EXHIBIT 99.2
THIS IS NOT A SOLICITATION OF ACCEPTANCES OF THE JOINT CHAPTER 11 PLAN OF
AAIPHARMA INC. AND THE OTHER DEBTORS IN THESE CHAPTER 11 CASES. ACCEPTANCES MAY
NOT BE SOLICITED UNTIL A DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE
BANKRUPTCY COURT. THIS DISCLOSURE STATEMENT IS BEING SUBMITTED FOR APPROVAL BUT
HAS NOT YET BEEN APPROVED BY THE BANKRUPTCY COURT.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
)
In re: ) Chapter 11
)
AAIPHARMA INC., et al., ) Case Nos. 05-11341 through 05-11345 and
) 05-11347 through 05-11350 (PJW)
Debtors. )
) Jointly Administered
)
--------------------------------------
DISCLOSURE STATEMENT FOR DEBTORS'
JOINT CHAPTER 11 PLAN
--------------------------------------
Wilmington, North Carolina
November 4, 2005
RICHARDS, LAYTON & FINGER, P.A. FRIED, FRANK, HARRIS, SHRIVER
One Rodney Square & JACOBSON LLP
920 North King Street One New York Plaza
Wilmington, Delaware 19801 New York, New York 10004-1980
Attn: Mark D. Collins, Esq. Attn: Bonnie Steingart, Esq.
Rebecca L. Booth, Esq. Gary L. Kaplan, Esq.
Karen M. McKinley, Esq. Arik Preis, Esq.
Tel: (302) 651-7700 Tel: (212) 859-8000
Fax: (302) 651-7701 Fax: (212) 859-4000
TABLE OF CONTENTS
PAGE
ARTICLE I. INTRODUCTION AND SUMMARY.................................................................. 13
1.01 The Solicitation.................................................................................... 13
1.02 Recommendations..................................................................................... 14
1.03 Summary of Key Provisions of the Plan............................................................... 14
1.04 Summary of Classifications and Treatment of Claims and Old Equity Interests......................... 16
1.05 Conditions of Consummation of Plan.................................................................. 21
ARTICLE II. DEFINITIONS............................................................................... 21
ARTICLE III. BACKGROUND................................................................................ 33
3.01 Debtors' Business................................................................................... 33
3.02 Pre-Petition Financing.............................................................................. 35
3.03 Events Preceding Commencement of the Chapter 11 Cases............................................... 36
3.04 Pending Litigation.................................................................................. 41
ARTICLE IV. DESCRIPTION OF CHAPTER 11 CASES........................................................... 44
4.01 First Day Motions................................................................................... 44
4.02 Schedules & Statement of Financial Affairs.......................................................... 45
4.03 Appointment of Creditors' Committee................................................................. 46
4.04 The DIP Financing Facility.......................................................................... 47
4.05 Bidding Procedures and Sale Motion.................................................................. 47
4.06 The Request for an Equity Committee................................................................. 48
4.07 Key Employee Retention Program...................................................................... 49
4.08 Stipulation with Cardinal Health.................................................................... 49
4.09 Bar Dates........................................................................................... 50
ARTICLE V. EVENTS LEADING TO FORMULATION OF THE PLAN................................................. 50
5.01 Development of the Business Plan.................................................................... 50
5.02 Retention of Chanin................................................................................. 51
5.03 Negotiations Among the Debtors, the Ad Hoc Committee of Secured Noteholders, and the Creditors'
Committee........................................................................................... 51
ARTICLE VI. SUMMARY OF THE PLAN....................................................................... 53
6.01 General............................................................................................. 53
6.02 Voting on the Plan.................................................................................. 53
6.03 Classification and Treatment of Claims and Old Equity Interests Under the Plan...................... 54
ARTICLE VII. EXECUTORY CONTRACTS AND UNEXPIRED LEASES.................................................. 59
7.01 Assumption and Rejection of Executory Contracts and Unexpired Leases................................ 59
7.02 Cure of Defaults.................................................................................... 60
7.03 Bar Date for Rejection Damages...................................................................... 60
7.04 Employee Benefit Plans.............................................................................. 60
ARTICLE VIII. IMPLEMENTATION OF THE PLAN................................................................ 61
8.01 Vesting of Property................................................................................. 61
8.02 Substantive Consolidation........................................................................... 61
8.03 Retention, Enforcement and Release of Causes of Action.............................................. 62
8.04 Implementation...................................................................................... 63
8.05 New Credit Facility................................................................................. 63
8.06 Corporate Action.................................................................................... 63
8.07 Issuance of New Securities.......................................................................... 63
8.08 Stockholder and Registration Rights Agreements...................................................... 64
8.09 Cancellation of Existing Securities and Agreements.................................................. 64
8.10 Dissolution......................................................................................... 64
8.11 Amended and Restated Certificates of Incorporation; Amended and Restated By-Laws.................... 64
8.12 Directors and Officers of the Reorganized Debtors................................................... 64
8.13 Management Agreements............................................................................... 65
8.14 Transactions on Business Days....................................................................... 65
8.15 Termination of DIP Financing Agreement.............................................................. 65
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8.16 Ordinary Course Refunds............................................................................. 65
ARTICLE IX. LITIGATION TRUST.......................................................................... 65
9.01 Establishment of the Litigation Trust; Funding...................................................... 65
9.02 Transfer of Designated Litigation to the Litigation Trust........................................... 66
9.03 Litigation Trust Interests; Term.................................................................... 67
9.04 Procedures for Distribution......................................................................... 67
9.05 Annual Distribution; Withholding.................................................................... 68
9.06 Allocation of Litigation Trust Taxable Income....................................................... 68
9.07 Litigation; Responsibilities of Litigation Trustee.................................................. 68
ARTICLE X. DISTRIBUTIONS UNDER THE PLAN.............................................................. 69
10.01 Timing of Distributions Under the Plan.............................................................. 69
10.02 Payments and Distributions with Respect to Disputed Claims.......................................... 69
10.03 Allocation of Consideration......................................................................... 69
10.04 Cash Payments....................................................................................... 70
10.05 Payment of Statutory Fees........................................................................... 70
10.06 No Interest......................................................................................... 70
10.07 Setoffs............................................................................................. 70
10.08 Special Provision Regarding Unimpaired Claims....................................................... 71
10.09 Fractional Securities............................................................................... 71
10.10 Compliance with Tax Requirements.................................................................... 71
10.11 Persons Deemed Holders of Registered Securities; Distribution Record Date........................... 71
10.12 Surrender of Existing Securities.................................................................... 72
10.13 Undeliverable or Unclaimed Distributions............................................................ 72
10.14 Distributions on Account of Senior Secured Notes.................................................... 72
10.15 Exemption From Certain Transfer Taxes............................................................... 73
10.16 Rule 9019 Settlement and Compromise of Disputes Between the Debtors, Holders of Senior Secured
Note Claims and Holders of General Unsecured Claims................................................. 73
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ARTICLE XI. PLAN ADMINISTRATION....................................................................... 73
11.01 Duties.............................................................................................. 73
11.02 Funding............................................................................................. 74
11.03 Distributions....................................................................................... 74
11.04 Retention of Professionals.......................................................................... 74
11.05 Succession.......................................................................................... 74
11.06 Cooperation......................................................................................... 74
11.07 Failure by Class 4 to Accept the Plan............................................................... 75
ARTICLE XII. PROVISIONS FOR TREATMENT OF DISPUTED GENERAL UNSECURED CLAIMS............................. 75
12.01 Objections to General Unsecured Claims; Disputed General Unsecured Claims........................... 75
12.02 Estimation of General Unsecured Claims.............................................................. 75
12.03 Timing of Payments and Distributions With Respect to Disputed General Unsecured Claims.............. 75
12.04 General Unsecured Claims Reserve.................................................................... 76
12.05 Distributions After Allowance of Disputed General Unsecured Claims.................................. 76
12.06 Distributions After Disallowance of Disputed General Unsecured Claims............................... 77
ARTICLE XIII. PROVISIONS FOR TREATMENT OF DISPUTED CLAIMS OTHER THAN GENERAL UNSECURED CLAIMS........... 77
13.01 Objections to Claims; Disputed Claims............................................................... 77
13.02 Estimation of Claims................................................................................ 77
13.03 Timing of Payments and Distributions with Respect to Disputed Claims other than General Unsecured
Claims.............................................................................................. 78
13.04 Distributions After Allowance of Disputed Claims other than General Unsecured Claims................ 78
13.05 Prosecution of Objections........................................................................... 78
ARTICLE XIV. DISCHARGE, INJUNCTIONS, RELEASES AND SETTLEMENT OF CLAIMS................................. 79
14.01 Discharge of all Claims and Old Equity Interests and Releases....................................... 79
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14.02 Exculpation......................................................................................... 81
14.03 Injunction.......................................................................................... 81
14.04 Guarantees and Claims of Subordination.............................................................. 82
14.05 Survival of Indemnification Obligations............................................................. 82
14.06 Cooperation with Litigation Trustee................................................................. 83
ARTICLE XV. CONDITIONS TO CONFIRMATION AND EFFECTIVE DATE............................................. 83
15.01 Conditions to Confirmation.......................................................................... 83
15.02 Conditions to Effective Date........................................................................ 84
15.03 Waiver of Conditions................................................................................ 84
15.04 Effect of Failure of Conditions..................................................................... 85
ARTICLE XVI. MISCELLANEOUS PROVISIONS OF THE PLAN...................................................... 85
16.01 Retention of Jurisdiction........................................................................... 85
16.02 Binding Effect...................................................................................... 86
16.03 Authorization of Corporate Action................................................................... 87
16.04 Modification of the Plan............................................................................ 87
16.05 Withdrawal of the Plan.............................................................................. 87
16.06 Nonvoting Stock..................................................................................... 87
16.07 Dissolution of any Committee........................................................................ 87
16.08 Section 1125(e) of the Bankruptcy Code.............................................................. 88
16.09 Post-Confirmation Obligations....................................................................... 88
ARTICLE XVII. CERTAIN FACTORS........................................................................... 88
17.01 Certain Bankruptcy Law Considerations............................................................... 88
17.02 Risks Related to the Debtors' Business.............................................................. 91
17.03 Factors Affecting the Value of the Securities....................................................... 92
ARTICLE XVIII. APPLICATION OF SECURITIES ACT............................................................. 94
18.01 Issuance and Resale of New Securities Under the Plan................................................ 94
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18.02 New Common Stock.................................................................................... 96
ARTICLE XIX. FINANCIAL PROJECTIONS, VALUATION AND ASSUMPTIONS USED..................................... 96
19.01 Valuation of aaiPharma.............................................................................. 96
19.02 Financial Projections............................................................................... 99
ARTICLE XX. CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................... 105
20.01 Federal Income Tax Consequences to the Debtors...................................................... 106
20.02 Federal Income Tax Consequences of the Plan to U.S. Holders of Senior Secured Note Claims........... 109
20.03 Federal Income Tax Consequences to U.S. Holders of General Unsecured Claims......................... 112
20.04 Consequences of Owning Litigation Trust Interests and Tax Treatment of the Litigation Trust........ 112
20.05 Federal Income Tax Consequences of Ownership and Disposition of New Common Stock.................... 113
20.06 Information Reporting and Backup Withholding........................................................ 114
ARTICLE XXI. ACCEPTANCE AND CONFIRMATION OF THE PLAN................................................... 115
21.01 Solicitation of Acceptance.......................................................................... 115
21.02 Confirmation Hearing................................................................................ 115
21.03 Requirements for Confirmation of the Plan........................................................... 116
21.04 Confirmation of the Plan under Section 1129(b)...................................................... 116
21.05 No Unfair Discrimination............................................................................ 117
21.06 Fair and Equitable Test............................................................................. 117
21.07 Best Interests Test................................................................................. 118
21.08 Feasibility......................................................................................... 119
ARTICLE XXII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN................................ 121
22.01 Liquidation Under Chapter 7 of the Bankruptcy Code.................................................. 121
22.02 Alternative Plan.................................................................................... 121
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ARTICLE XXIII. THE BANKRUPTCY PLAN -- VOTING INSTRUCTIONS AND PROCEDURES................................. 122
23.01 General............................................................................................. 122
23.02 Voting Deadline..................................................................................... 122
23.03 Holders of Claims Entitled to Vote.................................................................. 123
23.04 Vote Required for Acceptance by a Class............................................................. 123
23.05 Voting Procedures................................................................................... 123
ARTICLE XXIV. CONCLUSION AND RECOMMENDATION............................................................. 124
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APPENDIX A - FINANCIAL PROJECTIONS
APPENDIX B - LIQUIDATION ANALYSIS
APPENDIX C - PLAN
APPENDIX D - AAIPHARMA INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
2004
APPENDIX E - AAIPHARMA INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2005
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aaiPharma Inc., Applied Analytical Industries Learning Center, Inc., AAI
Properties, Inc., AAI Technologies, Inc., AAI Japan, Inc., aaiPharma LLC, AAI
Development Services, Inc. (Delaware), AAI Development Services, Inc.
(Massachusetts), and Kansas City Analytical Services, the above-captioned
Debtors and Debtors In Possession, hereby propose and file this disclosure
statement (the "Disclosure Statement") for the Debtors' Joint Chapter 11 Plan,
dated November 4, 2005 (the "Plan"):
THIS DISCLOSURE STATEMENT IS DESIGNED TO SOLICIT YOUR ACCEPTANCE OF THE
ATTACHED PLAN AND CONTAINS INFORMATION RELEVANT TO YOUR DECISION. PLEASE READ
THIS DISCLOSURE STATEMENT, THE PLAN, AND THE OTHER MATERIALS COMPLETELY AND
CAREFULLY. THE PLAN IS ATTACHED AS APPENDIX C TO THIS DISCLOSURE STATEMENT. PLAN
SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE PLAN, OTHER APPENDICES ANNEXED HERETO, AND
OTHER DOCUMENTS REFERENCED AS FILED WITH THE COURT BEFORE OR CONCURRENTLY WITH
THE FILING OF THIS DISCLOSURE STATEMENT. FURTHERMORE, THE FINANCIAL INFORMATION
CONTAINED HEREIN HAS NOT BEEN AUDITED. SUBSEQUENT TO THE DATE HEREOF, THERE CAN
BE NO ASSURANCE THAT: (A) THE INFORMATION AND REPRESENTATIONS CONTAINED HEREIN
WILL CONTINUE TO BE MATERIALLY ACCURATE, OR (B) THE DISCLOSURE STATEMENT
CONTAINS ALL MATERIAL INFORMATION. THE STATEMENTS CONTAINED IN THIS DISCLOSURE
STATEMENT ARE MADE AND ARE ONLY CORRECT AS OF THE DATE HEREOF AND NEITHER THE
DELIVERY OF THIS DISCLOSURE STATEMENT NOR ANY DISTRIBUTION OF PROPERTY HEREUNDER
PURSUANT TO THE PLAN WILL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
OR IN THE AFFAIRS OF THE DEBTORS SINCE THE DATE HEREOF.
THE CLASSES OF CLAIMS IMPAIRED (AS DEFINED IN THE BANKRUPTCY CODE) UNDER
THE PLAN AND ENTITLED TO VOTE ON THE PLAN ARE CLASS 3 (SENIOR SECURED NOTE
CLAIMS) AND CLASS 4 (GENERAL UNSECURED CLAIMS). CLASS 1 (PRIORITY CLAIMS), CLASS
2 (MISCELLANEOUS SECURED CLAIMS), AND CLASS 5 (CONVENIENCE CLAIMS) ARE
UNIMPAIRED, AND HOLDERS OF CLAIMS IN SUCH CLASSES ARE CONCLUSIVELY PRESUMED TO
HAVE ACCEPTED THE PLAN PURSUANT TO SECTION 1126(f) OF THE BANKRUPTCY CODE. CLASS
6 (510(b) NOTE CLAIMS) AND CLASS 7 (OLD EQUITY INTERESTS) ARE IMPAIRED AND THE
HOLDERS OF CLAIMS OR OLD EQUITY INTERESTS IN SUCH CLASSES WILL NOT RECEIVE OR
RETAIN ANY PROPERTY UNDER THE PLAN ON ACCOUNT OF THEIR CLAIMS OR OLD EQUITY
INTERESTS, AS THE CASE MAY BE, AND, THEREFORE, ARE DEEMED TO HAVE REJECTED THE
PLAN PURSUANT TO SECTION 1126(g) OF THE BANKRUPTCY CODE.
HOLDERS OF SENIOR SECURED NOTE CLAIMS (CLASS 3) AND GENERAL UNSECURED
CLAIMS (CLASS 4) ARE ENCOURAGED TO READ AND
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CAREFULLY CONSIDER THE MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT, INCLUDING
THOSE UNDER "CERTAIN FACTORS," PRIOR TO SUBMITTING BALLOTS VOTING ON THE PLAN.
