").
In no event, however, may the aggregate bonuses paid under the Retention Plan
exceed $3.5 million. The
38
Base Retention Bonuses will be paid to the participants as soon as practicable
following the Effective Date. However, under certain circumstances, the Debtors
may pay participants up to $1.25 million of Base Retention Bonuses prior to the
Effective Date. On or after the Effective Date, the Debtors may pay participants
the Discretionary Retention Bonus, on such dates as determined by the Debtors.
Pursuant to the Spot Bonus Pool, $500,000 was allocated to a discretionary bonus
program to pay to employees who made extraordinary efforts during the six-month
period following the Petition Date. Each employee will be eligible to receive,
on average, an aggregate retention bonus of $6,850. The range of aggregate
retention bonus payments is between $925 to $54,000.
Pursuant to the Sales Force Retention Policy, for the first two quarters of
fiscal year 2002, each sales employee will be entitled to a $6,000
non-recoverable draw each month (the "Non-Recoverable Draw"), 50% of which will
be paid at the end of each month, with the balance paid at the end of the third
quarter of fiscal year 2002. The anticipated cost of the Sales Retention Policy
is approximately $324,000. Pursuant to the Solution Engineer Retention Policy,
for the first two quarters of fiscal year 2002, each solution engineer will be
entitled to a $10,000 non-recoverable draw each quarter (the "Solution Engineer
Non-Recoverable Draw"), 50% of which will be paid at the end of each month, with
the balance paid at the end of the third quarter of fiscal year 2002. The
anticipated cost of the Solution Engineer Policy is approximately $100,000.
Under the Severance Plan, for all eligible employees actually and
involuntarily terminated without cause, the Severance Plan would entitle them to
severance payments ranging between four and twenty-four weeks of base salary,
plus medical benefits for such period of time, based on such employee's time of
service and title. Pursuant to the change-of-control portion of the Severance
Plan, upon an eligible employee's termination without cause in connection with
and within six months following a Sale of Business (as defined in the Severance
Plan), the change-of-control portion of the Severance Plan would entitle them to
payments ranging between eight and twenty-four weeks of base pay, plus medical
benefits for such period of time, based on such employee's time of service and
title.
9. DISCLOSURE STATEMENT NOTICE ORDER
By order dated February 7, 2002, the Bankruptcy Court established 2:00
p.m., Eastern Time, on March 19, 2002 as the date and time for the conduct of
the hearing to consider the entry of an order, inter alia, finding that the
Disclosure Statement contains "adequate information" in accordance with Section
1125 of the Bankruptcy Code. Objections or responses to the Disclosure Statement
were due on or before 4:00 p.m., Eastern Time, on March 12, 2002.
IV. THE PLAN
THE FOLLOWING IS A SUMMARY OF CERTAIN SIGNIFICANT PROVISIONS OF THE PLAN.
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION SET FORTH IN THE PLAN. TO THE EXTENT THAT THE TERMS OF THIS
DISCLOSURE STATEMENT VARY FROM THE TERMS OF THE PLAN, THE TERMS OF THE PLAN WILL
CONTROL.
A. GENERAL
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself and its creditors and stockholders.
39
Formulation of a plan of reorganization is the principal objective of a
Chapter 11 reorganization case. In general, a Chapter 11 plan of reorganization
(i) divides claims and equity interests into separate classes, (ii) specifies
the property that each class is to receive under the plan and (iii) contains
other provisions necessary to the reorganization of the debtor. Chapter 11 does
not require each holder of a claim or interest to vote in favor of the plan of
reorganization in order for the bankruptcy court to confirm the plan. However, a
plan of reorganization must be accepted by the holders of at least one class of
claims that is impaired (as defined above) without considering the votes of
"insiders" within the meaning of the Bankruptcy Code.
Distributions or deliveries to be made under the Plan will be made after
confirmation of the Plan, on the Effective Date or as soon thereafter as is
practicable, or at such other time or times specified in the Plan.
B. VALUATION
WHILE ASSISTING THE DEBTORS IN DETERMINING THE TOTAL ENTERPRISE VALUE OF
THE REORGANIZED DEBTORS, CDG ASSUMED AND RELIED ON THE ACCURACY AND COMPLETENESS
OF (I) ALL FINANCIAL AND OTHER INFORMATION FURNISHED TO IT BY THE DEBTORS AND
(II) PUBLICLY AVAILABLE INFORMATION. IN ADDITION, CDG DID NOT INDEPENDENTLY
VERIFY THE ASSUMPTIONS UNDERLYING THE FINANCIAL PROJECTIONS (THE "PROJECTIONS")
IN CONNECTION WITH ITS ANALYSIS OF THE REORGANIZED DEBTORS' TOTAL ENTERPRISE
VALUE, AND NO INDEPENDENT EVALUATIONS OR APPRAISALS OF THE DEBTORS' ASSETS WERE
SOUGHT OR WERE OBTAINED IN CONNECTION THEREWITH. THE PROJECTIONS ARE ANNEXED
HERETO AS APPENDIX B.
DUE TO THE FACT THAT VALUATION ANALYSES ARE BASED ON ASSUMPTIONS AND ARE
INHERENTLY SUBJECT TO UNCERTAINTIES, NEITHER THE DEBTORS, CDG NOR ANY OTHER
PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY OF THIS DETERMINATION.
In determining the Total Enterprise Value for the Reorganized Debtors, the
Debtors and CDG reviewed: (i) certain historical financial information of the
Debtors; (ii) certain internal financial and operating data of the Debtors;
(iii) publicly available information; (iv) the Projections; and (v) certain
economic and industry information related to the Debtors' operations. In
addition, and perhaps most importantly, in assessing the valuation of the
Reorganized Debtors, the Debtors and CDG largely relied upon the fact that
despite the extensive marketing process undertaken by the Debtors and CSFB to
locate potential investors, only the Investor was willing to make an investment
in the Debtors and, ultimately, to fund the Plan. As the Reorganized Debtors
would be unable to continue as a going concern without a significant investment
of the type contemplated by the Plan and the Commitment, and as the Debtors are
cash-flow negative and unable to meet their existing obligations without
additional funding, the best indication of the Reorganized Debtors' value is
that which is obtainable in the open market. Accordingly, the Debtors and CDG
have determined that the Total Enterprise Value (i.e., equity value plus debt
assumed, less cash and cash equivalents) of the Reorganized Debtors is $97.0
million. This amount represents the $81.3 million provided by the Investor plus
$88.2 million in total debt assumed minus $72.5 million of cash expected to be
on hand as of the Effective Date.
Independent of - and in order to validate - the foregoing analysis, the
Debtors and CDG estimated the Total Enterprise Value of the Reorganized Debtors
to be within a range of $85.0 million to $105.0 million by using the following
three traditional valuation methodologies:
o discounted cash flow analysis of the Projections (the "DCF Analysis");
40
o analysis of comparable trading multiples; and
o analysis of comparable transaction multiples.
The DCF Analysis involves deriving the future, debt-free cash flows that
the Reorganized Debtors would generate assuming the Projections were realized.
These cash flows, and an estimated value of the Reorganized Debtors at the end
of the projected period (the "Terminal Value"), are discounted to the present at
the Reorganized Debtors' estimated post-restructuring weighted average cost of
capital to determine the Total Enterprise Value of the Reorganized Debtors. In
estimating Total Enterprise Value under this approach, CDG selected a range of
discount rates from 35% to 45% and calculated the Terminal Value as of the end
of 2005 by utilizing an estimated terminal year revenue multiple, which ranges
from 1.0 to 1.3 times the Reorganized Debtors' projected 2005 revenue (see
discussion of comparable trading multiples below regarding this range). Inasmuch
as the Reorganized Debtors require a significant equity investment to continue
as a going concern, the discount rate is analogous to those applied when valuing
start-up companies with similar risks.
The analysis of comparable trading multiples involves identifying a group
of publicly traded companies that are representative of the industry in which
the Debtors operate and then calculating ratios of various financial results to
the public market values of these companies. The ranges of ratios derived are
then applied to the Reorganized Debtors' projected financial results to derive a
range of implied total enterprise values of the Reorganized Debtors. In
estimating Total Enterprise Value under this approach, CDG selected a range of
multiples of 1.1 to 1.3 times revenue, which represents the average valuation
multiple of ten companies that operate in a similar industry segment as the
Debtors based on these companies' estimated fiscal year 2002 results. The range
of multiples was then applied to the Reorganized Debtors' projected fiscal year
2002 results, as set forth in the Projections.
The analysis of comparable transaction multiples involves examining a group
of transactions which occurred recently in the Debtors' industry, and selecting
a transaction multiple range based upon the valuation multiples of this group.
In estimating the Total Enterprise Value of the Reorganized Debtors utilizing
this approach, CDG analyzed seven recent acquisitions in the Debtors' industry
and concluded that the appropriate range of multiples for the Debtors is 0.6 to
0.8 times the latest twelve months of revenue for the acquisition target. This
range was then applied to the Debtors' projected 2002 revenue to yield an
implied enterprise value range. Inasmuch as the Debtors' projected revenues in
2002 will be lower than their revenues in the latest twelve months, CDG did not
use the Debtors' latest twelve months of revenue in this analysis because doing
so would overstate the Total Enterprise Value.
The Total Enterprise Value is highly dependent upon achieving the future
financial results set forth in the Projections as well as the realization of
certain other assumptions that are not guaranteed.
THE VALUATIONS SET FORTH HEREIN REPRESENT ESTIMATED REORGANIZATION VALUES
AND DO NOT NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR
PRIVATE MARKETS. THE EQUITY VALUE ASCRIBED IN THE ANALYSIS DOES NOT PURPORT TO
BE AN ESTIMATE OF THE POST-REORGANIZATION MARKET VALUE. SUCH MARKET VALUE, IF
ANY, MAY BE MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY VALUE RANGES
ASSOCIATED WITH THE VALUATION ANALYSIS.
As a result of the consummation of the Plan and the transactions
contemplated thereby, the financial condition and results of operations of the
Reorganized Debtors from and after the Effective Date will not be comparable to
the financial condition or results of operations reflected in the historical
financial statements of the Debtors contained in the Plan and in the Exhibits
attached hereto.
41
---------------------------------------------------------------
NOTE ON ESTIMATES OF VALUE IN THIS DISCLOSURE STATEMENT
Estimates of value do not purport to be appraisals nor do they
necessarily reflect the values that may be realized if assets
of the Reorganized Debtors were to be sold. The estimates of
value represent hypothetical enterprise values for the
Reorganized Debtors assuming the implementation of the
Reorganized Debtors' business strategies as well as other
significant assumptions. Such estimates were developed by the
Debtors solely for purposes of formulating a plan of
reorganization and analyzing the projected recoveries under
the Plan and should not be viewed as an estimate of the prices
at which the securities of the Reorganized Debtors would trade
on the public or private capital markets if any such trading
would occur.
---------------------------------------------------------------
C. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN
Section 1122 of the Bankruptcy Code requires that a plan of reorganization
classify the claims of a debtor's creditors and the interests of its equity
holders. The Bankruptcy Code also provides that, except for certain claims
classified for administrative convenience, a plan of reorganization may place a
claim or interest of a creditor or equity holder in a particular class only if
such claim or interest is substantially similar to the other claims or interests
of such claSection The Plan places the Equipment Lease Secured Claims,
Miscellaneous Secured Claims, Miscellaneous Priority Claims, General Unsecured
Claims, Senior Creditor Claims, Convertible Subordinated Note Claims,
Convenience Claims, Convertible Subordinated Note Section 510(b) Claims,
Interdebtor Claims, Interests and Section 510(c) Claims in separate Classes.
The Debtors believe they have classified all Claims and Interests in
compliance with the provisions of Section 1122 of the Bankruptcy Code. The Plan
separately classifies General Unsecured Claims (Class 4), the Senior Creditor
Claims (Class 5), the Convertible Subordinated Note Claims (Class 6), the
Convenience Claims (Class 7), the Convertible Subordinated Note Section 510(b)
Claims (Class 8), Interdebtor Claims (Class 9), Interests in USi and LLC
Interests (Class 10) and Section 510(c) Claims (Class 11). If a Holder of a
Claim or Interest challenges such classification of Claims or Interests and the
Bankruptcy Court finds that a different classification is required for the Plan
to be confirmed, the Debtors, to the extent permitted by the Bankruptcy Court,
intend to make such reasonable modifications to the classification of Claims or
Interests under the Plan to provide for whatever classification might be
required by the Bankruptcy Court for confirmation.
EXCEPT TO THE EXTENT THAT SUCH MODIFICATION OF CLASSIFICATION ADVERSELY
AFFECTS THE TREATMENT OF A HOLDER OF A CLAIM AND REQUIRES RESOLICITATION,
ACCEPTANCE OF THE PLAN BY ANY HOLDER OF A CLAIM PURSUANT TO THIS SOLICITATION
WILL BE DEEMED TO BE A CONSENT TO THE PLAN'S TREATMENT OF SUCH HOLDER
42
OF A CLAIM REGARDLESS OF THE CLASS AS TO WHICH SUCH HOLDER OF A CLAIM IS
ULTIMATELY DEEMED TO BE A MEMBER.
The Bankruptcy Code also requires that a plan of reorganization provide the
same treatment for each claim or interest of a particular class unless the
holder of a particular claim or interest agrees to a less favorable treatment of
its claim or interest. The Debtors believe that the Plan complies with such
standard. If the Bankruptcy Court finds otherwise, it could deny confirmation of
the Plan if the Holders of Claims or Interests affected do not consent to the
treatment afforded them under the Plan.
1. TREATMENT OF ADMINISTRATIVE EXPENSES AND CERTAIN PRIORITY CLAIMS
(a) Administrative Expenses. Administrative Expenses consist of any
cost or expense of administration of the Chapter 11 Case allowable under Section
503(b) of the Bankruptcy Code, including without limitation (i) a Claim under
SectionSection 330(a), 331 or 503(b) of the Bankruptcy Code for compensation for
professional services rendered and reimbursement of expenses in the Chapter 11
Case ("Fee Claims"), (ii) any fees assessed against the Estate under 28 U.S.C.
Section 1930, (iii) the actual, necessary costs and expenses of preserving the
Estate and operating the business of the Debtors, incurred and payable in the
ordinary course of business by the Debtors after the Filing Date ("Ordinary
Course Administrative Expenses"), (iv) any and all liabilities that have, with
the approval of the Bankruptcy Court, been assumed by or otherwise become
binding upon the Debtors in the Chapter 11 Case at any time through the
Effective Date including, so long as approved by the Bankruptcy Court, (a) any
DIP financing, (b) all contracts and other obligations undertaken by or imposed
upon the Debtors at any time during such period, and (c) all unexpired leases
and executory contracts entered into prior to the Filing Date and assumed and
not assigned by the Debtors at any time during such period ("Approved Chapter 11
Liabilities"), and (v) any and all rights of reclamation converted to an
Administrative Expense pursuant to any order of the Bankruptcy Court under
Section 546(c) of the Bankruptcy Code ("Reclamation Claims").
Assuming that neither significant litigation nor objections are filed with
respect to the Plan and assuming the Plan is confirmed by May 31, 2002, the
Debtors estimate that unpaid Allowed Administrative Expenses as of the Effective
Date will be approximately $23.7 million. This amount includes, among others,
ordinary course trade payables, other non-trade payables including rent,
utilities, accrued benefits, and taxes as well as expenses payable to the
Investor and unpaid Fee Claims. To the extent certain of these expenses (i.e.,
the trade payables and accrued expenses) will not be immediately due and payable
on the Effective Date, Reorganized USi shall pay such Allowed Administrative
Expense Claims in the ordinary course of busineSection
Under the Plan, each Holder of an Allowed Administrative Expense, other
than Ordinary Course Expenses and Approved Chapter 11 Liabilities, will receive
payment in full and in Cash by the Reorganized Debtors on or before the latest
of (i) the Effective Date, (ii) the date that is 30 days after the date on which
such Administrative Expense becomes Allowed, and (iii) a date agreed by
Reorganized USi or the Debtors and the Holder of such Administrative Expense.
The Reorganized Debtors shall pay any DIP Financing Payout, if any, on the
Effective Date.
An Ordinary Course Administrative Expense or Approved Chapter 11 Liability
(other than the DIP Financing, if any) that is known and not disputed by
Reorganized USi by written notice given to the claimant prior to the 60th day
after the Effective Date will become Allowed on such day. A Reclamation Claim
will become Allowed only to the extent either (i) Reorganized USi and the Holder
of the Reclamation Claim agree upon the amount thereof in a stipulation approved
by the Bankruptcy Court or (ii) at least ten days before the Confirmation
Hearing, the Holder files with the Bankruptcy Court and
43
serves on Reorganized USi a motion requesting payment of such Reclamation Claim
and a Final Order is entered granting such motion. A Fee Claim may be Allowed if
(a) at least ten days before the Confirmation Hearing, the Holder has filed with
the Bankruptcy Court and served upon the Debtors a binding estimate of the
aggregate amount of Fee Claims of such Holder in the Chapter 11 Case from the
Filing Date through the Effective Date (as the same may be supplemented by
notice to the Debtors and the Investor on or before the Effective Date, a
"Binding Fee Estimate"), and (b) no later than 45 days after the Effective Date,
the Holder has filed with the Bankruptcy Court and served a fee application in
accordance with the Bankruptcy Code and Bankruptcy Rules. A Fee Claim will be
Allowed in an amount not to exceed the Binding Fee Estimate filed by such Holder
if and to the extent allowed or approved by the Bankruptcy Court. The
Reorganized Debtors are authorized to pay compensation for services rendered or
reimbursement of services incurred after the Effective Date in the ordinary
course of business and without the need for Bankruptcy Court approval.
(b) Priority Tax Claims. A Priority Tax Claim is any Claim against the
Debtors of the type specified in Section 507(a)(8) of the Bankruptcy Code. These
Claims consist of certain unsecured Claims of governmental units for taxes
including income taxes for a taxable year ending on or before the date of the
filing of the petition for which a tax return, if required, is last due,
including extensions, after three years before the date of the filing of the
petition. The Debtors estimate such Claims ultimately will be Allowed in the
amount of approximately $3 million.
Under the Plan, except to the extent that a Holder of an Allowed Priority
Tax Claim agrees to a different treatment, at the sole option of the Reorganized
Debtors, each Holder of an Allowed Priority Tax Claim will receive, in full and
complete settlement, satisfaction and discharge of its Allowed Priority Tax
Claim: (i) Cash in an amount equal to such Allowed Priority Tax Claim on, or as
soon thereafter as is reasonably practicable, the later of the Effective Date
and the first Business Day after the date that is 30 calendar days after the
date such Priority Tax Claim becomes an Allowed Priority Tax Claim, or (ii)
equal annual Cash payments in an aggregate amount equal to such Allowed Priority
Tax Claim, together with simple interest at a fixed rate of 6% per annum (or
upon such other terms determined by the Bankruptcy Court to provide Holders of
Allowed Priority Tax Claims with deferred Cash payments having a value, as of
the Effective Date, equal to the Allowed amount of such Claims), over a period
not exceeding six years after the date of assessment of such Allowed Priority
Tax Claim, which will begin on, or as soon thereafter as is reasonably
practicable, the later of the Effective Date and the first Business Day after
the date that is 30 calendar days after the date such Priority Tax Claim becomes
an Allowed Priority Tax Claim. Reorganized USi will have the right to pay any
Allowed Priority Tax Claim, or the remaining balance of any Allowed Priority Tax
Claim, in full at any time on or after the Effective Date, without premium or
penalty. The Holder of an Allowed Priority Tax Claim will not be entitled to
receive any payment on account of any penalty arising with respect to or in
connection with such Allowed Priority Tax Claim. Any such Claim for a penalty
will not be Allowed, and the Holder of an Allowed Priority Tax Claim will not
assess or attempt to collect such penalty from Reorganized USi or its property.
2. CLASS 1 - EQUIPMENT LEASE SECURED CLAIMS
For the convenience of identification, the Plan classifies the Allowed
Claims in Class 1 as a single ClaSection This Class is actually a group of
subclasses, depending upon the applicable Equipment Lease at issue and the
underlying property securing such Allowed Claims, and each subclass is treated
as a distinct Class for voting and distribution purposes. The separate
subclasses consist severally of each of the Equipment Lease Claims listed on
Attachment 3 to the Plan. Holders of Equipment Lease Secured Claims (i) voting
to accept the Plan or (ii) failing to timely vote on the Plan shall be deemed to
have
44
elected to be treated in accordance with Alternative A. Holders of Equipment
Lease Secured Claims voting to reject the Plan shall be deemed to have elected
to be treated in accordance with Alternative B.
The Plan provides for the following alternative treatments of Class 1
Claims:
(a) Alternative A. The Equipment Lease Secured Claims will be Allowed
in the amounts set forth in Attachment 3 to the Plan (less, in the case of each
Equipment Lease Secured Claim, all Adequate Protection Payments made on account
of such Claim), and the Equipment Lease Deficiency Claims (if any) held by the
Holders of such Equipment Lease Secured Claims will be Allowed in the amounts
set forth in Attachment 3 to the Plan. The Debtors offer the proposed Allowed
amount of the Equipment Lease Secured Claims in Alternative A subject to the
acceptance or deemed acceptance of the Plan and such treatment by such Holders
of Equipment Lease Claims and confirmation of the Plan, and solely as a proposed
compromise and settlement of certain matters in controversy between the Debtors
and such Holders in the Chapter 11 Case. The Debtors' offer in the Plan is in
all respects subject to Rule 408 of the Federal Rules of Evidence and shall not
be used against the Debtors, as an admission or otherwise, in the adjudication
of any such matters.
Each Holder of an Allowed Equipment Lease Secured Claim deemed to elect
Alternative A will receive, on account of such Claim, the obligation of
Reorganized USi to pay such Holder, deferred Cash payments equal to the Allowed
amount of such Equipment Lease Secured Claim, with interest from the Effective
Date at a fixed per annum interest rate (based on a year consisting of twelve
30-day months) as set forth in Attachment 3 of the Plan with respect to the
applicable lessor of each schedule of the Equipment Lease related to such Claim,
and otherwise on the terms set forth in an Amended Equipment Lease Agreement.
Commencing on the one-month anniversary of the Effective Date, payments shall be
made in equal monthly installments of principal and interest over a term of
months equal to the number of months (counting a partial month as a whole month)
remaining unexpired on the Filing Date on the lease term under each schedule of
the applicable Equipment Lease. Reorganized USi shall have the right to pay any
such Claim in full by paying the remaining principal balance thereof, with
accrued interest through the date of payment, in Cash at any time on or after
the Effective Date, without premium or penalty, and the Holder of such Claim
will retain, as security for such obligation on the terms set forth in such
Amended Equipment Lease Agreement, its security interest in the equipment leased
to the Debtors under the applicable Equipment Lease.
On or before the Effective Date, a Holder of an Equipment Lease Secured
Claim electing or deemed to have elected Alternative A may, at its option by
delivering written notice to Reorganized USi, elect a substitute payment
schedule and interest rate under a Substitute Equipment Lease Agreement, in lieu
of the treatment set forth in Section 5.01 I.(b)(1) and (2) of the Plan, as
follows: (i) the Equipment Lease Secured Claim bearing interest from the
Effective Date at a fixed per annum rate (based on a year consisting of twelve
30-day months) equal to 10%, (ii) 50% of the Equipment Lease Secured Claim to be
paid in Cash on or as soon as practicable after the Effective Date, (iii)
current monthly interest to be paid on the unamortized portion of the unpaid
amount of the Equipment Lease Secured Claim to be paid commencing on the date
that is the last day of the first full month that occurs after the Effective
Date through December 31, 2003 and (iv) the principal balance of the Equipment
Lease Secured Claim to be amortized on a straight-line basis over a 48-month
period commencing on January 1, 2004 and payable (1) in 18 consecutive monthly
installments of principal and interest combined, commencing on January 31, 2004
and (2) with a balloon payment of the remaining principal balance to be made on
June 30, 2005. The substitute payment schedule and interest rate will be
pursuant to the terms of a Substitute Equipment Lease Agreement. Under the
Substitute Equipment Lease Agreement, the Holder of the Equipment Lease Secured
Claim will retain, as security for its obligations under such agreement, its
security interest in the
45
equipment leased under the applicable Equipment Lease. Holders of Equipment
Lease Secured Claims that have elected a substitute payment schedule and
interest rate as provided in Section 5.01, I (d) of the Plan may elect, by
delivering written notice to Reorganized USi on or before the Effective Date, to
deem payments under Substitute Plan Notes received in respect of any Equipment
Lease Deficiency Claim of such Holders under the Equipment Leases as additional
rent under the Substitute Equipment Lease Agreements. Reorganized USi will have
the right to prepay amounts due under such substitute payment schedule by paying
the remaining balance thereof, with accrued interest through the date of
payment, in Cash at any time on or after the Effective Date, without premium or
penalty.