IN MAKING A DECISION TO ACCEPT OR REJECT THE PLAN, EACH HOLDER OF SENIOR SECURED
NOTE CLAIMS (CLASS 3) AND GENERAL UNSECURED CLAIMS (CLASS 4) 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. THERE CAN BE NO ASSURANCE
THAT EACH OF THESE CONDITIONS WILL BE SATISFIED OR WAIVED (AS PROVIDED IN THE
PLAN) OR THAT THE PLAN WILL BE CONSUMMATED. EVEN AFTER THE EFFECTIVE DATE,
DISTRIBUTIONS UNDER THE PLAN MAY BE SUBJECT TO SUBSTANTIAL DELAYS FOR HOLDERS OF
CLAIMS THAT ARE DISPUTED.
EACH OF CLASS 3 (SENIOR SECURED NOTE CLAIMS) AND CLASS 4 (GENERAL
UNSECURED CLAIMS) WILL HAVE ACCEPTED THE PLAN IF THE HOLDERS OF CLAIMS IN EACH
SUCH CLASS (OTHER THAN ANY HOLDER DESIGNATED UNDER SUBSECTION 1126(e) OF THE
BANKRUPTCY CODE) WHO CAST VOTES TO ACCEPT THE PLAN HOLD AT LEAST TWO-THIRDS IN
DOLLAR AMOUNT AND MORE THAN ONE-HALF IN NUMBER OF THE ALLOWED CLAIMS THAT ARE
HELD BY HOLDERS OF CLAIMS ACTUALLY VOTING IN SUCH CLASS.
THE DEBTORS WILL REQUEST THAT THE COURT CONFIRM THE PLAN UNDER BANKRUPTCY
CODE SECTION 1129(b). SECTION 1129(b) PERMITS CONFIRMATION OF THE PLAN DESPITE
REJECTION BY ONE OR MORE CLASSES IF THE COURT FINDS THAT THE PLAN "DOES NOT
DISCRIMINATE UNFAIRLY" AND IS "FAIR AND EQUITABLE" AS TO THE CLASS OR CLASSES
THAT DO NOT ACCEPT THE PLAN. BECAUSE CLASS 6 (510 (b) NOTE CLAIMS) AND CLASS 7
(OLD EQUITY INTERESTS) ARE DEEMED TO HAVE REJECTED THE PLAN, THE DEBTORS WILL
REQUEST THAT THE COURT FIND THAT THE PLAN IS FAIR AND EQUITABLE AND DOES NOT
DISCRIMINATE UNFAIRLY AS TO CLASS 6 (510 (b) NOTE CLAIMS) AND CLASS 7 (OLD
EQUITY INTERESTS), AND ANY OTHER CLASS THAT FAILS TO ACCEPT THE PLAN. FOR A MORE
DETAILED DESCRIPTION OF THE REQUIREMENTS FOR ACCEPTANCE OF THE PLAN AND OF THE
CRITERIA FOR CONFIRMATION, SEE ARTICLE XXI HEREIN, ENTITLED "ACCEPTANCE AND
CONFIRMATION OF THE PLAN."
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY ORDER OF THE 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.
NO PARTY IS AUTHORIZED BY THE DEBTORS TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE PLAN OTHER THAN THAT WHICH IS CONTAINED IN
THIS DISCLOSURE
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STATEMENT. NO REPRESENTATIONS OR INFORMATION CONCERNING THE DEBTORS, THEIR
FUTURE BUSINESS OPERATIONS, OR THE VALUE OF THEIR PROPERTIES HAVE BEEN
AUTHORIZED BY THE DEBTORS.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION
1125 OF THE BANKRUPTCY CODE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE
SECURITIES LAWS OR OTHER APPLICABLE NONBANKRUPTCY LAWS. ENTITIES HOLDING OR
TRADING IN OR OTHERWISE PURCHASING, SELLING OR TRANSFERRING CLAIMS AGAINST,
INTERESTS IN OR SECURITIES OF, THE DEBTORS SHOULD EVALUATE THIS DISCLOSURE
STATEMENT ONLY IN LIGHT OF THE PURPOSE FOR WHICH IT WAS PREPARED. THIS
DISCLOSURE STATEMENT AND THE PLAN DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION AND NEITHER THE SECURITIES EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS PASSED UPON OR WILL PASS UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED HEREIN OR THEREIN.
IF THE REQUISITE ACCEPTANCES OF THE PLAN ARE RECEIVED, THE PLAN IS
CONFIRMED BY THE COURT, AND THE EFFECTIVE DATE OCCURS, ALL HOLDERS OF CLAIMS AND
OLD EQUITY INTERESTS (INCLUDING THOSE WHO DO NOT OR ARE NOT ENTITLED TO SUBMIT
BALLOTS TO ACCEPT OR TO REJECT THE PLAN) WILL BE BOUND BY THE PLAN AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
EACH HOLDER OF A CLAIM AGAINST OR AN OLD EQUITY INTEREST IN THE DEBTORS
SHOULD CONSULT WITH SUCH PARTY'S LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS AS
TO ANY MATTERS CONCERNING THE SOLICITATION OF VOTES TO ACCEPT OR REJECT THE
PLAN, THE PLAN, AND THE TRANSACTIONS CONTEMPLATED THEREBY.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE
DATE HEREOF AND NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT NOR ANY
DISTRIBUTION OF PROPERTY PURSUANT TO THE PLAN WILL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE DEBTORS SINCE THE DATE
HEREOF.
THIS SOLICITATION AND DISCLOSURE STATEMENT CONTAINS PROJECTED FINANCIAL
INFORMATION REGARDING THE COMPANY AND CERTAIN OTHER FORWARD-LOOKING STATEMENTS,
ALL OF WHICH ARE BASED ON VARIOUS ESTIMATES AND ASSUMPTIONS. SUCH INFORMATION
AND STATEMENTS ARE SUBJECT TO INHERENT UNCERTAINTIES AND TO A WIDE VARIETY OF
SIGNIFICANT BUSINESS, ECONOMIC, AND COMPETITIVE RISKS, INCLUDING THOSE
SUMMARIZED HEREIN.
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ACTUAL EVENTS, CIRCUMSTANCES, EFFECTS, AND RESULTS MAY VARY SIGNIFICANTLY
FROM THOSE INCLUDED IN OR CONTEMPLATED BY THE PROJECTED FINANCIAL INFORMATION
AND OTHER FORWARD-LOOKING STATEMENTS CONTAINED HEREIN WHICH, THEREFORE, ARE NOT
NECESSARILY INDICATIVE OF THE FUTURE FINANCIAL CONDITION OR RESULTS OF
OPERATIONS OF THE DEBTORS AND SHOULD NOT BE REGARDED AS REPRESENTATIONS BY THE
DEBTORS, THEIR ADVISORS, OR ANY OTHER PERSONS THAT THE PROJECTED FINANCIAL
CONDITION OR RESULTS CAN OR WILL BE ACHIEVED.
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ARTICLE I.
INTRODUCTION AND SUMMARY
This Disclosure Statement is being furnished by the Debtors,
pursuant to section 1125 of the Bankruptcy Code, in connection with the
solicitation of votes to accept or reject the Plan (as it may be altered,
amended, modified or supplemented) from Holders of Senior Secured Note Claims
(Class 3) and General Unsecured Claims (Class 4). All capitalized terms used in
this Disclosure Statement have the meanings ascribed to such terms in Article II
herein, entitled "Definitions", except as otherwise indicated. 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
appearing elsewhere in this Disclosure Statement.
1.01 The Solicitation
On the Petition Date, each of the Debtors filed separate petitions
under chapter 11 of the Bankruptcy Code. On the date hereof, the Debtors filed
their Plan and this related Disclosure Statement with the Court pursuant to
section 1125 of the Bankruptcy Code and in connection with the solicitation of
votes to accept or reject the Plan (the "Solicitation").
[On ________, 2005, the Court determined that this Disclosure
Statement contains "adequate information" in accordance with section 1125 of the
Bankruptcy Code. Pursuant to section 1125(a)(1) of the Bankruptcy Code,
"adequate information" is defined as "information of a kind, and in sufficient
detail, as far as is reasonably practicable in light of the nature and history
of the debtor and the condition of the Debtors' books and records, that would
enable a hypothetical reasonable investor typical of holders of claims or
interests of the relevant class to make an informed judgment about the plan . .
.." 11 U.S.C. Section 1125(a)(1).
THE COURT HAS SCHEDULED A HEARING TO CONSIDER CONFIRMATION OF THE
PLAN FOR ______, 2005 AT __:__ _.M. (PREVAILING EASTERN TIME) BEFORE THE
HONORABLE PETER J. WALSH, UNITED STATES BANKRUPTCY JUDGE, UNITED STATES
BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE. THE HEARING MAY BE ADJOURNED FROM
TIME TO TIME WITHOUT FURTHER NOTICE OTHER THAN BY ANNOUNCEMENT IN THE COURT ON
THE SCHEDULED DATE OF SUCH HEARING. ANY OBJECTIONS TO CONFIRMATION OF THE PLAN
MUST BE IN WRITING AND MUST BE FILED WITH THE CLERK OF THE COURT AND SERVED ON
THE DEBTORS' COUNSEL LISTED BELOW TO ENSURE RECEIPT BY THEM ON OR BEFORE __:__
_.M. (PREVAILING EASTERN TIME), ______, 2005.]
RICHARDS, LAYTON & FINGER, P.A. FRIED, FRANK, HARRIS, SHRIVER
One Rodney Square & JACOBSON LLP
920 North King Street One New York Plaza
Wilmington, Delaware 19801 New York, New York 10004-1980
Attn: Mark D. Collins, Esq. Attn: Bonnie Steingart, Esq.
Rebecca L. Booth, Esq. Gary L. Kaplan, Esq.
Karen M. McKinley, Esq. Arik Preis, Esq.
Tel: (302) 651-7700 Tel: (212) 859-8000
Fax: (302) 651-7701 Fax: (212) 859-4000
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1.02 Recommendations (1)
THE DEBTORS, THE CREDITORS' COMMITTEE, AND THE AD HOC COMMITTEE OF
SECURED NOTEHOLDERS RECOMMEND THAT EACH ENTITY ENTITLED TO VOTE ON THE PLAN VOTE
TO ACCEPT THE PLAN. The Debtors, the Creditors' Committee, and the Ad Hoc
Committee of Secured Noteholders believe that:
1. the Plan provides the best possible result for the
Holders of Claims;
2. with respect to each Impaired Class of Claims, the
distributions under the Plan, if any, are not less than
the amounts that would be received if the Debtors were
liquidated under chapter 7 of the Bankruptcy Code;
3. acceptance of the Plan is in the best interests of
Holders of Claims.
1.03 Summary of Key Provisions of the Plan
The purpose of the Plan is to restructure the Debtors' outstanding
indebtedness and resolve the Debtors' liquidity problems, thereby enhancing the
recoveries for the Debtors' creditors and enabling the Debtors to continue as a
going concern. On July 25, 2005, the Debtors closed the sale of their
pharmaceutical assets to Xanodyne Pharmaceuticals Inc. and through the Plan, the
Debtors will reorganize around their development services division.
The Plan is the product of extensive negotiations between the
Debtors, the Creditors' Committee, and the Ad Hoc Committee of Secured
Noteholders. The Plan represents a compromise between the divergent viewpoints
held by the Debtors' major creditor constituencies regarding the value of the
Debtors and the allocation of the consideration to be distributed in connection
with the reorganization of the Debtors. In particular, the Creditors' Committee
has suggested that various causes of actions may exist against the Holders of
Senior Secured Notes and the lenders under the Debtor's Pre-Petition Credit
Agreement and the DIP Financing Agreement, among others, and has asserted that
the enterprise value of the Reorganized Debtors is greater than the value being
put forth by the Debtors in support of confirmation of the Plan. The Debtors and
the Ad Hoc Committee of Secured Noteholders dispute various of those assertions.
The Plan incorporates a settlement of all claims against Holders of Senior
Secured Notes and of all disputes with the Creditors' Committee with respect to
the value of the Reorganized Debtors. Pursuant to the terms of the settlement
embodied in the Plan, Holders of Senior Secured Note Claims will receive 100% of
the stock of Reorganized aaiPharma and, provided that Class 4 votes to accept
the Plan, the Debtors will (i) distribute to Holders of Allowed General
Unsecured Claims $4 million in Cash, (ii) transfer certain pending litigation to
a Litigation Trust for the benefit of Holders of Allowed General Unsecured
Claims, (iii) permit the Creditors' Committee to appoint a Plan Administrator
who will be responsible for objecting to and compromising disputed General
Unsecured Claims, and (iv) pay up to $200,000
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(1) The Debtors have had discussions with advisors to the Ad Hoc Committee of
Secured Noteholders about the terms and conditions of the Plan and Disclosure
Statement but have not had any discussions with the members of the Ad Hoc
Committee of Secured Noteholders themselves. As a result of such discussions
with the advisors of the Ad Hoc Committee of Secured Noteholders, the Debtors
believe that the Ad Hoc Committee of Secured Noteholders will support and
recommend the Plan after it is filed with the Court. Therefore, all
"recommendations" of or statements of "support" by the Ad Hoc Committee of
Secured Noteholders (or similar statements) set forth herein or in the Plan are
accordingly qualified in their entirety.
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to the Plan Administrator to fund the claims objection and allowance process
with respect to the General Unsecured Claims.
The $4 million being provided to Holders of General Unsecured Claims
is the only amount being provided for distribution to Holders of General
Unsecured Claims and for the pursuit of the litigation that is being transferred
to the Litigation Trust. As such, a Plan Administration Committee, which will be
appointed by the Creditors' Committee, will make the determination with respect
to how much of the $4 million is to be distributed to Holders of Allowed General
Unsecured Claims and how much is to be allocated towards litigation costs.
Because there is a fixed amount of Cash from which the Holders of Allowed
General Unsecured Claims will receive distributions under the Plan, the
distributions to each Holder of an Allowed General Unsecured Claim depends upon
the amount of total General Unsecured Claims actually Allowed as well as how
much of the $4 million is to be allocated to the Litigation Trust. Approximately
$65 million in Claims were filed against the Debtors. While the Debtors cannot
predict with any degree of certainty the amount of Claims that will be Allowed,
based on the Debtors' books and records, the Debtors estimate that approximately
$25-40 million in General Unsecured Claims will ultimately be Allowed.
Therefore, under the Plan and based on the Debtors' estimation of Allowed
General Unsecured Claims, if Class 4 accepts the Plan and assuming all $4
million is distributed to Holders of General Unsecured Claims, each Holder of an
Allowed General Unsecured Claim would receive Cash in an amount equal to
approximately 10.0-16.0% of such Allowed General Unsecured Claim. However,
because the Debtors cannot predict the amount of Claims that will ultimately be
Allowed against the Debtors, the amounts, if any, that will be allocated to fund
the Litigation Trust, or the proceeds, if any, that the Litigation Trust will
receive from the Designated Litigation, there can be no assurances that Holders
of Allowed General Unsecured Claims would receive such a recovery.
MOREOVER, IN THE EVENT CLASS 4 DOES NOT VOTE TO ACCEPT THE PLAN, NO
DISTRIBUTION OF ANY KIND WILL BE MADE TO HOLDERS OF GENERAL UNSECURED CLAIMS. IF
CLASS 4 DOES NOT VOTE TO ACCEPT THE PLAN, THE DEBTORS INTEND TO SEEK
CONFIRMATION OF THE PLAN UNDER THE "CRAMDOWN PROVISION" OF SECTION 1129(b) OF
THE BANKRUPTCY CODE. IF THE COURT FINDS THAT THE PLAN SATISFIES THE REQUIREMENTS
OF SECTION 1129(b) OF THE BANKRUPTCY CODE, THE COURT MAY CONFIRM THE PLAN
NOTWITHSTANDING CLASS 4'S REJECTION OF THE PLAN, IN WHICH CASE THE HOLDERS OF
SENIOR SECURED NOTE CLAIMS WOULD RECEIVE 100% OF THE EQUITY OF REORGANIZED
AAIPHARMA AND HOLDERS OF GENERAL UNSECURED CLAIMS WOULD RECEIVE NO DISTRIBUTION
UNDER THE PLAN.
Pursuant to the Plan, Holders of Allowed Priority Claims,
Miscellaneous Secured Claims, and Convenience Claims are Unimpaired and deemed
to accept the Plan. Holders of 510(b) Note Claims and Old Equity Interests are
Impaired and Holders of 510(b) Note Claims or Old Equity Interests do not
receive or retain any property under the Plan and are deemed to reject the Plan.
In order for the Plan to be confirmed by the Court pursuant to
section 1129(b) of the Bankruptcy Code, at least one class of Impaired Claims
must accept the Plan, determined without including votes to accept the Plan cast
by insiders (i.e., Affiliates of the Debtors). A class of claims has accepted a
plan if such plan has been accepted by creditors that hold at least two-thirds
in amount and more than one-half in number of the allowed claims of such class
held by creditors that have accepted or rejected such plan.
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Even if the requisite classes accept the Plan, the Plan will be
confirmed by the Court only if all other requirements to confirmation are
satisfied. See section 17.01(ii) "Certain Factors -- Certain Bankruptcy Law
Considerations -- Risk of Non-Confirmation or Modification of the Plan."
1.04 Summary of Classifications and Treatment of Claims and Old Equity
Interests
The Plan categorizes the Claims against and Old Equity Interests in
the Debtors into seven classes. The Plan also provides that expenses incurred by
the Debtors during the Chapter 11 Cases will be paid in full and specifies the
manner in which the Claims and Old Equity Interests in each class are to be
treated. To the extent that the descriptions and explanations contained in this
Disclosure Statement vary with the terms and conditions of the Plan, the terms
and conditions of the Plan are controlling. The table below provides a summary
of the classification, treatment and distributions to be made in respect of
Claims and Old Equity Interests in each class under the Plan as well as the
Debtors' estimate of the amount of Allowed Claims in each class:
Class Type of Claim or Interest Treatment
------------------------- -------------------------------------
Not Applicable Administrative Expenses The Debtors or the Reorganized
Debtors, as the case may be, will pay
each Allowed Administrative Expense
in full, in Cash, on the later of (a)
the Effective Date (or as soon
thereafter as is practicable), (b)
the date on which the Bankruptcy
Court enters an order allowing such
Administrative Expense, or (c) such
other date to which the Reorganized
Debtors and the Holder of the Allowed
Administrative Expense otherwise
agree; provided, however, that
Allowed Administrative Expenses
representing (a) obligations incurred
in the ordinary course of business or
assumed by the Debtors or the
Reorganized Debtors, as the case may
be, will be paid in full or performed
by the Debtors or Reorganized
Debtors, as the case may be, in the
ordinary course of business,
consistent with past practice and (b)
obligations incurred to Professionals
for services provided through the
Confirmation Date will be paid in
accordance with the applicable Court
order approving the fees and expenses
of each such Professional; provided,
further, however, that Allowed
Administrative Expenses incurred by
the Debtors or the Reorganized
Debtors, as
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the case may be, after the
Confirmation Date, including claims
for Professionals' fees and expenses,
will not require application to the
Court and will be paid by the Debtors
or Reorganized Debtors, as the case
may be, in the ordinary course of
business and without further Court
approval. All applications for final
allowance of compensation and
reimbursement of expenses will be
subject to the authorization and
approval of the Bankruptcy Court. Any
objections to such applications shall
be filed no later than twenty (20)
days following the date on which a
final fee application is filed with
the Court. All Obligations (as such
term is defined in the DIP Financing
Agreement) payable under the DIP
Financing Agreement and all other DIP
Lender Claims, including any Claims
for reimbursement of expenses and
fees of professionals employed by the
DIP Lenders shall constitute Allowed
Administrative Expenses and shall be
paid in full, in cash, on the
Effective Date without any setoff,
defenses or counterclaims without the
need for application to or approval
from the Court. All Indenture
Trustee's Fees and Expenses and/or
Senior Secured Noteholder Fees (as
such term is defined in the Final DIP
Financing Order) shall constitute
Allowed Administrative Expenses and
shall be paid in full in cash on the
Effective Date, without any setoffs,
defenses or counterclaims and without
the need for application to, or
approval of, any court.
Not Applicable Priority Tax Claims With respect to each Allowed Priority
(approximately $657,000 Tax Claim, at the sole option of the
claimed)(2) Debtors, each Holder of an Allowed
Priority Tax Claim shall be entitled
to receive from the Reorganized
Debtors on account of such
- ----------
(2) Tax Claims have not been reconciled by the Debtors to date. Further, as
the Governmental Unit Bar Date is November 7, 2005, the number and dollar
amount of Priority Tax Claims is subject to change. The estimated amount
of $657,000 includes approximately $499,000 in Proofs of Claim filed,
$42,000 listed in Schedule E Priority Claims as set forth in the
Schedules, and approximately $116,000 of Claims that the Debtors believe
may be misclassified.
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Claim: (i) Cash payments made in
equal annual installments beginning
on or before the first anniversary
following the Effective Date with the
final installment being payable no
later than the sixth anniversary of
the date of the assessment of such
Allowed Priority Tax Claim, together
with interest on the unpaid balance
of such Allowed Priority Tax Claim
from the Effective Date calculated at
the Market Rate; or (ii) such other
treatment agreed to by each Holder of
such Allowed Priority Tax Claim and
the Debtors or Reorganized Debtors,
as the case may be.
Class 1 Priority Claims Unimpaired. On the latest of (a) the
(other than Effective Date (or as soon as
Administrative Expenses practicable thereafter), (b) the date
and Priority Tax Claims) on which such Priority Claim becomes
(3) (approximately an Allowed Priority Claim, or (c)
$1,600,000.00 claimed)(4) such other date on which the Debtors
(approximately $68,000 and the Holder of such Allowed
estimated)(5) Priority Claim otherwise may agree,
each Holder of an Allowed Priority
Claim shall be entitled to receive
Cash in an amount sufficient to
render such Allowed Priority Claim
Unimpaired under section 1124 of the
Bankruptcy Code.
Class 2 Miscellaneous Secured Unimpaired. On the Effective Date, at
Claims(6) (approximately the sole option of the Debtors, (i)
$2,500,000 claimed) the legal, equitable and contractual
(approximately $1,300,000 rights to which the Miscellaneous
estimated)(7) Secured Claim entitles the Holder of
such Claim will remain unaltered, and
the Holder of such Claim shall retain
any Liens and/or security interests
securing such Claim, or (ii) the
Debtors will provide other treatment
that will render such Miscellaneous
Secured Claim Unimpaired under
section 1124 of the Bankruptcy Code.
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(3) Other Priority Claims have not been reconciled by the Debtors.
(4) The filed Proofs of Claim consist of all docketed Priority Claims less
Priority Tax Claims.
(5) The estimate for Priority Claims represents estimated Other Priority
Claims Allowed less Claim amounts filed as Priority which the Debtors
expect to be (x) reclassified as General Unsecured or (y) expunged.
(6) Miscellaneous Secured Claims have not been reconciled by the Debtors to
date.
(7) The estimate for Miscellaneous Secured Claims represents total filed
Secured Proofs of Claim minus any Claims that the Debtors expect to be
reclassified under the Plan.
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Class 3 Senior Secured Note Impaired. The Senior Secured Note
Claims ($187,811,020.83) Claims are Allowed in the amount of
$187,811,020.83, without avoidance,
setoff, subordination, any defenses,
counterclaims, or any other reduction
of any kind. On the Effective Date,
in full satisfaction, release, and
discharge of, and in exchange for,
all Allowed Senior Secured Note
Claims, each Holder of an Allowed
Senior Secured Note Claim shall be
entitled to receive (a) its Pro Rata
share of the Senior Secured Note
Distribution and (b) to the extent
unpaid, payment in cash in full of
all Indenture Trustee's Fees and
Expenses and/or Senior Secured
Noteholder Fees (as such term is
defined in the Final DIP Financing
Order).
Subject to the occurrence of the
Effective Date, if Class 4 votes to
accept the Plan, each Holder of a
Senior Secured Note Claim and the
Indenture Trustee will be deemed to
waive any unsecured Claim that may
arise from the Liens in favor of the
Holders of Senior Secured Notes
proving insufficient to cover the
Allowed Senior Secured Note Claims.
As such, subject to the occurrence of
the Effective Date and if Class 4
votes to accept the Plan, Holders of
Senior Secured Note Claims will not
share in the General Unsecured Cash
Amount and shall not be Litigation
Trust Interest Holders.
Class 4 General Unsecured Claims Impaired. Pursuant to the terms of a
(approximately settlement between the Debtors, the
$65,827,000.00 claimed) Holders of Senior Secured Note Claims
(8) (approximately $25-40 and the Holders of General Unsecured
million estimated) Claims, and provided that Class 4
votes to accept the Plan, as soon as
practicable following the earlier of
(i) the Initial Distribution Date and
(ii) the date on which all Disputed
General Unsecured Claims have been
resolved by Final Order of the Court,
each Holder of an Allowed General
Unsecured Claim shall receive its Pro
Rata share of (x) the General
- ----------
(8) This amount includes $64,923,000 of Claims, some of which the Debtors
believe are misclassified, and a net adjusted unclaimed amount of $904,000
as set forth in the Schedules.
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Unsecured Cash Amount and (y) the
Litigation Trust Interests in
accordance with sections 13.05 and
13.06 of the Plan.
Class 5 Convenience Claims Unimpaired. On the Effective Date (or
(approximately as soon as practicable thereafter)
$14,000.00)(9) each Holder of an Allowed Convenience
Claim, including Holders of General
Unsecured Claims who have elected to
reduce such General Unsecured Claim
to $250 by an irrevocable written
election pursuant to such Holders'
Ballot, shall receive Cash in an
amount sufficient to render such
Allowed Convenience Claim Unimpaired
under section 1124 of the Bankruptcy
Code.
Class 6 510(b) Note Claims Impaired. On the Effective Date, all
510(b) Note Claims will be
extinguished and no distributions
will be made to Holders of 510(b)
Note Claims.
Class 7 Old Equity Interests Impaired. On the Effective Date, all
Old Equity Interests will be
extinguished and no distributions
will be made to Holders of Old Equity
Interests.
FOR A MORE DETAILED DESCRIPTION OF THE TREATMENT OF THE FOREGOING
CLASSES OF CLAIMS AND OLD EQUITY INTERESTS, SEE SECTION 6.03 "SUMMARY OF THE
PLAN -- CLASSIFICATION AND TREATMENT OF CLAIMS AND OLD EQUITY INTERESTS UNDER
THE PLAN."
IF THE REQUISITE ACCEPTANCES ARE RECEIVED, THE PLAN IS SUBSEQUENTLY
CONFIRMED BY THE COURT, AND THE PLAN IS CONSUMMATED, ALL HOLDERS OF CLAIMS AND
OLD EQUITY INTERESTS (INCLUDING THOSE WHO DO NOT OR ARE NOT ENTITLED TO SUBMIT
BALLOTS TO ACCEPT OR REJECT THE PLAN) WILL BE BOUND BY THE TERMS OF THE PLAN AND
THE TREATMENT AFFORDED SUCH HOLDERS THEREUNDER.
- ----------
(9) The estimated value of Class 5 Convenience Claims only includes Claims (i)
that are listed on the Debtors' Schedules as neither disputed, contingent,
or unliquidated and in an amount of $250 or less or (ii) for which a Proof
of Claim was filed with respect to such Claim in an amount of $250 or
less. The estimated value of Class 5 Convenience Claims does not include
Claims of Holders of Class 4 General Unsecured Claims that may elect to
reduce their Claim so as to receive Class 5 Convenience Claim treatment.
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1.05 Conditions of Consummation of Plan
Consummation of the Plan is subject to satisfaction of certain
conditions (which, other than those relating to compensation and reimbursement
of Professionals may be waived by the Debtors or the Reorganized Debtors, as the
case may be), including:
(i) The Confirmation Order shall be in form and substance
reasonably acceptable to the Ad Hoc Committee of Secured
Noteholders and the Creditors' Committee;
(ii) The Debtors must have received a firm written commitment
for the New Credit Facility;
(iii) The Confirmation Order shall have become a Final Order;
(iv) Provided that Class 4 votes to accept the Plan, the
Debtors or the Reorganized Debtors, as the case may be,
must have deposited the General Unsecured Cash Amount in
the General Unsecured Claim Reserve;
(v) Provided that Class 4 votes to accept the Plan, the
Debtors or the Reorganized Debtors, as the case may be,
must have deposited the Claims Objection Fund into a
segregated interest bearing account in the name and
under the control of the Plan Administrator;
(vi) The New Common Stock must have been issued to the
Indenture Trustee in accordance with the Plan;
(vii) All authorizations, consents and regulatory approvals in
connection with the consummation of the Plan shall have
been obtained and not revoked; and
(viii) All New Credit Facility Documents shall have been
executed and, if applicable, all conditions to the New
Credit Facility's effectiveness, other than the
occurrence of the Effective Date, must have been
satisfied or waived (such waiver requiring the consent
of the Ad Hoc Committee of Secured Noteholders, which
consent shall not be unreasonably delayed, conditioned
or withheld) pursuant to the terms thereof.
ARTICLE II.
DEFINITIONS
Whenever from the context it appears appropriate, each term stated
in either the singular or the plural shall include the singular and the plural,
and pronouns stated in the masculine, feminine, or neutral gender shall include
the masculine, the feminine, and the neuter. The word "including" is not a
limiting term and shall be interpreted to mean "including, but not limited to".
Any term used in the Plan that is not defined herein, but is defined in the
Bankruptcy Code or the Bankruptcy Rules, shall have the meaning ascribed to that
term in the Bankruptcy Code or the Bankruptcy Rules. For purposes of this
Disclosure Statement, except as expressly provided or unless the context
otherwise requires, all capitalized terms not otherwise defined shall have the
meanings ascribed to them in this Article II. For purposes of this
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Disclosure Statement, any reference to a contract, instrument, release,
indenture, order, or other agreement or document being in a particular form or
on particular terms and conditions means that such document shall be
substantially in such form or substantially on such terms and conditions and
shall be in form and substance satisfactory to the Debtors.
AAI LLC: aaiPharma LLC.
aaiPharma: aaiPharma Inc.
Ad Hoc Committee of Secured Noteholders: The ad hoc committee of
Holders of the Senior Secured Notes that was formed prior to the Petition Date.
Administrative Expense: Collectively, (a) any cost or expense of
administration of the Chapter 11 Cases allowed under section 503(b) of the
Bankruptcy Code, including Allowed costs and expenses under sections 365(d)(3)
or 365(d)(10) of the Bankruptcy Code and (b) the Bankruptcy Fees.
Affiliates: As defined in section 101(2) of the Bankruptcy Code.
Allowed: With respect to Claims and Administrative Expenses, (a) any
Claim or Administrative Expense against a Debtor, proof of which is timely filed
or by order of the Court or pursuant to the Plan is not or will not be required
to be filed, (b) any Claim that has been or is hereafter listed in the Schedules
as neither disputed, contingent or unliquidated, and for which no timely Proof
of Claim has been filed, or (c) any Claim or Administrative Expense allowed
pursuant to the Plan or the Confirmation Order; provided, however, that with
respect to any Claim described in clauses (a) or (b) above or Administrative
Expense described in clause (a) above, such Claim or Administrative Expense
shall be allowed only if (i) no objection to the allowance thereof has been
interposed within the applicable period of time fixed by the Plan, the
Bankruptcy Code, the Bankruptcy Rules or the Court or (ii) such an objection is
so interposed and the Claim or Administrative Expense shall have been allowed by
a Final Order (but only if such allowance was not solely for the purpose of
voting to accept or reject this plan). Except as otherwise specified in the Plan
or a Final Order, the amount of an allowed Claim or Administrative Expense shall
not include interest on such Claim or Administrative Expense from and after the
Petition Date.
Amended and Restated By-Laws: The by-laws for the Reorganized
Debtors, as amended and restated pursuant to the Plan, to be filed with the
Court as part of the Plan Supplement, which shall be in form and substance
satisfactory to the Ad Hoc Committee of Secured Noteholders.
Amended and Restated Certificates of Incorporation: The certificates
of incorporation and/or articles of organization for the Reorganized Debtors, as
amended and restated pursuant to the Plan, to be filed with the Court as part of
the Plan Supplement, which shall be in form and substance satisfactory to the Ad
Hoc Committee of Secured Noteholders.
Aquasol: Aquasol(R), a registered trademark owned by Mayne Pharma
(USA) Inc.
Ballot: The ballots distributed together with the Plan and
Disclosure Statement to Holders of Senior Secured Note Claims and General
Unsecured Claims (i) for the purpose of
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accepting or rejecting this Plan and (ii) for Holders of General Unsecured
Claims to determine whether to elect to reduce their Claim to a Convenience
Claim.
Bank of America: Bank of America, N.A., as administrative agent to
the Pre-Petition Credit Agreement and as administrative agent to the DIP
Financing Agreement.