Extensions of credit under Amended Equipment Lease Agreements or Substitute
Equipment Lease Agreements (as applicable) will be deemed to be secured
financings and not true leases. Notwithstanding the foregoing, if an Equipment
Lease that gives rise to an Equipment Lease Secured Claim is a "true lease" (as
opposed to a secured financing) and Reorganized USi files or consents to a
Subsequent Bankruptcy Case, such Holder may at its option reinstate its
Equipment Lease as a true lease by notifying Reorganized USi of such election in
writing. Upon such election, (i) the original terms of such Equipment Lease will
be reinstated except that (a) the term of such Equipment Lease shall extend
until the later of the end of the term of the Amended Equipment Lease Agreement
or Substitute Equipment Lease Agreement applicable to such Equipment Lease and
the maturity date of the Plan Notes or Substitute Plan Notes (as applicable)
issued in respect of the Equipment Lease Deficiency Claim of such Holder, and
(b) the sole payments due under such Equipment Lease shall be payments in
amounts and at times required under the Amended Equipment Lease Agreement or
Substitute Equipment Lease Agreement applicable to such Equipment Lease and
under the Plan Notes or Substitute Plan Notes (as applicable) issued in respect
of the Equipment Lease Deficiency Claim of such Holder, (ii) all payments
received by such Holder in respect of the Amended Equipment Lease Agreement or
Substitute Equipment Lease Agreement (as applicable) and the Plan Notes or
Substitute Plan Notes (as applicable) issued in respect of the Equipment Lease
Deficiency Claim of such Holder will be credited as payments under the Equipment
Lease so reinstated, (iii) the Amended Equipment Lease Agreement or Substitute
Equipment Lease Agreement applicable to such Equipment Lease and the Plan Notes
or Substitute Plan Notes (as applicable) issued in respect of the Equipment
Lease Deficiency Claim of such Holder will be cancelled, and (iv) the Equipment
Lease so reinstated will be deemed to be a true lease in the Subsequent
Bankruptcy Case.
(b) Alternative B. Each Equipment Lease Secured Claim will be Allowed
in an amount equal to the value of the collateral securing such Claim as of the
Filing Date, as agreed by the Debtors or Reorganized USi (as applicable) and
such Holder or as determined by the Bankruptcy Court, less all Adequate
Protection Payments made on account of such Claim. Each Holder of an Allowed
Equipment Lease Secured Claim deemed to elect Alternative B will, on account of
such Claim, at the option of Reorganized USi: (i) receive return of the
collateral securing such Claim or return of a portion of the collateral securing
such Claim (with the balance of the Allowed Equipment Lease Secured Claim to be
treated as provided in the Plan) with the amount of any Allowed Equipment Lease
Secured Claim and any unsecured deficiency claim in Class 4 to be as agreed by
Reorganized USi and such Holder or as determined by the Bankruptcy Court;
(ii)(a) equal annual Cash payments commencing on the first anniversary of the
Effective Date and continuing through the fifth anniversary of the Effective
Date in an aggregate amount equal to the Allowed amount of such Claim, plus
interest at a fixed rate as agreed by Reorganized USi and such Holder or as
determined by the Bankruptcy Court (provided, however, that Reorganized USi
shall have the right to pay any such Claim in full by paying the remaining
principal balance thereof, with accrued interest through the date of payment, in
Cash at any time on or after the Effective Date, without premium or penalty),
and (b) retain the liens securing such Claim to the extent of the Allowed amount
of such Claim pursuant to Section 1129(b)(2)(A)(i) of the Bankruptcy Code; or
46
(iii) receive such other treatment as will provide for realization of the
indubitable equivalent of such Claim pursuant to Section 1129(b)(2)(A)(iii) of
the Bankruptcy Code. Reorganized USi reserves all of its rights in respect of
Holders of Equipment Lease Claims deemed to elect Alternative B, including the
right to assert (x) Reserved Causes of Action against such Holders in respect of
such Claims, and/or (y) that Equipment Leases are "true leases" subject to
rejection and as to which Equipment Lease Deficiency Claims are not Senior
claims entitled to the benefit of the Subordination Provisions.
(c) Equipment Leases as True Leases. If the holder of an Equipment
Lease is deemed to elect Alternative B and the Equipment Lease is determined by
the Bankruptcy Court to be a "true lease" (as opposed to a secured financing)
subject to rejection pursuant to Section 365 of the Bankruptcy Code, USi will be
entitled to seek assumption or rejection of such lease (or any separate lease
schedules thereof) at any time on or before the date that is 30 days after such
determination becomes a Final Order. If USi fails timely to seek assumption of
such lease or notifies the applicable lessor of rejection of the lease, the
lease will be deemed rejected without further order of the Bankruptcy Court. In
the event of rejection of such Equipment Lease (or any separate lease schedules
thereof) any rejection damage claim, which will remain subject to allowance,
must be filed on or before the date that is 30 days after the later of the
Effective Date or such later rejection date and shall be a Senior Claim only to
the extent that Reorganized USi agrees or the Bankruptcy Court determines that
such claim is entitled to the benefit of the Subordination Provisions.
(d) Satisfaction of Section 507(b) and Section 365(d)(10) Rights. The
distributions to Holders of Equipment Lease Secured Claims deemed tO elect
Alternative A or Alternative B will be in full satisfaction of any and all
rights of such Holders under Section 507(b) or Section 365(d)(10) of the
Bankruptcy Code, including in the satisfaction of rights to a priority claim for
adequate protection payments.
3. CLASS 2 - MISCELLANEOUS SECURED CLAIMS
Class 2 consists of all Miscellaneous Secured Claims under Section 506(a)
of the Bankruptcy Code, including the Miscellaneous Secured Claims portion of
the Conklin & Conklin Claims, other than Administrative Expenses and Equipment
Lease Secured Claims. The Debtors estimate that Miscellaneous Secured Claims
will equal approximately $15.0 million as of the Filing Date. Under the Plan,
Class 2 is not Impaired.
(a) Treatment. Pursuant to the terms of the Plan, on the Effective
Date, at Reorganized USi's option, either (i) the Reorganized Debtors will
assume an Allowed Miscellaneous Secured Claim and the legal, equitable and
contractual rights to which an Allowed Miscellaneous Secured Claim entitles the
Holder of such Claim will not be altered by the Plan, or (ii) Reorganized
Debtors will provide such other treatment in respect of such Claim as will cause
such Claim not to be Impaired; provided, however, that the Allowed Miscellaneous
Secured Claim portion of the Conklin & Conklin Note Claims shall be treated
pursuant to Section 5.02(c)(i) of the Plan (i.e., will be paid in full in Cash
on the Effective Date of the Plan). The Debtors' failure to object to any such
Claim during the pendency of the Chapter 11 Case will not prejudice, diminish,
affect or impair the Reorganized Debtors' right to contest or defend against
such Claim in any lawful manner or forum when and if such Claim is sought to be
enforced by the Holder thereof. Each Miscellaneous Secured Claim and all liens
lawfully granted or existing on any property of the Estate on the Filing Date as
security for a Miscellaneous Secured Claim will (a) survive the confirmation and
consummation of the Plan and the Debtors' discharge under Section 1141(d) of the
Bankruptcy Code and Section 12.01 of the Plan and the vesting of property of the
Estate in Reorganized Debtors, (b) remain enforceable in accordance with the
contractual terms of any lawful agreements
47
enforceable by the Holder of such Claim on the Filing Date until the Allowed
amount of such Claim is paid in full, and (c) remain subject to avoidance by
Reorganized Debtors under the Bankruptcy Code.
(b) Preservation of Rights. Notwithstanding the provisions of Section
5.02 of the Plan, on or as soon as reasonably practicable after the later of the
Effective Date and the date that is 30 calendar days after a Miscellaneous
Secured Claim becomes Allowed, Reorganized USi may elect to provide the Holder
of a Miscellaneous Secured Claim with (a) Cash in an amount equal to 100% of the
unpaid amount of such Claim, (b) the proceeds of the sale or disposition of the
collateral securing such Claim to the extent of the value of the Holder's
secured interest in such Claim, (c) the collateral securing such Claim, (d) a
note with periodic Cash payments having a present value equal to the Allowed
amount of such Claim, or (e) such other distribution as necessary to satisfy the
requirements of the Bankruptcy Code. In the event Reorganized USi treats a Claim
under clause (i) or (ii) of Section 5.02(c) of the Plan, the liens securing such
Claim shall be deemed released.
(c) Specific Treatment for Certain Miscellaneous Secured Claims.
Wells Fargo Bank Minnesota, N.A. With respect to the Miscellaneous Secured
Claim (the "Wells Fargo Claim") held by Wells Fargo Bank Minnesota, N.A. ("Wells
Fargo"), the Debtors shall, notwithstanding any contractual provision or
applicable law that entitles Wells Fargo to demand or receive accelerated
payment of the Wells Fargo Claim after the occurrence of a default, (i) cure any
default that occurred before or after the commencement of the Chapter 11 Case,
other than a default of a kind specified in section 365(b)(2) of the Bankruptcy
Code; (ii) reinstate the maturity of the Wells Fargo Claim as it existed before
such default; (iii) compensate Wells Fargo for any damages incurred as a result
of a reasonable reliance by Wells Fargo on such contractual provision or any
such applicable law to the extent provided by applicable law; and (iv) otherwise
leave unaltered the legal, equitable, and contractual rights to which the Well
Fargo Claim is entitled.
Bank of America, N.A. The Debtors presently intend to reinstate and
unimpair the Miscellaneous Secured Claim held by Bank of American, N.A. ("BofA")
in respect of those certain standby letters of credit issued by BofA on account
of leased and owned property, to the extent such letters of credit are fully
cash collateralized, under Section 5.02 of the Plan. In the event the Debtors
propose a different treatment for the Miscellaneous Secured Claim held by BofA,
the Debtors will provide BofA with written notice of such alternative treatment
no later than ten days prior to the Voting Deadline.
4. CLASS 3 - MISCELLANEOUS PRIORITY CLAIMS
Class 3 consists of all Claims that are entitled to priority in payment
under Section 507(a) of the Bankruptcy Code, other than Administrative Expenses
and Priority Tax Claims. Miscellaneous Priority Claims include Claims for wages,
salaries and contributions to employee benefit plans, to the extent that such
Claims are entitled to priority under Section 507(a) of the Bankruptcy Code and
have not been paid. The Debtors are not currently aware of any Miscellaneous
Priority Claims, and therefore believe that the amount of Allowed Miscellaneous
Priority Claims will be insignificant in amount, if any. Each Holder of an
Allowed Miscellaneous Priority Claim shall receive, on account of such Claim,
payment of the Allowed amount of such Claim in full and in Cash. Class 3 is not
Impaired.
5. CLASS 4 - GENERAL UNSECURED CLAIMS
Class 4 consists of all Claims of the type specified in SectionSection
502(g), 502(h) and 502(i) of the Bankruptcy Code, all Pre-Petition
Indemnification Claims (except those Pre-Petition Claims, if any, that
48
are subordinated pursuant to Section 510(b) or (c) of the Bankruptcy Code), all
Indenture Trustee Prepetition Claims and all other Claims that are not
Administrative Expenses, Priority Tax Claims, Miscellaneous Priority Claims,
Equipment Lease Secured Claims, Senior Creditor Claims, Miscellaneous Secured
Claims, Convertible Subordinated Note Claims, Convenience Claims (except for
purposes of defining Convenience Claims), Convertible Subordinated Note Section
510(b) Claims, Interdebtor Claims, Claims classified as Interests or Section
510(c) Claims. The Debtors estimate that the aggregate amount of General
Unsecured Claims that will be Allowed is approximately $17.43 million net of
Allowed Reclamation Claims.(13) To the extent the Debtors assume any unexpired
leases or executory contracts pursuant to Article 7 of the Plan, any cure
payments required to be made pursuant to Section 365(b) of the Bankruptcy Code
will be paid in Cash. Under the Plan, Class 4 is Impaired.
Under the Plan, each Allowed General Unsecured Claims shall be treated as
follows:
(a) Treatment. Each Holder of an Allowed General Unsecured Claim will
receive, on account of such Claim, its Ratable Share (determined as if no
elections to receive Substitute Plan Notes had been made) of (i) the Plan
Distribution determined based on the Plan Distribution Ratio, and (ii) the
Secondary Plan Distribution B.
(b) Option for Substitute Payment Schedule. On or before the Effective
Date, a Holder of a General Unsecured Claim may, at its option by delivering
written notice to Reorganized USi and in lieu of receiving Plan Notes, elect to
receive an amount equal to its Ratable Share of the principal amount of Plan
Notes that would have been distributed pursuant to the Plan Distribution and the
Secondary Plan Distribution B, had no elections to receive Substitute Plan Notes
been made (such amount, together with an amount equal to the principal amount of
Substitute Plan Notes to be issued in accordance with Section 5.05(c) of the
Plan, the "Substitute Plan Distribution Amount"), in the form of Substitute Plan
Notes.
(c) Effect of Allowance of Reclamation Claims. If any Holder of a General
Unsecured Claim holds or asserts a Reclamation Claim, such General Unsecured
Claim shall not be Allowed until such Reclamation Claim is Allowed, disallowed
or otherwise resolved, and when Allowed such General Unsecured Claim shall be
reduced by the Allowed amount of the Reclamation Claim.
6. CLASS 5 - SENIOR CREDITOR CLAIMS
Class 5 consists of the Senior Creditor Claims. Senior Creditor Claims
include (a) all Equipment Lease Deficiency Claims (provided that with respect to
Equipment Lease Deficiency Claims determined pursuant to Section 5.05(a)(1)(ii)
of the Plan, only to the extent agreed to by Reorganized USi or determined by
the Bankruptcy Court to be entitled to the benefit of the Subordination
Provisions), (b) that portion of the Conklin & Conklin Note Claims entitled to
treatment as a Senior Creditor Claim, and (c) subject to Section 5.05(a)(3) of
the Plan, all other Claims that (i) are not Administrative Expenses, Priority
Tax Claims, Miscellaneous Priority Claims, Equipment Lease Secured Claims,
Miscellaneous Secured Claims, General Unsecured Claims, Convenience Claims,
Convertible Subordinated Note Claims, Convertible Subordinated Note Section
510(b) Claims, Interdebtor Claims, Claims classified as Interests or Section
510(c) Claims and (ii) are entitled to the benefit of the Subordination
Provisions. Under the Plan, Class 5 is Impaired. Under the Plan, the Holders of
Allowed Senior Creditor Claims will be treated as follows:
- ---------------------------------
(13) This estimate is inclusive of Allowed Convenience Claims.
49
(a) Allowance of Claims. Each Holder of an Equipment Lease Deficiency
Claim deemed to elect (i) Alternative A shall hold an Allowed Senior Creditor
Claim in the amount set forth in Attachment 3 to the Plan, and (ii) Alternative
B shall be an Allowed Senior Creditor Claim only to the extent and in the amount
agreed upon by the Debtors and the respective Holder of such Equipment Lease
Deficiency Claim or, if such status, extent and amount cannot be mutually agreed
upon, as determined by the Bankruptcy Court. A portion of the Conklin & Conklin
Claims shall be Allowed as a Senior Creditor Claim in the amount of $1.9
million. No other Claim shall be Allowed as a Senior Creditor Claim unless (i)
the Holder of such Claim delivers to the Debtors, no later than 20 days prior to
the Confirmation Hearing or any earlier date fixed by order of the Bankruptcy
Court, a demand for Allowance of such Claim as a Senior Creditor Claim
accompanied by the written opinion of independent legal counsel acting for such
Holder, addressed to the Debtors and Reorganized USi, stating that such Holder
is entitled to the benefit of the Subordination Provisions and (ii) the Debtors
approve or, at or prior to the Confirmation Hearing, the Bankruptcy Court orders
classification of the Allowed amount of such Claim as a Senior Creditor Claim.
(b) Treatment. Each Holder of an Allowed Senior Creditor Claim shall
receive, on account of such Claim, its ratable share of:
(1) A portion of the Plan Distribution determined based on the
Plan Distribution Ratio, calculated as if no elections to receive Substitute
Plan Notes had been made; and
(2) In enforcement of the Subordination Provisions, an additional
portion of the Plan Distribution (being the portion that otherwise would be
distributed to Holders of Allowed Convertible Subordinated Note Claims)
determined by applying the Plan Distribution Ratio to the Allowed amount of the
Convertible Subordinated Note Claims. Such enforcement of the Subordination
Provisions shall in no way affect or limit the distributions to be made to
Holders of Convertible Subordinated Note Claims pursuant to Secondary Plan
Distribution A.
(c) Option for Substitute Payment Schedule. On or before the Effective
Date, a Holder of a Senior Creditor Claim may, at its option by delivering
written notice to Reorganized USi and in lieu of receiving Plan Notes, elect to
receive an amount equal to its Ratable Share of the principal amount of Plan
Notes that would have been distributed pursuant to the Plan Distribution,
calculated as if no elections to receive Substitute Plan Notes had been made, in
the form of Substitute Plan Notes.
7. CLASS 6 - CONVERTIBLE SUBORDINATED NOTE CLAIMS
Class 6 consists of all Convertible Subordinated Note Claims. Under the
Plan, Class 6 is Impaired. Under the Plan, the Holders of Allowed Senior
Subordinated Note Claims will be treated as follows:
(a) Allowance of Claims. The Convertible Subordinated Note Claims will
be Allowed in the amount of $125.0 million plus interest accrued to the Filing
Date of approximately $5.8 million.
(b) Treatment and Limited Enforcement of Subordination. In accordance
with and in enforcement of the Subordination Provisions, all distributions which
the Holders of Convertible Subordinated Note Claims would otherwise be entitled
to receive under the Plan with respect to the Plan Distribution shall be
delivered to the Holders of the Allowed Senior Creditor Claims and provision
therefor is made in Section 5.05(b)(2) of the Plan. Notwithstanding the
provisions contained in Article 5 of the Convertible Subordinated Note
Indenture, each Holder of an Allowed Convertible Subordinated
50
Note Claim shall be entitled to receive and retain, on account of such Claim,
its ratable share of Secondary Plan Distribution A, subject to the provisions of
Sections 10.02 and 10.03 of the Plan, based upon the amount of Convertible
Subordinated Notes held by such Holder.(14) Holders of Allowed Class 6 Claims in
an amount less than $500,000 in principal amount will receive Cash in lieu of
their proportionate share of the New Warrants, and the aggregate amount of New
Warrants will be reduced to reflect such Cash payments, if any. Secondary Plan
Distribution A is made in compromise and settlement of issues in dispute and
approval shall be sought pursuant to Bankruptcy Rule 9019 in connection with
confirmation of the Plan. The treatment provided in the Plan shall be in full
and complete settlement, satisfaction and discharge of any Claims of Holders of
Senior Creditor Claims pursuant to the Subordination Provisions or otherwise.
(c) Limited Subordination Enforcement as Essential Element. Whether or
not Class 6 or any individual Holder of a Convertible Subordinated Note Claim
has accepted the Plan, the Subordination Provisions shall be enforced, without
exception, through the consummation of the Plan as an essential element thereof,
as to (i) the Plan Distribution and (ii) except with respect to Secondary Plan
Distribution A, any and all other distributions or property that the Holders of
Allowed Convertible Subordinated Note Claims are, would or might otherwise be
entitled to receive from the Debtors or the Estate or in the Chapter 11 Case on
account of Convertible Subordinated Note Claims. All such portions of the Plan
Distribution and, except for Secondary Plan Distribution A, other distributions
and property shall be delivered by the Debtors and Reorganized USi directly to
the Holders of Senior Creditor Claims pursuant to the Subordination Provisions.
On the Effective Date, the Convertible Subordinated Notes and the
Convertible Subordinated Note Indenture and all obligations of the Debtors or
the Estate thereunder or in respect thereof will be cancelled and forever
released and discharged.
8. CLASS 7 - CONVENIENCE CLAIMS
Class 7 consists of all Convenience Claims. Convenience Claims include all
Allowed General Unsecured Claims against the Debtors in the amount of $2,500 or
less; provided, however, that if the Holder of an Allowed General Unsecured
Claim in amount greater than $2,500 elects on such Holder's ballot for voting on
the Plan (a) Convenience Claim treatment and (b) to reduce such Claim to $2,500
in accordance with Section 5.07(b) of the Plan, such Claim shall be treated as a
Convenience Claim for all purposes.
(a) Treatment. Each Holder of an Allowed Convenience Claim shall
receive Cash equal to thirty-four and thirty-four one hundredths percent
(34.34%) of the unpaid amount of such Allowed Claim.
(b) Election of Treatment. Any Holder of an Allowed General Unsecured
Claim whose Allowed General Unsecured Claim is equal to or less than $2,500
shall receive treatment of its Allowed Claim under Section 5.07(a) of the Plan
in full settlement, satisfaction, release and discharge of such Allowed Claim.
Any Holder of an Allowed General
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(14) The Indenture Trustee has indicated that it intends to deduct and apply the
amount of its fees and expenses, pursuant to sections 8.9 and 8.10 of the
Convertible Subordinated Note Indenture, from the $6,250,000 Cash portion
of Secondary Plan Distribution A prior to distributing the balance of the
distribution to which Holders of Convertible Subordinated Note Claims are
entitled under the Plan. The Indenture Trustee estimates that its fees and
expenses will not exceed $100,000.
51
Unsecured Claim whose Allowed General Unsecured Claim is more than $2,500, and
who timely elects to reduce the amount of such Allowed Claim to $2,500 in
accordance with the terms of Section 5.07(b) of the Plan also shall receive
treatment of its Allowed Claim, as so reduced, under Section 5.07(a) of the Plan
in full settlement, satisfaction, release and discharge of such Allowed Claim.
Election of treatment in Class 7 must be made on such Holder's ballot for voting
on the Plan and be received by the Debtors on or prior to the deadline for
voting established by the Bankruptcy Court. Any election of Convenience Claim
treatment made after such deadline shall not be binding upon the Debtors or the
Reorganized Debtors unless the deadline is expressly waived, in writing, by the
Debtors. The exercise of such an election shall in no way preclude the Debtors
or the Reorganized Debtors from objecting to the Claim.
9. CLASS 8 - CONVERTIBLE SUBORDINATED NOTE SECTION 510(B) CLAIMS
Class 8 consists of, to the extent required or permitted by Section 510(b)
of the Bankruptcy Code to be subordinated to the Convertible Subordinated Note
Claims, any and all Claims arising from or relating to any issuance, purchase or
sale of Convertible Subordinated Notes or any rescission thereof or any right of
reimbursement or contribution with respect thereto or otherwise arising from or
relating to the Convertible Subordinated Note Indenture (except any Trustee's
Prepetition Claim) or any instrument, agreement, breach of contract, breach of
legal duty, tort, wrongful conduct, act, omission or event in any respect or in
any manner arising therefrom or related thereto. The Holders of Convertible
Subordinated Note Section 510(b) Claims will receive no distribution under the
Plan. Class 8 is Impaired. The Debtors are not aware of the existence of any
Convertible Subordinated Note Section 510(b) Claims.
10. CLASS 9 - INTERDEBTOR CLAIMS
Class 9 consists of any Claim held by a Debtor against another Debtor.
Class 9 is not Impaired.
11. CLASS 10 - INTERESTS IN USi AND LLC INTERESTS
Class 10 consists of (i) any and all equity or ownership interests in USi
and all stock certificates and other investment securities, whether or not
certificated, representing any such equity or ownership interest and any and all
options, warrants, subscription agreements and contractual rights to acquire any
such equity or ownership interest, (ii) all LLC Interests, (iii) pursuant to
Section 510(b) of the Bankruptcy Code, all Claims arising from or relating to
any issuance, purchase or sale of any such securities or any rescission thereof
or any right of reimbursement or contribution with respect thereto or otherwise
arising from or relating to any instrument, agreement, breach of contract,
breach of legal duty, tort, wrongful conduct, act, omission or event in any
respect or in any manner arising therefrom or related thereto (including, but
not limited to, all Claims asserted or alleged in or arising from or related to
transactions at issue in that certain action entitled Weizel v.
USinternetworking, Inc., et. al. (01-CV-9348) (the "Class Action")) and (iv)
Pre-Petition Indemnification Claims, if any, that are subordinated pursuant to
Section 510(b) or (c) of the Bankruptcy Code.
The Debtors believe the claims raised in the Class Action are baseless and
without merit. The Class Action complaint was filed on or about October 24, 2001
in the United States District Court for the Southern District of New York
against USi, its underwriters and certain of USi's officers in connection with
the initial public offering of USi's common stock. To the extent claims raised
in the Class Action are claims of USi against directors and officers, such
claims will be released pursuant to Section 12.04 of the Plan. In addition, to
the extent permitted by applicable law, the claims of the plaintiffs in the
Class Action and other shareholders will also be released and enjoined by
Section 12.04 of the Plan. The Class Action litigation is more fully discussed
in USi's Form 10-Q for the quarter ended September 30, 2001,
52
which has been filed with the SEC and is available on USi's web page at
www.usi.net or the SEC's web page at www.sec.gov.
On the Effective Date, all Allowed Interests in USi and Allowed LLC
Interests will be cancelled and Holders of such Interests and/or LLC Interests
will receive no distribution under the Plan. Class 10 is Impaired.
12. CLASS 11 - SECTION 510(C) CLAIMS
Class 11 consists of all Claims against a Debtor subject to subordination
pursuant to Section 510(c) of the Bankruptcy Code. The Holders of Section 510(c)
Claims will receive no distribution under the Plan. Class 11 is Impaired.
D. RECLAMATION CLAIMS
Section 546(c) of the Bankruptcy Code recognizes state statutory or common
law reclamation rights of a seller that has sold goods to a debtor. The elements
of a valid reclamation claim are (a) a written reclamation demand made by the
seller within ten days of the receipt of such goods by the debtor (or 20 days if
such ten-day period expires after the commencement of the bankruptcy case); (b)
the reclaimed goods were shipped on credit and in the ordinary course of
business; (c) the purchaser of the reclaimed goods was insolvent at the time it
received the goods and (d) the buyer still held the reclaimed goods at the time
it received the reclamation demand.
Under the Plan, if any Holder of a General Unsecured Claim holds or asserts
a Reclamation Claim, such General Unsecured Claim shall not be Allowed until
such Reclamation Claim is Allowed, disallowed or otherwise resolved, and when
Allowed such General Unsecured Claim shall be reduced by the Allowed amount of
the Reclamation Claim. Under the Plan, a Reclamation Claim shall become Allowed
only to the extent either (i) Reorganized USi and the Holder of the Reclamation
Claim agree upon the amount thereof in a stipulation approved by the Bankruptcy
Court, or (ii) at least ten days before the Confirmation Hearing, the Holder
files with the Bankruptcy Court and serves on Reorganized USi a motion
requesting payment of such Reclamation Claim and a Final Order is entered
granting such motion. The Debtors have not received any Reclamation Claims to
date.