Bankruptcy Code: Title 11 of the United States Code, as amended from
time to time, as applicable during the Chapter 11 Cases.
Bankruptcy Fees: Any fees or charges assessed against the Debtors'
estates under section 1930 of title 28 of the United States Code.
Bankruptcy Rules: The Federal Rules of Bankruptcy Procedure, as
amended from time to time, promulgated under section 2075 of title 28 of the
United States Code and the Local Rules of Bankruptcy Practice and Procedure of
the United States Bankruptcy Court for the District of Delaware, as applicable
during the Chapter 11 Cases.
Bar Date: The date designated by the Court as the last day for
filing a Proof of Claim against the Debtors.
Brethine: Brethine(R), a registered trademark owned by the Debtors.
Business Day: Any day other than a Saturday, Sunday or "legal
holiday" as defined in Bankruptcy Rule 9006(a).
Cash: Legal tender of the United States of America.
Causes of Action: Any and all actions, causes of action, suits,
accounts, controversies, agreements, promises, rights to legal remedies, rights
to equitable remedies, rights to payment and claims, whether known or unknown,
reduced to judgment, not reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, secured, unsecured and
whether asserted or assertable directly or derivatively, in law, equity or
otherwise.
Chanin: Chanin Capital LLC, the broker-dealer affiliate of Chanin
Capital Partners, LLC.
Chapter 5 Actions: Causes of Action that may exist under sections
510, 542, 544, 545, 547, 548, 549, 550, and 553 of the Bankruptcy Code, or under
similar state laws.
Chapter 11 Cases: The respective cases under chapter 11 of the
Bankruptcy Code concerning the Debtors commenced on the Petition Date.
Claim: Any right to (a) payment from the Debtors, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured
or (b) an equitable remedy for breach of performance of the Debtors if such
breach gives rise to a right to payment from the Debtors, whether or not such
right to an equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured or unsecured.
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Claims Objection Fund: $200,000 in cash paid by the Debtors to the
Plan Administrator on the Effective Date (if and only if the class of Holders of
General Unsecured Claims votes to accept the Plan), to be used by the Plan
Administrator in accordance with section 13.01 of the Plan.
Committees: Collectively (i) the Creditors' Committee, (ii) the Ad
Hoc Committee of Secured Noteholders and (iii) any other committee(s) appointed
pursuant to section 1102(a) of the Bankruptcy Code in the Chapter 11 Cases.
Confirmation Date: The date on which the Confirmation Order is
entered on the docket maintained by the clerk of the Court with respect to the
Chapter 11 Cases.
Confirmation Hearing: The hearing held by the Court pursuant to
section 1128(a) of the Bankruptcy Code regarding the confirmation of the Plan
pursuant to section 1129 of the Bankruptcy Code, as such hearing may be
adjourned or continued from time to time.
Confirmation Order: The order of the Court confirming the Plan
pursuant to section 1129 of the Bankruptcy Code.
Convenience Claim: Any General Unsecured Claim that is (i) Allowed
in an amount of $250 or less or (ii) Allowed in an amount greater than $250 but
that is reduced to $250 by an irrevocable written election pursuant to such
Holder's Ballot. In no event shall any Convenience Claim exceed $250 for the
purposes of allowance, treatment, or distribution under the Plan.
Court: The United States Bankruptcy Court for the District of
Delaware, or any other court having jurisdiction over the Chapter 11 Cases.
Creditor: Any Entity that is the Holder of a Claim against any of
the Debtors that arose on or before the Petition Date or a Claim against any of
the Debtors' estates of the kind specified in section 502(g), 502(h) or 502(i)
of the Bankruptcy Code.
Creditors' Committee: The official committee of unsecured creditors,
appointed in these Chapter 11 Cases pursuant to section 1102(a) of the
Bankruptcy Code on May 24, 2005, as the same may be constituted from time to
time.
Darvocet: Darvocet(R), a registered trademark owned by Xanodyne.
Darvon: Darvon(R), a registered trademark owned by Xanodyne.
Debtors: Collectively, AAI LLC, aaiPharma, Applied Analytical
Industries Learning Center, Inc., AAI Properties, Inc., AAI Technologies, Inc.,
AAI Japan, Inc., AAI Development Services, Inc. (Delaware), AAI Development
Services, Inc. (Massachusetts), and Kansas City Analytical Services.
Designated Litigation: (a) the litigation pending in the United
States District Court for the Southern District of New York, captioned aaiPharma
Inc. v. Kremers Urban Development Co, et al., Civil Action No.
02-CV-09628-BSJ-RLE and (b) the litigation pending in the United States District
Court for the Northern District of Georgia, captioned aaiPharma Inc. v. Athlon
Laboratories, Inc., Civil Action No. 1:04-cv-01036-BBM.
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DIP Financing Agent: Silver Point, as agent for the DIP Lenders.
DIP Financing Agreement: The debtor in possession credit agreement
by and among the Debtors, as the borrowers, the DIP Lenders, and the DIP
Financing Agent, dated as of May 11, 2005, as amended from time to time.
DIP Lender Claims: A claim against a Debtor arising pursuant to the
DIP Financing Agreement.
DIP Lenders: The lenders under the DIP Financing Agreement.
DIP Revolving Loan: The loan provided by the DIP Lenders in
accordance with the DIP Financing Agreement and the Final DIP Financing Order in
the form of a $30 million revolving credit facility.
DIP Term Loan: The loan provided by the DIP Lenders in accordance
with the DIP Agreement and the Final DIP Financing Order in the form of a $180
million term loan.
Disclosure Statement: This disclosure statement relating to the
Plan, including the exhibits and schedules thereto, as the same may be amended,
modified, or supplemented from time to time, as approved by the Court pursuant
to the Disclosure Statement Approval Order.
Disclosure Statement Approval Order: The Final Order approving the
Disclosure Statement Motion, entered by the Court on [December__, 2005].
Disclosure Statement Motion: The motion filed by the Debtors on
November 4, 2005, pursuant to section 1125 of the Bankruptcy Code and Bankruptcy
Rules 3017 and 3018 seeking approval of the adequacy of this Disclosure
Statement and the solicitation procedures and scheduling the Confirmation
Hearing.
Disputed: With respect to Claims or Old Equity Interests, any Claim
or Old Equity Interest that is not Allowed.
Distribution Date: To the extent necessary, the Initial Distribution
Date and each Periodic Distribution Date.
Distribution Record Date: The date established in the Confirmation
Order for determining the identity of Holders of Allowed Claims entitled to
distributions under the Plan, which shall be no earlier than the date of entry
of the Confirmation Order.
Duraclon: Duraclon(R), a registered trademark owned by Fujisawa
Healthcare, Inc.
Effective Date: The first Business Day immediately following the
date upon which all conditions to the Effective Date set forth in section 16.02
of the Plan have been satisfied or waived by the Debtors or the Reorganized
Debtors, as the case may be; provided, however, that if a stay of the
Confirmation Order is in effect on such date, the Effective Date will be the
first Business Day after such stay is no longer in effect.
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Entity: Any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
estate, entity, trust, trustee, United States Trustee, unincorporated
organization, government, Governmental Unit, agency or political subdivision
thereof.
Estates: The bankruptcy estates of the Debtors in the Chapter 11
Cases created pursuant to section 541 of the Bankruptcy Code upon the
commencement of the Debtors' Chapter 11 Cases.
Final DIP Financing Order: That certain Final Order Pursuant To 11
U.S.C. Sections 105, 361, 362, 363, And 364 Of The Bankruptcy Code (I)
Authorizing The Debtors To Obtain Postpetition Financing And Use Cash Collateral
(II) Granting Liens, Security Interest And Superpriority Claims, and (III)
Granting Adequate Protection (Docket No. 135) entered on the docket of the Court
on June 6, 2005, as the same has been or may be amended or supplemented by the
Court from time to time.
Final Order: An order, ruling or judgment of the Court or any other
court of competent jurisdiction, which has not been reversed, vacated or stayed
and as to which the time to appeal, petition for certiorari, or move for
reargument or rehearing has expired and as to which no appeal, petition for
certiorari, or other proceedings for reargument or rehearing will then be
pending, or as to which any right to appeal, petition for certiorari, reargue,
or rehear will have been waived in writing in form and substance satisfactory to
the Debtors or, on and after the Effective Date, the Reorganized Debtors or, in
the event that an appeal, writ of certiorari, or reargument or rehearing thereof
has been sought, such order of the Court or other court of competent
jurisdiction will have been determined by the highest court to which such order
was appealed, or certiorari, reargument or rehearing will have been denied and
the time to take any further appeal, petition for certiorari or move for
reargument or rehearing will have expired; provided, however, that the
possibility that a motion under Rule 59 or Rule 60 of the Federal Rules of Civil
Procedure, or any analogous rule under the Bankruptcy Rules or applicable state
court rules of civil procedure, may be filed with respect to such order will not
cause such order not to be a Final Order.
510(b) Note Claim: Claims of the type described in, and subject to
subordination under, section 510(b) of the Bankruptcy Code relating to, arising
from, or in connection with the Senior Secured Notes, which Claims shall not be
Senior Secured Note Claims.
FDA: The United States Food and Drug Administration.
FTI: FTI Palladium Partners, a division of FTI Consulting, Inc.
General Unsecured Claim: Any Claim other than an Administrative
Expense, Miscellaneous Secured Claim, Senior Secured Note Claim, Convenience
Claim, 510(b) Note Claim, Intercompany Claim, Priority Claim, or Priority Tax
Claim.
General Unsecured Cash Amount: $4,000,000 in Cash (together with any
amounts remaining in the Claims Objection Fund upon the completion of the Claims
objection process by the Plan Administrator) which funds are to be distributed
to the Plan Administrator for the benefit of the Holders of Allowed General
Unsecured Claims or to be used to fund the Litigation Trust, as provided in the
Plan, if and only if the class of Holders of General Unsecured Claims votes to
accept the Plan.
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General Unsecured Claim Reserve: The General Unsecured Cash Amount
that shall be held in a segregated interest bearing account to be established by
the Reorganized Debtors on the Effective Date, and under the control of and in
the name of the Plan Administrator, for the purpose of making distributions to
Holders of Allowed General Unsecured Claims pursuant to section 13.05 of the
Plan or funding the Litigation Trust, or both, as provided in the Plan.
Governmental Unit: As defined in section 101(27) of the Bankruptcy
Code.
Holder: Any Entity that holds a Claim or Old Equity Interest.
Impaired: Any Claim or Interest that is "impaired" within the
meaning of section 1124 of the Bankruptcy Code.
Indenture Trustee: Wachovia Bank, National Association (formerly,
First Union National Bank) as indenture trustee under the Pre-Petition
Indenture, together with its duly appointed successors and assigns, if any.
Indenture Trustee Charging Lien: Any Lien or other priority in
payment or right available to the Indenture Trustee pursuant to the Pre-Petition
Indenture or otherwise under applicable law to which the Indenture Trustee is
entitled, against distributions to be made to Holders of Senior Secured Note
Claims for payment of the Indenture Trustee's Fees and Expenses.
Indenture Trustee's Fees and Expenses: Any and all compensation,
fees, disbursements, indemnity claims, and expenses (including the fees and
expenses of the Indenture Trustee's attorneys, agents, and other professionals),
including without limitation, Milbank, Tweed, Hadley & McCloy LLP, Morris
Nichols Arsht & Tunnell and The Blackstone Group, incurred by the Indenture
Trustee at any time prior to the Effective Date.
Initial Distribution Date: The date that is the four-month
anniversary of the Effective Date.
Instrument: Any share of stock, security, promissory note or other
"Instrument" within the meaning of that term as defined in section 9-102(47) of
the Uniform Commercial Code.
Intercompany Claim: Any Claims between and among the Debtors and any
Claims of any Subsidiaries against a Debtor.
Intercreditor Agreement: That certain Intercreditor Agreement dated
as of April 23, 2004 entered into among Silver Point Finance, LLC as Senior
Collateral Agent, Wachovia Bank, National Association, as Noteholder Collateral
Agent, and aaiPharma Inc.
Interim DIP Financing Order: That certain Interim Order Pursuant To
11 U.S.C. Sections 105, 361, 362, 363, And 364 Of The Bankruptcy Code (I)
Authorizing The Debtors To Obtain Postpetition Financing And Use Cash Collateral
(II) Granting Liens, Security Interest And Superpriority Claims, and (III)
Granting Adequate Protection (Docket No. 45) entered on the docket of the Court
on May 12, 2005.
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Lien: As defined in section 101(37) of the Bankruptcy Code; except
that a Lien that has been avoided in accordance with a provision of the
Bankruptcy Code, including sections 544, 545, 546, 547, 548 or 549, shall not
constitute a Lien.
Litigation Trust: The trust provided for under the Plan and created
pursuant to the Litigation Trust Agreement to, among other things, prosecute,
reduce to judgment, or settle the Designated Litigation on behalf of the
Litigation Trust Interest Holders and to administer the proceeds of the
Designated Litigation. The Debtors, in consultation with the Creditors'
Committee, and the Ad Hoc Committee of Secured Noteholders, may determine to
create the Litigation Trust as a limited liability company.
Litigation Trust Agreement: The agreement relating to the form and
administration of the Litigation Trust to be effective as of the Effective Date.
The Litigation Trust Agreement will be included in the Plan Supplement and shall
be in a form and substance reasonably satisfactory to the Creditors' Committee.
Litigation Trust Interest Holders: All holders of Allowed General
Unsecured Claims.
Litigation Trust Interests: The interests in the Litigation Trust to
be distributed to Holders of Allowed General Unsecured Claims pursuant to
section 6.04 of the Plan.
Litigation Trustee: The person described in and appointed pursuant
to the Litigation Trust Agreement and any successor appointed pursuant to the
Litigation Trust Agreement for the purpose of acting as trustee of the
Litigation Trust in accordance with the terms and conditions of the Litigation
Trust Agreement and the Confirmation Order. The Creditors' Committee shall file
a notice with the Court identifying the Litigation Trustee no later than five
(5) days prior to the Confirmation Hearing.
M.V.I.: M.V.I.(R), a registered trademark owned by Mayne Pharma
(USA) Inc.
Management Incentive Plan: The equity incentive compensation plan to
be adopted by the Reorganized Debtors, which shall be filed with the Court as
part of the Plan Supplement, and which shall be in form and substance
satisfactory to the Ad Hoc Committee of Secured Noteholders.
Market Rate: The rate applicable to federal judgments pursuant to 28
U.S.C. Section 1961.
Maximum Allowable Amount: With respect to any Disputed General
Unsecured Claim, the least of the amounts (a) set forth in the Proof(s) of Claim
filed by the Holder thereof, (b) determined by a Final Order of the Court or any
other court of competent jurisdiction as the maximum fixed amount of such
General Unsecured Claim or as the estimated amount of such General Unsecured
Claim for allowance, distribution, and reserve purposes, (c) in the case of a
Proof of Claim filed in an unliquidated, undetermined, or contingent amount, as
determined by a Final Order of the Court or any other court of competent
jurisdiction, or (d) as agreed upon, in writing, by the Debtors or Plan
Administrator and the Holder of such Disputed Claim.
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Miscellaneous Secured Claim: Any Claim that is a "secured" claim
within the meaning of, and to the extent allowable as a secured claim under,
section 506 of the Bankruptcy Code, other than a Senior Secured Note Claim.
New Board of Directors: The Board of Directors of Reorganized
aaiPharma on and after the Effective Date, which shall consist of the chief
executive officer and six members appointed by the Ad Hoc Committee of Secured
Noteholders.
New Common Stock: The [10,000,000] shares of common stock of
Reorganized aaiPharma to be issued by Reorganized aaiPharma on and after the
Effective Date pursuant to the Plan or otherwise, and having the relative rights
set forth in the Amended and Restated Certificate of Incorporation of
Reorganized aaiPharma.
New Credit Agreement: The $40 million secured credit agreement to be
executed on the Effective Date. A term sheet setting forth the material terms of
the New Credit Agreement will be filed with the Court as part of the Plan
Supplement.
New Credit Facility: The financing to be provided by the New Credit
Agreement (which may be on a revolving or term loan basis, or some combination
thereof).
New Credit Facility Documents: The New Credit Agreement, to be filed
with the Court as part of the Plan Supplement, and any ancillary documents to be
executed in connection therewith, all of which shall be in form and substance
satisfactory to the Ad Hoc Committee of Secured Noteholders.
New Loan Lenders: The lenders that are parties to the New Credit
Agreement as of the Effective Date.
Noteholder Deficiency Claim: Any unsecured Claim that may arise from
the Liens in favor of the Holders of Senior Secured Notes proving insufficient
to cover the Allowed Senior Secured Note Claims.
Old Common Stock: aaiPharma's common stock, par value $0.001 per
share, issued and outstanding as of the Petition Date.
Old Equity Interests: The equity interests in aaiPharma including
(a) those represented by shares of Old Common Stock and any options, warrants,
calls, subscriptions or other similar rights or other agreements, commitments or
outstanding securities obligating any Debtor to issue, transfer or sell any
shares of Old Common Stock, and (b) Claims of the type described in, and subject
to subordination under, section 510(b) of the Bankruptcy Code with respect to
Old Common Stock, including Claims asserted against the Debtors in litigation
pending in the United States District Court for the Eastern District of North
Carolina, Western Division, captioned (i) In re aaiPharma Inc. Securities
Litigation, Consolidated Civil Action No. 7:04-CV-27-D and (ii) Martin v.
aaiPharma Inc., et al. (In re aaiPharma Inc. Securities Litigation), Case No.
7:04-CV-27-D, Master File Case No. 7:04-CV-78-D.
Oramorph SR: Oramorph(R) SR, a registered trademark owned by
Xanodyne.
Petition Date: May 10, 2005, the date on which the Debtors filed
with the Court their petitions commencing the Chapter 11 Cases.
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Periodic Distribution Date: Means (a) initially, the first Business
Day that is four (4) full months after the Initial Distribution Date and (b)
subsequently, a Business Day designated by the Plan Administrator that occurs in
the month that is four (4) full months after the immediately preceding Periodic
Distribution Date, or in the case of either (a) or (b), such earlier or later
date established by the Court or designated as such by the Plan Administrator in
its reasonable discretion in a filing with the Court.
Plan: The Joint Chapter 11 Plan of Reorganization, together with all
exhibits hereto, as the same may be amended or modified from time to time.
Plan Administration Committee: A committee consisting of three (3)
members appointed by the Creditors' Committee, who shall be reasonably
acceptable to the Debtors, to oversee the Plan Administrator, and determine the
amount, if any, of the General Unsecured Cash Amount to be transferred to the
Litigation Trust to carry out the purposes of such Litigation Trust as set forth
in the Litigation Trust Agreement. The Plan Administration Committee shall be
governed by the Plan Administration Committee By-laws. The Creditors' Committee
shall file a notice with the Court stating the identity of the members of the
Plan Administration Committee no later than five (5) days prior to the
Confirmation Hearing.
Plan Administration Committee By-laws: The by-laws governing the
Plan Administration Committee, which shall not be inconsistent with the terms of
this Plan, and which shall be filed with the Court as part of the Plan
Supplement by the Creditors' Committee prior to the Effective Date.
Plan Administrator: An Entity to be designated by the Creditors'
Committee that shall be reasonably acceptable to the Debtors to (i) make
distributions from the General Unsecured Claims Reserve required under the Plan
to Holders of Allowed General Unsecured Claims, (ii) transfer from the General
Unsecured Claim Reserve to the Litigation Trust the amount of the General
Unsecured Cash Amount as determined by the Plan Administration Committee, and
(iii) take all actions in accordance with Article 13 of the Plan. The Creditors'
Committee shall file a notice with the Court stating the identity of the Plan
Administrator no later than five (5) days prior to the Confirmation Hearing.
Plan Supplement: The supplemental appendix to the Plan to be filed
with the Court no later than ten (10) days prior to the initial date set for the
Confirmation Hearing that will contain draft forms of the documents relevant to
the implementation of the Plan, as specified herein.
Pre-Petition Credit Agreement: The Credit Agreement, dated as of
April 23, 2004, as amended, modified or supplemented from time to time prior to
the Petition Date, among the Debtors as borrowers, the Pre-Petition Credit
Agreement Lenders, as lenders, Silver Point, as Collateral Agent, and Bank of
America as Administrative Agent.
Pre-Petition Credit Agreement Lenders: Silver Point, and the other
lenders party to the Pre-Petition Credit Agreement as of the Petition Date.
Pre-Petition Indenture: That certain indenture, dated as of March
28, 2002, as amended, modified, or supplemented from time to time prior to the
Petition Date, by and between aaiPharma, as issuer, and Wachovia Bank, National
Association, as indenture trustee, pursuant to which, among other things, the
Senior Secured Notes were issued.
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Priority Claim: Any Claim, other than a Priority Tax Claim, DIP
Lender Claim, or an Administrative Expense that is entitled to priority in
payment under section 507(a) of the Bankruptcy Code.
Priority Tax Claim: Any Claim that is entitled to priority in
payment under section 507(a)(8) of the Bankruptcy Code.
Pro Rata: A proportionate share, so that the ratio of the amount of
property distributed on account of an Allowed Claim in a class is the same as
the ratio such Claim bears to the total amount of all Claims (including Disputed
Claims) in such class.
Professional: (a) Any professional employed in the Chapter 11 Cases
pursuant to section 327, 328 or 1103 of the Bankruptcy Code, (b) FTI, and (c)
any other Entity seeking compensation or reimbursement of expenses in connection
with the Chapter 11 Cases pursuant to section 503(b)(4) of the Bankruptcy Code;
provided, however, professionals employed by the DIP Lenders or DIP Financing
Agent and professionals employed by the Ad Hoc Committee of Secured Noteholders
or the Indenture Trustee shall not be "Professionals" for the purposes of the
Plan or this Disclosure Statement.
Proof of Claim: As defined in Bankruptcy Rule 3001.
Purchase Agreement: The asset purchase agreement dated May 6, 2005,
by and among AAI LLC and aaiPharma and Xanodyne for the sale of the Purchased
Assets by the Debtors to Xanodyne, as approved by the Sale Approval Order, and
as amended from time to time.
Purchased Assets: Those assets of the Debtors sold to Xanodyne
pursuant to the Purchase Agreement to effectuate the Sale Transaction.
Registration Rights Agreement: The agreement to be entered into on
the Effective Date between Reorganized aaiPharma and the Holders of New Common
Stock, substantially in the form included in the Plan Supplement, which shall be
in a form satisfactory to the Ad Hoc Committee of Secured Noteholders.
Reorganized aaiPharma: aaiPharma from and after the Effective Date.
Reorganized Debtors: Collectively, the Debtors from and after the
Effective Date, other than those Debtors to be listed in the Plan Supplement
which shall be dissolved pursuant to section 9.10 of the Plan.
Rothschild: Rothschild, Inc.
Roxanol: Roxanol(TM), an unregistered trademark owned by Xanodyne.
Roxicodone: Roxicodone(R), a registered trademark owned by Xanodyne.
Sale Approval Order: That certain Order Pursuant To Sections 105(A),
363, And 365 Of The Bankruptcy Code And Rules 2002, 6004, 6006, And 9014 Of The
Federal Rules Of Bankruptcy Procedure (I) Authorizing The Debtors' Sale To
Xanodyne Pharmaceuticals, Inc. Of A Substantial Portion Of Their Assets, Free
And Clear Of Liens, Claims, Old Equity Interests,
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And Encumbrances; (Ii) Approving An Asset Purchase Agreement; And (Iii)
Authorizing The Assumption, Assignment, And Sale Of Certain Executory Contracts
And Unexpired Leases (Docket No. 296) entered on the docket of the Court on July
18, 2005, as the same has been or may be amended or supplemented by the Court
from time to time.
Sale Motion: The motion filed by the Debtors on the Petition Date
pursuant to section 363 of the Bankruptcy Code seeking authority to, among other
things, sell the Purchased Assets to Xanodyne to effectuate a Sale Transaction.
Sale Transaction: The sale transaction pursuant to which
substantially all of the assets of the Debtors' Pharmaceuticals Division were
sold pursuant to the Sale Approval Order.
Sale Transaction Closing Date: July 25, 2005, which is the date upon
which the Sale Transaction was consummated between the Debtors and Xanodyne.
Sale Transaction Closing Date Proceeds: Any proceeds in the form of
cash, securities, or other form of liquid proceeds received by the Debtors on
the Sale Transaction Closing Date pursuant to the Purchase Agreement.
Schedules: The schedules of assets and liabilities and the
statements of financial affairs filed or to be filed, as the case may be, in the
Chapter 11 Cases by the Debtors, as such schedules or statements may be amended
or supplemented from time to time in accordance with Bankruptcy Rule 1009 or
orders of the Court.
Secured Claim: A Claim that (x) is secured by a Lien on property in
which a Debtor has an interest or that is subject to setoff under section 553 of
the Bankruptcy Code, to the extent of the value of the Claim holder's interest
in the Debtor's interest in such property or to the extent of the amount subject
to setoff, as applicable, as determined pursuant to section 506(a) of the
Bankruptcy Code or (y) is Allowed by a Final Order or pursuant to this Plan as a
Secured Claim.
Senior Executive Employment Agreements: The employment agreements
between the Reorganized Debtors and certain senior executives, all of which
shall be in form and substance satisfactory to the Ad Hoc Committee of Secured
Noteholders. A term sheet setting forth the material terms of each of the Senior
Executive Employment Agreements shall be included in the Plan Supplement.
Senior Secured Note Claims: Any and all Claims in respect of, or in
connection with, all or any portion of the aggregate outstanding and unpaid
amount of principal and interest due and owing under the Senior Secured Notes
other than 510(b) Note Claims.
Senior Secured Note Distribution: [1,000,000] shares of New Common
Stock, constituting 100% of the New Common Stock to be distributed under the
Plan, subject to dilution for the New Common Stock to be issued as set forth in
the Management Incentive Plan.
Senior Secured Notes: The 11-1/2% Senior Secured Notes due 2010
issued pursuant to the Pre-Petition Indenture.
Silver Point: Silver Point Finance, LLC.
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Stockholder Agreement: The agreement to be entered into on the
Effective Date between Reorganized aaiPharma and the Holders of New Common
Stock, substantially in the form included in the Plan Supplement, which shall be
in a form satisfactory to the Ad Hoc Committee of Secured Noteholders.
Subsidiaries: All direct and indirect subsidiaries of aaiPharma and
the other Debtors.
Tax: All taxes, charges, fees, duties, levies, imposts, rates or
other assessments imposed by any federal, state, local or foreign Governmental
Unit, including income, gross receipts, excise, property, sales, stamp, use,
license, capital stock, transfer, franchise, payroll, withholding, social
security, value added and other taxes, and any interest, penalties, fines,
losses, damages, costs or additions attributable thereto.
Unimpaired: Any Claim or Interest that is not Impaired within the
meaning of section 1124 of the Bankruptcy Code.
United States Trustee: The Office of the United States Trustee for
the District of Delaware.
Voting Agent: Bankruptcy Services LLC.
Voting Deadline: The date set by the Court pursuant to the
Disclosure Statement Approval Order by which Ballots for acceptance or rejection
of the Plan must be received by the Voting Agent.
Xanodyne: Xanodyne Pharmaceuticals, Inc.
ARTICLE III.
BACKGROUND
3.01 Debtors' Business
aaiPharma is the direct parent of each of the other Debtors.
aaiPharma is a Delaware corporation with its corporate headquarters currently
located in Wilmington, North Carolina. The Debtors have operations in North
Carolina, South Carolina, Massachusetts, Kansas, Japan, and Canada and their
subsidiaries and affiliates have operations outside of the United States in
Germany, France, Sweden, the Netherlands, and Great Britain. None of the
Debtors' foreign subsidiaries or affiliates filed for chapter 11 protection as
part of these Chapter 11 Cases, nor did they file any comparable proceedings in
their respective jurisdictions.
aaiPharma was founded in 1979 to provide laboratory services, such
as analytical testing on pharmaceutical compounds, to pharmaceutical companies.
In the 1980s, the Debtors increased their service offerings to include clinical
trials material manufacturing, microbiological testing, and regulatory and
quality consulting. The Debtors continued expanding their scientific base in the
1990s by adding bioanalytical, biotechnical, and commercial manufacturing, as
well as human clinical trials management capabilities to their service
offerings.
In the 1990s, certain of the Debtors began to use their drug
development capacity to work on their own internal product pipeline. In that
regard, certain of the Debtors entered into
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various shared-risk arrangements with companies to bring pharmaceutical products
to the market based on development work conducted by the Debtors.
In 2001, while continuing to operate their development services
business, aaiPharma and AAI LLC began pursuing a pharmaceutical product
acquisition strategy. Between August 2001 and April 2002, AAI LLC acquired the
M.V.I., Aquasol, Brethine, Darvon, and Darvocet product lines, which were
initially marketed by aaiPharma and AAI LLC through a contract sales force. In
late 2002, aaiPharma and AAI LLC decided to build an internal sales force to
market their products. In late 2003, aaiPharma completed the acquisition of a
line of pain products from Elan Corporation, plc, including Oramorph SR,
Roxanol, Roxicodone, and Duraclon. aaiPharma also acquired several other
products during this period, including a methadone injectible product.
In April 2004, the Debtors sold their M.V.I. and Aquasol product
lines, which had been acquired in August 2001. Due to liquidity issues, the
Debtors eliminated their internal sales force in December 2004 and relied on a
small commercial group that worked mainly with large wholesalers and hospital
buying groups. As discussed below, on July 25, 2005, the Debtors sold
substantially all of their pharmaceutical assets to Xanodyne pursuant to section
363 of the Bankruptcy Code.
Prior to July 25, 2005, the Debtors operated through two divisions:
(i) the Pharmaceuticals Division and (ii) AAI Development Services. Prior to a
reorganization of their operating divisions in March 2005, the Debtors also
operated a Research and Development Division, the activities of which were
integrated into the Pharmaceuticals Division and AAI Development Services. As of
September 30, 2005, the Debtors had approximately 639 employees in the United
States, Canada, and Japan.
Prior to the sale of substantially all of its assets, the
Pharmaceuticals Division marketed and commercialized the pharmaceutical products
that the Debtors acquired or developed. aaiPharma and AAI LLC commercialized
products in the pain management and critical care therapeutic areas. Their pain
management products included Duraclon, Schedule IV products (Darvon/Darvocet),
and Schedule II products (Methadone injectible, Roxicodone, Roxanol and Oramorph
SR). Their critical care products were used to treat organ rejection in kidney
transplants (azathioprine) and severe asthma (Brethine).
The Pharmaceuticals Division's customers were primarily large,
well-established pharmaceutical wholesalers. Cardinal Health, Inc.,
AmerisourceBergen Corporation and McKesson Corporation accounted for
approximately 7.3%, 9.4% and 13.1% of the Debtors' 2004 consolidated net
revenues, respectively and 20.2%, 26.0% and 36.3%, respectively, of the
Pharmaceuticals Division's 2004 net revenues.
Through AAI Development Services, the Debtors offer a comprehensive
range of pharmaceutical product development services to their customers, who are
located worldwide. These services include formulation development, analytical,
microbiological, bioanalytical and stability testing services, production
scale-up, biotechnology analysis, human clinical trials, regulatory and quality
consulting, and manufacturing. These services generally are provided on a
fee-for-service basis.
AAI Development Services provides its services, both individually
and in an integrated fashion, to its customers to help them develop, control,
improve and manufacture their
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drug products. AAI Development Services also provided services to the
Pharmaceuticals Division, to support proprietary product development and
commercial manufacture of certain proprietary marketed drug products. Pursuant
to the terms of a master services agreement, AAI Development Services will
provide similar services to Xanodyne.
AAI Development Services' pharmaceutical services include drug
formulation development and small scale manufacturing, as well as storage and
distribution of clinical trial materials. In addition, AAI Development Services
provides a wide variety of analytical services, as well as services pertaining
to method development and validation, drug product and active pharmaceutical
ingredient characterization and control, microbiological support, stability
storage and studies, technical support and problem solving.
AAI Development Services integrates a Phase I clinical study
capability with bioanalytical and biotechnology expertise to provide
biopharmaceutical services to its customers. AAI Development Services also
provides a broad range of Phase I through IV clinical services to customers in
the pharmaceutical, biotechnology, and medical device industries for assistance
in the drug development and regulatory approval process in North America and
Europe.
Finally, AAI Development Services provides consulting services with
respect to regulatory affairs, quality compliance, and process validations. It
assists in the preparation of regulatory submissions for drugs, devices and
biologics, audits clients' vendors and client operations, conducts seminars,
provides training courses, and advises clients on applicable regulatory
requirements.
In March 2005, the Debtors reorganized their research and
development group to maximize efficiency, given the limited resources available.
The management of the Debtors' intellectual property assets, including their
drug delivery technologies and patents owned by aaiPharma and its subsidiaries,
and the provision of services in the course of product development is conducted
by AAI Development Services.