E. UNEXPIRED LEASES AND EXECUTORY CONTRACTS
1. GENERAL
Subject to the approval of the Bankruptcy Court, the Bankruptcy Code
empowers a debtor in possession to assume or reject executory contracts and
unexpired leases. Generally, an "executory contract" is a contract under which
material performance is due from both parties. If an executory contract or
unexpired lease is rejected by a debtor in possession, the other parties to the
agreement may file a claim for damages incurred by reason of the rejection,
which claim is treated as a prepetition claim. If an executory contract or
unexpired lease is assumed by a debtor in possession, the debtor in possession
has the obligation to perform its obligations thereunder in accordance with the
terms of such agreement and failure to perform such obligations could result in
a claim for damages which may be entitled to administrative expense status.
53
2. THE PLAN
Under the Plan, any unexpired lease or executory contract that has not been
expressly rejected or assumed by the Debtors with the Bankruptcy Court's
approval on or prior to the Effective Date will be deemed to have been assumed
by the Debtors as of the Effective Date unless (i) such lease or contract has
then been rejected, (ii) there is then pending before the Bankruptcy Court a
motion to assume, a motion to reject or a motion to assume and assign such lease
or contract, (iii) such lease or contract is identified on a "Schedule of Leases
and Contracts to be Rejected" filed at least ten days before the date of the
Confirmation Hearing (as such schedule may be amended on or prior to the date of
the Confirmation Hearing), or (iv) such lease or contract is rejected following
entry of an order regarding and fixing the amount of a disputed cure amount as
provided in Section 7.02 of the Plan.
At the Confirmation Hearing, the Debtors may request the Bankruptcy Court
to approve assumption or assumption and assignment of certain of its real
property leases and executory contracts. The Debtors will file and serve a
schedule of such leases and contracts with the Bankruptcy Court as provided in
Section 7.02 of the Plan.
Section 7.02 of the Plan provides that except to the extent that different
treatment has been agreed to by the non-debtor party or parties to any executory
contract or unexpired lease to be assumed pursuant to the Plan, the Debtors
shall, consistent with the requirements of Section 365 of the Bankruptcy Code,
at the time of the commencement of the solicitation of votes on the Plan, file
and serve on parties to executory contracts or unexpired leases to be assumed
and other parties in interest a pleading with the Bankruptcy Court listing all
executory contracts or unexpired leases to be assumed and the cure amounts
(including amounts of compensation for actual pecuniary loss) proposed by the
Debtors to be paid in connection with such assumption, and the parties to such
executory contracts or unexpired leases to be assumed shall have until ten days
before the date of commencement of the Confirmation Hearing to object in writing
to such cure amounts listed by the Debtors and to propose alternative cure
amounts; provided, that the Debtors shall be entitled to modify and amend such
pleading at any time on or before the date of the Confirmation Hearing to add or
subtract an executory contract or unexpired lease from such pleading and/or to
amend or modify any cure amount listed by the Debtors; and provided, further,
that if the Debtors amend the pleading to add an executory contract or unexpired
lease or to reduce the cure amount thereof, the non-debtor party thereto shall
have until ten days after service of such amendment to object in writing thereto
or to propose alternative cure amounts. In the event that no objection is timely
filed, the applicable party shall be deemed to have consented to the cure amount
(including amounts of compensation for actual pecuniary loss) proposed by the
Debtors and shall be forever enjoined and barred from seeking any additional
amount on account of the Debtors' cure obligations under Section 365 of the
Bankruptcy Code from the Debtors, the Estate, Reorganized USi or any other
Reorganized Debtor. If an objection is filed with respect to an executory
contract or unexpired lease, the Bankruptcy Court shall hold a hearing to
determine the amount of any disputed cure amount not settled by the parties.
Notwithstanding the foregoing, at all times through the date that is five
Business Days after the Bankruptcy Court enters an order resolving and fixing
the amount of a disputed cure amount, the Debtors and Reorganized USi shall be
authorized to reject such executory contract or unexpired lease by notice to (i)
the non-debtor party to such executory contract or unexpired lease and (ii) the
office of the United States Trustee, without obtaining further Bankruptcy Court
approval.
Any lease of nonresidential real property that was assigned by the Debtors
prior to the Filing Date will be treated as being neither executory nor
unexpired and shall be deemed neither assumed nor rejected pursuant to the Plan.
Under the Plan, the Debtors reserve all rights accorded to it under Section 365
of the
54
Bankruptcy Code, including all rights under Section 365(f) of the Bankruptcy
Code with respect to the assignment of any or all of its executory contracts
and unexpired leases.
In the event that the rejection of an executory contract or unexpired lease
by any of the Debtors pursuant to the Plan results in damages to the non-debtor
party or parties to such contract or lease, a Claim for such damages, if not
heretofore evidenced by a filed proof of claim, shall be forever barred and
shall not be enforceable against the Debtors, or their respective properties or
interests in property as agents, successors, or assigns, unless a proof of claim
is filed with the Bankruptcy Court and served upon counsel for the Debtors and
the Claims Agent on or before the date that is 30 days after the later of the
Effective Date or such later rejection date that occurs as a result of a dispute
concerning amounts necessary to cure any defaults.
The provisions of Article 7 of the Plan, which relate to the treatment of
unexpired leases and executory contracts, do not apply to the Equipment Leases
and Indemnification Contracts.
F. VESTING OF PROPERTY IN THE REORGANIZED DEBTORS
If the Plan becomes effective as set forth in Section 13.02 of the Plan,
(i) the Reorganized Debtors will retain, and confirmation of the Plan will vest
in the Reorganized Debtors, all property of the Estate except any property of
the Estate that is abandoned or transferred to any other Entity as permitted
under the Bankruptcy Code on or prior to the Effective Date, and (ii) title to
all such non-excepted property will vest in the Reorganized Debtors, absolutely,
unconditionally, indefeasibly and forever, on the Effective Date, free and clear
of all Claims, all liens securing Claims and all Interests, except any lien
preserved under Section 5.01 or 5.02 of the Plan. The Reorganized Debtors will
not be liable or responsible for any Claim against the Debtors or the Estate or
any obligation of the Debtors or the Estate except as expressly assumed by the
Reorganized Debtors in the Plan. The Reorganized Debtors will be the successor
to the Debtors for the purposes of SectionSection 1123, 1129 and 1145 of the
Bankruptcy Code. The Reorganized Debtors may operate their businesses and may
use, acquire, and dispose of property free of any restrictions of the Bankruptcy
Code or the Bankruptcy Rules and in all respects as if there were no pending
case under any chapter or provision of the Bankruptcy Code, except as provided
in the Plan.
G. ADMINISTRATION OF THE PLAN
After the Effective Date, the Plan will be administered in accordance with
the Plan and applicable law. From and after the Effective Date, any right or
power under the Plan which is exercisable by the Debtors or the Reorganized
Debtors or any of them shall be exercisable by the Reorganized Debtors only.
Subject to any further order of the Bankruptcy Court, Reorganized USi or its
designee will administer the Plan from and after the Effective Date and as such
will be both authorized and obligated, as agent for and on behalf of the Estate,
to admit, object to or contest any and all Claims, to defend, protect and
enforce any and all rights and interests, to make any and all distributions
required or permitted to be made under the Plan, to file any and all reports,
requests for relief or opposition thereto, and to take any and all other actions
necessary or appropriate to administer and implement the Plan in accordance with
applicable law and shall be authorized to pay (from its own funds and without
any right of contribution or reimbursement as against the Estate) any and all
claims, liabilities, losses, damages, costs and expenses incurred in connection
therewith or as a result thereof, including all fees and expenses of its
professionals accruing from and after the Effective Date without any application
to the Bankruptcy Court. Reorganized USi will not be entitled to receive any
compensation or indemnification whatsoever from the Estate in administering or
implementing the Plan or in respect of any such claims, liabilities, losses,
damages, costs or expenses.
55
H. REORGANIZATION OF THE REORGANIZED DEBTORS
On the Effective Date, the Reorganized Debtors will be reorganized and
discharged under the Plan. The Amended Certificate of Incorporation will provide
for the authorization of New Common Stock under the Plan and prohibit the
issuance of non-voting equity securities, except as permitted by Section 1123 of
the Bankruptcy Code. The Amended Bylaws and the Amended Certificate of
Incorporation will be substantially in the form to be attached to the Plan as
Exhibit C and Exhibit D, respectively. Reorganized USi will pay the Cash and
issue and/or deliver the New Common Stock, the Plan Notes, the Secondary Plan
Notes, the Substitute Plan Notes and the New Warrants as provided in the Plan.
Subject to Section 5.10(a) of the Plan, all limited liability company agreements
to which the Debtors are a party shall be assumed in accordance with Section
7.01 of the Plan.
I. ISSUANCE OF NEW COMMON STOCK; USE OF PROCEEDS
1. ISSUANCE OF NEW COMMON STOCK. On the Effective Date, subject to the
terms and conditions of the Commitment, Reorganized USi will issue and deliver
to the Investor, against payment of the Subscription Price by the Investor to
Reorganized USi, 100% of the shares of New Common Stock representing all
outstanding capital stock of Reorganized USi. From and after the Effective Date,
Reorganized USi shall be authorized to issue additional shares of common stock
in accordance with its Amended Certificate of Incorporation and applicable law.
2. USE OF PROCEEDS. Reorganized USi will use the proceeds of the
Subscription Price (i) to pay Allowed Administrative Expenses(15) and make other
cash distributions required under the Plan, (ii) to fund the DIP Financing
Payout, if any, (iii) to satisfy the Debtors' obligations in connection with the
closing of the Plan, and (iv) for other general corporate purposes. The Debtors
estimate that the obligations that are related to the closing of the Plan (other
than the Administrative Expenses referred to above) will be approximately $14.0
million in the aggregate, including the $6.25 million cash payment due to
Holders of Subordinated Convertible Note Claims, the $2.0 million Bain
Transaction Fee (if Closing occurs prior to May 31, 2002), the reimbursement of
the $4.0 million CSFB Fee, and other Transaction-related payments and expenses.
3. ASSUMPTION OF PLAN OBLIGATIONS. On the Effective Date, the Reorganized
Debtors will assume and perform and observe each and all of the provisions of
the Plan applicable to them and each and all of the obligations and undertakings
of the Debtors under the Plan, including, but not limited to, payment of (i) all
Allowed Administrative Expenses, (ii) all Allowed Priority Tax Claims, (iii) all
Allowed Miscellaneous Priority Claims, (iv) the obligation to pay the Allowed
amount of all Equipment Lease Secured Claims as set forth in Section 5.01(b) of
the Plan, (v) all Allowed Miscellaneous Secured Claims, (v) the Plan
Distribution, (vi) the Substitute Plan Distribution Amount, (vii) the Secondary
Plan Distribution A, (viii) the Secondary Plan Distribution B, (ix) all Allowed
Convenience Claims and (x) all other obligations of the Reorganized Debtors
under the Plan.
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(15) The Debtors estimate that, as of the Effective Date, unpaid Administrative
Expenses will aggregate approximately $23.7 million. This amount includes,
inter alia, fees to indenture trustee, ordinary course trade payables,
rent, utilities, accrued benefits and taxes as well as expenses payable to
the Investor and unpaid professional fees and expenses. Many of these
expenses (i.e., certain trade payables and the accrued expenses) will have
accrued but will not yet be due and payable as of the Effective Date.
Accordingly, such expenses will be paid after the Effective Date in the
ordinary course of busineSection
56
J. COMMITMENT
1. GENERAL
The following is a summary of certain provisions of the Commitment and is
qualified in its entirety by reference to the complete text of the Commitment,
which is incorporated herein by reference and attached to the Plan as Attachment
2. The Debtors encourage you to read the Commitment in its entirety because it
is the legal document that governs the subscription by the Investor.
Under the Commitment, and subject to the terms and conditions described
therein, as of the Effective Date the Investor will invest $81.25 million in
Reorganized USi in consideration for all of the outstanding shares of New Common
Stock (the "Transaction"). In addition, the Investor will execute a subscription
agreement among the Investor, Reorganized USi and the Bain Fund with respect to
an additional $25.0 million investment by the Bain Fund, such investment to be
subject to Reorganized USi meeting financial targets to be negotiated among
Reorganized USi, the Investor and the Bain Fund.(16)
2. COVENANTS
The parties have agreed to a number of covenants including the following:
o ACTIONS REQUIRING INVESTOR'S PRIOR CONSENT. The Debtors must obtain
the consent of the Investor before taking any of a number of actions
specified in the Commitment, including consenting to any relief from
the automatic stay, filing any amendment to the Plan, and assuming or
rejecting any executory contract.
o NO SHOP PROVISION. Neither USi, its subsidiaries or representatives
will:
(1) directly or indirectly solicit, initiate or encourage the
submission of any Alternative Proposal;(17)
(2) directly or indirectly participate in any discussions or
negotiations regarding, or furnish to any person any information
with respect to, or take any other
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(16) As discussed above, it is currently contemplated that these financial
targets may be based on various measures of Reorganized USi's performance
such as EBITDA and EBITDA minus capital expenditures.
(17) "Alternative Proposal" is defined under the Commitment to mean any of the
following: (i) any proposal or offer for a merger, consolidation,
dissolution, recapitalization, reorganization or business combination
involving USi or any subsidiary of USi; (ii) any proposal or offer for,
directly or indirectly in one transaction or a series of related
transactions, the issuance by USi or sale, exchange or other transfer by
its securityholders of 50% or more of (x) any class of its equity
securities, (y) the aggregate principal amount of the Convertible
Subordinated Notes or (z) the aggregate amount of its capitalized lease
obligations; (iii) any proposal or offer to acquire in any manner, directly
or indirectly in one transaction or a series of related transactions, 50%
or more of (w) any class of USi's equity securities or (x) the aggregate
principal amount of outstanding Convertible Subordinated Notes or (y) the
aggregate amount of USi's capitalized lease obligations or (z) the
consolidated total assets of USi and its subsidiaries; or (iv) except for
the Plan, any proposal, offer or plan intended to be consummated in any
proceedings by USi or any subsidiary of USi under the Bankruptcy Code
including any such proposal to be implemented under Chapter 11 of the
Bankruptcy Code or pursuant to a proposed plan of reorganization of USi or
any subsidiary of USi.
57
action to facilitate the making of, any proposal or
expression of interest that constitutes or is reasonably
likely to lead to any Alternative Proposal; or
(3) enter into any agreement with respect to any Alternative
Proposal;
provided, however, the Debtors and the Board are permitted to
take any of the actions described in clause (2), after approval
by the Bankruptcy Court of the Commitment, with respect to any
person who has submitted, on an unsolicited basis, an alternative
proposal or an expression of interest believed by the Debtors in
good faith to be bona fide and indicating such person's ability,
desire and intent to make an alternative proposal if the Debtors
determine in good faith, after consultation with counsel and an
independent financial adviser, that such proposal or expression
of interest is reasonably likely to result in a Superior
Alternative Proposal(18) and that taking such action is required
for the Board to comply with its fiduciary duties under
applicable law. (See Section 2.03(a) of the Commitment.)
o USi must promptly advise the Investor of the existence and material
terms of any Alternative Proposal or inquiry with respect to, or that
could reasonably be expected to lead to, any Alternative Proposal, and
the identity of the person making such proposal or inquiry. USi must
keep the Investor reasonably informed of the status and details of any
such Alternative Proposal or inquiry and any related discussions and
provide to the Investor copies of all correspondence and other written
material between USi and any third party in connection with any
Alternative Proposal or inquiry. (See Section 2.03(b) of the
Commitment.)
o Unless the Board, after consultation with outside counsel, determines
in its good faith judgment that it is required to do so in order to
fulfill its fiduciary obligations under applicable law and USi
simultaneously terminates the Commitment, neither the Board nor any
committee thereof shall (i) withdraw or modify in a manner adverse to
the Investor, or publicly propose to withdraw or modify in a manner
adverse to the Investor, the approval or recommendation by the Board
or any such committee of the Commitment or the Transactions (as
defined in the Commitment), (ii) approve any letter of intent,
agreement in principle, acquisition agreement or other agreement
relating to any Alternative Proposal (other than confidentiality
agreements to the extent required) or (iii) approve or recommend, or
publicly propose to approve or recommend, any Alternative Proposal.
(See --- Section 2.03(c) of the Commitment.)
o FEES AND EXPENSES.
o EXPENSE REIMBURSEMENTS: USi will pay reasonable fees and expenses
incurred by the Investor in connection with the Chapter 11 Case
(the "Post-Petition Purchaser Expenses") and the Transactions (as
defined in the
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(18) "Superior Alternative Proposal" is defined under the Commitment to mean any
alternative proposal that the Board determines, in good faith (after
consultation with a financial adviser), is superior, by an amount not less
than $5 million (representing the sum of the Transaction Fee plus a minimum
increment of $4 million (the "Bid Increment")), from a financial point of
view to the Debtors' creditors and holders of Company Common Stock (as
defined in the Commitment), taken as a whole, to the Transaction and
reasonably capable of being completed, taking into account all financial,
regulatory, legal and other aspects of such proposal.
58
Commitment), whether or not the Closing occurs. USi will provide
the Investor with a retainer and a fee prepayment to facilitate
payment of the Investor's fees and expenses. (See Section 2.06(a)
of the Commitment.)
o TRANSACTION FEE: Upon consummation by USi of an Alternative
Proposal, USi shall pay to the Investor a transaction fee of $1
million (the "Transaction Fee") if the Commitment is terminated
in any of the following circumstances:
(1) the Commitment is terminated pursuant to Section
4.01(b),(19) Section 4.01(c)(20) or clause (i) of Section
4.01(d)(21) of the Commitment and: (x) at or prior to the
time of such termination an Alternative Proposal from a
proponent not affiliated with or acting in concert with the
Investor or any of the Investor's affiliates has been
publicly announced; and (y) within 18 months of such
termination USi consummates, or obtains a court order
approving, any Alternative Proposal;
(2) the Investor terminates the Commitment in connection with
(i) USi's withdrawal or modification of the Plan in a manner
adverse to the Investor or breach of the "no solicitation"
provisions of the Commitment or (ii) USi's breach of or
failure to perform in any material respect any of its
covenants contained in the Commitment; or
(3) USi terminates the Commitment in connection with its
acceptance of a Superior Alternative Proposal. (See Section
2.06(b) of the Commitment.)
o CAP ON EXPENSE REIMBURSEMENT AND TRANSACTION FEE. The
Post-Petition Purchaser Expenses and the Transaction Fee shall
not exceed $1.75 million in the aggregate. (See Section 2.06 (c)
of the Commitment.)
3. CONDITIONS PRECEDENT
Consummation of the Transaction is subject to the satisfaction or waiver on
or prior to the date of the Closing of several conditions as more fully set
forth in Sections 3.01, 3.02 and 3.03 of the Commitment.
The respective obligation of each party to consummate the Closing under the
Commitment is subject to the satisfaction or waiver on or prior to the Closing
Date of certain conditions, including the Confirmation Order becoming final, the
satisfaction of requirements under antitrust laws and the lack of
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(19) Requiring that Closing shall occur on or before June 7, 2002.
(20) Detailing Investor's termination rights. See Section IV.J.4.
(21) Providing that Investor may terminate the Commitment if certain
representations or warranties become untrue or inaccurate.
59
any statute, rule, regulation, injunction or other legal restraint preventing
the consummation of the Transaction.
Some of the more substantive conditions precedent that must be satisfied by
the Debtors or waived by the Investor in order to obligate the Investor, include
the following:
o PROJECTIONS. The Debtors and other USi subsidiaries on a
consolidated basis have not failed to meet by more than the
permitted divergence any of the projections set forth in Schedule
I to the Commitment for any period ended prior to the Closing.
These projections, which relate to USi's total revenue,
iMAP-related revenue, EBITDA and EBITDA minus certain capitalized
labor and consulting costs, were prepared by the Investor and
differ in certain respects from the Projections attached hereto
as Appendix B, which were prepared by the Debtors. In addition,
since November 30, 2001, there shall not have occurred any
change, effect, event, occurrence, state of facts or development
that, individually or in the aggregate, would reasonably be
expected to result in the Debtors and other USi subsidiaries on a
consolidated basis failing to meet any such projections by more
than the permitted divergence. (See Section 3.02(d) of the
Commitment.)
o MATERIAL ADVERSE EFFECT. Since November 30, 2001, no change,
effect, event, occurrence, state of facts or development has
occurred that, individually or in the aggregate, would reasonably
be expected to give rise to a Company Material Adverse Effect (as
defined in the Commitment). (See Section 3.02(c) of the
Commitment.)
o MATERIAL ADVERSE CHANGES. There have not occurred since January
7, 2002,(i) any extraordinary or material adverse change in the
financial markets or major stock exchange indices in the United
States, (ii) any material adverse change in United States
currency exchange rates or a material suspension of, or
limitation on, the markets therefor, (iii) a declaration of a
banking moratorium or any material suspension of payments in
respect of banks in the United States or (iv) in the case of any
of the foregoing existing on January 7, 2002, a material
acceleration or worsening thereof. (See Section 3.02(f) of the
Commitment.)
o CURE AMOUNTS. The Investor has confirmed to its satisfaction in
good faith that cure amounts to be paid in connection with the
assumption of Executory Contracts (as defined in the Commitment),
and the payment of other amounts related to the Executory
Contracts, will not exceed $4.4 million in the aggregate. (See
Section 3.02(l) of the Commitment.)
o ADEQUATE PROTECTION. The Investor has confirmed to its
satisfaction in good faith that Adequate Protection Payments (as
defined in the Plan) have not exceeded in the aggregate $1.5
million in any calendar month. (See Section 3.02(m) of the
Commitment.)
o FEE CLAIMS. The Investor has confirmed to its satisfaction in
good faith that Allowed Company Fee Claims (as defined in the
Commitment) will not exceed $6.5 million in the aggregate. (See
Section 3.02(n) of the Commitment.)
60
o OTHER SECURED CLAIMS. The Investor has confirmed to its
satisfaction in good faith that the aggregate amount of (i)
Allowed Miscellaneous Secured Claims plus (ii) the amount by
which (-) the aggregate amount of Equipment Lease Secured Claims
(as defined in the Plan) of Holders electing Alternative B less
the aggregate amount of Plan Notes (as defined in the Plan) not
issued as a result of such elections exceeds (y) the aggregate
amount of the Equipment Lease Secured Claims of such Holders as
provided in Alternative A plus (iii) Allowed Priority Tax Claims
(as defined in the Plan) will not exceed the sum of (a)
$19,543,526 plus (b) unpaid interest accruing after December 31,
2001 on Miscellaneous Secured Claims and Priority Tax Claims to
the e-tent allowable as part of any such Claim under the
Bankruptcy Code minus (c) the sum of all principal payments, if
any, paid in respect of the foregoing obligations on or after
December 19, 2001, whether made as Adequate Protection Payments
or otherwise. (See Section 3.02(o) of the Commitment.)
4. TERMINATION PROVISIONS
The Commitment may be terminated under certain specified circumstances at
any time prior to the Closing. Some of the more salient termination provisions
provide that the Commitment may be terminated:
o By the mutual written consent of the Investor and USi. (See
Section 4.01(a) of the Commitment.)
o By either the Investor or USi (i) if the Closing does not occur
on or before June 7, 2002 (the "Outside Date"), unless the
failure to consummate the Closing is the result of a breach of
the Commitment by the party seeking to terminate the Commitment
or (ii) any governmental entity takes any action permanently
prohibiting the Closing and such action shall have become final
and nonappealable. (See Section 4.01(b) of the Commitment.)
o By the Investor at any time prior to the Closing if:
|-| CONFIRMATION DEADLINE. The Confirmation Order, in form and
substance satisfactory to the Investor, is not entered on or
before May 24, 2002. (See Section 4.01(c)(vi) of the
Commitment.)
|-| EXCLUSIVITY. The Debtors' exclusive right to file or solicit
a plan under Section 1121 of the Bankruptcy Code is not
e-tended or is terminated. (See Section 4.01(c)(viii) of the
Commitment.)
|-| MODIFICATION OF ORDERS. The Bankruptcy Court enters any
order modifying the Plan Procedure Order (as defined in the
Commitment) or the Confirmation Order. (See Section
4.01(c)(viii) of the Commitment.)
|-| LIFT STAY. The Bankruptcy Court enters any order granting
relief from the automatic stay to any creditor holding or
asserting a lien or reclamation claim having a value of
greater than $500,000 individually or $1.0 million in the
aggregate. (See Section 4.01(c)(viii) of the Commitment.)
61
|-| PLAN MODIFICATION. The Board or any committee thereof
withdraws the Plan or modifies the Plan in a manner adverse
to the Investor, or publicly resolves to withdraw the Plan
or modify the Plan in a manner adverse to the Investor or
withdraws or modifies its approval or recommendation of the
Commitment or the Transactions (as defined in the
Commitment), or approves or recommends, or resolves to
approve or recommend, any Alternative Proposal. (See Section
4.01(e) of the Commitment.)
o By USi if, among other specified requirements, (i) the Board has
received a Superior Alternative Proposal, (ii) in light of such
Superior Alternative Proposal the Board shall have determined in
good faith, after consultation with outside counsel, that it is
required for the Board to withdraw or modify its approval or
recommendation of the Commitment or any Transactions (as defined
in the Commitment) in order to act in a manner consistent with
its fiduciary duty under applicable Law, (iii) USi has notified
the Investor in writing of the determinations described in clause
(ii) above, and (iv) at least three business days following
receipt by the Investor of the notice referred to in clause (iii)
above, and taking into account any revised proposal made by the
Investor since receipt of the notice referred to in clause (iii)
above, such Superior Alternative Proposal remains a Superior
Alternative Proposal and the Board has again made the
determinations referred to in clause (ii) above. (See Section
4.01(f) of the Commitment.)