3.02 Pre-Petition Financing
Prior to the Petition Date, the Debtors financed their acquisition
of pharmaceutical products and other growth and development using a variety of
means, including obtaining a secured credit facility and issuing debt
securities.
On April 23, 2004, and in order to refinance their then-existing
senior credit facility (the "Old Credit Facility"), the Debtors entered into the
Pre-Petition Credit Agreement. As amended, the Pre-Petition Credit Agreement
generally provided for (a) a $165 million senior secured term loan facility,
maturing on April 21, 2007 (the "Term Loan"), which consisted of a $135 million
term loan and a $30 million supplemental term loan and (b) a $15 million senior
secured revolving credit facility, maturing on April 21, 2007 (the "Revolver").
As of the Petition Date, the Debtors had borrowed all amounts available under
the Term Loan, and had borrowed approximately $14 million under the Revolver.
The Pre-Petition Credit Agreement was secured by a first priority lien on
substantially all of the Debtors' assets. Pursuant to the terms of the Final DIP
Financing Order, the Debtors used the proceeds of the DIP Term Loan to satisfy
their obligations under the Pre-Petition Credit Agreement.
Pursuant to the terms of the Pre-Petition Indenture, on March 28,
2002, aaiPharma issued $175 million of Senior Secured Notes. When originally
issued, the interest rate on the
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Senior Secured Notes was 11.0%, however, in April 2004, and pursuant to the
terms of the April 2004 Consent Solicitation (as defined in section 3.03 -
Events Preceding Commencement of the Chapter 11 Cases), the interest rate on the
Senior Secured Notes was increased to 11.5%. In October 2004, and pursuant to
the terms of the October 2004 Consent Solicitation (as defined in section 3.03 -
Events Preceding Commencement of the Chapter 11 Cases), aaiPharma increased the
amount of interest payable on the Senior Secured Notes from 11.5% per annum to
12% per annum for the period beginning October 1, 2004 and ending on March 31,
2005. The Senior Secured Notes are guaranteed on a subordinated basis by all of
aaiPharma's existing domestic subsidiaries and any future domestic subsidiaries
of which it owns 80% or more of the equity interests. In addition, the Senior
Secured Notes are secured by a lien junior in priority to the lien held by
Pre-Petition Credit Agreement Lenders on substantially all of the Debtors'
assets. The relationship between the Pre-Petition Credit Agreement Lenders and
the Holders of the Senior Secured Notes (the "Noteholders") is governed by that
certain intercreditor agreement, dated as of April 23, 2004, among Silver Point
as Senior Collateral Agent, Wachovia Bank, N.A. as Noteholder Collateral Agent,
and aaiPharma. As further described below, the Pre-Petition Credit Agreement was
repaid in full with the proceeds of the DIP Term Loan. As such, the Senior
Secured Notes are currently secured by a Lien junior in priority only to the
Liens in favor of the DIP Lenders on substantially all of the Debtors' assets.
aaiPharma has 100 million shares of authorized Old Common Stock; of
this amount, 28,585,582 shares were outstanding as of May 6, 2005. The Debtors'
Old Common Stock was listed on the NASDAQ exchange under the symbol "AAII" until
it was delisted from the NASDAQ on April 18, 2005. Effective as of March 31,
2005, shares of aaiPharma's Old Common Stock are now listed on the Pink Sheets
under the symbol "AAIIQ.PK." aaiPharma estimates that there are approximately
5,200 beneficial holders of the Old Common Stock. Based on reports filed with
the Securities and Exchange Commission, the following individuals and entities
hold at least 5.0% of aaiPharma's common stock: (i) Frederick D. Sancilio, Ph.D.
("Dr. Sancilio") (21.4%), (ii) Brown Capital Management, Inc. (15.7%), (iii) The
Goldman Sachs Group, Inc. (11.9%), (iv) James Waters (11.7%), and (v) Royce
Associates, LLC (5.0%). In the aggregate, the aforementioned shareholders own
approximately 66% of the outstanding Old Common Stock. Collectively, all
executive officers and directors own 25.8% of aaiPharma's Old Common Stock.
3.03 Events Preceding Commencement of the Chapter 11 Cases
The Debtors have been experiencing financial and operational
problems since March 2004. The Debtors also have seen a severe decline in the
price of aaiPharma's Old Common Stock since early 2004. At the beginning of
February 2004, the Debtors' Old Common Stock traded at over $28 per share; by
May 6, 2005, it was listed at $0.34 per share. These problems culminated in the
commencement of the Chapter 11 Cases.
In February 2004, through its internal processes, aaiPharma's
directors became aware of unusual sales in the Debtors' Brethine and Darvocet
product lines during the last four months of 2003. On February 27, 2004, the
Debtors appointed an independent committee of all non-employee directors (the
"Special Committee") to conduct an inquiry into those matters (the "Internal
Inquiry"). The Special Committee retained the law firm of King & Spalding, LLP
to assist in its inquiry, which then retained Deloitte & Touche USA, LLP, as
forensic auditors. The Special Committee's investigation lasted approximately
nine weeks and, as a result of the
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inquiry, the Debtors ultimately concluded that they needed to restate their
financial results for 2003.
In April 2004, the Debtors received five federal grand jury
subpoenas from the United States Attorney's Office for the Western District of
North Carolina (the "U.S. Attorney's Office") seeking documents and testimony
related to, among other things, certain transactions regarding (i) the Debtors'
2002 and 2003 financial information, (ii) the terms, conditions of employment,
and compensation arrangements of certain senior management personnel, (iii)
compensation and incentive arrangements for employees responsible for the sale
of Debtors' Brethine, Darvocet, calcitriol, azathioprine and Darvon Compound
products, (iv) quantities of the foregoing products in distribution channels,
(v) financial benefits with respect to specified corporate transactions to
senior management and others, (vi) certain loans obtained by the Debtors, (vii)
extensions of credit, if any, by the Debtors to officers or directors, (viii)
accounting for sales and returns of products, (ix) analysts' conference calls on
financial results, and (x) internal and external investigations of
pharmaceutical product sales activities, and related matters. The SEC has also
issued a subpoena covering similar matters. In July 2004, the Debtors' shared
the results of the Internal Inquiry with representatives from the U.S.
Attorney's Office and the SEC in response to their requests and the SEC
subpoena. The Debtors and their directors have continued to fully cooperate with
these government investigations and the Debtors have continued to voluntarily
produce documents to the U.S. Attorney's Office and to the SEC in response to
government requests. Although these investigations are presently on-going,
senior management personnel who joined the Debtors after the investigations
began are not targets of the investigations. In connection with the
investigations, on June 23, 2005, David Hurley, the former chief operating
officer of aaiPharma, was charged with conspiracy to commit wire fraud, mail
fraud, and securities fraud, and related charges. Pursuant to the terms of a
plea agreement with the government, Mr. Hurley pled guilty to the conspiracy
charge and agreed to cooperate with the government in its continuing
investigation of the Debtors. Mr. Hurley also settled civil charges brought by
the SEC by consenting to a permanent bar prohibiting him from acting as an
officer or director of a public company and to paying a civil penalty in an
amount that has not yet been determined.
aaiPharma and certain of its current and former officers and
directors, and its independent registered public accountants have been named as
defendants in purported stockholder class action lawsuits alleging violations of
federal securities laws. In addition, a stockholder derivative suit has been
filed by two putative shareholders against current and former members of
aaiPharma's Board of Directors and senior management. aaiPharma is named as a
"nominal defendant." In addition, aaiPharma and certain of its current and
former directors, officers and employees have been named in a purported class
action brought by an aaiPharma 401(k) plan participant and beneficiary asserting
claims under ERISA on behalf of a class of all persons who are or were
participants in or beneficiaries of the aaiPharma Inc. Retirement and Savings
Plan during the period from April 24, 2002 to June 15, 2004. The complaints in
all of these actions center around alleged misrepresentations and material
omissions made by the Debtors and their current and former officers and
directors in the Debtors' public filings and asserted failures by aaiPharma and
its current and former directors, officers, and employees to comply with certain
duties under ERISA.
In mid-March 2004, the Debtors retained FTI as turnaround advisors
to address their financial and operational difficulties. Gregory Rayburn of FTI
joined the Debtors as the interim Chief Operating Officer in March 2004. Mr.
Rayburn and FTI have continued to assist the Debtors on various matters and have
worked with
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the Debtors on the development of a business plan to allow them to successfully
reorganize their businesses.
The Debtors announced on March 31, 2004, that they would not be able
to timely file their annual report on Form 10-K for the year ended December 31,
2003 (the "2003 10-K"). The Debtors announced that the Internal Inquiry was
still progressing expeditiously, and that no timetable had been set for the
completion of the review, the completion of the audit of the Debtors' 2003
financial statements, or the filing of the 2003 10-K. The Debtors further
announced that in the course of the Internal Inquiry, they had become aware of
certain matters that would require a material adjustment to the 2003 financial
information contained in the Debtors' February 5, 2004 press release and the
financial statements included in their quarterly report on Form 10-Q for the
period ended September 30, 2003, and that material adjustments might also be
required to the financial statements included in the Debtors' other Form 10-Q
reports filed in 2003.
The Debtors' failure to timely file the 2003 10-K constituted a
default under the Old Credit Facility. As a result of this default, the lenders
under the Old Credit Facility exercised their right to block the Debtors from
making a $9.6 million interest payment due on the Senior Secured Notes on April
1, 2004.
As a result of the default under the Old Credit Facility and their
inability to make the April 2004 interest payment due on the Senior Secured
Notes, the Debtors sought to restructure their debt obligations. In that regard,
on April 20, 2004, the Debtors successfully completed a solicitation (the "April
2004 Consent Solicitation") seeking the Noteholders' consent to, inter alia,
approve the refinancing of the Old Credit Facility and amend the Pre-Petition
Indenture. As such, and as part of the April 2004 Consent Solicitation, the
Debtors entered into the Pre-Petition Credit Agreement to refinance the Old
Credit Facility. In addition, the Debtors entered into a supplemental indenture
(the "Supplemental Indenture") with the trustee under the Pre-Petition Indenture
to effectuate the various amendments and waivers necessary to enter into the
Pre-Petition Credit Agreement, as well as increase the interest rate on the
Senior Secured Notes. On April 26, 2004, the Debtors sold their M.V.I. and
Aquasol product lines to Mayne Pharma (USA) Inc. for $105 million, subject to
certain adjustments. A portion of the cash proceeds from that sale were used
along with proceeds from the Pre-Petition Credit Agreement to, inter alia,
refinance the Old Credit Facility, fund the interest payment on the Senior
Secured Notes, provide working capital, and pay the fees, costs, and expenses
incurred in connection with the Pre-Petition Credit Agreement.
In June 2004, the Debtors implemented a 10% workforce reduction,
including a reduction of their internal pharmaceutical sales force by 30%, and
refocused their pharmaceutical sales and marketing efforts to the hospital
market.
On August 9, 2004, the Debtors entered into an amendment to the
Pre-Petition Credit Agreement to, among other things, increase the amount of the
term loans by up to $10 million, extend the maturity date of the facilities by
one year to April 21, 2007, increase the interest rate on the loans by an
additional 1.5% and adjust certain covenants under the facilities, and waive
certain defaults and events of default.
In September 2004, and in continuation of the restructuring, the
Debtors announced and implemented a supplemental restructuring plan, which
included an additional 4% workforce reduction and a facility closure plan.
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As is customary in the pharmaceuticals industry, the Debtors bear
the risk of their products not being sold by wholesalers and retailers as their
products approach their expiration dates prior to being sold to end-users. The
Debtors accept returns of their products as they near their expiration date. The
Debtors have also established contract prices for certain indirect customers
that are supplied by their wholesale customers. A chargeback represents the
difference between the current published wholesale acquisition cost and the
indirect customers' contract prices. The Debtors establish reserves to cover
future chargebacks and product returns. Such reserves are necessary because the
Debtors must either issue a credit against future sales or make a cash payment
when a chargeback is issued or a product is returned.
In 2004, operating results for the Debtors' product sales business
were affected by the amount of inventory previously sold into the wholesale
channel. Revenues from sales to wholesalers in 2004 were significantly reduced
from prior periods due to levels of Brethine and Darvon/Darvocet products on
hand at wholesalers at the beginning of the year. During 2004, the Debtors
significantly reduced the aggregate amount of units of their products at the
wholesalers and chain pharmacies.
Sales of the Debtors' Brethine and Roxicodone products have also
greatly diminished due to FDA approval of generic equivalents in early 2004,
adversely affecting both the number of units that could be sold and the prices
that could be obtained for such units, and the increasing likelihood of a
product in the channel reaching the end of its expiration date and being
returned to the Debtors. The introduction of generic competition for Brethine
further negatively impacted revenues by lowering margins from the Charleston
manufacturing facilities and eliminating the near-term need for the manufacture
of additional Brethine injectible products, which created an excess in sterile
manufacturing capacity that the Debtors were unable to fully sell to third
parties.
During 2004, the Debtors underwent substantial changes in
management. In February 2004, David Hurley, aaiPharma's chief operating officer
and president of the Pharmaceuticals Division, resigned. In March 2004, Philip
Tabbiner, D.B.A. resigned as aaiPharma's president and chief executive officer
and was replaced by Dr. Sancilio, the founder and former chief executive officer
of aaiPharma. In May 2004, William L. Ginna stepped down from his position as
aaiPharma's executive vice president and chief financial officer and Gina
Gutzeit, a senior managing director with FTI, was named as interim chief
financial officer. In July 2004, aaiPharma hired Michael W. George as chief
administrative officer and as an executive vice president, and John Harrington
as executive vice president of human resources. On September 27, 2004, Dr.
Sancilio stepped down as executive chairman, president, chief executive officer,
and chief scientific officer of aaiPharma. He was replaced as president and
chief executive officer by Ludo J. Reynders, Ph.D. James G. Martin, Ph.D., a
non-employee member of the aaiPharma's board of directors, was elected to serve
as non-executive chairman of the board. During the remainder of 2004, the
president of Development Services, Vijay Aggarwal, Ph.D., and the executive vice
president of AAI Development Services' sales, development, and project
management, Stephen Cottrell, also resigned from aaiPharma to take positions at
other companies, with Mr. George assuming responsibilities as president for AAI
Development Services. In December 2004, Matthew Czajkowski joined aaiPharma as
executive vice president and chief financial officer, replacing Gina Gutzeit,
and was thereafter appointed chief administrative officer in March 2005. In
March 2005, Mr. George joined the Pharmaceuticals Division and Dr. Reynders took
direct operational control over AAI Development Services.
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Despite the efforts undertaken by the Debtors, by the end of
September 2004, the Pharmaceuticals Division was continuing to suffer a
significant decline in operating results. On September 30, 2004, the Debtors
announced that they would not make the $10 million interest payment on the
Senior Secured Notes due on October 1, 2004, and would use the 30-day grace
period provided under the Senior Secured Notes to enter into discussions with
the Ad Hoc Committee of Secured Noteholders. The Ad Hoc Committee of Secured
Noteholders retained The Blackstone Group ("Blackstone") as its financial
advisor and Milbank, Tweed, Hadley & McCloy LLP ("Milbank") as counsel to
facilitate discussions on the restructuring of the Senior Secured Notes.
At the same time, the Debtors engaged in discussions with the
lenders under the Pre-Petition Credit Agreement to seek waivers and/or consents
for potential defaults of certain financial covenants under the Senior Secured
Notes. As part of such discussions, on October 8, 2004, the indenture for the
Senior Secured Notes was amended for the third time to adjust certain financial
covenants. In addition to such adjustments, the lenders waived compliance with
certain financial covenants for the quarters ended September 30, 2004 and
December 31, 2004, which provided that aaiPharma meet certain consolidated
EBITDA thresholds, and added a minimum gross revenue requirement for the quarter
ending December 31, 2004.
In later October 2004, consistent with their attempts to restructure
their businesses to maximize value for all constituents, and as part of their
efforts to evaluate and analyze all alternatives, the Debtors retained
Rothschild to explore the potential sale of some or all of the assets comprising
the Pharmaceuticals Division. At the same time, in an effort to preserve value
for all of the Debtors' stakeholders by raising sufficient liquidity to continue
to fund operations, on October 22, 2004, the Debtors entered into a fourth
amendment (the "Fourth Amendment") to the Pre-Petition Credit Agreement. This
amendment increased the existing term loan facility by $30 million, and allowed
the Debtors certain additional flexibility under the financial covenants.