5. LIABILITY LIMITATION PROVISIONS
The Investor is a newly formed corporation with no assets. Under the letter
agreement, dated January 7, 2002, delivered by the Bain Fund to the Investor
(the "Letter Agreement"), the Bain Fund has committed to the Investor that,
subject to the terms and conditions of the Letter Agreement, upon satisfaction
of all of the Investor's conditions to completing the Transactions and
consummation of the Closing, the Bain Fund will invest $81.25 million in
Investor in order to enable Investor to complete the Transactions. The Bain Fund
can either subscribe $81.25 million for all of the shares of the Investor or
allocate its investment to affiliates.
Under the Letter Agreement, the Bain Fund's obligations are only to the
Investor, and not to any other party. In addition, the Letter Agreement limits
the Bain Fund's liability thereunder to $1 million and provides that the Letter
Agreement is not specifically enforceable. In Section 2.01(f) of the Commitment,
USi and the Investor each irrevocably waives its right to challenge the
limitation on the Bain Fund's liability provided in the Letter Agreement.
K. MANAGEMENT AGREEMENT
The Investor has entered into a Management Agreement dated January 7, 2002
with an affiliate of Bain, which provides for a fee to be paid to the Bain
affiliate of $3 million whether or not a Closing is consummated; provided,
however that if the Closing occurs prior to May 31, 2002, only $2 million of the
fee shall then be payable and $500,000 of the fee shall be payable on each of
the first and second anniversaries of the Closing. The Management Agreement also
provides for an annual management fee of $1 million for the first two years
following the Closing and $1.5 million thereafter in exchange for consulting
services. The Management Agreement provides for full indemnification and expense
reimbursement in favor of Bain and its affiliates. If a Closing is consummated,
Reorganized USi will become a party to the Management Agreement at the Effective
Date. If a Closing is not consummated,
62
neither the Debtors nor the Reorganized Debtors shall have any liability or
obligation in respect of the Management Agreement.
L. OPERATIONS AND MANAGEMENT OF REORGANIZED DEBTORS
Under the Plan, from and after the Effective Date, Reorganized USi will be
managed under the direction of its board of directors in accordance with the
applicable provisions of the DGCL, the Amended Certificate of Incorporation and
the Amended Bylaws. On or prior to the date which is fifteen (15) days prior to
the date of the Confirmation Hearing, the Investor, subject to the consent of
the Debtors, shall designate five directors of Reorganized USi and notify the
Debtors in writing of such designation. On or before the date of the
Confirmation Hearing, the Debtors will file with the Bankruptcy Court a schedule
setting forth the names of the persons to be appointed as the directors of
Reorganized USi pursuant to Section 8.03 of the Plan. On the Effective Date,
subject to appointment of the persons named in such schedule as directors of
Reorganized USi and acceptance of such appointment by such persons, (i) the
directors of Reorganized USi shall thereafter be appointed or elected in
accordance with the DGCL, the Amended Certificate of Incorporation and the
Amended Bylaws, as they may from time to time be amended and (ii) the authority,
power and incumbency of the persons then acting as directors of the Debtors will
be terminated and such directors shall be deemed to have resigned. Following the
Effective Date, affiliates of the Bain Fund will own more than a majority of the
Investor or its direct or indirect corporate parent. Through such ownership,
such affiliates will have the ability to elect a majority of the boards of
directors of Reorganized USi and its subsidiaries and to determine the outcome
of any proposed corporate transactions or other matters submitted to
stockholders of such corporations for approval. It is anticipated that the
Debtors' current officers will remain with the Reorganized Debtors following the
Effective Date in their current positions and with substantially the same
compensation as in effect prior to the Effective Date. It is also anticipated
that some of the current officers will be employed under employment agreements
with Reorganized USi, and one or more of such officers may become investors in
Reorganized USi. In addition, Reorganized USi may generally offer equity
incentives to its employees. Finally, a number of USi's current directors have
also expressed an interest in investing in Reorganized USi. As of the date of
this Disclosure Statement, the Debtors do not have any additional information
about any of these arrangements other than what is stated herein; however, as
indicated, it is possible that one or more of the Debtors' officers and
directors may enter into one or more of these arrangements.
Reorganized USi will be the sole member of the other Reorganized Debtors,
Admiral, GEMC Properties, Riva and Shore.
M. EFFECTS OF PLAN CONFIRMATION
1. DISCHARGE AND TERMINATION. Except for the Reorganized Debtors'
obligations under the Plan, if the Plan becomes effective as set forth in
Section 13.02 of the Plan, the confirmation of the Plan will (i) discharge the
Debtors, the Estate, and the Reorganized Debtors from any debt or liability that
arose before the Confirmation Date, or which might at any time on or after the
Confirmation Date arise out of or relate, directly or indirectly, to any
pre-Confirmation Date acts or omissions, any debt of the kind specified in
SectionSection 502(g), 502(h) or 502(i) of the Bankruptcy Code, all Claims
treated in the Plan, all contingent and unliquidated liabilities Of every type
and description to the fullest extent discharge of such liabilities is permitted
under the Bankruptcy Code, and all other Claims against the Debtors, the Estate,
or the Reorganized Debtors that were outstanding, accrued or existing, or might
reasonably have been asserted, on the Confirmation Date, in each instance
whether or not a proof of such Claim is filed or deemed filed, whether or not
such Claim is Allowed, and whether or not the Holder of such Claim has
63
voted on the Plan, (ii) terminate all Interests in USi and rights and interests
and claims of the Holders of all Interests in USi and (iii) terminate all LLC
Interests and all rights and interests and claims of the Holders of all LLC
Interests.
2. COMPLETE SATISFACTION. If the Plan becomes effective as set forth in
Section 13.02 of the Plan, the distributions and rights provided under the Plan
will be in complete satisfaction, discharge and release, effective as of the
Confirmation Date, of all Claims against and Interests in the Debtors, the
Estate and Reorganized USi and all liens upon any property of the Debtors, the
Estate or the Reorganized Debtors.
3. BINDING EFFECT. The provisions of the Plan will be binding upon and
inure to the benefit of the Debtors, the Estate, the Reorganized Debtors, any
Holder of any Claim or Interest treated in the Plan, and each of their
respective predecessors, successors, assigns, agents, officers and directors
and, to the fullest extent permitted under Section 1141(a) of the Bankruptcy
Code and other applicable law, each other Entity affected by the Plan.
4. RELEASE AND INJUNCTION. If the Plan becomes effective as set forth in
Section 13.02 of the Plan, each of the Debtors, in its individual capacity and
as Debtors in Possession, for and on behalf of the Estate, and the Reorganized
Debtors will release and discharge, absolutely, unconditionally, irrevocably and
forever:
(a) Certain Bankruptcy Causes of Action. Any and all Causes of Action
that may be enforceable by the Debtors or the Debtors in Possession under
SectionSection 510, 544, 547, 548 and 550 of the Bankruptcy Code, provided that
(i) any and all Reserved Causes of Action shalL be reserved and preserved, and
(ii) such discharge and waiver shall not waive or otherwise prejudice the rights
of the Debtors and/or Reorganized USi to invoke the provisions of Section 502(d)
of the Bankruptcy Code with respect to the assertion of any claim by an Entity
from which property otherwise may have been recoverable absent such release and
discharge; and
(b) Causes of Action Against Directors and Officers. Any and all Causes
of Action against any Directors and Officers, solely in their capacity as such,
from any claim or Cause of Action (i) arising from the beginning of time through
the Confirmation Date related to acts or omissions to act (including, but not
limited to, any claims or Causes of Action arising out of any alleged fiduciary
or other duty); or (ii) which might at any time after the Confirmation Date
arise out of or relate, directly or indirectly, to any pre-Confirmation Date
acts or omissions, provided, that any and all Reserved Causes of Action shall be
reserved and preserved; and
(c) Causes of Action Against Representatives. Any and all Causes of
Action against any Representative arising from or related to such
Representative's acts or omissions to act in the Chapter 11 Case or in
connection with the Transactions, except that Representatives shall not be
released from any liability relating to acts or omissions to act of gross
negligence or willful misconduct.
"Reserved Causes of Action" means (i) any and all Causes of Action against
Directors and Officers based upon their obligations to one or more of the
Debtors under any promissory notes, loans or other similar obligations to the
Debtors, (ii) any and all Causes of Action against any Holder of an Equipment
Lease Secured Claim that has elected treatment under Alternative B as described
in Section 5.01 of the Plan, including all Causes of Action of the type
described in Section 12.04 of the Plan, (iii) any and all Causes of Action
against any Holder of a Miscellaneous Secured Claim, including all Causes of
Action of the type described in Section 12.04 of the Plan and (iv) any and all
Causes of Action
64
against Directors and Officers for willful misconduct. Except as expressly
released by the Debtors in the Plan, all claims are preserved.
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH HOLDER OF A CLAIM
(WHETHER OR NOT ALLOWED) AGAINST OR INTEREST IN THE DEBTORS, THE ESTATE OR THE
REORGANIZED DEBTORS WILL BE ENJOINED FROM COMMENCING OR CONTINUING ANY ACTION,
EMPLOYMENT OF PROCESS OR ACT TO COLLECT, OFFSET OR RECOVER AND WILL BE DEEMED TO
RELEASE ANY CLAIM AGAINST (A) ANY DIRECTORS AND OFFICERS IN THEIR CAPACITY AS
SUCH ARISING FROM THE BEGINNING OF TIME THROUGH THE CONFIRMATION DATE OR WHICH
MIGHT AT ANY TIME AFTER THE CONFIRMATION DATE ARISE OUT OF OR RELATE, DIRECTLY
OR INDIRECTLY, TO ANY PRE-CONFIRMATION DATE ACTS OR OMISSIONS RELATED TO HIS OR
HER ACTS OR OMISSIONS TO ACT (INCLUDING, BUT NOT LIMITED TO, ANY CLAIMS ARISING
OUT OF ANY ALLEGED FIDUCIARY OR OTHER DUTY), OR (B) ANY REPRESENTATIVE ARISING
FROM OR RELATED TO SUCH REPRESENTATIVE'S ACTS OR OMISSIONS TO ACT IN THE CHAPTER
11 CASE OR IN CONNECTION WITH THE TRANSACTIONS.(22)
5. EXCULPATION. Under the Plan, neither the Debtors, nor the Estate, nor
the Reorganized Debtors, nor Investor or any affiliates of Investor, or its
transferees or successors, nor any past, present or future members of the
Official Committee, nor any Holders of Claims or Interests treated in the Plan,
nor any officer, director, shareholder, employee, agent, attorney, accountant or
adviser acting for any of them, shall (i) be obligated in any manner under the
Plan or in respect of or by reason of the filing, negotiation, prosecution,
confirmation, consummation or implementation of the Plan or any action taken or
not taken in connection therewith, or (ii) have or incur any liability to any
Holder of any Claim or Interest or any other Entity in respect of any such
matters or any information provided or statement made in the Disclosure
Statement or omitted therefrom, except that (a) the Debtors and the Reorganized
Debtors will fulfill the obligations expressly set forth in the Plan, (b) any
obligation imposed by law that may not lawfully be disclaimed or waived as set
forth in the Plan shall remain enforceable to the extent required by law, (c)
Investor will fulfill its obligations as and to the extent set forth in the
Commitment and (d) any obligation or liability arising out of willful misconduct
or gross negligence shall remain enforceable. Each of the Entities identified in
the foregoing sentence shall be entitled to rely upon the advice of counsel with
respect to its duties and responsibilities under the Plan and shall be fully
protected in acting or in refraining from acting in accordance with such advice
or in any manner approved or ratified by the Bankruptcy Court and is intended to
be an express third-party beneficiary of the exculpation provisions above.
6. SUBORDINATION. Except as expressly set forth in the Plan, distributions
under the Plan take into account what the Debtors believe to be the relative
priorities of the Claims and Interests in each Class in connection with any and
all contractual, legal or equitable subordination provisions or rights relating
thereto. Accordingly, (i) any distributions under the Plan shall be received and
retained free of and from any obligations to hold or transfer the same to any
other creditor and shall not be subject to levy,
- ---------------------------
(22) The SEC staff has taken the position that a release of third-party claims
against third-party non-debtors under a plan of reorganization is generally
not allowed, may be challenged in connection with confirmation of the Plan
and generally may not be approved by a bankruptcy court under applicable
law. To the extent that applicable law does not allow all or part of the
releases contemplated by Section 12 of the Plan, only those provisions of
the releases that are enforceable under applicable law (if any) would be
effected by Section 12 of the Plan.
65
garnishment, attachment or other legal process by any Holder by reason of
claimed contractual subordination rights, and (ii) the Confirmation Order shall
constitute an injunction enjoining any Entity from enforcing or attempting to
enforce any contractual, legal or equitable subordination rights to property
distributed under the Plan.
7. INJUNCTION. The discharge provided in Section 12.01 of the Plan shall
also operate as an injunction restraining any Entity from commencing or
continuing any action, suit or proceeding, or employing any process, or
otherwise acting, to collect, offset or recover any Claim or Interest discharged
under the Plan to the fullest extent authorized or provided by the Bankruptcy
Code, including SectionSection 524 and 1141 thereof.
THE CONFIRMATION ORDER SHALL CONSTITUTE AN INJUNCTION ENJOINING ANY ENTITY
FROM ENFORCING OR ATTEMPTING TO ENFORCE ANY CAUSE OF ACTION AGAINST ANY PRESENT
OR FORMER SHAREHOLDER, DIRECTOR, OFFICER, EMPLOYEE, ATTORNEY OR AGENT OF THE
DEBTORS BASED ON, ARISING FROM OR RELATING TO ANY FAILURE TO PAY, OR MAKE
PROVISION FOR PAYMENT OF, ANY AMOUNT PAYABLE IN RESPECT OF ANY PRIORITY TAX
CLAIM ON WHICH THE PAYMENTS DUE UNDER SECTION 3.01 OF THE PLAN HAVE BEEN MADE OR
ARE NOT YET DUE UNDER SECTION 3.01 OF THE PLAN.
N. TERMINATION OF INDEMNIFICATION OBLIGATIONS
All obligations of the Debtors or the Estate or the Reorganized Debtors to
indemnify, or to pay contribution or reimbursement to the Directors and
Officers, any of the Debtors' present or former agents, employees and
representatives or any Holder of a Claim or Interest treated in the Plan, or any
trustee or agent acting for any such Holder, or any person in any manner
engaged, employed or indemnified in connection with the issuance or sale of any
Cancelled Securities or any agent, attorney, adviser, financial adviser,
investment banker, employee or representative or any heirs, representatives,
successors or assigns of any indemnified person that may be outstanding, accrued
or existing, or might reasonably have been asserted, on the Confirmation Date or
which might at any time after the Confirmation Date arise out of or relate,
directly or indirectly, to any pre-Confirmation Date acts or omissions (whether
pursuant to a certificate of incorporation, bylaws, contractual obligations or
any applicable law or otherwise) in respect of any past, present or future
action, suit or proceedings ("Prepetition Indemnification Claims") will be
discharged under the Plan and all undertakings and agreements for or relating to
any such indemnification, contribution or reimbursement ("Indemnification
Contracts") will be rejected and terminated under the Plan, provided, however,
that such discharge of obligations and such rejection and termination of
undertaking, and agreements are not intended and will not be construed to
prohibit or in any manner limit the right or ability of any present or former
directors, officers, agents, employees or representatives of the Debtors or any
of its affiliates (or any the right or ability of any other Entity) to enforce
his, her or its rights against the insurer under any and all applicable policies
of insurance (whether the such policies were arranged and paid for by the
Debtors or by Reorganized USi or by any other Entity or otherwise) and any and
all such rights will be and are expressly preserved under the Plan.
O. PRESERVATION OF INSURANCE
The Debtors' discharge and other provisions provided in the Plan will not
diminish or impair the enforceability of any insurance policies that may cover
Claims against the Debtors or any other Entity.
66
P. DEEMED CONSOLIDATION
As of the Effective Date, the Debtors will be deemed consolidated for the
following purposes under the Plan: (i) no distributions shall be made under the
Plan on account of the Interdebtor Claims or any Interest of a Debtor in another
Debtor; (ii) all guarantees by any of the Debtors of the obligations of any
other Debtor arising prior to the Effective Date or other obligations as to
which one or more Debtors are co-obligors arising prior to the Effective Date,
will be deemed eliminated so that any Claim against any Debtor and any guarantee
thereof executed by any other Debtor and any joint and/or several liability of
any of the Debtors will be deemed to be one obligation of the deemed
consolidated Debtors; and (iii) each and every Claim filed or to be filed in the
Chapter 11 Case of any of the Debtors will be deemed filed against the deemed
consolidated Debtors and will be deemed one Claim against and, to the extent
Allowed, obligation of the deemed consolidated Debtors.
Such deemed consolidation, however, will not (other than for purposes
related to funding distributions under the Plan) affect: (a) the legal and
organizational structure of the Reorganized Debtors; or (b) the enforceability
or existence of any pre- or post-Filing Date guarantees, liens, and security
interests that are required to be maintained (1) in connection with executory
contracts or unexpired leases that were entered into during the Chapter 11 Case
or that have been or will be assumed, (2) pursuant to the Plan, or (3) in
connection with any financing entered into by the Reorganized Debtors on the
Effective Date; or (c) distributions out of any insurance policies or proceeds
of policies.
Q. DISTRIBUTIONS UNDER THE PLAN(23)
1. INITIAL DISTRIBUTIONS. Except as otherwise provided in the Plan,
Reorganized USi, or its designee, shall make, on or as promptly as practicable
after the Effective Date, but no later than 30 days after the Effective Date
with respect to property other than Cash and 45 days after the Effective Date
with respect to Cash, an initial distribution (each, an "Initial Distribution")
equal to (a) 25% in the case of the Plan Distribution and Secondary Plan
Distribution B and (b) 50% in the case of the Substitute Plan Distribution (or,
in each case, such other percentage determined by the Bankruptcy Court as
provided below, the "Initial Distribution Percentage") of (i) the aggregate Plan
Distribution in respect of Claims that are, on the Effective Date, Allowed
Claims Entitled to the Plan Distribution, by applying the Plan Distribution
Ratio to such Allowed Claims, and such distribution will be made in Plan Notes
as provided in Sections 5.04, 5.05 and 5.06 of the Plan, (ii) the Secondary Plan
Distribution B in respect of General Unsecured Claims that are Allowed as of the
Effective Date, by providing each such Holder with its Ratable Share of such
distribution, and such distribution shall be made in Plan Notes as provided in
Section 5.04 of the Plan and (iii) the aggregate Substitute Plan Distribution
Amount in respect of General Unsecured Claims and Senior Creditor Claims that
are Allowed as of the Effective Date and that have elected to receive the
Substitute Plan Distribution Amount pursuant to Sections 5.04(b) and 5.05(c) of
the Plan, as applicable; provided, however, that the Debtors and Reorganized USi
(as applicable) will have the right to request that the Bankruptcy Court
determine the Initial Distribution Percentage to be used to calculate the
Initial Distributions. Subject to the Section 10.01 of the Plan, (x) the
remainder of the Plan
- ---------------------------
(23) The Claim estimates contained herein are based upon the Debtors'
examination of their books and records. The Bankruptcy Court has
established March 11, 2002 as the Bar Date. Because recoveries under the
Plan are directly linked to the amount and value of the Allowed Claims, any
change in the Debtors' Claims estimates resulting from an analysis of the
proofs of claim filed as of the Bar Date will impact their predictions of
recoveries under the Plan. In accordance with Section 11.04 of the Plan,
the Debtors have the right to seek a Bankruptcy Court order establishing
Claims estimates for purposes of effectuating distributions under the Plan
and avoiding undue delay in the administration of the Estate.
67
Distribution (the "Remaining Plan Distribution Amount") will be held by
Reorganized USi pending final determination of the Allowed amount of all Claims
Entitled to the Plan Distribution, (y) the remainder of the Secondary Plan
Distribution B (the "Remaining Secondary Plan Distribution B Amount") shall be
held by Reorganized USi pending final determination of the Allowed amount of
General Unsecured Claims entitled to such distribution, and (z) the remainder of
the Substitute Plan Distribution Amount (the "Remaining Substitute Plan
Distribution Amount") shall be held by Reorganized USi (provided that a good
faith estimate of the portion of the Substitute Plan Distribution Amount payable
in Cash on the date of issuance of the Substitute Plan Notes but not distributed
as part of the Initial Distribution shall be placed by Reorganized USi in an
interest bearing escrow account for distribution consistent with the terms of
Section 10.01 of the Plan) pending final determination of the Allowed amount of
all General Unsecured Claims and Senior Creditor Claims that have elected to
receive the Substitute Plan Distribution Amount pursuant to Sections 5.04(b) and
5.05(c) of the Plan, as applicable.
2. PERIODIC DISTRIBUTIONS. After the Effective Date but prior to the date
of the Final Distribution, the Reorganized Debtors shall, no less than
semi-annually (provided that no less than 25% of the Remaining Plan Distribution
Amount will be distributed as a result of Disputed Claims as of the Effective
Date subsequently becoming Allowed Claims), make periodic distributions
("Periodic Distributions") of the Remaining Plan Distribution Amount to Holders
of Allowed Claims Entitled to the Plan Distribution which became Allowed after
the Effective Date. Each Periodic Distribution shall be used first to fund a
distribution to each Holder of an Allowed Claim Entitled to the Plan
Distribution on which no distribution was made in the Initial Distribution or in
any prior Periodic Distribution, in an amount determined based on the same ratio
of Plan Distribution to Allowed amount of Claims Entitled to the Plan
Distribution (without any allowance for interest accrued subsequent to the date
of the Initial Distribution or any prior Periodic Distribution) as that received
in the Initial Distribution and any Periodic Distribution by the Holders of
Allowed Claims Entitled to the Plan Distribution that were Allowed on the
Effective Date or any such Periodic Distribution Date. Periodic Distributions to
Holders of Allowed General Unsecured Claims and Allowed Senior Creditor Claims
on account of, as appropriate, the Remaining Secondary Plan Distribution B
Amount and the Remaining Substitute Plan Distribution Amount shall be determined
and made in a similar manner and fashion as Periodic Distributions on respect of
the Remaining Plan Distribution Amount.
3. FINAL DISTRIBUTIONS. A final distribution of the Remaining Plan
Distribution Amount will be made as promptly as practicable after determination
of the Allowed amount of all Claims Entitled to the Plan Distribution. Such
distribution will be applied first to fund a distribution to each Holder of an
Allowed Claim Entitled to the Plan Distribution on which no distribution was
made in the Initial Distribution or in any Periodic Distribution, in an amount
(the "Catch-Up Distribution") determined based on the same ratio of Plan
Distribution to Allowed amount of Claims Entitled to the Plan Distribution
(without any allowance for interest accrued subsequent to the date of the
Initial Distribution) as that received in the Initial Distribution and any
Periodic Distributions by the Holders of Claims Entitled to the Plan
Distribution that were Allowed on the Effective Date or any Periodic
Distribution Date. Subject to the limitation on Plan Distribution as set forth
in the Plan, any portion of the Plan Distribution remaining after the Catch-Up
Distribution will be distributed ratably to the Holders of all Allowed Claims
Entitled to the Plan Distribution, by applying the Plan Distribution Ratio to
such Allowed Claims in accordance with and as provided in Sections 5.04, 5.05
and 5.06 of the Plan. Final distributions to Holders of Allowed General
Unsecured Claims and Allowed Senior Creditor Claims on account of, as
appropriate, the Remaining Secondary Plan Distribution B Amount and the
Remaining Substitute Plan Distribution Amount shall be determined and made in a
similar manner and fashion as the final distribution in respect of the Remaining
Plan Distribution Amount.
68
4. NO ADJUSTMENTS OR CLAIMS FOR EXCESS INITIAL OR PERIODIC DISTRIBUTION. No
rescission or other adjustment will be required in respect of an Initial
Distribution or any Periodic Distribution if the Remaining Plan Distribution
Amount, the Remaining Secondary Plan Distribution B Amount or the Remaining
Substitute Plan Distribution Amount, as applicable, is less than the amount
required for the Catch-Up Distribution. In such event, the deficiency will be
allocated ratably to Allowed Claims entitled to receive the Catch-Up
Distribution. The payment of the Remaining Plan Distribution Amount, Remaining
Secondary Plan Distribution B Amount or the Remaining Substitute Plan
Distribution Amount, as applicable, ratably on account of Allowed Claims
entitled to receive the Catch-Up Distribution will discharge all liability of
Reorganized USi in respect of any distribution required to be made pursuant to
the Plan on account of such Claims. The Holders of Allowed Claims entitled to
receive the Catch-Up Distribution will not have any claim or Cause of Action
against Reorganized USi or any other Entity in respect of any excess
distribution received by any Holder of a Claim by reason of its participation in
an Initial Distribution or Periodic Distribution.
5. LIMITATION ON PLAN DISTRIBUTION. Notwithstanding anything to the
contrary contained in the Plan, no Holder of an Allowed Claim Entitled to the
Plan Distribution will be entitled to receive a Plan Note in respect of the Plan
Distribution with a principal amount in excess of 23.66% of the Allowed amount
of such Claim; provided, however, that such limitation as it applies to Holders
of Allowed Senior Creditor Claims shall be increased to include such Holders'
Ratable Share of 23.66% of the Plan Distribution in respect of the Allowed
Amount of Convertible Subordinated Note Claims. If, after distribution of the
Remaining Plan Distribution Amount and after giving effect to the limitation
contained in the immediately preceding sentence, there remain Plan Notes in the
Plan Distribution, such notes will be deemed cancelled.
6. LIMITATION ON SECONDARY PLAN DISTRIBUTION B. Notwithstanding anything to
the contrary contained in the Plan, no Holder of an Allowed General Unsecured
Claim shall be entitled to receive a Plan Note in respect of the Secondary Plan
Distribution B with a principal amount in excess of 10.68% of the Allowed amount
of such Claim. If, after distribution of the Remaining Secondary Plan
Distribution B Amount, there remain Plan Notes in the Secondary Plan
Distribution B, such notes shall be deemed cancelled.
7. LIMITATION OF SUBSTITUTE PLAN DISTRIBUTION AMOUNT. Notwithstanding
anything to the contrary contained in the Plan, no Holder of an Allowed General
Unsecured Claim or Allowed Senior Creditor Claim shall be entitled to receive a
Substitute Plan Note in respect of the Substitute Plan Distribution Amount with
a principal amount in excess of the amount equal to the product of (i) the total
percentage distribution to Holders of Allowed Claims receiving the Plan
Distribution and the Secondary Plan Distribution B and (ii) the Allowed amount
of such Claims; provided, however, that the total percentage distribution
(calculated as a percentage of Allowed amounts) in respect of Holders of Allowed
Senior Creditor Claims shall include such Holders' Ratable Share of Plan
Distribution in respect of the Allowed amount of Convertible Subordinated Note
Claims. If, after distribution of the Remaining Substitute Plan Distribution
Amount and after giving effect to the limitation contained in the immediately
preceding sentence, there remain Substitute Plan Notes, such notes shall be
deemed cancelled.
8. SECONDARY PLAN DISTRIBUTION A. On or as promptly as practicable after
the Effective Date but not later than 30 days after the Effective Date,
Reorganized USi shall distribute or cause to be distributed the Secondary Plan
Distribution A to the Indenture Trustee for distribution pursuant to the terms
of the Convertible Subordinated Note Indenture so as to provide each Holder of
an Allowed Convertible Subordinated Note Claim its Ratable Share of the
Secondary Plan Distribution A.
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9. TIMING OF OTHER DISTRIBUTIONS. Except as otherwise provided in the Plan,
distributions in respect of Claims that, on the Effective Date, are Allowed
Claims will be made by Reorganized USi (or its designee) on or as promptly as
practicable after the Effective Date but not later than 30 days after the
Effective Date with respect to property other than Cash and 45 days after the
Effective Date with respect to Cash. Distributions in respect or as a result of
Claims Allowed after the Effective Date will be made as soon as practicable
after such Claim becomes Allowed.
10. SUBSEQUENT PAYMENTS ON PLAN NOTES AND SUBSTITUTE PLAN NOTES. If any
Plan Notes or Substitute Plan Notes are issued after the occurrence of one or
more monthly Payment Dates, Reorganized USi shall pay principal and interest due
and payable on such Payment Dates at the time of issuance of such Plan Notes or
Substitute Plan Notes. Such payment shall be deemed timely and no interest shall
be payable as a result of delay in receipt of principal and interest due on any
Payment Date caused by such delayed issuance of Plan Notes or Substitute Plan
Notes.
11. COMPLIANCE WITH TAX REQUIREMENTS. In connection with each distribution
with respect to which the filing of an information return (such as an Internal
Revenue Service Form 1099 or 1042) or withholding is required, Reorganized
Debtors will file such information return with the Internal Revenue Service and
provide any required statements in connection therewith to the recipients of
such distribution or effect any such withholding and deposit all moneys so
withheld as required by-law. With respect to any Entity from whom a tax
identification number, certified tax identification number or other tax
information required by law to avoid withholding has not been received by
Reorganized Debtors (or its distribution agent), Reorganized Debtors may, at its
option, withhold the amount required and distribute the balance to such Entity
or decline to make such distribution until the information is received. In no
event, however, shall Reorganized Debtors be obligated to liquidate Plan Notes,
Secondary Plan Notes, Substitute Plan Notes or New Warrants to honor any
withholding obligation.
12. PERSONS DEEMED HOLDERS OF REGISTERED SECURITIES. Except as otherwise
provided in the Plan, Reorganized USi and each transfer or distribution agent
will be entitled to treat the record Holder of a registered security as of the
Confirmation Date as the sole Holder of the Claim or Interest in respect thereof
for purposes of all notices, payments or other distributions under the Plan. No
notice of any transfer of any such security will be binding on Reorganized USi
or any transfer or distribution agent, unless such transfer has been properly
registered in accordance with the provisions of the governing indenture or
agreement at least ten Business Days prior to the day on which any such notice
is given or any such payment or other distribution is made. If there is any
dispute regarding the identity of the person entitled to any payment or
distribution in respect of any Claim under the Plan, no payment or distribution
need to be made in respect of such Claim until the Bankruptcy Court resolves the
dispute pursuant to a Final Order.
Notwithstanding anything in the Plan or the Disclosure Statement to the
contrary, Reorganized USi and each transfer or distribution agent will be
entitled to use other reasonable means to determine the identity of the Holders
of Claims in respect of any registered security. Without limiting the foregoing,
Reorganized USi, Bank of New York (as trustee under the Convertible Subordinated
Note Indenture), each depositary, transfer agent and distribution agent, as
applicable, may reasonably rely on registration forms or certificates delivered
by direct or indirect participants in any depositary and other beneficial owners
of the Convertible Subordinated Notes in order to determine who is the Holder of
any such Claim and who is entitled to any distribution in respect thereof.
Each beneficial owner of Claims represented by securities or other
instruments that are held by or registered in the name of a broker, dealer,
commercial bank, trust company or other nominee or custodian
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is urged to contact such entity so that Reorganized USi may promptly determined
the identities of the Holders of such Claims.
If there is any dispute regarding the identity of the person entitled to
any payment or distribution in respect of any Claim under the Plan, no payment
or distribution need be made in respect of such Claim until the Bankruptcy Court
resolves the dispute pursuant to a Final Order.
13. DISTRIBUTION OF UNCLAIMED PROPERTY. Any distribution of property under
the Plan that is unclaimed after two years following the Effective Date will
irrevocably revert to Reorganized USi, without regard to state escheatment laws.
14. ALLOWANCE OF CLAIMS SUBJECT OF SECTION 502(D); RIGHT OF SETOFF.
Allowance of Claims under the Plan will be in all respects subject to the
provisions of Section 502(d) of the Bankruptcy Code, except that no Claim that
is Allowed in an amount set forth in the Plan or an Attachment hereto will be
disallowed under Section 502(d) of the Bankruptcy Code. The Reorganized Debtors
will have the right to set off, against any Claim and the distributions to be
made pursuant to the Plan in respect of such Claim, any and all debts,
liabilities and claims of every type and nature whatsoever which (after giving
effect to the releases set forth in Section 12.04 of the Plan) the Estate or
any of the Reorganized Debtors may have against the Holder of such Claim, and
neither any prior failure to do so nor the Allowance of such Claim, whether
pursuant to the Plan or otherwise, will constitute a waiver or release of any
such right of setoff.
R. CASH IN LIEU OF DE MINIMIS NEW WARRANT DISTRIBUTIONS TO CLASS 6
Notwithstanding anything in the Plan to the contrary, no Allowed Class 6
Claim (Convertible Subordinated Note Claim) in an amount less than $500,000 in
principal amount (calculated without regard to interest accrued thereon but
unpaid prior to the Filing Date) shall be entitled to receive any New Warrants.
In lieu of being entitled to receive a portion of the New Warrants, each Holder
of an Allowed Class 6 Claim that is less than $500,000 in principal amount will
instead receive (in substitution for New Warrants) additional Cash in an amount
equal to (a) the principal amount of such Holder's Allowed Class 6 Claim,
divided by (b) $125.0 million (i.e., the total principal amount of the
Convertible Subordinated Note Claims), multiplied by (c) $500,000 (i.e., the
aggregate value of the New Warrants).
S. FRACTIONAL WARRANTS
Cash will be distributed (based on a valuation of $500,000 for the
aggregate value of the New Warrants) in lieu of any portion of a distribution on
account of an Allowed Claim that would otherwise result in a fractional New
Warrant.
T. RETENTION OF DISTRIBUTION AGENT
The Debtors or Reorganized Debtors may, in their sole discretion, retain
one or more distribution agents to assist the Debtors and Reorganized Debtors in
making the distributions contemplated by the Plan.
U. CANCELLATION OF SECURITIES
On the Effective Date, the Equipment Leases and, except for purposes of
distribution under the Plan, the Convertible Subordinated Note Indenture and all
Cancelled Securities will be cancelled and all obligations thereunder discharged
by confirmation of the Plan.
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V. SURRENDER OF CANCELLED SECURITIES
On the Effective Date, each of the respective transfer books maintained for
the Cancelled Securities will be closed. Except for the right to receive the
distributions, if any, pursuant to the Plan, the Holder of a Cancelled Security
will have no rights arising from or relating to such Cancelled Security after
the Effective Date, including rights of subordination or subrogation that may be
construed to be inherent in or ancillary or related to such Cancelled Security.
Reorganized USi may require as a condition to any distribution to any Holder of
a Cancelled Security that the beneficial holder thereof execute a letter of
transmittal or other certificate as to the amount of Cancelled Securities held
and the designation by such beneficial holder of the name and address of such
beneficial holder for purposes of distribution under the Plan. Each Holder of a
Cancelled Security evidencing any Allowed Claim will surrender such Cancelled
Security to Reorganized USi (or its designee), and Reorganized USi (or its
designee) will distribute to such Holder or to such Holder's agent, trustee or
representative the appropriate consideration therefor in accordance with the
Plan as promptly as is reasonably practicable. No distribution under the Plan
will be made to or for account of any Holder of an Allowed Claim evidenced by a
Cancelled Security unless and until such Cancelled Security is received by
Reorganized USi (or its designee). If a Cancelled Security is lost or destroyed,
the Holder of such Cancelled Security must deliver an affidavit of loss or
destruction to the Debtors or Reorganized USi (or their designee), as well as an
agreement to indemnify the Debtors and Reorganized USi (and post a bond if so
requested by the Debtors or Reorganized USi), in form and substance reasonably
acceptable to Reorganized USi, before such Holder may receive any distribution
that it would otherwise be entitled to receive under the Plan in respect of such
lost or destroyed Cancelled Security. Any Holder of an Allowed Claim that fails
to surrender a Cancelled Security related thereto or to deliver an affidavit and
an indemnity agreement before the later to occur of (i) two years from the
Effective Date, and (ii) six months following the date such Holder's Claim
becomes an Allowed Claim will be deemed to have no further Claim and no
distributions will be made under the Plan in respect of such Claim.
W. PROCEDURES FOR RESOLVING DISPUTED CLAIMS AND PAYMENTS UNDER THE PLAN
Under the Plan, after the Effective Date, only the Debtors or Reorganized
Debtors may object to Claims, except a Claim that is Allowed as set forth in the
Plan. Any such objection must be filed and served no later than the later of (i)
the 60th day following the Effective Date, (ii) 30 days after the filing of the
proof of claim of such Claim, or (iii) any later day set by order of the
Bankruptcy Court, which the Debtors or the Reorganized Debtors may at any time
request on notice to the United States Trustee and all other parties in interest
that have filed a request for notice pursuant to Bankruptcy Rule 2002 in the
Case. Unless otherwise ordered by the Bankruptcy Court, the Debtors or
Reorganized USi shall litigate the merits of each Disputed Claim until it is
abandoned by the Holder, determined by Final Order or compromised and settled by
the Debtors or Reorganized Debtors, subject to any required approval of the
Bankruptcy Court. After the Effective Date, Reorganized USi shall be authorized
to compromise and settle Disputed Claims without seeking further Bankruptcy
Court approval and such Disputed Claims shall be Allowed in the amount that is
agreed upon pursuant to such compromise or settlement. No payments or
distributions shall be made in respect of any Disputed Claim. In order to
effectuate distributions pursuant to the Plan and avoid undue delay in the
administration of the Estate, the Debtors (prior to the Effective Date) and
Reorganized Debtors (after the Effective Date) shall have the right to seek an
order of the Bankruptcy Court, after notice and a hearing (which notice may be
limited to the Holder of such Disputed Claim and which hearing may be held on an
expedited basis), estimating a Disputed Claim pursuant to Section 502(c) of the
Bankruptcy Code or providing that a Disputed Claim shall be Allowed in part,
with the rest to remain Disputed.
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X. RETENTION OF JURISDICTION
Pursuant to the Plan, the property of the Estate and affairs of the Debtors
will remain subject to the jurisdiction of the Bankruptcy Court until the Plan
becomes effective as set forth in Section 13.02 of the Plan. After the Plan
becomes effective, the Bankruptcy Court will retain jurisdiction over the
Debtors and the Reorganized Debtors with respect to the administration of the
Plan and the consolidated Chapter 11 Case to the fullest extent permitted by
law, including for the purpose of hearing all requests for relief and
determining all disputes relating to (i) the Plan and the implementation,
interpretation and enforcement thereof, (including, but not limited to, the
discharge, release and injunction provisions of Article 12 of the Plan) and any
contract or agreement created in connection with the Plan, (ii) the allowance,
amount and classification of Claims and Interests treated in the Plan, (iii) the
rights and obligations of any Holder of any such Claim or Interest, whether as
against the Debtors or Reorganized USi or as against any other Holder, (iv)
compensation of professional persons, (v) any and all applications, motions,
adversary proceedings and contested or litigated matters pending on the
Effective Date and arising under Chapter 11 or arising in or related to the
Chapter 11 Case or the Plan, (vi) all Reserved Causes of Action, (vii) the
interpretation or enforcement of the Confirmation Order or any proceedings or
matters set forth or contemplated therein, and (viii) any other matter within
the continuing jurisdiction of the Bankruptcy Court. To the fullest extent of
applicable law, such jurisdiction shall be exclusive until the Bankruptcy Court
enters an order closing the Chapter 11 Case and non-exclusive thereafter. The
Reorganized Debtors will have sole authority, from and after the Effective Date,
to commence litigation with respect to and to settle and release all Reserved
Causes of Action.
Y. AMENDMENTS AND MODIFICATIONS TO THE PLAN
To the fullest extent permitted under Section 1127 of the Bankruptcy Code,
the Plan may be altered, amended or modified by the Debtors with the consent of
the Investor, upon the Debtors' good faith consultation with the Committee, at
any time prior to the Effective Date and by Reorganized USi anytime thereafter.
Z. WITHDRAWAL OF THE PLAN
The Debtors reserve the right to revoke or withdraw the Plan at any time
prior to the Effective Date. If it does so, the Plan shall be null and void.
AA. CONDITIONS TO OCCURRENCE OF EFFECTIVE DATE OF THE PLAN
The Plan will not become effective, and no obligations and rights set forth
in the Plan as of the Effective Date or thereafter shall come into existence,
unless each of the following conditions is met on the Effective Date:
1. COMMITMENT. All conditions set forth in the Commitment will have been
satisfied or waived, including the condition that the Confirmation Order shall
be a Final Order.
2. REORGANIZED USi. Reorganized USi will remain a Delaware corporation
existing in good standing under the DGCL. The Amended Certificate of
Incorporation and the Amended Bylaws shall be its sole governing documents.
Reorganized USi shall have duly authorized, executed and delivered all New
Common Stock, Amended Equipment Lease Agreements, Substitute Equipment Lease
Agreements, Plan Notes, Secondary Plan Notes, Substitute Plan Notes and New
Warrants to be issued, delivered or
73
distributed pursuant to the Plan. The consummation of the Plan shall not be in
any respect restrained by order of any court of competent jurisdiction.
3. PAYMENT OF THE SUBSCRIPTION PRICE. The Investor shall have tendered to
Reorganized USi concurrent payment of the Subscription Price of $81.25 million
for the shares of the New Common Stock.
4. DELIVERY OF DOCUMENTS. All documents required to be executed and
delivered on or prior to the Effective Date under the Plan or under the
Commitment shall have been executed and delivered by the parties thereto.
5. TRUST INDENTURE ACT. The New Indentures pursuant to which the Plan
Notes, the Secondary Plan Notes and the Substitute Plan Notes are to be issued
shall have been qualified under the TIA.
The Effective Date of the Plan will be the first Business Day after the
foregoing conditions are met, but not earlier than the eleventh day after the
Confirmation Order is entered. When the Plan becomes effective, the Reorganized
Debtors shall perform the obligations required under the Plan to be performed by
them on the Effective Date.
BB. DISSOLUTION OF OFFICIAL COMMITTEE
When the Plan becomes effective as set forth in Section 13.02 of the Plan,
the Official Committee will cease to exist and their members and employees or
agents (including attorneys, investment bankers, financial advisers, accountants
and other professionals) will be released and discharged from all further
authority, duties, responsibilities and obligations relating to, arising from or
in connection with the Chapter 11 Case.
V. CONFIRMATION OF THE PLAN
Described below are certain important considerations under the Bankruptcy
Code in connection with confirmation of the Plan.
A. CONFIRMATION GENERALLY
The Bankruptcy Code requires the Bankruptcy Court to determine whether a
plan of reorganization complies with the technical requirements of Chapter 11 of
the Bankruptcy Code. It requires further that a debtor's disclosures concerning
its plan of reorganization have been adequate and have included information
concerning all payments made or promised by the debtor in connection with the
plan.
If the Plan is confirmed, the Debtors expect the Effective Date to occur
not later than 30 days after the Confirmation Date.
To confirm the Plan, the Bankruptcy Court must find that all of these and
certain other requirements have been met. Thus, even if the specified majority
vote in number and dollar amount is achieved for each Class of Impaired Claims,
the Bankruptcy Court must make independent findings respecting the Plan's
conformity with the requirements of the Bankruptcy Code before it may confirm
the Plan. Some of these statutory requirements are discussed below.
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B. VOTING STANDARDS
Holders of Claims in Classes that are "Impaired" under the Plan will
receive this Disclosure Statement, the Plan, the Voting Procedures Order, notice
of the Confirmation Hearing and a ballot for accepting or rejecting the Plan or
notice of non-voting status (as applicable).
A class is "Impaired" under a plan unless, with respect to each claim or
interest of such class, the plan:
o leaves unaltered the legal, equitable and contractual rights to which
the claim or interest entitles the holder of such claim or interest;
or
o notwithstanding any contractual provision or applicable law that
entitles the holder of such claim or interest to demand or receive
accelerated payment on account of a default, cures any default,
reinstates the original maturity of the obligation, compensates the
holder for any damages incurred as a result of reasonable reliance on
such provision or law and does not otherwise alter the legal,
equitable or contractual rights of such holder based on such claim or
interest.
A class that is not Impaired under a plan of reorganization is deemed to
have accepted the plan and, therefore, solicitation of acceptances with respect
to such class is not required.
See Section I.E of this Disclosure Statement for a description of the
procedures to be employed in tabulating acceptances and rejections of the Plan.
C. ACCEPTANCE
The Bankruptcy Code defines acceptance of a plan by an Impaired class of
claims as acceptance by holders of at least two-thirds in dollar amount, and
more than one-half in number, of Allowed claims of that class that actually
vote. Acceptance of the Plan need only be solicited from Holders of Claims whose
Claims belong to a Class that is "Impaired" and not deemed to have rejected the
Plan. Except in the context of a "cram down" (described below), as a condition
to confirmation of the Plan, the Bankruptcy Code requires that, with certain
exceptions, each Impaired Class accepts the Plan. If the specified majorities
are not obtained, the Debtors have the right, assuming that at least one
Impaired Class has accepted the Plan, to request confirmation of the Plan under
Section 1129(b) of the Bankruptcy Code. This procedure is commonly referred to
as a "cram down." For a more detailed description of the requirements for
acceptance of the Plan and of the criteria for confirmation of the Plan
notwithstanding rejection or deemed rejection by certain Impaired Classes, see
Section V.D.3, "Cram Down," below.
D. CONFIRMATION AND CONSUMMATION
At the Confirmation Hearing, the Bankruptcy Court will determine whether
the requirements of Section 1129(a) of the Bankruptcy Code have been satisfied
with respect to the Plan. Confirmation of a plan under Section 1129(a) of the
Bankruptcy Code requires, among other things, that:
o the plan complies with the applicable provisions of the Bankruptcy
Code;
o the proponent of the plan has complied with the applicable provisions
of the Bankruptcy Code;
75
o the plan has been proposed in good faith and not by any means
forbidden by law;
o any payment made or to be made by the proponent under the plan for
services or for costs and expenses in, or in connection with, the
Chapter 11 case, or in connection with the plan and incident to the
case, has been approved by, or is subject to the approval of, the
bankruptcy court as reasonable;
o the proponent has disclosed the identity and affiliations of any
individual proposed to serve, after confirmation of the plan, as a
director, officer, or voting trustee of the debtor, an affiliate of
the debtor participating in the plan with the debtor, or a successor
to the debtor under the plan. The appointment to, or continuance in,
such office of such individual, must be consistent with the interests
of creditors and equity security holders and with public policy and
the proponent must have disclosed the identity of any insider that the
reorganized debtor will employ or retain, and the nature of any
compensation for such insider;
o with respect to each Impaired class of claims or interests, either
each holder of a claim or interest of such class has accepted the
plan, or will receive or retain under the plan on account of such
claim or interest, property of a value, as of the effective date of
the plan, that is not less than the amount that such holder would
receive or retain if the debtor were liquidated on such date under
Chapter 7 of the Bankruptcy Code;
o each class of claims or interests has either accepted the plan or is
not Impaired under the plan;
o except to the extent that the holder of a particular claim has agreed
to a different treatment of such claim, the plan provides that allowed
administrative expenses and priority claims (other than priority tax
claims) will be paid in full on the effective date (except that if a
class of priority claims has voted to accept the Plan, holders of such
claims may receive deferred cash payments of a value, as of the
effective date of the plan, equal to the allowed amounts of such
claims) and that holders of priority tax claims may receive on account
of such claims deferred cash payments, over a period not exceeding six
years after the date of assessment of such claims, of a value, as of
the effective date, equal to the allowed amount of such claims;
o if a class of claims is Impaired, at least one Impaired class of
claims has accepted the plan, determined without including any
acceptance of the plan by any insider holding a claim in such class;
and
o confirmation of the plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of the
debtor or any successor to the debtor under the plan, unless such
liquidation or reorganization is proposed in the plan.
Subject to receiving the requisite votes in accordance with Section 1129(a)(8)
of the Bankruptcy Code and the "cram down" of Classes not receiving any
distribution under the Plan, the Debtors believe that:
o the Plan satisfies all of the statutory requirements of Chapter 11 of
the Bankruptcy Code;
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o the Debtors have complied or will have complied with all of the
requirements of Chapter 11 of the Bankruptcy Code; and
o the Plan has been proposed in good faith.
Set forth below is a more detailed summary of the relevant statutory
confirmation requirements.
1. THE BEST INTERESTS TEST
The "best interests" test requires that the Bankruptcy Court find
either:
o that all members of each Impaired class have accepted the plan; or
o that each holder of an allowed claim or interest of each Impaired
class of claims or interests will under the plan receive or retain on
account of such claim or interest, property of a value, as of the
effective date of the plan, that is not less than the amount that such
holder would so receive or retain if the debtor were liquidated under
Chapter 7 of the Bankruptcy Code on such date.
The first step in meeting this test is to determine the dollar amount that
would be generated from the liquidation of the Debtors' assets and properties in
a Chapter 7 liquidation case. The gross amount of cash available in such a
liquidation would be the sum of the proceeds from the disposition of the
Debtors' assets and the cash held by the Debtors at the time of the commencement
of the Chapter 7 case. This gross amount would be reduced by the amount of any
Allowed Claims secured by such assets, the costs and expenses of the
liquidation, and such additional administrative expenses and priority claims
that may result from the termination of the Debtors' business and the use of
Chapter 7 for the purposes of liquidation. Any remaining net cash would be
allocated to creditors and shareholders in strict accordance with the order of
priority of claims contained in Section 726 of the Bankruptcy Code.
THE DEBTORS HAVE DETERMINED, AS DISCUSSED IN THE LIQUIDATION ANALYSIS
ANNEXED AS APPENDIX C HERETO, THAT CONFIRMATION OF THE PLAN WILL PROVIDE EACH
CREDITOR AND INTEREST HOLDER WITH A RECOVERY THAT IS NOT LESS THAN IT WOULD
RECEIVE PURSUANT TO A LIQUIDATION OF THE DEBTORS UNDER CHAPTER 7 OF THE
BANKRUPTCY CODE.
See the liquidation analysis annexed as Appendix C hereto for a further
discussion of how the Plan satisfies the "best interests" test.
2. FINANCIAL FEASIBILITY
Section 1129(a)(11) of the Bankruptcy Code requires that confirmation
should not be likely to be followed by the liquidation, or the need for further
financial reorganization, of the Debtors or any successor to the Debtors unless
such liquidation or reorganization is proposed in the Plan. For purposes of
determining whether the Plan meets this requirement, the Debtors have analyzed
their ability to meet their obligations under the Plan. For example, the Debtors
have examined whether the Reorganized Debtors will be able to make all of the
Cash payments required to be made under the Plan, including, but not limited to,
payments to Holders of Allowed Administrative Expense Claims, Allowed Priority
Tax Claims, Allowed Equipment Lease Secured Claims and Allowed Miscellaneous
Priority Claims (each as applicable) under the Plan, as well as payments that
will be due under the Plan Notes, the Secondary Plan Notes and the Substitute
Plan Notes. The Debtors have estimated the total amount of these Cash
77
payments to be $138.6 million and expect sufficient liquidity from operations
and the Transaction to fund these Cash payments as and when they become due.