In order to execute the Fourth Amendment, the Debtors needed the
consent of the Noteholders. The Debtors successfully completed a solicitation
(the "October 2004 Consent Solicitation") seeking the consent of the Noteholders
to certain amendments to the Supplemental Indenture. Among other things, the
Debtors received the Noteholders' consent to borrow the additional $30 million
under the Pre-Petition Credit Agreement, and amend certain covenants in the
Pre-Petition Indenture regarding the use of such funds. As part of the October
2004 Consent Solicitation, and as noted above, the Debtors also agreed to
increase the interest rate on the Senior Secured Notes from 11.5% per annum to
12% per annum for the period beginning October 1, 2004 and ending on March 31,
2005. In consideration for these actions, the Debtors paid the consenting
Noteholders a consent fee of $20.00 in cash per $1,000 principal amount of
Senior Secured Notes for which consents were delivered (the "Consent Fee").
Following the close of the October 2004 Consent Solicitation,
certain Noteholders alleged that procedural problems rendered the solicitation
process invalid. While the Debtors believe the process was valid, the Debtors
attempted to negotiate a consensual resolution with the non-consenting
Noteholders. On January 24, 2005, pursuant to an agreement with certain
Noteholders, the Debtors agreed to offer to pay the Consent Fee to the
Noteholders who had not consented to the October 2004 Consent Solicitation in
exchange for such Noteholders' consent to the terms of the October 2004 Consent
Solicitation. In addition, mutual releases were executed covering the October
2004 Consent Solicitation.
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As noted above, in October 2004, Rothschild was retained to explore
a sale of certain of the Debtors' assets, the proceeds of which would be used to
reduce the Debtors' senior debt. Rothschild's efforts produced varying degrees
of interest in the Pharmaceuticals Division by potential purchasers. Rothschild
contacted a total of 97 buyers, of which 47 signed confidentiality agreements
and received informational memorandums. Of these 47, 16 entities submitted
"first round" bids and proceeded to conduct due diligence during the months of
December, January and February 2005. Ultimately, and after reviewing all of the
bids, the Debtors and their advisors entered into more detailed negotiations
with a number of bidders, including Xanodyne.
During this same timeframe, however, the Debtors continued to
experience financial and operational difficulties stemming from their problems
in 2004, and failed to timely file their Form 10-K for the year ending December
31, 2004. By the spring of 2005, the Debtors were without sufficient liquidity
to operate their businesses. While the Debtors explored a number of potential
transactions to improve the Debtors' liquidity and to avoid chapter 11, the
Debtors were unable to find any sources of liquidity that would have enabled the
Debtors to avoid chapter 11. At that time, the Debtors received a tax refund of
$11.3 million, the vast majority of which could only be used by the Debtors to
fund operations with the approval of the Pre-Petition Credit Agreement Lenders.
Concurrently, the Debtors received a proposal from Xanodyne to enter into a
three week exclusivity arrangement. In order to obtain the liquidity necessary
to maintain the Debtors' businesses and maximize value for all of their
constituents, the Debtors entered into discussions with the Pre-Petition Credit
Agreement Lenders to forbear from exercising certain rights and remedies under
the Pre-Petition Credit Agreement and to allow the Debtors to use the full $11.3
million tax refund to fund operations, on the understanding that the Debtors
would pursue exclusive negotiations with Xanodyne. At the same time, the Debtors
began negotiations with various financial institutions on the terms of various
financing arrangements, including potential debtor-in-possession financing that
would provide the Debtors with the necessary liquidity in the event of a
possible chapter 11 filing. Through the discussions with various parties, it
became apparent that the Debtors existing Pre-Petition Credit Agreement Lender
was the only available source of debtor in possession financing.
At the conclusion of their exclusive negotiating period with
Xanodyne, which exclusivity period had been extended as negotiations progressed,
the Debtors reached an agreement to sell substantially all of the assets of the
Pharmaceuticals Division to Xanodyne subject to higher and better offers
pursuant to section 363 of the Bankruptcy Code. The Debtors' management and
Board of Directors believed that the sale, through a bankruptcy court approved
auction process, would provide the Debtors with the maximum value obtainable for
those assets. As a result, to obtain the liquidity being made available under
the proposed debtor in possession financing to operate their businesses and
preserve the value of their enterprise, on the Petition Date, the Debtors
commenced the Chapter 11 Cases.
3.04 Pending Litigation
(i) Lawsuits Against the Debtors
aaiPharma and certain of its current and former officers and
directors, as well as its former independent registered public accountants have
been named as defendants in purported stockholder class action lawsuits alleging
violations of federal securities laws that were brought prior to the Petition
Date. The securities lawsuits were filed beginning in February 2004 and are
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pending in the U.S. District Court for the Eastern District of North Carolina.
By order dated April 16, 2004, the district court consolidated the securities
lawsuits into one consolidated action, captioned In re aaiPharma Inc. Securities
Litigation, Consolidated Civil Action No. 7:04-CV-27-D, and on February 11,
2005, the plaintiffs filed a consolidated amended complaint. The amended
securities complaint asserts claims arising under sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder on behalf of a
class of purchasers of Old Common Stock during the period from April 24, 2002
through and including June 15, 2004. The securities complaints allege generally
that the defendants knowingly or recklessly made false or misleading statements
during the applicable time period concerning the Debtors' financial condition
and that the Debtors' financial statements did not present the Debtors' true
financial condition and were not prepared in accordance with generally accepted
accounting principles. The amended securities complaint seeks certification as a
class action, unspecified compensatory damages, attorneys' fees and costs, and
other relief.
In addition, aaiPharma and certain of our current and former
directors, officers and employees have been named in a purported class action,
captioned Martin v. aaiPharma Inc., et al. (In re aaiPharma Inc. Securities
Litigation), Case No. 7:04-CV-27-D, Master File Case No. 7:04-CV-78-D, and
brought by an aaiPharma pension plan participant and beneficiary asserting
claims under ERISA on behalf of a class of all persons who are or were
participants in or beneficiaries of the aaiPharma Inc. Retirement and Savings
Plan (the "ERISA Plan") during the period from April 24, 2002 to June 15, 2004.
An amended complaint was filed on March 14, 2005 which alleges generally that
the defendants breached fiduciary duties owed under ERISA with respect to the
prudence and lack of diversification of investment of ERISA Plan assets in Old
Common Stock, by misleading participants and beneficiaries of the plan regarding
the Debtors' earnings, prospects and business condition, by failing to act in
the sole interest of ERISA Plan participants, and by failing to monitor the
actions of other ERISA Plan fiduciaries. The complaint seeks certification as a
class action, unspecified compensatory damages, attorneys' fees and costs, and
other equitable relief. This lawsuit is pending in U.S. District Court for the
Eastern District of North Carolina. The proceedings in this matter are being
coordinated with the securities lawsuits described above.(10)
A stockholder derivative suit, captioned Vincent, et al., v.
Sancilio, et al., Case No, 04-CV-166-D, was filed in the United States District
Court for the Eastern District of North Carolina on August 26, 2004 by two
putative shareholders against current and former directors and senior
management. aaiPharma is named as a "nominal defendant." The complaint alleges
that the individual director and officer defendants breached fiduciary and
contractual obligations to the Debtors by implementing an inadequate system of
internal control over financial reporting and causing the Debtors to issue false
and misleading statements exposing the Debtors to securities fraud liability,
and that certain defendants engaged in insider trading. The complaint seeks
unspecified compensatory damages, attorneys' fees and costs, and other
relief.(11)
- ----------
(10) The Debtors believe that the claims asserted in the securities litigation
and the ERISA litigation are claims of the type described in, and subject
to, subordination under section 510(b) of the Bankruptcy Code. As such,
the claims asserted against the Debtors in those litigations are treated
as Old Equity Interests under the Plan, and will receive the treatment
afforded to Old Equity Interests set forth in the Plan.
(11) The stockholder derivative action is a Cause of Action belonging to the
Debtors and will be released by the Debtors pursuant to the terms of the
Plan.
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(ii) Lawsuits Brought by the Debtors
(a) KUDCO Litigation
In December 2002, the Debtors filed a lawsuit against Kremers Urban
Development Co., Schwarz Pharma Inc. and other Schwarz Pharma-affiliated
Entities (collectively, with the named defendants, "KUDCO") in the U.S. District
Court for the Southern District of New York alleging infringement of an
omeprazole patent owned by the Debtors, which has subsequently been amended to
assert infringement of an additional omeprazole patent owned by the Debtors and
to name additional defendants. In the litigation, the Debtors are seeking, among
other things, damages of a reasonable royalty as compensation for KUDCO's
infringement of its patents and the Debtors are seeking to have such damages
enhanced on the basis of willful misconduct by KUDCO.
KUDCO filed an answer to the Debtors' complaint that denied the
Debtors' claims, asserted various affirmative defenses to the Debtors' claims
(including patent invalidity and product non-infringement), and asserted
counterclaims and antitrust violations under federal and state antitrust laws.
KUDCO also contested the personal jurisdiction of the court over the majority of
the defendants of the defendants in this lawsuit. Motions on the jurisdictional
issues are pending before the court. The Debtors denied the substantive
allegations made by KUDCO in its counterclaims, and the court granted the
Debtors' motion to stay antitrust discovery.
Substantial discovery of both sides' documents and of defendants'
product samples has occurred in the lawsuit, although both sides asserted
numerous discovery deficiencies against the other. On February 26, 2004, the
judge assigned the discovery disputes to a federal magistrate for resolution. No
trial date has been set.
(b) Athlon Litigation
On April 15, 2004, the Debtors filed a lawsuit against Athlon
Pharmaceuticals, Inc. ("Athlon") in the U.S. District Court for the Northern
District of Georgia seeking a declaratory judgment that the Debtors were
entitled to terminate the service agreement (the "Athlon Service Agreement")
dated July 16, 2003, as amended, between the Debtors and Athlon as well as
damages and injunctive relief for material breaches of the Athlon Service
Agreement by Athlon. Pursuant to the Athlon Service Agreement, representatives
of Athlon would promote the sale of the Debtors' Darvocet A500 product to
physicians.
The lawsuit asserts that Athlon materially breached the Athlon
Service Agreement in several ways, including failure to: (i) provide the
required number of sales representatives, (ii) use its best efforts to promote
Darvocet A500 at the targeted levels of first and second pharmaceutical details
to physicians, (iii) perform the services to the best of its ability, and (iv)
require its sales representatives to perform the contracted services in a
professional manner consistent with industry standards and in conformance with
that level of care and skill ordinarily exercised by professional contract sales
organizations in similar circumstances. The lawsuit also asserts that Athlon
breached its representation and warranty that it would perform, and would
require its sales representatives to perform, the contracted services in
substantially the same manner that it would promote Athlon's own products. The
Debtors amended the lawsuit on July 7, 2004 to assert claims of fraud and
breaches of contract and implied covenants and sought to recover compensatory
and punitive damages and attorneys' fees.
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Athlon has asserted several counterclaims, including breach of an
implied covenant of good faith in fair dealing and anticipatory breach of the
contract, which the Debtors have denied. Athlon also filed a lawsuit against the
Debtors alleging that the Debtors breached the terms of an asset purchase
agreement between the Debtors and Athlon and that seeks allegedly unpaid
royalties and attorneys' fees. The Debtors have denied the substantive
allegations raised by Athlon and filed counterclaims seeking to recover an
overpayment in the royalties owed to Athlon. No trial date has been set.
ARTICLE IV.
DESCRIPTION OF CHAPTER 11 CASES
On the Petition Date, the Debtors commenced the Chapter 11 Cases,
which were consolidated for procedural purposes only under Case No. 05-11341
(PJW) and are currently pending before the Honorable Peter J. Walsh. Since the
Petition Date, the Debtors have continued to operate as debtors in possession
subject to the supervision of the Court. Transactions out of the ordinary course
of business have required Court approval. In addition, the Court has supervised
the Debtors' employment of attorneys and other professionals.
An immediate effect of the filing of the bankruptcy petitions was
the imposition of the automatic stay under the Bankruptcy Code which, with
limited exceptions, enjoined the commencement or continuation of all collection
efforts by creditors, the enforcement of liens against the Debtors, and
litigation against the Debtors. This injunction remains in effect, unless
modified or lifted by order of the Court, until a plan of reorganization is
confirmed and becomes effective.
4.01 First Day Motions
(i) Traditional First Day Motions
On the Petition Date, the Debtors submitted a number of motions and
applications requesting so-called "first day orders." On May 11, 2005, the Court
entered the following first day orders, among others: (i) an order authorizing
the retention of Bankruptcy Services, LLC as claims, notice and balloting agent;
(ii) an order authorizing the Debtors to maintain their medical and dental
health insurance plan and pay pre-petition salaries, commissions, employee
wages, other compensation, reimbursable expenses and benefits and directing the
Debtors' banks to honor pre-petition employee wage and expense checks; (iii) an
order authorizing the Debtors to maintain their pre-petition bank accounts,
business forms, stationery and checks and to continue using their cash
management system; and (iv) an order authorizing the Debtors to pay certain
pre-petition tax liabilities. On May 12, 2005, the Court entered an order
authorizing the Debtors to enter into the DIP Financing Agreement, on an interim
basis and scheduling a final hearing on the DIP Financing Agreement. For
additional details regarding the first day motions filed on the Petition Date,
see the Declaration of Matthew E. Czajkowski in support of chapter 11 Petitions
and First Day Motions and Applications, dated May 10, 2005.
(ii) Pre-Petition Obligations Motion
In addition to requesting the traditional first-day relief described
above, on the Petition Date the Debtors also sought authority to honor certain
pre-petition obligations. Those pre-petition obligations included honoring
returns of pharmaceutical products, satisfying certain
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Medicaid rebates, and honoring payments to federally-mandated investigators and
clinical research monitors
In the ordinary course of business, the Debtors sold their products
to wholesalers who then sold those products to hospitals and retail pharmacies.
The Debtors invoiced the wholesaler for any products delivered to the
wholesaler, and the wholesaler invoiced the hospitals and retail pharmacies to
which it sold the Debtors' products. In the ordinary course, a certain portion
of those products ultimately could not be sold, either because of product
expiration, drop in demand, or other reasons. As is common in the pharmaceutical
industry, the Debtors bore the financial risk of their products not being sold
for whatever reason. In that regard, the Debtors' permitted their wholesalers to
return products that could not be sold for a "credit" that reduced any amounts
which the wholesaler owed to the Debtors. Additionally, the Debtors' products
were often sold to Medicaid recipients. Pursuant to various agreements that the
Debtors had in connection with the Medicaid program, at the end of each quarter,
and upon invoice from the various state governments, the Debtors were required
to pay a rebate to Medicaid for the amount of products that were sold in the
previous quarter to Medicaid recipients.
In the normal course of their development services work, the Debtors
test third party drugs and other products on human beings. In order to conduct
these trials, the Debtors contract with investigators mandated by the FDA to
utilize their clinics and personnel. In addition, and in accordance with FDA
regulations, the Debtors must hire and pay for clinical research monitors to
monitor these sites, keep all relevant statistics, and generally oversee the
clinical testing to ensure that the Debtors' testing proceeds in accordance with
all regulations.
To avoid the risk that the Debtors would not be able to continue as
a going concern if either their wholesalers ceased selling the Debtors' products
or their investigators and clinical research monitors ceased participating in
the Debtors' clinical testing programs, as well as the potential for massive
fines for failure to comply with Medicaid regulations, the Debtors sought to
satisfy those pre-petition obligations. On May 11, 2005, the Court entered an
order authorizing the Debtors to honor certain pre-petition return and
chargeback obligations to customers, pay Medicaid rebate obligations, and pay
pre-petition amounts to investigators and clinical research monitors.
4.02 Schedules & Statement of Financial Affairs
Pursuant to section 521 of the Bankruptcy Code and Bankruptcy Rule
1007, unless otherwise ordered by the Court, the Debtors must file certain
schedules of claims, assets, liabilities, executory contracts and unexpired
leases and other information (the "Schedules") and a Statement of Financial
Affairs (the "Statements") within fifteen (15) days of the Petition Date. This
information is designed to provide creditors and other interested parties with
material information to enable each creditor to evaluate its proposed treatment
under any plan. On May 12, 2005, the Debtors requested, and were granted, an
extension of time to file their Schedules and Statements, through and including
June 24, 2005. The Debtors filed the Schedules and Statements with the Court on
June 24, 2005.
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4.03 Appointment of Creditors' Committee
On May 24, 2005, the United States Trustee appointed the Creditors'
Committee, which consists of 5 members. The entities that are members of, and
the counsel and advisors retained by, the Creditors' Committee are set forth
below.
(i) Members of the Committee
AmerisourceBergen
1300 Morris Drive
Chesterbrook, Pennsylvania 19087
Chair
Roxane Laboratories, Inc.