Moreover, the Debtors have prepared detailed Projections, which detail, among
other things, the financial feasibility of the Plan. See Projections annexed
hereto as Appendix B. The Debtors' Projections indicate, on a pro forma basis,
that for fiscal years 2002 through 2005, the Debtors expect the Reorganized
Debtors to generate EBITDA of approximately $(3.4) million in 2002, $28.5
million in 2003, $46.2 million in 2004 and $76.8 million in 2005. Moreover, in
addition to the $81.25 million to be invested in the Reorganized Debtors as of
the Effective Date, pursuant to an agreement to be executed among Investor,
Reorganized USi and the Bain Fund as of the Effective Date, the Investor will
invest an additional $25.0 million in the Reorganized Debtors if the Reorganized
Debtors achieve financial targets to be negotiated among Reorganized USi, the
Investor and the Bain Fund. The Debtors' management believes that this
additional funding is likely as the Projections are reasonable in light of
current circumstances and expectations. The Debtors' management also believes
this level of cash flow and funding will be sufficient to satisfy all of the
Debtors' future interest, capital expenditure and other obligations during this
period. Accordingly, the Debtors believe that confirmation of the Plan is not
likely to be followed by the liquidation or further reorganization of the
Reorganized Debtors. Please see Section VIII, "Risk Factors," for a discussion
of some of the risks that could affect the Reorganized Debtors' ability to repay
their post-Effective Date indebtedness, including their ability to consummate
the Transactions.
3. CRAM DOWN
-------------------------------------------------------
CRAM DOWN BY DEBTORS
The Debtors are seeking to cram down the Plan on certain
Holders of Claims and Interests in Impaired Classes (i.e.,
Classes 8, 10 and 11) and reserve the right to cram down the
Plan on other Holders of Claims in Impaired Classes.
-------------------------------------------------------
The Bankruptcy Code contains provisions for confirmation of a plan even if
the plan is not accepted by all Impaired classes, as long as at least one
Impaired class of claims has accepted the plan. The so-called "cram down"
provisions are set forth in Section 1129(b) of the Bankruptcy Code.
Under the "cram down" provisions, on the request of a plan proponent the
Bankruptcy Court will confirm a plan despite the lack of acceptance by an
Impaired class or classes if the Bankruptcy Court finds that:
o the plan does not discriminate unfairly with respect to each
non-accepting Impaired class;
o the plan is fair and equitable with respect to each non-accepting
Impaired class; and
o at least one Impaired class has accepted the plan.
These standards ensure that holders of junior interests, such as common
stockholders, cannot retain any interest in a debtor under a plan of
reorganization that has been rejected by a senior Impaired
78
class of claims or interests unless the claims or interests in that senior
Impaired class are paid in full or the parties agree otherwise.
As used by the Bankruptcy Code, the phrases "discriminate unfairly" and
"fair and equitable" have narrow and specific meanings unique to bankruptcy law.
A plan does not discriminate unfairly if claims or interests in different
classes but with similar priorities and characteristics receive or retain
property of similar value under a plan.
By establishing separate Classes for the Holders of each type of Claim and
by treating each Holder of a Claim in each Class similarly, the Plan has been
structured so as to meet the "unfair discrimination" test of Section 1129(b) of
the Bankruptcy Code.
The Bankruptcy Code sets forth different standards for establishing that a
plan is "fair and equitable" with respect to a dissenting class, depending on
whether the class is comprised of secured or unsecured claims. In general,
Section 1129(b) of the Bankruptcy Code permits confirmation notwithstanding
non-acceptance by an Impaired class if that class and all junior classes are
treated in accordance with the "absolute priority" rule, which requires that the
dissenting class be paid in full before a junior class may receive anything
under the plan.
In the Chapter 11 Case, it is currently anticipated that the Holders of
Claims in the Impaired Classes entitled to vote on the Plan will accept the Plan
by the requisite majorities.
With respect to a Class of unsecured Claims that does not accept the Plan,
the Debtors must demonstrate to the Bankruptcy Court that either:
o each Holder of an unsecured Claim in the dissenting Class receives or
retains under such Plan property of a value equal to the Allowed
amount of its unsecured Claim; or
o the Holders of Claims or Holders of Interests that are junior to the
claims of the Holders of such unsecured Claims will not receive or
retain any property under the Plan.
Additionally, the Debtors must demonstrate that no Class senior to a
non-accepting Impaired Class receives more than payment in full on its Claims.
If all the applicable requirements for confirmation of the Plan are met as
set forth in SectionSection 1129(a)(1) through (13) of the Bankruptcy Code,
except that one or more Classes of Impaired Claims have failed to accept the
Plan under Section 1129(a)(8) of the Bankruptcy Code, the Debtors may request
that the Bankruptcy Court confirm the Plan under the "cram down" procedures in
accordance with Section 1129(b) of the Bankruptcy Code.
4. SUBORDINATION ENFORCEMENT
The Plan provides that, in accordance with and enforcement of the Debtors'
interpretation of the Subordination Provisions of the Convertible Subordinated
Note Indenture, certain distributions which the Holders of Convertible
Subordinated Note Claims would otherwise be entitled to receive under the Plan
shall be delivered to the Holders of Senior Creditor Claims. In particular, that
portion of the Plan Distribution allocable to Holders of Convertible
Subordinated Note Claims will be turned over to the Holders of Senior Creditor
Claims in enforcement of the Subordination Provisions. However, the Secondary
Plan Distribution A will be made to Holders of Convertible Subordinated Claims
notwithstanding the Subordination Provisions.
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The Debtors believe that the partial subordination enforcement set forth in
the Plan is lawful and appropriate and is a reasonable compromise of all
disputes related to the Subordination Provisions, which should be approved as an
integral element of confirmation pursuant to Rule 9019 of the Bankruptcy Rules.
Section 510 of the Bankruptcy Code provides that valid subordination
agreements are to be enforced in a bankruptcy case. If clearly set forth as a
part of the subordination agreement, provisions that have the effect of
providing that senior creditors are to receive property to which the
subordinated creditors would otherwise be entitled so as to pay a claim for
post-petition interest are enforceable, even though the claim for post-petition
interest is not itself allowable as a claim in a Chapter 11 case.
The essence of subordination is both deferral and turnover: payment to the
subordinated creditor is deferred until the senior debt is paid in full, and
distributions which the subordinated creditor would otherwise be entitled to
receive must be paid to the senior creditor until the senior debt is satisfied.
VI. OFFICIAL COMMITTEE
Pursuant to Section 1102(a) of the Bankruptcy Code, following the
commencement of a Chapter 11 case, the United States Trustee may appoint a
committee of creditors holding unsecured claims against the Chapter 11 debtor,
and may appoint additional committees of creditors or of equity holders as
deemed appropriate to assure the adequate representation of holders of claims
and interests in the Chapter 11 case.
On January 15, 2002, the United States Trustee appointed the Official
Committee. On February 21, 2002, the Bankruptcy Court approved the retention of
Cleary, Gottlieb, Steen & Hamilton and Hunton & Williams, as co-counsel. The
Official Committee has filed an employment application for Trenwith Securities
LLC to serve as its financial adviser.
Prior to the Filing Date, USi had entered into discussions with an informal
committee (represented by Cleary, Gottlieb, Steen & Hamilton) consisting of
certain Holders of the Convertible Subordinated Notes in connection with a
restructuring of the Debtors. Following the appointment of the Official
Committee, this informal committee ceased independent activity. The Debtors paid
the prepetition fees and expenses of the advisors to this informal committee.
CSFB did not receive any payment in connection with its activities as a member
of this informal committee.
VII. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
If the Plan is not confirmed by the Bankruptcy Court and consummated, the
alternatives to the Plan include (i) liquidation of the Debtors under Chapter 7
of the Bankruptcy Code and (ii) an alternative plan of reorganization.
A. LIQUIDATION UNDER CHAPTER 7
If no plan can be confirmed, the Debtors' Chapter 11 Case may be converted
to cases under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee
would be appointed to liquidate the assets of the Debtors for distribution to
creditors and Interest Holders in accordance with the priorities established by
the Bankruptcy Code. For the reasons discussed above, the Debtors believe that
confirmation of the Plan will provide each Holder of a Claim entitled to receive
a distribution under the Plan with a recovery that is not less (and is expected
to be substantially more) than it would receive
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pursuant to liquidation of the Debtors under Chapter 7 of the Bankruptcy Code.
The liquidation analysis is annexed hereto as Appendix C.
B. ALTERNATIVE PLAN
If the Plan is not confirmed, the Debtors (or if the Debtors' exclusive
period in which to file a plan of reorganization has expired, any other party in
interest) may be entitled to file a different plan. Such a plan might involve a
sale of substantially all of the Debtors' assets, another form of reorganization
and continuation of the Debtors' business, or an orderly liquidation of the
Debtors' assets. The Debtors have explored various other alternatives in
connection with their prepetition restructuring efforts and the formulation and
development of the Plan. The Debtors believe the Plan enables Holders of Claims
to realize the most value under the circumstances. In a liquidation under
Chapter 11, the Debtors' assets would be sold in an orderly fashion over a more
extended period of time than in a liquidation under Chapter 7, possibly
resulting in somewhat greater (but indeterminate) recoveries at greater cost
than would be obtained in a Chapter 7 liquidation. Although potentially
preferable to a Chapter 7 liquidation, the Debtors believe that liquidation
under Chapter 11 would result in substantially lower recoveries than provided
for by the Plan.
The Commitment allows USi to terminate the agreement and the Transaction
with Bain in certain circumstances in which a third party proposes a Superior
Alternative Transaction. This process is described in greater detail in Section
4.01(f) of the Commitment. As of the date of this Disclosure Statement, the
Debtors have not received any such proposals.
VIII. RISK FACTORS
HOLDERS OF CLAIMS 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. IN THE EVENT REORGANIZED
USI IS COMBINED WITH INTERPATH AS A RESULT OF INVESTOR'S INVESTMENT, HOLDERS
SHOULD CONSIDER THE RISKS SET FORTH IN THIS SECTION AS PERTAINING TO THE
COMBINED ENTITY OF REORGANIZED DEBTORS AND INTERPATH.
A. BUSINESS RISKS
1. THERE CAN BE NO ASSURANCE THAT THE INDUSTRY CONDITIONS UNDER WHICH THE
REORGANIZED DEBTORS WILL OPERATE WOULD ENABLE THEM TO ACHIEVE THE
REVENUES, OR THE GROSS MARGINS THEREON, WHICH THE DEBTORS HAVE RELIED
UPON TO PROJECT THE REORGANIZED DEBTORS FUTURE BUSINESS PROSPECTS.
USi's business model depends on the adoption of Internet-based business
software solutions by commercial users. USi's business could suffer dramatically
if Internet-based solutions are not accepted or not perceived to be effective.
The market for Internet services, private network management solutions and
widely distributed Internet-enabled packaged application software has only
recently begun to develop and is now evolving rapidly.
The growth of Internet-based business software solutions could also be
limited by:
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o concerns over transaction security and user privacy;
o inadequate network infrastructure for the entire Internet; and
o inconsistent performance of the Internet.
USi cannot be certain that this market will continue to grow or to grow at the
rate it anticipates.
2. THE GROWTH IN DEMAND FOR OUTSOURCED BUSINESS SOFTWARE APPLICATIONS IS
NOW BEGINNING, BUT THE FUTURE IS STILL UNCERTAIN.
Future demand for and acceptance of outsourced business software
applications, including USi's iMAP offerings is uncertain. While there has been
a significant level of initial adoption of the ASP model, USi believes that many
of its potential customers are still not fully aware of the benefits of
outsourced solutions. In addition, the rate of initial adoption may be slowed by
performance or financial problems among Application Service Providers. It is
possible that our iMAP offerings may never achieve broad market acceptance. If
the market for USi's offerings does not grow or grows more slowly than USi
currently anticipates, its business, financial condition and operating results
would be materially adversely affected.
3. TECHNOLOGY MAY CHANGE FASTER THAN REORGANIZED USI CAN UPDATE ITS
NETWORK AND TECHNOLOGY.
The markets USi serves are characterized by rapidly changing
technology, evolving industry standards, emerging competition and the frequent
introduction of new services, software and other products. Success depends
partly on the ability to enhance existing or develop new products, software and
services that meet changing customer needs in a timely and cost-effective way.
USi cannot be sure, however, that it will do some or all of these things. For
example, if software application architecture changes in significant ways, the
software for which USi has licenses could become obsolete, USi may be forced to
update our hardware and network configurations or USi may be forced to replace
its mirroring technology. This may require substantial time and expense, and
even then USi cannot be sure that it will succeed in adapting its businesses to
these and other technological developments.
4. NETWORK OUTAGES COULD NEGATIVE AFFECT REORGANIZED USI'S REVENUES.
USi has built and currently maintains a very sophisticated data center
network to provide availability to its clients' applications over the Internet
and private connections. Complex networks are subject to the risk of outages.
Over the course of its operating history, portions of its network have
experienced network outages lasting from minutes to hours. Each of USi's
clients' contracts contain service level guarantees which initially provide for
revenue credits, and eventually termination of the contract, if access to the
client's application is compromised. The total amount of service fee credits
provided to USi's clients during its operating history due to network outages
has not been material. Factors both in and outside of USi's control could cause
additional outages to its network which could cause a loss in revenue.
5. REORGANIZED USI MAY NOT BE ABLE TO DELIVER ITS IMAP OFFERINGS IF THIRD
PARTIES DO NOT PROVIDE IT WITH KEY COMPONENTS OF ITS INFRASTRUCTURE.
USi depends on other companies to supply key components of its
telecommunications infrastructure and systems and network management solutions.
Any failure to obtain needed products or services in a timely fashion and at an
acceptable cost could have a material adverse effect on our business,
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results of operations and financial condition. Although it leases redundant
capacity from multiple suppliers, a disruption in telecommunications capacity
could prevent it from maintaining its standard of service. Some of the key
components of the system and network are available only from sole or limited
sources in the quantities and quality USi demands. USi buys these components
from time to time, does not carry significant inventories of them and has no
guaranteed supply arrangements with vendors.
6. REORGANIZED USI WILL NEED TO PERFORM SOFTWARE UPGRADES FOR ITS
CUSTOMERS, AND ANY INABILITY TO SUCCESSFULLY PERFORM THESE UPGRADES
COULD CAUSE INTERRUPTIONS OR ERRORS IN ITS CUSTOMERS' SOFTWARE
APPLICATIONS, WHICH COULD INCREASE ITS COSTS AND DELAY MARKET
ACCEPTANCE OF ITS SERVICES.
USi's software vendors from time to time will upgrade their software
applications, and at such time USi will be required to implement these software
upgrades for customers. Implementing software upgrades can be a complicated and
costly process, particularly implementation of an upgrade simultaneously across
multiple customers. Accordingly, USi cannot ensure that it will be able to
perform these upgrades successfully or at a reasonable cost. It may also
experience difficulty implementing software upgrades to a large number of
customers, particularly if different software vendors release upgrades
simultaneously. If USi is unable to perform software upgrades successfully and
to a large customer base, its customers could be subject to increased risk of
interruptions or errors in their business-critical software, its reputation and
business would likely suffer and the market would likely delay the acceptance of
its services. Additionally, if USi evolves its business model to charge
customers for the cost of software upgrades, it may lose prospective customers
who choose not to pay for these upgrades. Therefore, any such upgrades could
strain development and engineering resources, require significant unexpected
expenses and cause USi to miss our financial forecasts or those of securities
analysts. Any of these problems could impair customer relations and reputation
and could subject USi to litigation.
7. THE MARKETS USI SERVES ARE HIGHLY COMPETITIVE AND MANY OF ITS
COMPETITORS HAVE MUCH GREATER RESOURCES.
USi's competitors may include such companies as Accenture, AT&T, Corio,
Digex, EDS, IBM, Oracle, Qwest Communications, SAP, Interpath and Sprint. While
USi believes that its GSP environment, together with our level of service,
support and targeted business focus distinguish it from these competitors, some
of these competitors have significantly greater market presence, brand
recognition, and financial, technical and personnel resources than USi does, and
have extensive coast-to-coast Internet networks.
Many of these competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry than
USi does. USi cannot be sure that it will have the resources or expertise to
compete successfully in the future. USi's competitors may be able to:
o more quickly develop and expand their network infrastructures and
service offerings;
o better adapt to new or emerging technologies and changing customer
needs;
o take advantage of acquisitions and other opportunities more readily;
o negotiate more favorable licensing agreements with software
application vendors;
o devote greater resources to the marketing and sale of their products;
o obtain patents which limit or bar USi from providing services;
o adopt more aggressive pricing policies; and
o hire USi employees.
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In addition, some of USi's competitors may also be able to provide
customers with additional benefits at lower overall costs. USi cannot be sure
that it will be able to match cost reductions by its competitors. In addition,
USi believes that there is likely to be consolidation in its markets.
Consolidation could increase price competition and other competitive forces in
ways that materially adversely affect USi's business, results of operations and
financial condition. Finally, there are few substantial barriers to entry, and
USi has no patented technology that would bar competitors from its market.
8. OTHERS MAY SEIZE THE MARKET OPPORTUNITY USI HAS IDENTIFIED BECAUSE IT
MAY NOT EFFECTIVELY EXECUTE ITS STRATEGY.
USi's business strategy is complex and requires that it successfully and
simultaneously complete many tasks. In order to be successful, it will need to:
o build and operate a highly reliable, complex global network;
o negotiate effective partnerships and develop economically attractive
service offerings;
o attract and retain iMAP clients; o attract and retain highly skilled
employees;
o integrate acquired companies into its operations;
o evolve its business to gain advantages in an increasingly competitive
environment; and
o expand its international operations.
In addition, although most of its management team has worked together for
approximately two years, there can be no assurance that they will be able to
successfully execute all elements of USi's strategy. There will be additional
demands on USi's customer service support and sales, marketing and
administrative resources as it increases its service offerings and expand its
target markets. The strains imposed by these demands are magnified by its
limited operating history. Any inability to expand its network or services or to
effectively manage its employee base commensurate with the demand for its
services could adversely affect its revenues.
9. REORGANIZED USI WILL BE CONTROLLED BY INVESTOR AND OTHER AFFILIATES OF
BAIN AS LONG AS THEY OWN THE MAJORITY OF THE COMMON STOCK OF
REORGANIZED USI, AND ANY OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT
THE OUTCOME OF STOCKHOLDER VOTING DURING SUCH TIME.
After the Effective Date, Reorganized USi will be controlled by Investor
and other affiliates of Bain as long as they own the majority of the common
stock of Reorganized USi, and any other stockholders will be unable to affect
the outcome of stockholder voting during such time. As long as Investor and
other affiliates of Bain own a majority of the outstanding common stock of
Reorganized USi, they will continue to be able to elect the entire board of
directors, to remove any director for any reason, to determine the outcome of
all corporate actions that require stockholder approval and to control all
matters affecting Reorganized USi. Furthermore, as a privately held corporation,
Reorganized USi will not have any obligation to disclose any information to any
stockholders or creditors.
10. REORGANIZED USI MAY NOT BE ABLE TO ACHIEVE ITS PROJECTED FINANCIAL
RESULTS.
The Debtors cannot assure you that Reorganized USi will be able to achieve
the revenue or cash flow they have relied on to project their future business
prospects or otherwise meet their projected
84
financial results. If Reorganized USi does not achieve these projected revenue
or cash flow levels, it may lack sufficient liquidity to continue operating as
planned after the Effective Date.
Furthermore, although Reorganized USi's Projections represent the Debtors'
current views as to the results of Reorganized USi's operations over the periods
indicated, the Debtors expect that actual revenue, cash flow and EBITDA may from
time to time in the short term be higher or lower than the amounts estimated in
the long-term business plans used by the Debtors in preparing the Projections.
Nonetheless, based on currently available information the Debtors do not believe
that any such fluctuations would ultimately result in material changes in the
amounts in Reorganized USi's Projections.
11. THE BANKRUPTCY FILING MAY FURTHER DISRUPT THE DEBTORS' AND REORGANIZED
USi'S OPERATIONS.
The impact, if any, that the Chapter 11 Case may have on the operation of
Reorganized USi cannot be accurately predicted or quantified. The Debtors
believe administration of the Chapter 11 Case and consummation of the Plan in an
expeditious manner will help to minimize adverse impact on relationships with
customers, employees and suppliers. If confirmation and consummation of the Plan
do not occur expeditiously, the Chapter 11 Case could further adversely affect
the Debtors' relationships with its customers, employees and suppliers.
However, even an expedited Chapter 11 case could have a detrimental impact
on future sales and patronage due to the possibility that the Chapter 11 Case
may create a negative image of the Debtors in the eyes of their customers and
suppliers. The bankruptcy filing and an extended Chapter 11 proceeding may
adversely affect the confidence of customers of the Debtors' applicable service
provider business, which could adversely impact revenues. The Debtors'
commencement of the Chapter 11 Case could further adversely affect the Debtors'
relationship with their customers, suppliers and employees. A prolonged Chapter
11 Case may make it more difficult for the Debtors to retain and attract
management and other key personnel and would require senior management to spend
an excessive amount of time and effort dealing with the Debtors' financial
problems instead of focusing on the operation of their businesses. Lastly,
additional litigation claims may be brought directly or indirectly related to
the Chapter 11 Case if and when the applicable stays are lifted, which could
have a detrimental impact on the Debtors' and Reorganized USi's operations.
12. THE DEBTORS HAVE HAD SIGNIFICANT NET LOSSES AND ANTICIPATE FUTURE
LOSSES THROUGH THE YEAR ENDING DECEMBER 31, 2003.
The Debtors have reported net losses since inception in 1998. Even if
Reorganized USi achieves the results described in the Projections included in
this Disclosure Statement, they expect to have net losses until the year ending
December 31, 2003.
13. REORGANIZED USi MAY NOT BE ABLE TO MEET ITS POST-REORGANIZATION DEBT
OBLIGATIONS, OPERATING EXPENSES, WORKING CAPITAL AND OTHER CAPITAL
EXPENDITURES.
The Debtors are currently highly leveraged. Reorganized USi will be
substantially less leveraged; however, the Debtors cannot assure you that the
operating cash flow of Reorganized USi will be adequate to pay the principal and
interest payments under their post-reorganization indebtedness when due, as well
as to fund all capital expenditures contemplated in the cash-flow projections.
85
The Debtors believe that the implementation of their business strategy is
crucial to their future financial viability and the ability to generate the cash
flow necessary to pay principal and interest relating to the Plan Notes, the
Secondary Plan Notes and the Substitute Plan Notes, and their
post-reorganization working capital and capital expenditure needs.
14. REORGANIZED USi MAY HAVE LIMITED ABILITY TO FUND ITS WORKING CAPITAL
REQUIREMENTS.
Reorganized USi's business is expected to require certain amounts of
working capital. While Reorganized USi's Projections assume that sufficient
funds to meet their working capital needs for the foreseeable future will be
available from the proceeds of the Commitment, the ability of Reorganized USi to
gain access to additional capital, if needed, cannot be assured, particularly in
view of competitive factors, capital market conditions and industry conditions.
Restrictions on capital investment are expected to be more restrictive if
Reorganized USi's cash flow is lower than projected. As noted above, failure to
make necessary capital expenditures could have an adverse effect on Reorganized
USi's ability to remain competitive.
15. REORGANIZED USi MAY NOT HAVE SUFFICIENT CASH FLOW TO REPAY EXISTING
DEBT OR HAVE ACCESS TO SUFFICIENT FINANCING TO REFINANCE SUCH DEBT AT
OR PRIOR TO MATURITY.
As of the Effective Date, Reorganized USi expects to have borrowings of
approximately $60.8 million through the issuance of the Plan Notes, the
Secondary Plan Notes and the Substitute Plan Notes, as well as outstanding
secured indebtedness of approximately $27.4 million in connection with certain
Allowed Miscellaneous Secured Claims that Reorganized USi will reaffirm. The
Plan Notes will mature 24 months after the Effective Date, the Substitute Plan
Notes will mature 36 months after the Effective Date and the Secondary Plan
Notes will mature six years after the Effective Date. Prior to the maturity of
the Plan Notes, the Secondary Plan Notes and the Substitute Plan Notes,
Reorganized USi may use excess cash flow from operations, if any, to repay such
indebtedneSection However, excess cash flow from operations may be insufficient
to fully repay the Plan Notes, the Substitute Plan Notes and the Secondary Plan
Notes prior to or at their maturity date. As a result, Reorganized USi would
have to rely on external financing sources and/or a refinancing of the Plan
Notes, the Secondary Plan Notes and the Substitute Plan Notes. There can be no
assurance that Reorganized USi will be able to refinance this indebtedneSection
16. THE PLAN NOTES, SECONDARY PLAN NOTES AND SUBSTITUTE PLAN NOTES ARE
ILLIQUID AND IT IS UNLIKELY THAT A TRADING MARKET FOR THE PLAN NOTES,
THE SECONDARY PLAN NOTES OR THE SUBSTITUTE PLAN NOTES WILL DEVELOP IN
THE FORESEEABLE FUTURE.
The Debtors cannot assure you that a market will develop for the Plan
Notes, the Secondary Plan Notes or the Substitute Plan Notes issued under the
Plan. Reorganized USi is not obligated and does not expect to have the Plan
Notes, the Secondary Plan Notes or the Substitute Plan Notes listed on a
national securities exchange or the Nasdaq. In addition, the Plan Notes,
Secondary Plan Notes and the Substitute Plan Notes will be issued in principal
amounts in proportion to the Allowed Claims of the respective Holders receiving
such notes; therefore, they will not be issued in multiples of $1,000, as is
customary with publicly traded issuances of notes. Reorganized USi will be a
private company and will not be subject to public disclosure requirements,
either under law or under the applicable indentures. Accordingly, it is highly
unlikely that any market for the Plan Notes, the Secondary Plan Notes or the
Substitute Plan Notes will develop. The Plan Notes, the Secondary Plan Notes and
the Substitute Plan Notes will be transferable only to large institutions
qualifying as "Qualified Institutional Buyers" under the Securities Act of 1933,
as amended (the "Securities Act"), and the regulations promulgated thereunder.
Even if such securities are subsequently listed, the Debtors cannot assure you
that an active
86
market for such securities would develop or, if any such market does develop,
that it will continue to exist, or as to the degree of price volatility in any
such market that does develop. Accordingly, if you receive Plan Notes, Secondary
Plan Notes or Substitute Plan Notes, you may have to hold such securities until
their maturity date.
17. THE NEW WARRANTS ARE ILLIQUID AND SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER.
The New Warrants, and the shares of common stock issued upon any exercise
thereof, are not transferable except for limited rights to transfer such
securities to large institutions qualifying as "Qualified Institutional Buyers"
under the Securities Act and the regulations promulgated thereunder in
transactions that do not require, and are not likely to require, filings by the
issuer under applicable securities laws. The Debtors cannot assure you that any
market will develop for the New Warrants or the common stock issuable upon
exercise thereof. It is not expected that the New Warrants or such common stock
will be listed on a national securities exchange or the Nasdaq, and neither the
Debtors nor the Investor nor any of their affiliates has undertaken any
obligation to cause any such listing or qualification to occur. The New
Warrants, and the common stock issued upon any exercise thereof, are not
expected to be eligible for Depository Trust Company's book-entry delivery
services (or any similar services). The issuer of the New Warrants will be a
private company, not subject to public disclosure requirements (under securities
laws or the New Warrants themselves), and will likely be under the direct or
indirect control of one investor or a limited number of investors. Accordingly,
it is highly unlikely that any market for the New Warrants or the common stock
issuable upon exercise thereof will develop. Even if such securities are
subsequently listed, the Debtors cannot assure than an active market for such
securities would develop or, if any such market does develop, that it will
continue to exist, or as to the degree of price volatility in any such market
that does develop. Accordingly, if you receive New Warrants, you may have to
hold such securities (and the common stock purchased upon any exercise of such
securities) for the indefinite future.
18. THE ESTIMATED VALUATION OF THE REORGANIZED DEBTORS AND THE NEW
WARRANTS AND THE ESTIMATED RECOVERIES TO HOLDERS OF CLAIMS, IS NOT
INTENDED TO REPRESENT THE TRADING VALUES OF THE CLAIMS OR THE NEW
WARRANTS.
The estimated valuation of Reorganized Debtors used in this Disclosure
Statement was determined as set forth in Section IV.B hereof and is not intended
to represent the trading values of Reorganized USi's securities in public or
private markets. The estimated recovery to Class 6 is based on this theoretical
valuation analysis. This valuation analysis is based on numerous assumptions
(the realization of many of which is beyond the control of the Reorganized
Debtors), including: (i) the Reorganized Debtors' ability to meet the
Projections included with this Disclosure Statement; (ii) the Reorganized
Debtors' ability to maintain sufficient financial flexibility to fund
operations, working capital requirements and capital expenditures; (iii) capital
and financial market conditions; and (iv) Reorganized USi's ability to attract
and retain key managers.
Even if the Reorganized Debtors successfully implement their business plan
and achieve the Projections included with this Disclosure Statement, the trading
market values for the Plan Notes, Secondary Plan Notes, Substitute Plan Notes
and New Warrants could be adversely impacted by: (a) lack of trading liquidity
for such securities; (b) lack of institutional research coverage; and (c)
concentrated selling by recipients of such securities.
19. RESALE OF THE PLAN SECURITIES MAY BE RESTRICTED BY LAW.
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The Plan Notes, Secondary Plan Notes, Substitute Plan Notes and New
Warrants will be distributed under the Plan without registration under the
Securities Act or any state securities laws under exemptions from registration
contained in Section 1145(a) of the Bankruptcy Code. If a holder of securities
offered and sold under the Plan is deemed to be an "underwriter" with respect to
such securities (with certain exceptions for "ordinary trading transactions" by
certain persons) or an "affiliate" of the issuer of such securities, resales of
such securities by such holder would not be exempt from the registration
requirements under the Securities Act and securities laws under Section 1145 of
the Bankruptcy Code and, accordingly, could be effected only under an effective
registration statement or a reliance on another applicable exemption from these
registration requirements. Because Reorganized USi and the issuer of the New
Warrants will not be required to disclose information to the public, or to
holders of the Plan Notes, Secondary Plan Notes, Substitute Plan Notes or
Warrants, certain exemptions from registration requirements will not be
available.
20. IF THE DEBTORS AND THE INVESTOR DO NOT REACH AGREEMENT AS TO THE TERMS
AND CONDITIONS OF INVESTOR'S ADDITIONAL INVESTMENT OF $25.0 MILLION IN
REORGANIZED USi, THEN THE COMMITMENT MAY NOT BE CONSUMMATED OR THE
INVESTOR WILL NOT HAVE ANY OBLIGATION TO MAKE THE $25.0 MILLION
INVESTMENT, WHICH COULD ADVERSELY AFFECT THE FINANCIAL CONDITION OF
REORGANIZED USi.
The Commitment contemplates that on the Effective Date, the Investor will
execute a subscription agreement among the Investor, Reorganized USi and the
Bain Fund with respect to an additional investment of $25.0 million, which would
be subject to Reorganized USi's meeting financial targets to be negotiated among
the parties. These financial targets may be based on various measures of
Reorganized USi's performance such as EBITDA and EBITDA minus capital
expenditures. Investor, Reorganized USi and the Bain Fund have not yet reached
agreement as to the terms and conditions of these financial targets, and they
may fail to reach any such agreement, in which case the Debtors may either
exercise their right to terminate the Commitment or decide to consummate the
Commitment without any legal obligation by the Investor and/or the Bain Fund to
make an additional $25.0 investment in Reorganized USi. If the Commitment is
terminated, the Plan may not be approved by the Bankruptcy Court; if the
Commitment is consummated without the Investor and/or Bain Fund's obligation to
invest the additional $25.0 million, this could adversely affect the financial
condition of Reorganized USi.
21. IF REORGANIZED USi FAILS TO MEET CERTAIN FINANCIAL TARGETS, THE
INVESTOR AND/OR BAIN FUND WILL NOT BE OBLIGATED TO MAKE AN ADDITIONAL
INVESTMENT OF $25.0 MILLION IN REORGANIZED USi, AND THE FINANCIAL
CONDITION OF REORGANIZED USi COULD BE ADVERSELY AFFECTED.
If the Investor executes a subscription agreement on the Effective Date
among the Investor, Reorganized USi and the Bain Fund with respect to an
additional $25.0 million investment by the Bain Fund, this investment will be
subject to Reorganized USi's meeting certain financial targets based on various
measures of Reorganized USi's performance, such as EBITDA and EBITDA minus
capital expenditures. If Reorganized USi fails to meet these targets, the
Investor and/or Bain Fund will not be obligated to make this $25.0 million
investment, which could adversely affect the financial condition of Reorganized
USi.
22. BECAUSE REORGANIZED USi, OR ITS SUCCESSOR OR PARENT, WILL HAVE NO
OBLIGATION TO PROVIDE FINANCIAL OR OTHER INFORMATION TO THE PUBLIC, IT
MAY BE DIFFICULT TO VALUE ANY OF THE SECURITIES ISSUED BY REORGANIZED
USi, WHICH MAY ADVERSELY AFFECT THEIR VALUE AND TRANSFERABILITY.
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Because Reorganized USI, or its successor or parent, will be a private
company, it will not be subject to any public disclosure requirements.
Furthermore, Reorganized USi has not agreed contractually to provide holders of
its securities with any financial or other information. Accordingly, you will
not have any information upon which to value any of the securities you will
receive from Reorganized USi, or its successor or parent, pursuant to the Plan.
This lack of information may adversely affect the value of the securities you
receive and their transferability.
B. BANKRUPTCY RISKS
1. PARTIES IN INTEREST MAY OBJECT TO THE DEBTORS' CLASSIFICATION OF
CLAIMS.
Section 1122 of the Bankruptcy Code provides that a plan of reorganization
may place a claim or an interest in a particular class only if such claim or
interest is substantially similar to the other claims or interests of such
claSection The Debtors believe that the classification of claims and interests
under the Plan complies with the requirements set forth in the Bankruptcy Code.
However, the Debtors cannot assure you that the Bankruptcy Court will reach the
same conclusion.
2. THE COMMENCEMENT OF THE CHAPTER 11 CASE MAY HAVE NEGATIVE IMPLICATIONS
UNDER CERTAIN CONTRACTS OF THE DEBTORS.
The Debtors are parties to various contractual arrangements under which the
commencement of the Chapter 11 Case and the other transactions contemplated by
the Plan could, subject to the Debtors' rights and powers under SectionSection
105, 362 and 365 of the Bankruptcy Code, (i) result in a breach, violation,
default or conflict, (ii) give other parties thereto rights of termination or
cancellation, or (iii) have other adverse consequences for the Debtors or the
Reorganized Debtors. The magnitude of any such adverse consequences may depend
on, among other factors, the diligence and vigor with which other parties to
such contracts may seek to assert any such rights and pursue any such remedies
in respect of such matters, and the ability of the Debtors or Reorganized
Debtors to resolve such matters on acceptable terms through negotiations with
such other parties or otherwise.
3. THE DEBTORS MAY NOT BE ABLE TO SECURE CONFIRMATION OF THE PLAN OR
CONSUMMATION OF THE COMMITMENT.
The Debtors cannot assure you that the requisite acceptances to confirm the
Plan will be received or that the Commitment will be consummated. Consummation
of the Commitment is subject to the satisfaction or waiver of several
conditions, which may not be satisfied or waived. With respect to the Plan, even
if the requisite acceptances are received, the Debtors cannot assure you that
the Bankruptcy Court will confirm the Plan. A non-accepting creditor or equity
security holder of the Debtors might challenge the balloting procedures and
results as not being in compliance with the Bankruptcy Code or Bankruptcy Rules.
Even if the Bankruptcy Court determined that the Disclosure Statement and the
balloting procedures and results were appropriate, the Bankruptcy Court could
still decline to confirm the Plan if it found that any of the statutory
requirements for confirmation had not been met. Section 1129 of the Bankruptcy
Code sets forth the requirements for confirmation and requires, among other
things, a finding by the Bankruptcy Court that the confirmation of the Plan is
not likely to be followed by a liquidation or a need for further financial
reorganization and that the value of distributions to non-accepting holders of
claims and interests within a particular class under the Plan will not be less
than the value of distributions such holders would receive if the Debtors were
liquidated under Chapter 7 of the Bankruptcy Code. While the Debtors cannot
assure you that the Bankruptcy Court will conclude that these requirements have
been met, the Debtors believe that the Plan will not be followed by a need for
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further financial reorganization and that non-accepting holders within each
class under the Plan will receive distributions at least as great as would be
received following a liquidation under Chapter 7 of the Bankruptcy Code when
taking into consideration all administrative claims and the costs and
uncertainty associated with any such Chapter 7 case.
The confirmation and consummation of the Plan and the Commitment are
subject to certain conditions. If the Plan is not confirmed, or if the
Commitment is not consummated, it is unclear whether a restructuring of the
Debtors could be implemented and what distribution Holders of Claims or
Interests ultimately would receive with respect to their Claims or Interests. If
an alternative reorganization could not be agreed to, it is possible that the
Debtors would have to liquidate their assets, in which case it is likely that
Holders of Claims or Interests would receive substantially less favorable
treatment than they would receive under the Plan.
4. THE COMMITMENT MAY NOT BE CONSUMMATED.
Closing of the Commitment is subject to numerous conditions to closing and
termination rights in favor of the Investor, as set forth in more detail in
Section IV.J. hereof. Invocation of one or more of those rights would provide
the Investor with the right not to close or to terminate the Commitment prior to
closing. For example, the Projections currently set forth in Schedule B hereto
provide a basis for Bain to invoke a failure of the condition set forth in
section 3.02(d) of the Commitment. Other operational matters or matters in
connection with the bankruptcy proceedings, such as changes to the Plan or a
failure to obtain confirmation of the Plan by May 24, 2002, could lead to the
right of the Investor to terminate the Commitment or to decline to consummate
the Transaction.
5. DEBTORS MAY OBJECT TO THE AMOUNT OR CLASSIFICATION OF YOUR CLAIM.
The Debtors reserve the right to object to the amount or classification of
any claim or interest. The estimates set forth in this Disclosure Statement
cannot be relied on by any creditor whose claim or interest is subject to an
objection. Any such claim or interest holder may not receive its specified share
of the estimated distributions described in this Disclosure Statement.
C. COMBINATION RISKS
1. IN THE EVENT THAT REORGANIZED USi IS ACQUIRED BY INVESTOR INDIRECTLY
THROUGH INTERPATH, THERE CAN BE NO ASSURANCE THAT THE BENEFITS OF A
COMBINATION OF REORGANIZED USi AND INTERPATH CAN OR WILL BE REALIZED.
In the event that Reorganized USi is acquired by Investor indirectly
through Interpath, the Debtors believe that the combination of Reorganized USi
and Interpath has the potential to increase market presence, create operating
scale, generate synergies and ultimately enhance financial performance. However,
there is no guarantee that such enhanced performance can be realized or would be
realized, for various reasons, including the following:
o The integration of the two companies will entail transition costs
and other expenses incurred in combining operational processes.
While it is anticipated that these costs would be recouped
through operational savings, there is no guarantee that such
costs can be recouped.
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o It is expected that the companies would operate in a manner
similar to the past and continue to improve customer service
levels. However, customer service could be disrupted on a
temporary or longer-term basis during the integration of the two
companies, potentially resulting in customer attrition.
o While the companies anticipate making efforts to retain key
personnel, key management or employees could voluntarily end
their employment during or after the integration of the two
companies.
o While it is anticipated that the companies will continue to
attract, secure and implement new customer relationships, the
integration of the two companies may delay customer commitments,
resulting in lost sales opportunities.
o Vendors may determine not to supply the combined companies, and
the companies may not be able to replace one or more such vendors
on terms acceptable to the companies.
2. IF CONSUMMATED, THE ACQUISITION OF REORGANIZED USi INDIRECTLY THROUGH
INTERPATH COULD HAVE A NEGATIVE IMPACT ON THE ENTITIES' FINANCIAL
PERFORMANCE AND ABILITY TO MEET THEIR RESPECTIVE FINANCIAL OBLIGATIONS
TO THEIR EMPLOYEES, CUSTOMERS, VENDORS AND CREDITORS.
The integration and transition costs of combining the two companies may
exceed projected and budgeted integration and transition costs, which could
adversely affect their ability to meet their respective financial obligations.
IX. DESCRIPTION OF NEW SECURITIES
A. NEW COMMON STOCK
All shares of the New Common Stock, when issued pursuant to the Plan and
the Commitment, will be fully paid and nonassessable. The Holders of New Common
Stock will be entitled to such dividends (whether payable in Cash, property or
capital stock) as may be declared from time to time by the board of directors of
Reorganized USi from funds, property or stock legally available therefor, and
will be entitled after payment of all prior claims, to receive pro rata all
assets of Reorganized USi upon the liquidation, dissolution or winding up of
Reorganized USi. Holders of New Common Stock have no redemption, conversion or
preemptive rights to purchase or subscribe for securities of Reorganized USi.
Except as required by law, the respective Holders of New Common Stock will
vote on all matters as a single class and each Holder of New Common Stock will
be entitled to one vote for each share of the New Common Stock that it owns.
Holders of New Common Stock will not have cumulative voting rights.
B. PLAN NOTES
The Plan Notes will be unsecured promissory notes issued by Reorganized USi
substantially in the form set forth in Exhibit E to the Plan. The Plan Notes
will mature on the second anniversary of the last day of the month in which the
Effective Date occurs, and will bear interest at a fixed per annum rate (based
on a year consisting of twelve 30-day months) equal to 10% per annum with
principal amortized on a straight-line basis. The Plan Notes will be payable in
24 consecutive monthly installments
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of combined principal and interest, commencing on the last day of the first full
month following the Effective Date. However, for any Plan Notes issued after one
or more of these installments is due, Reorganized USi will pay all principal and
interest due in those installments upon issuance of such Plan Notes, and no
additional interest will accrue on the principal or interest that otherwise
would have been paid in an earlier installment. The Plan Notes will not be
transferable except to Qualified Institutional Buyers.
The Plan Notes will be governed by an indenture, substantially in the form
attached to the Plan as Exhibit E (the "Plan Indenture"), and indenture trustee
qualified under the TIA. This indenture will not include any financial or
operational covenants. Reorganized USi will have the right to pay in full or in
part any Plan Note by paying the remaining principal balance of such Plan Note,
together with accrued interest through the payment date, in Cash at any time on
or after the Effective Date, without premium or penalty.
C. SUBSTITUTE PLAN NOTES
The Substitute Plan Notes will be unsecured promissory notes issued by
Reorganized USi in substantially the form of Exhibit G to the Plan, (i) bearing
interest from the Effective Date on the unamortized portion of the 50% of the
principal amount, which is not payable at issuance, at a fixed per annum rate
(based on a year consisting of twelve 30-day months) equal to 10% and (ii) with
(a) 50% of the principal amount of which being paid in Cash proportionately with
and at the times of distribution of Substitute Plan Notes pursuant to Section
10.01 of the Plan, (b) current monthly interest to be paid on such unamortized
portion of the principal balance commencing on the date that is the last day of
the first full month that occurs after the Effective Date through December 31,
2003, and (c) the balance of the principal amount amortized on a straight-line
basis over a 48-month period commencing on January 1, 2004 and payable (1) in 18
consecutive monthly installments of principal and interest combined, commencing
on January 31, 2004, and (2) with a balloon payment of the remaining principal
balance to be made on June 30, 2005. Notwithstanding the foregoing, for any
Substitute Plan Notes issued after one or more of the monthly installments of
principal or interest is due, Reorganized USi will pay all principal and
interest due in those installments upon issuance of such Substitute Plan Notes,
and no additional interest will accrue on the principal or interest that
otherwise would have been paid in an earlier installment. The Substitute Plan
Notes will not be transferable except to Qualified Institutional Buyers.
The Substitute Plan Notes will be governed by an indenture, substantially
in the form attached to the Plan as Exhibit G (the "Substitute Plan Note
Indenture"), and indenture trustee qualified under the TIA. This indenture will
not include any financial or operational covenants. Reorganized USi will have
the right to pay in full or in part any Substitute Plan Note by paying the
remaining principal balance of such Substitute Plan Note, together with accrued
interest through the payment date, in Cash at any time on or after the Effective
Date, without premium or penalty.
D. SECONDARY PLAN NOTES
The Secondary Plan Notes will be unsecured promissory notes issued by
Reorganized USi substantially in the form set forth in Exhibit F to the Plan.
The Secondary Plan Notes will have a six-year bullet maturity, accrue interest
at 8% per annum simple interest payable at maturity and be pari passu with the
Plan Notes and the Substitute Plan Notes.
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The Secondary Plan Notes will be governed by an indenture, substantially in
the form attached to the Plan as Exhibit F (the "Secondary Plan Indenture"), and
indenture trustee qualified under the TIA. The Secondary Plan Indenture will
include the following general terms:
o Reorganized USi will have the right to pay in full or in part any
Secondary Plan Note by paying the remaining principal balance of such
Secondary Plan Note, together with accrued interest through the
payment date, in Cash at any time on or after the Effective Date,
without premium or penalty;
o the Secondary Plan Notes will accelerate only upon certain events of
default specified in the Secondary Plan Indenture;
o there will be no restrictions on Reorganized USi's incurrence of debt
or issuance of equity, or other financial or operational covenants,
except that Reorganized USi will not be permitted to issue dividends
(other than in the form of securities of USi) in respect of, or
repurchase, its stock as long as the Secondary Plan Notes are
outstanding; and
o the Secondary Plan Notes will not be transferable except to Qualified
Institutional Buyers. (See Section VIII.A.16 for more information on
legal and practical impediments to transfer of the Secondary Plan
Notes.)
E. FORM OF PLAN NOTES, SUBSTITUTE PLAN NOTES AND SECONDARY PLAN NOTES
The Company may issue the Plan Notes, Substitute Plan Notes and the
Secondary Plan Notes in the form of one or more global notes, respectively
(each, a "Global Note"). Any Global Notes issued by Reorganized USi will be
deposited with a depositary and registered in the name of the depositary or its
nominee (such nominee being referred to herein as the "Global Note Holder").
Depositaries facilitate the clearance and settlement of transactions in
those securities between participants through electronic book-entry changes in
accounts of its participants. The participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to a depositary's system may also be available to other
entities such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly (collectively, the "Indirect Participants"). Persons who are not
participants may beneficially own securities held by or on behalf of the
depositary only through the participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of the depositary are recorded on the records of the
participants and Indirect Participants.
If Reorganized USi deposits Global Notes with a depositary, the depositary
will credit the accounts of participants designated by the Company with portions
of the principal amount of the applicable Global Notes. After this transaction,
ownership of these interests in the Global Notes will be shown on, and the
transfer of ownership of these interests will be effected only through, records
maintained by the depositary (with respect to the participants) or by the
participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
Prospective purchasers are advised that the laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Note to such persons will be limited to such extent.
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So long as the Global Note Holder is the registered owner of any Plan
Notes, Substitute Plan Notes or Secondary Plan Notes, the Global Note Holder
will be considered the sole holder under the applicable indentures of any Plan
Notes, Substitute Plan Notes or Secondary Plan Notes evidenced by the Global
Notes. Beneficial owners of Plan Notes, Substitute Plan Notes or Secondary Plan
Notes evidenced by the Global Senior Notes will not be considered the owners or
holders of such notes under the applicable indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
applicable trustee. Neither Reorganized USi nor the trustee will have any
responsibility or liability for any aspect of the records of the depositary or
for maintaining, supervising or reviewing any records of depositary relating to
the Plan Notes, Substitute Plan Notes or Secondary Plan Notes.
Payments in respect of the principal of, and interest and premium, if any,
on a Global Note registered in the name of the Global Note Holder on the
applicable record date will be payable by the trustee to or at the direction of
the Global Note Holder in its capacity as the registered holder of the Plan
Notes, Substitute Plan Notes or Secondary Plan Notes under the applicable
indentures. Under the terms of such indentures, Reorganized USi and the trustee
will treat the persons in whose names the Plan Notes, Substitute Plan Notes and
Secondary Plan Notes, as applicable, including the Global Notes, are registered
as the owners of the such notes for the purpose of receiving payments and for
all other purposes. Consequently, neither Reorganized USi nor the trustee, nor
any agent of Reorganized USi or the trustee, has or will have any responsibility
or liability for:
(1) any aspect of the depositary's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of the depositary's records or any participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of the
depositary or any of its Participants or Indirect Participants.
Reorganized USi may determine instead to issue Plan Notes, Substitute Plan
Notes and the Secondary Plan Notes that are in the form of registered definitive
notes. In addition, the indentures governing the Plan Notes, Substitute Plan
Notes and the Secondary Plan Notes, respectively, describe the means by which
certificated notes and global notes may be exchanged for one another.
F. NEW WARRANTS
The New Warrants will be issued in certificated form substantially as set
forth in Exhibit H to the Plan. The New Warrants have a five-year term and an
exercise price equal to the value, as of the Effective Date of the Plan, of the
shares issuable upon exercise thereof by the entity in which the parent company
of the Investor makes its investment in Reorganized USi (but in all events in
such corporation in which Bain Fund holds its investment). In addition, the New
Warrants will have the following general terms: (i) the New Warrants and the
shares of common stock issuable upon exercise of the New Warrants will be
subject to drag-along rights in favor of the Investor and will be entitled to
tag-along rights; (ii) there can be no transfer of the New Warrants or the
shares of common stock issued upon any exercise thereof unless to Qualified
Institutional Buyers in a transaction that does not violate, or require any
filing under, applicable securities law and does not cause the issuer, or
significantly increase the likelihood of the issuer becoming required, to make
any registration or filing under applicable securities laws (see Section
VIII.A.17 for more information on legal and practical impediments to transfer of
the New Warrants); (iii) there will be anti-dilution protection against dilution
by stock splits and recapitalization,
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but no economic anti-dilution protection; and (iv) there will be piggyback
registration rights commencing after the issuer's initial registered public
offering (subject to normal underwriter cutbacks).
Under Section 10.02 of the Plan, the issuance of New Warrants will be
limited to Holders of Allowed Class 6 Claims (Allowed Convertible Subordinated
Note Claims) in an amount greater than $500,000 (calculated without regard to
interest accrued thereon but unpaid prior to the Filing Date). This means that
if a Holder holds less than $500,000 in principal amount of Allowed Class 6
Claims, the Holder will receive, in substitution for New Warrants, additional
Cash in an amount equal to (a) the principal amount of such Holder's Allowed
Class 6 Claim, divided by (b) $125.0 million (i.e., the total principal amount
of the Convertible Subordinated Note Claims), multiplied by (c) $500,000 (i.e.,
the aggregate value of the New Warrants).
X. FINANCIAL AND LEGAL ADVISERS; FEES AND EXPENSES
The Debtors have engaged Willkie Farr & Gallagher and Whiteford, Taylor &
Preston L.L.P. as bankruptcy co-counsel, and Latham & Watkins, as special
counsel. The Debtors have also engaged CDG as financial adviser and Ernst &
Young as auditor. Once the Bankruptcy Court approves their employment and
retention, for their services to the Debtors in connection with the Chapter 11
Case, these professionals will receive customary hourly or other fees and will
be reimbursed for all reasonable out-of-pocket expenses.
The Bankruptcy Court has approved the retention of Cleary, Gottlieb, Steen
& Hamilton and Hunton & Williams, as co-counsel, and the Official Committee has
filed a motion for an order authorizing and approving the retention of Trenwith
Securities LLC as its financial adviser in connection with the Debtors'
restructuring. Once the Bankruptcy Court approves their employment and
retention, for their services to the Official Committee in connection with the
Chapter 11 Case, these professionals will receive customary hourly or other fees
and will be reimbursed for all reasonable out-of-pocket expenses.
The Plan provides that any unpaid reasonable fees and expenses incurred on
or after the Filing Date by the counsel and financial advisers retained by the
Debtors or the Official Committee (together with the reasonable fees and
expenses of local counsel) with respect to the Chapter 11 Case will be paid by
Reorganized USi (after application of any retainer held by any of the Debtors'
professionals) as an Administrative Expense after notice and a hearing in
accordance with the procedures established by the Bankruptcy Court for
professionals employed by the Debtors or the Official Committee.
XI. EXEMPTIONS FROM SECURITIES ACT REGISTRATION
The New Common Stock to be issued on the Effective Date will be issued
pursuant to the exemption from the registration requirements of the Securities
Act afforded by Section 4(2) of the Securities Act. The Plan Notes, Secondary
Plan Notes, Substitute Plan Notes and New Warrants to be issued on the Effective
Date will be issued pursuant to the exemption from the registration requirements
of the Securities Act, and of any state or local laws, provided by Section
1145(a)(1) of the Bankruptcy Code. Under Section 1145(a)(1) of the Bankruptcy
Code, the registration requirements of the Securities Act and of any state and
local laws do not apply to the offer or sale under a plan of securities of a
debtor, of an affiliate participating in a joint plan with the debtor, or of a
successor to the debtor under the plan (i) in exchange for a claim against, an
interest in, or a claim for an administrative expense in the case concerning,
the debtor, or (ii) "principally" in such exchange and "partly" for Cash or
property. The Debtors believe that
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the issuance of the Plan Notes, Secondary Plan Notes, Substitute Plan Notes and
New Warrants(24) will satisfy the aforementioned requirements.
Under Section 1145 of the Bankruptcy Code, resales of the Plan Notes,
Secondary Plan Notes, Substitute Plan Notes and New Warrants, as well as
purchases of stock upon exercise of the New Warrants, and resales of such common
stock following issuance upon any exercise of the New Warrants, are all exempt
from the registration requirements of otherwise applicable securities laws
unless, as more fully described below, the Holder thereof is deemed to be an
"underwriter" with respect to such securities, as defined in Section 1145(b)(1)
of the Bankruptcy Code. (However, the ability to resell these securities is
subject to the restrictions on transferability created by the terms of these
securities. See Section VIII.A.16-17, Section IX.) Generally, Section 1145(b)(1)
of the Bankruptcy Code defines an "underwriter" as any person who (a) purchases
a claim against, interest in, or claim for an administrative expense in the case
concerning, the debtor, if such purchase is with a view to distribution of any
security received or to be received in exchange for such claim or interest, (b)
offers to sell securities offered or sold under the plan for the holders of such
securities, (c) offers to buy securities offered or sold under the plan from the
holders of such securities, if such offer to buy is made with a view to
distribution 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 (d) is an issuer as used in Section 2(11) of the
Securities Act with respect to the securities. Although the definition of the
term "issuer" appears in Section 2(4) of the Securities Act, the reference
(contained in Section 1145(b)(1)(D) of the Bankruptcy Code) to Section 2(11) of
the Securities Act includes as "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 (an "Affiliate").
"Control" (as such term is defined in Rule 405 of Regulation C 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.
An officer or director of Reorganized USi may be deemed an Affiliate. In
addition, the legislative history of Section 1145 suggests that a former
creditor or interestholder receiving 10% or more of the securities of a debtor
would likely be deemed an Affiliate.
To the extent that a person deemed to be an "underwriter" receives
securities, resales by that person would not be exempted by Section 1145 of the
Bankruptcy Code from registration under the Securities Act except in "ordinary
trading transactions" (within the meaning of Section 1145(b)(1) of the
Bankruptcy Code).
The Bankruptcy Code does not define the term "ordinary trading
transactions," and the Securities Exchange Commission has not given definitive
guidance with respect to the proper construction of the term. In a no-action
letter the staff of the Commission has, however, concurred in the view that a
transaction will be an "ordinary trading transaction" if it is carried out on an
exchange or in the over-the-counter market at a time when the issuer of the
traded securities is a reporting company under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and does not involve any of the following
factors:
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(24) The New Warrants will be issued by, and exercisable for shares of stock to
be issued by, the entity in which the parent company of the Investor makes
its investment in Reorganized USi (but in all events in such corporation in
which Bain Fund holds its investment). Section 1145 exempts from
registration under the Securities Act the securities of "a successor to the
debtor under the plan." Under case law and SEC no-action letter
interpretations of Section 1145 of the Bankruptcy Code, the corporate
parent of Reorganized USi qualifies as a "successor" for purposes of
Section 1145.
96
(i) (a) concerted action by two or more recipients of securities
issued under a plan of reorganization in connection with the sale of those
securities, or (b) concerted action by distributors on behalf of one or
more such recipients in connection with sales;
(ii) the preparation or use of informational documents concerning the
offering of the securities to assist in the resale of the securities, other
than the disclosure statement approved in connection with the plan (and any
supplement thereto) and documents filed with the Commission by the debtor
or the reorganized company pursuant to the Exchange Act; or
(iii) special compensation to brokers or dealers in connection with
the sale of the securities designed as a special incentive to resell the
securities, other than compensation that would be paid pursuant to
arm's-length negotiations between a seller and a broker or dealer, each
acting unilaterally, that is not greater than the compensation that would
be paid for a routine similar-sized sale of similar securities of a similar
issuer.
In addition, a person deemed to be an "underwriter" solely because he is an
Affiliate may be able to sell securities without registration, in accordance
with Rule 144 under the Securities Act, which permits public sales of securities
received pursuant to a plan by statutory underwriters subject to volume
limitations and certain other conditions, including, among others, the
availability of current public information with respect to the issuer. Based on
the views of the Commission expressed in no-action letters, a person deemed to
be an underwriter solely because he is an Affiliate may be able to sell
securities without registration in accordance with Rule 144, without complying
with the holding period requirement of Rule 144(d) assuming satisfaction of the
other relevant conditions.
Neither Reorganized USi nor any of its affiliates are or will be under any
obligation to make available information of the type required to be publicly
disclosed in order to make the Rule 144 exemption available. Holders will not be
able to sell any of the securities issued under the Plan (or the shares of stock
issued upon any exercise of the New Warrants) pursuant to Rule 144 until such
time, if any, as such information is made available. Accordingly, Holders should
expect not to be able to resell any of the securities received under the Plan
pursuant to Rule 144 for the indefinite future.
THE FOREGOING SUMMARY DISCUSSION IS GENERAL IN NATURE AND HAS BEEN INCLUDED
IN THIS DISCLOSURE STATEMENT SOLELY FOR INFORMATIONAL PURPOSES. THE DEBTORS MAKE
NO REPRESENTATIONS CONCERNING, AND DO NOT HEREBY PROVIDE ANY OPINION OR ADVICE
WITH RESPECT TO, THE SECURITIES LAW AND BANKRUPTCY LAW MATTERS DESCRIBED ABOVE.
IN LIGHT OF THE COMPLEX AND SUBJECTIVE INTERPRETIVE NATURE OF WHETHER A
PARTICULAR RECIPIENT OF NEW COMMON STOCK, PLAN NOTES, SUBSTITUTE PLAN NOTES,
SECONDARY PLAN NOTES AND NEW WARRANTS MAY BE DEEMED TO BE AN "UNDERWRITER"
WITHIN THE MEANING OF SECTION 1145(B)(1) OF THE BANKRUPTCY CODE UNDER APPLICABLE
FEDERAL AND STATE SECURITIES LAWS AND, CONSEQUENTLY, THE UNCERTAINTY CONCERNING
THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND ANY STATE AND LOCAL LAWS, THE DEBTORS ENCOURAGE EACH CREDITOR
TO CONSIDER CAREFULLY AND CONSULT WITH ITS OWN LEGAL ADVISER(S) WITH RESPECT TO
SUCH (AND ANY RELATED) MATTERS.
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XII. ABSENCE OF PUBLIC TRADING MARKET; AVAILABLE INFORMATION; FILINGS
WITH THE COMMISSION AND RELATED MATTERS
USi is currently subject to the informational and periodic reporting
requirements of the Exchange Act, and, in accordance therewith, files periodic
reports and other documents and information with the Commission. Such reports,
documents and information may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at Room 1024
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Upon the Effective Date, Reorganized USi will not be subject to the
information and periodic reporting requirements of the Exchange Act. Neither
Reorganized USi nor any of its affiliates are or will be under any obligation to
make available information of any type.
No established trading market exists for the New Common Stock, Plan Notes,
Secondary Plan Notes, Substitute Plan Notes and New Warrants, and none is likely
to develop following the effectiveness of the Plan, particularly because of the
absence of any publicly available information with respect to Reorganized USi
and its affiliates and because, after giving effect to the Plan, Reorganized USi
will be under the direct or indirect control of one investor or a limited number
of investors for the indefinite future.
XIII. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
A. IN GENERAL
The following discussion summarizes certain United States federal income
tax consequences of the implementation of the Plan to the Debtors and certain
Holders of Claims and Interests. The following summary does not apply to Holders
whose Claims or Interests are entitled to reinstatement or payment in full in
Cash under the Plan.
The following summary is based on the Internal Revenue Code of 1986 (the
"Code"), Treasury regulations promulgated thereunder, judicial decisions and
published rulings and pronouncements of the Internal Revenue Service ("IRS") as
in effect on the date hereof. Changes in these rules, or new interpretations of
these rules, 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 subject to
significant uncertainties. Also, the tax consequences to Holders of Claims and
Interests may vary based on the individual circumstances of each Holder. 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 does
not address foreign, state or local tax consequences of the Plan, and it does
not purport to address the federal income tax consequences of the Plan to
special classes of taxpayers, such as, without limitation, foreign taxpayers,
broker-dealers, banks, insurance companies, financial institutions, small
business investment corporations, regulated investment companies, tax-exempt
organizations, investors in pass-through entities, litigation claimants,
employees of the Debtors with claims relating to their employment, or
stockholders who acquired the stock through the exercise of an employee stock
option or otherwise as compensation. This discussion assumes that Holders hold
their Claims and Interests, and will hold any property received in exchange for
such Claims and Interests, as "capital assets" within the meaning of Code
section 1221. The tax consequences to Holders of Claims or Interests may vary
based on the specific characteristics and circumstances of the Holders.
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The following does not address the state and local tax consequences of the
implementation of the Plan to the Debtors or to Holders of Claims against or
Interests in the Debtors. As to the Holders of Claims and Interests, the tax
consequences to them will depend on the laws of the particular state and local
jurisdictions in which the Holders reside, are organized or engage in
busineSection As to the state and local tax consequences to the Debtors, in
general, the income tax consequences will be similar to the federal income tax
consequences discussed below, although in certain cases, the state and/or local
income tax treatment may differ from the federal income tax treatment (although
the Debtors do not believe that such differences will be material). The Debtors
also do not believe that there will be any state sales tax liability arising
from the consummation of the Plan. Finally, with respect to the imposition of
any state stamp or other similar tax, the Debtors believe that the issuance,
transfer or exchange of a security, or the making or delivery of an instrument
of transfer under the Plan, will be exempt under section 1146(c) of the
Bankruptcy Code.
ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND ADVICE BASED ON THE INDIVIDUAL CIRCUMSTANCES PERTAINING
TO THE HOLDER OF A CLAIM. ALL HOLDERS OF CLAIMS OR INTERESTS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL AND
OTHER TAX CONSEQUENCES TO THEM OF THE PLAN.
B. TAX CONSEQUENCES TO CREDITORS
1. GENERAL
(a) Tax Securities. The tax consequences of the Plan to a Holder of a
claim may depend in part upon whether such claim is based on an obligation of
the Debtors that constitutes a "security" for federal income tax purposes. The
determination of whether a debt obligation constitutes a security for federal
tax purposes is complex and depends on the facts and circumstances surrounding
the origin and nature of the claim. Generally, obligations arising out of the
extension of trade credit have been held not to be tax securities, while
corporate debt obligations evidenced by written instruments with original
maturities of ten years or more have been held to be tax securities. The General
Unsecured Claims, Convenience Claims and the Senior Creditor Claims are not
securities for federal tax purposes. It is uncertain whether the Convertible
Subordinated Note Claims will be considered securities for federal tax purposes
and Holders are advised to consult their tax advisors with respect to this
issue.
(b) "Fair Market Value". For tax purposes, the fair market value of the
New Warrants will be their actual fair market value upon issuance. The fair
market value of the Plan Notes, the Substitute Plan Notes and the Secondary Plan
Notes will be their respective "issue price," as defined in the Code. The "issue
price" of any such note should be its "stated principal amount" (generally, the
aggregate of all payments due under the note, excluding stated interest), if
neither the note nor the Claim for which it is exchanged is considered to be
"publicly traded" within the meaning of the original issue discount ("OID")
rules of the Code within a short period before or after the Effective Date of
the Plan. Otherwise, such issue price will be its actual fair market value, as
determined by such public trading. For this purpose, "stated interest" does not
include interest unless it is unconditionally payable in Cash or other property
(other than debt instruments of the issuer) at least annually at a single fixed
rate (or certain qualified floating rates). The OID rules of the Code define
"publicly traded" to include appearing on a "quotation medium" that provides a
reasonable basis to determine fair market value by disseminating
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either recent price quotations of identified brokers, dealers or traders, or
actual prices of recent sales transactions. As the Plan Notes, Substitute Plan
Notes and Secondary Plan Notes will be subject to certain transfer restrictions,
the Debtors believe that the Plan Notes, Substitute Plan Notes and Secondary
Plan Notes should not be considered "publicly traded."
(c) Character of Gain or LoSection The character of any gain or loss as
ordinary or capital with respect to a Claim, or with respect to the disposition
of stock or a security received in respect of a Claim, will depend on a number
of factors, including, without limitation,
o the origin and nature of the Claim or Interest,
o the tax status of the Holder of the Claim or Interest,
o whether the Claim or Interest is a capital asset in the hands of the
Holder, and
o the extent to which the Holder previously claimed a loss, bad debt
deduction or charge to a reserve for bad debts with respect to the
Claim or Interest.
If gain or loss recognized by a Holder of a Claim or Interest is capital
gain or loss, it will be long-term if the Holder held it for more than one year.
Special considerations apply to Holders that acquired their Claim or
Interest at a discount subsequent to their issuance (see "Market Discount"
below), or when interest was in default. The tax consequences of the receipt of
Cash and property that is attributable to accrued but unpaid interest is
discussed below in the section entitled "Consideration Allocable to Interest."
Each Holder is urged to consult its tax advisor as to the application of these
factors to its own particular circumstances.
(d) Consideration Allocable to Interest. A Holder of a Claim that
receives a distribution under the Plan with respect to its Claim will recognize
ordinary income to the extent it receives Cash or property in respect of
interest (including original issue discount that has accrued during the time
that the Holder has held such Claim) that has not already been included by the
Holder in income for federal income tax purposes under its method of accounting.
If the Cash and other property allocable to interest is less than the amount
previously included as interest in the Holder's federal income tax return, the
discharged portion of interest may be deducted in the taxable year in which the
Effective Date occurs. The extent to which consideration distributed under the
Plan is allocable to interest is uncertain, and Holders of Claims are urged to
consult their own tax advisors concerning that subject.
(e) Market Discount. Generally, a "market discount" bond is one
acquired after its original issuance for less than the issue price of such bond
plus the aggregate amount, if any, of original issue discount includible in the
income of all holders of such bond before such acquisition. Generally, gain
realized on the disposition of a market discount bond (or on the disposition of
property exchanged for such bond in certain non-taxable exchanges) will be
ordinary income to the extent of "accrued market discount" at the time of such
disposition (determined using either constant interest or ratable daily
accrual). The market discount rules will also apply in the case of stock or a
security acquired on original issuance under a non-taxable exchange for a market
discount obligation.
(f) Original Issue Discount. If the Plan Notes, Substitute Plan Notes
or Secondary Plan Notes to be issued under the Plan or the Senior Creditor
Claims, General Unsecured Claims, or Convertible Subordinated Note Claims for
which they will be exchanged are "publicly traded" within the
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meaning of the OID rules, the Plan Notes, Substitute Plan Notes and Secondary
Plan Notes may have significant amounts of OID. The amount of OID would equal
the difference between their "stated redemption price at maturity" (generally,
the aggregate of all payments due under the note, excluding stated interest) and
their "issue price" (determined as discussed above in the section on "Fair
Market Value"). In general, a holder of a debt instrument with OID must include
such OID in its income on a constant yield to maturity basis over the term of
the instrument. The rules and regulations governing the calculation and taxation
of OID are complex, and Holders of Senior Creditor Claims, General Unsecured
Claims, or Convertible Subordinated Note Claims are urged to consult their tax
advisors with regard to the tax consequences to them of owning Plan Notes,
Substitute Plan Notes or Secondary Plan Notes with OID.
(g) Backup Withholding. Under the Code, interest, dividends and other
"reportable payments" may, under certain circumstances, be subject to "backup
withholding." Various claimants, such as corporations, are exempt from backup
withholding.
Backup withholding generally applies if the payee:
o fails to furnish its social security number or other taxpayer
identification number (a "TIN");
o furnishes an incorrect TIN;
o fails to properly report interest or dividends; or
o 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 withholding.
2. TREATMENT OF CERTAIN CREDITORS
(a) General Unsecured Claims, Senior Creditor Claims. As discussed in
Section I.C., "Summary of Classification and Treatment of Claims and Interests"
of this Disclosure Statement, under the Plan, on the Effective Date, each Holder
of a Senior Creditor Claim and each Holder of a General Unsecured Claim will
receive, in complete settlement, satisfaction and discharge of its Claim, its
pro rata share of Plan Notes or Substitute Plan Notes.
The exchange of a General Unsecured Claim or a Senior Creditor Claim would
be a fully taxable transaction. The Holder would recognize any gain or loss
realized on the exchange. The Holder's basis in all property received in the
exchange would equal its fair market value. The Holder's holding period in such
property would begin on the day following the exchange.
(b) Convertible Subordinated Note Claims. Under the Plan, each Holder
of a Convertible Subordinated Note Claim will receive:
o its pro rata share of Cash in the amount of $6.25 million;
o its pro rata share of Secondary Plan Notes in an aggregate principal
amount of $11.25 million;
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o its pro rata share of the New Warrants; and
o its pro rata share of the Plan Notes.
If the Convertible Subordinated Note Claims are securities, the exchange of
a Convertible Subordinated Note Claim will constitute a recapitalization. In
this case, an exchanging Holder would not recognize any loss realized on the
exchange. If the Holder realizes a gain on the exchange, the Holder must
recognize such gain to the extent of the sum of (a) the amount of Cash, (b) if
the Secondary Plan Notes are not securities, the fair market value of such notes
and (c) if the Plan Notes are not securities, the fair market value of such
notes received by the Holder. The Holder's aggregate basis in (a) its New
Warrants and (b) the notes, if any, that are securities will equal its basis in
its Convertible Subordinated Note Claim decreased by the sum of the amount of
Cash and the fair market value of the notes that are not securities received in
the exchange and increased by the gain, if any, recognized in the exchange. The
Holder's basis in the notes, if any, that are not securities will be their fair
market value. The Holder's aggregate basis in the New Warrants and the
securities will be allocated in accordance with their fair market values. The
Holder's holding period in the New Warrants, and in the notes, if any, that are
securities, would include the Holder's holding period in the Convertible
Subordinated Note Claim exchanged therefor. The Holder's holding period in the
notes, if any, that are not securities, would begin on the day following the
exchange.
If the Convertible Subordinated Note Claims are not securities, the
exchange of a Convertible Subordinated Note Claim would be a fully taxable
transaction. The Holder would recognize any gain or loss realized on the
exchange. The Holder's basis in all property received in the exchange would
equal its fair market value. Its holding period in such property would begin on
the day following the exchange.
It is uncertain whether the Convertible Subordinated Note Claims, the Plan
Notes or the Secondary Plan Notes will be treated as securities for United
States federal income tax purposes. Holders of Convertible Subordinated Note
Claims are urged to consult their independent tax advisor on this issue.
(c) Convenience Claims. Under the Plan, Holders of General Unsecured
Claims which are less than $2,500 or who elect such treatment, will be treated
as Holders of Convenience Claims. Under the Plan, each Holder of a Convenience
Claim will receive Cash equal to 34.34 percent of the Allowed Claim. An
exchanging Holder will recognize gain or loss equal to the amount of Cash
received under the Plan less its adjusted tax basis in its Convenience Claim.
C. TAX CONSEQUENCES TO EQUITY HOLDERS
The Plan contemplates the cancellation of all equity interests in the
Debtor, without consideration. Holders of Debtor stock should therefore
recognize on the Effective Date a capital loss equal to their basis in such
stock.
D. TAX CONSEQUENCES TO THE DEBTORS
1. CANCELLATION OF DEBT
In general, the Code provides that a taxpayer must include in gross income
the amount of any cancellation of indebtedness ("COI") income realized during
the tax year, except to the extent the payment of the discharged debt would have
given rise to a tax deduction. COI income is the amount by which the
indebtedness discharged exceeds the Cash and the fair market value of property
given in
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exchange therefor. Such COI income is not included in taxable income, however,
where the cancellation of indebtedness is accomplished through a bankruptcy plan
approved by the court in a case under the Bankruptcy Code.
A debtor in a bankruptcy case generally must reduce its tax attributes,
such as NOLs, tax credits, capital loss carryforwards and tax basis in its
assets, by any such excluded COI income, as of the beginning of the taxable year
following the year in which the COI income is realized. This tax attribute
reduction rule is subject to certain exceptions, such as where the tax basis of
the Debtors' assets is less than the Debtors' continuing liabilities (unless an
election is made to reduce tax basis of depreciable property rather than
reducing other tax attributes). The Debtors believe that the amount of COI
income will be substantial, but the precise amount of COI income, and the
resulting tax attribute reduction of the Debtors, will depend on the total value
of the Plan Notes, Substitute Plan Notes, Secondary Plan Notes and New Warrants
given in exchange for the indebtedness of the Debtors, determined as described
above in the section on "Fair Market Value." However, the tax attributes of the
Debtors will not be reduced by any amounts contributed to the capital of the
Debtors under the Plan.
2. EFFECTS ON NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX ATTRIBUTES
(a) Reduction of Tax Attributes. As a result of the attribute reduction
described above, the NOLs of the Debtors may be substantially reduced or even
eliminated. Other tax attributes may also be reduced. To the extent that asset
basis is reduced, depreciation or amortization of assets would also be reduced,
and gain recognized (and therefore tax imposed) in connection with a disposition
of assets may be increased.
(b) Code Section 382 - In General. Code section 382 provides generally
that corporations that undergo an "ownership change" may be limited in the
amount of existing tax attributes, including NOLs, that can be used to offset
income generated by the corporation after the date of the ownership change,
unless an exception under Code section 382(l)(5) applies. The Debtors will not
meet the requirements of Code section 382(l)(5). Stated simply, an ownership
change occurs when aggregate changes in stock ownership by 5 percent
shareholders exceed 50 percentage points by value over a three-year "testing
period." Following an ownership change, the annual amount of income that may be
offset by the corporation's NOLs after the ownership change generally will be
limited to an amount equal to the sum of the equity value of the corporation
immediately before the ownership change (but, under Code section 382(l)(6),
including any increase in value resulting from any surrender or cancellation of
indebtedness under the Chapter 11 Case), multiplied by the long-term tax-exempt
rate then in effect. This section 382 limitation may be increased by certain
"recognized built-in gains" triggered during a five-year "recognition period"
beginning on the ownership change date. Certain "recognized built-in losses,"
including certain deductions, triggered during the recognition period may be
limited in the same manner as if such loss were an NOL existing as of the
ownership change.
(c) Application of Code Section 382 to the Debtors. Any NOL remaining
after the attribute reduction discussed above would be subject to the general
section 382 limitation. As a result, annual usage of the NOL would be limited to
the equity value of the Debtors immediately before the Effective Date
(including, under Code section 382(l)(6), any increase in value resulting from
the cancellation of any claims under the Plan), multiplied by the long-term
tax-exempt rate in effect as of the Effective Date. The Debtors may be allowed
to increase such limitation by certain built-in gains realized during the
five-year recognition period following the change date. In addition, certain
"recognized built-in losses" realized during the recognition period may be
subject to the Debtors' Code section 382 limitation as if they were NOLs.
Specifically, amortization of intangibles, and possibly depreciation of tangible
assets, may be limited during the five year "recognition period" following the
Effective Date. The extent of such limitation depends on a number of factual and
legal uncertainties, and, accordingly, the extent of any such limitation cannot
be determined at this time.
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XIV. CONCLUSION
The Debtors believe that confirmation of the Plan is desirable and in the
best interests of all Holders of Claims and Interests. The Debtors therefore
urge you to vote to accept the Plan.
Dated: Annapolis, Maryland
March 19, 2002
USINTERNETWORKING, INC.
By: /s/ William Washecka
---------------------------------
Its: Executive Vice President and CFO
ADMIRAL MANAGEMENT COMPANY, LLC
By: /s/ Mark McEneaney
---------------------------------
Its: General Manager
GEMC PROPERTIES, LLC
By: /s/ Mark McEneaney
---------------------------------
Its: General Manager
RIVA CANYON LLC
By: /s/ Mark McEneaney
---------------------------------
Its: General Manager
SHORE SERVICES LLC
By: /s/ Mark McEneaney
---------------------------------
Its: General Manager
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