900 Ridgeway Road
Ridgefield, Connecticut 06877
Novartis Pharmaceuticals
59 Route 10
East Hanover, New Jersey 07936
Fine Chemicals Corporation
15 Hawkins Avenue
Capetown, South Africa
TMP Worldwide
622 Third Avenue
New York, New York 10017
(ii) Professionals Retained by the Creditors' Committee
Reed Smith LLP
1201 Market Street, Suite 1500
Wilmington, Delaware 19801
Attn: Kurt F. Gwynne, Esq.
and
2500 One Liberty Place
1650 Market Street
Philadelphia, Pennsylvania 19103
Attn: Claudia Z. Springer, Esq.
Attorneys for the Creditors' Committee
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J.H. Cohn LLP
333 Thornall Street
Edison, New Jersey 08837
Attn: Bernard A. Katz
Accountants and Financial Advisors to the Creditors' Committee
4.04 The DIP Financing Facility
In order to continue to operate during the Chapter 11 Cases, on the
Petition Date, the Debtors sought the Court's approval to obtain financing
offered by the Pre-Petition Credit Agreement Lenders. In that regard, on May 12,
2005, the Court approved the DIP Financing Agreement on an interim basis and
entered the Interim DIP Financing Order to provide the Debtors with the
necessary capital to fund their post-petition activities. On June 3, 2005, the
Court entered the Final DIP Financing Order approving the DIP Financing
Agreement.
The DIP Financing Agreement provides for a $210 million senior
secured loan, consisting of a $180 million DIP Term Loan and a $30 million DIP
Revolving Loan. The DIP Term Loan was used to repay in full the amounts
outstanding under the Pre-Petition Credit Agreement. In accordance with the DIP
Financing Agreement, all cash proceeds from the Sale Transaction were used to
repay the amounts outstanding under the DIP Term Loan. The DIP Revolving Loan is
being used to provide working capital to the Debtors, subject to certain
conditions. The maturity date of the DIP Financing Agreement will be the earlier
of the Effective Date and May 12, 2006.
At the Debtors' option, the DIP Term Loan will bear interest at the
Reference Rate plus 7.25%, increasing by 1% on the earlier of 3 months after the
close of the Sale Transaction and November 12, 2005 and each 3-month anniversary
thereafter, or the LIBOR Rate plus 8.25%. At the Debtors' option, the DIP
Revolving Loan will bear interest at the Reference Rate plus 4%, increasing by
1% on the earlier of 3 months after the close of the Sale Transaction and
November 12, 2005 and each 3-month anniversary thereafter, or the LIBOR Rate
plus 5%. Upon the occurrence and during the continuation of an event of default,
interest will accrue at a rate equal to 2% above the rate previously applicable
to such obligations, payable on demand. In addition, in accordance with the DIP
Financing Agreement, the Debtors have paid a commitment fee of $900,000 and a
monthly fee of $10,000 to the DIP Financing Agent. The Debtors are also required
to pay all expenses of the of the DIP Lenders and the DIP Financing Agent
(including fees, expenses, and charges of counsel to the DIP Lenders and the DIP
Financing Agent).
4.05 Bidding Procedures and Sale Motion
As discussed above, prior to the Petition Date, the Debtors explored
the sale of substantially all of the assets of the Pharmaceuticals Division and
reached an agreement with Xanodyne on the terms of a sale to be conducted
pursuant to section 363 of the Bankruptcy Code and subject to higher and better
offers. In that regard, on the Petition Date, the Debtors filed the Sale Motion
seeking to establish certain bidding procedures and ultimately approve the Sale
Transaction. On June 8, 2005, the Court entered an order approving certain
bidding procedures (the "Bidding Procedures Order"), which, among other things,
designated Xanodyne as the "stalking horse bidder" and provided for a $4 million
termination fee and up to $1.75 million in expense reimbursements for Xanodyne
in the event that a higher and better bid was accepted by the Debtors from
another bidder.
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Immediately following the entry of the Bidding Procedures Order,
Rothschild began distributing information memoranda to potential buyers who had
executed confidentiality agreements prior to the Petition Date. Rothschild also
contacted parties that had been contacted previously and newly-interested
parties. In total, Rothschild contacted over 100 potential buyers after entry of
the Bidding Procedures Order. As a result of Rothschild's efforts, the Debtors
received one "Qualified Bid" as defined in the Bidding Procedures Order. On July
11, 2005, the Debtors held an auction in accordance with the terms of the
Bidding Procedures Order. At the conclusion of the auction, the Debtors
determined that Xanodyne's final bid at the auction was the highest and best
offer and on July 18, 2005, the Court entered an order approving the sale of the
Purchased Assets to Xanodyne.
On July 25, 2005, the Debtors completed the Sale Transaction with
Xanodyne for $209.25 million in cash, or approximately $40 million more than the
"stalking-horse" offer originally made by Xanodyne, as well as up to $30 million
in future development services work to be performed by the Reorganized Debtors
for Xanodyne. Of the total proceeds received, and consistent with the Debtors'
obligations under the DIP Financing Agreement, $180 million was used to pay down
the DIP Term Loan. The remaining proceeds were used, and continue to be used,
for any and all necessary operations during the Chapter 11 Cases in an effort to
help all of the Debtors' constituencies obtain the highest possible recovery on
account of their Claims and Old Equity Interests.
4.06 The Request for an Equity Committee
On September 26, 2005, Dr. Sancilio submitted a request to the
United States Trustee for the formation of an official committee of equity
security holders. Dr. Sancilio's request was based upon his belief that the
enterprise value of the Debtors was sufficient to permit Holders of Old Equity
Interests to obtain a recovery on account of their Old Equity Interests. Dr.
Sancilio's independent financial advisors prepared a valuation that he asserted
supported his view that Holders of Old Equity Interests would be able to obtain
a recovery. The information supplied by Dr. Sancilio to his independent
financial advisors consisted of financial data and projections that the Debtors
deemed confidential. As such, the Debtors informed Dr. Sancilio that they did
not consent to his sharing such information with the United States Trustee. The
Debtors and Dr. Sancilio ultimately resolved this issue and permitted Dr.
Sancilio to disclose such information to the United States Trustee upon the
United States Trustee's agreement to keep such information confidential. The Ad
Hoc Committee of Secured Noteholders objected to Dr. Sancilio's request to form
an official committee of equity security holders. The Creditors' Committee
supported Dr. Sancilio's request, provided that the fees and expenses of any
such committee to be paid by the Debtors would not exceed $75,000. The Debtors
were neutral with regard to whether such a committee should be appointed, but
asserted that if such a committee were appointed, any fees and expenses of
advisors to the committee should only be paid by the Debtors if they made a
substantial contribution to the Chapter 11 Cases under section 503(b) of the
Bankruptcy Code. On October 18, 2005, the United States Trustee rejected Dr.
Sancilio's request for the appointment of an official committee of equity
security holders.
On November 1, 2005, Dr. Sancilio filed a motion with the Court for
an order directing the United States Trustee to appoint an official committee of
equity security holders in the Chapter 11 Cases. The hearing on this motion is
scheduled for November 21, 2005. The Debtors, the Creditors' Committee, and the
Ad Hoc Committee of Secured Noteholders each
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disagree with the assertions made by Dr. Sancilio's motion, and will be filing
appropriate pleadings in response to the motion.
4.07 Key Employee Retention Program
On June 28, 2005, the Debtors filed a motion seeking an order
authorizing the payment of benefits pursuant to a key employee retention program
(the "KERP") and on July 18, 2005, the Court entered an order approving the
KERP. The KERP consists of three components: (i) a retention component for
various employees in the Pharmaceuticals Division to reward those employees for
having remained with the Debtors throughout the sale process up through and
including the Sale Transaction Closing Date, (ii) an incentive component related
to the Debtors receiving a higher and better offer than Xanodyne's initial
"stalking horse" bid, and (iii) a severance component for those employees in the
Pharmaceuticals Division who were not offered comparable employment with
Xanodyne or with the Debtors after the Sale Transaction Closing Date.
Under the KERP, key employees of the Debtors are entitled to
participate and are divided into three groups. Employees in Group 1, which
consists of five senior-level members of management, were entitled to receive
(i) retention payments equal to 35% of their annual base salary, (ii) incentive
payments equal to 15% of their annual base salary, and (iii) severance payments
equal to 8 weeks of their base salary. Employees in Group 2 were entitled to
receive (i) retention payments equal to 25% of their annual base salary and (ii)
severance payments equal to 12 weeks of their base salary. Employees in Group 3
were entitled to receive (i) retention payments equal to 10% of their annual
base salary, (ii) incentive payments equal to 5% of their annual base salary,
and (iii) severance payments equal to 10-12 weeks of their base salary.
Additionally, the KERP provides for a discretionary fund of $400,000 for the
Debtors' management to offer retention payments to certain mid-level employees
who the Debtors believe are crucial to their post-restructuring efforts.
4.08 Stipulation with Cardinal Health
On June 7, 2005, the Debtors filed a motion seeking approval of a
stipulation with Cardinal Health, Inc. and various related entities ("Cardinal")
permitting the exercise of setoff rights and the release of certain pre-petition
warehousemen's liens of Cardinal. The Court approved the stipulation on June 27,
2005. The Debtors' pharmaceutical business generated revenue through the sale of
various pharmaceutical products to various wholesalers, including Cardinal. In
addition to acting as a wholesaler of the Debtors' pharmaceutical products,
Cardinal also provided the Debtors with various services, including logistics,
warehousing, packaging, invoice processing, application of cash received, and
distribution. As of the Petition Date, Cardinal owed the Debtors $3,730,005.00
for pharmaceutical products purchased and the Debtors owed Cardinal
$1,629,943.00 for the services Cardinal provided to the Debtors. To reconcile
those amounts, and to ensure that Cardinal continued to provide services and
continued to purchase pharmaceutical products from the Debtors, the Debtors and
Cardinal entered into a stipulation whereby the amounts owing between the
parties were offset, resulting in a cash payment to the Debtors of $1,997,009.00
and the release of Cardinal's pre-petition warehousemen's liens. Pursuant to the
terms of the stipulation, the Debtors and Cardinal agreed to continue performing
all of their obligations under the various agreements upon payment in cash upon
invoice according to the terms and conditions of those various agreements.
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4.09 Bar Dates
(i) Bar Date Motion
On June 9, 2005, the Debtors filed a motion seeking an order
establishing bar dates by which creditors must file Proofs of Claim in the
Debtors' Chapter 11 Cases, and approving the forms and manner of notice thereof.
The Debtors requested that the Court set August 19, 2005 (the "General Bar
Date"), as the bar date for all Creditors holding Claims against the Debtors,
and November 7, 2005 (the "Governmental Unit Bar Date"), as the bar date for all
governmental entities to file Proofs of Claim in the Debtors' cases or be
forever barred from asserting such Claims against the Debtors. The Debtors'
motion also sought to establish the bar date by which Creditors must file claims
arising out of the rejection of executory contracts or unexpired leases as the
later of (a) the General Bar Date or (b) thirty (30) days after the entry of an
order authorizing the rejection of such executory contract or unexpired lease.
On June 27, 2005, the Court entered an order setting the foregoing bar dates.
(ii) Governmental Claims
As discussed above, in April 2004, the Debtors received five federal
grand jury subpoenas from the United States Attorney's Office for the Western
District of North Carolina seeking documents and testimony and the Debtors have
also received a subpoena from the SEC covering similar matters. In connection
with those investigations, the Debtors' former chief operating officer has
entered a guilty plea to a charge of conspiracy and agreed to assist the
government in its ongoing investigation of the Debtors. The Governmental Unit
Bar Date is November 7, 2005 and no claims have yet been filed by Governmental
Units in connection with the ongoing investigation of the Debtors. The Debtors
believe that if any claims are asserted by a Governmental Unit in connection
with the investigation, such claims would be subordinated to the priority level
of Old Equity Interests in accordance with section 510 of the Bankruptcy Code.
If any Governmental Unit fails to file a proof of claim prior to the
Governmental Unit Bar Date, the Debtors believe that such Governmental Unit will
not have an Allowed Claim and its Claims will be discharged upon confirmation of
the Plan.
ARTICLE V.
EVENTS LEADING TO FORMULATION OF THE PLAN
5.01 Development of the Business Plan
The Debtors' management has put together a business plan that sets
forth management's views for the path that the Debtors' businesses should take
in the upcoming years, as well as management's projections with regard to the
Debtors' performance. After months of analysis, review, drafting, and
consideration, the Debtors' management believes that the business plan presents
the best alternative to maximize value for the Debtors' go-forward business, and
provides all constituents with the most realistic look at the future of the
Debtors' businesses. After careful consideration and questioning (including
fully considering assertions by Dr. Sancilio that earlier draft financial
projections were more accurate than those included in the business plan), the
Debtors' Board of Directors approved the business plan on September 8, 2005.
Among other things, the Debtors' business plan envisions a change in
the Debtors' business strategy. In the past, the Debtors invested in
intellectual property by using
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underutilized capacity in their laboratories and by spending cash on third party
goods and services in the pursuit of their own research and development ("R&D")
projects. Such R&D investment, when successful, was subsequently monetized
through the sale or out-licensing of the Debtors' intellectual property. The
Debtors' business plan contemplates that the Reorganized Debtors will not
continue to make such R&D investments, but will instead focus on the Debtors'
core Development Services business. In addition, the Debtors' business plan
contemplates that upon emergence from chapter 11, Reorganized aaiPharma will be
a privately-held company.
5.02 Retention of Chanin
On September 28, 2005, the Court approved the Debtors' motion to
retain and employ Chanin as an investment banker. Chanin was retained to (i)
provide the Debtors with a valuation of their Estates, (ii) memorialize such
valuation in a written report, (iii) assist the Debtors in evaluating
alternatives and adjustments to their business plan and the Plan, (iv) assist
the Debtors in the preparation of this Disclosure Statement, (v) prepare a
summary of the valuation report that is contained in section 19.01 "Financial
Projections, Valuation and Assumptions used - Valuation of aaiPharma," and (vi)
if necessary, prepare for, and provide evidence and testimony in support of
Chanin's valuation of the Debtors' Estates.
5.03 Negotiations Among the Debtors, the Ad Hoc Committee of Secured
Noteholders, and the Creditors' Committee
Following the adoption of the business plan by the Board of
Directors of aaiPharma and the presentation of the Chanin valuation report, the
Board of Directors directed management and the Debtors' advisors to begin
negotiations with the Creditors' Committee and the Ad Hoc Committee of Secured
Noteholders over the terms of a chapter 11 plan in an effort to achieve a
consensual restructuring. At the outset of the negotiations, the Creditors'
Committee asserted that (i) the Debtors have a higher enterprise value than that
set forth in Chanin's valuation analysis, (ii) the General Unsecured Creditors
should receive a substantial distribution and (iii) the Creditors' Committee had
issues with respect to the security interests granted to, and had potential
causes of action against, the Holders of Senior Secured Notes Claims, and the
lenders under the Debtors' Pre-Petition Credit Agreement and the DIP Financing
Agreement, among others, that would have to be addressed in any chapter 11 plan.
Consistent with the Debtors' desire and efforts to develop a consensual plan of
reorganization, the Debtors encouraged negotiations among the Debtors' creditor
constituencies.
Although the Debtors and the Holders of Senior Secured Note Claims
do not believe that there is merit to the issues or alleged Causes of Action
raised by the Creditors' Committee and stand by Chanin's valuation, in order to
facilitate a consensual plan and to settle and compromise any and all issues
raised by the Creditors' Committee, the Debtors, the Ad Hoc Committee of Secured
Noteholders and the Creditors' Committee reached a compromise whereby the
Creditors' Committee could obtain incremental value in Cash for the General
Unsecured Creditors, the right to certain litigation currently being pursued by
the Debtors, and a release of preference claims and other avoidance actions in
exchange for the Creditors' Committee's support of the Plan and releases of all
Claims against the Pre-Petition Credit Agreement Lenders and the Holders of
Senior Secured Notes, among others. In reaching this agreement, the Creditors'
Committee determined that, among other things, a $4 million Cash distribution
and the right to pursue the Designated Litigations provided significantly
greater value to the Holders of General Unsecured Claims than the value that may
have been realized by
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seeking to object to confirmation and through the pursuit of claims against the
Holders of Senior Secured Notes. Similarly, the Ad Hoc Committee of Secured
Noteholders determined that delays in emerging from chapter 11 and the cost of
litigation that might result from a non-consensual chapter 11 plan could result
in harm to the Debtors' businesses that would impair the recovery of the Holders
of Senior Secured Note Claims and thus reaching a consensual resolution with the
Holders of General Unsecured Claims was in the best interest of all parties.
The settlement, which represents a compromise between the divergent
viewpoints held by the Debtors, the Creditors' Committee, and the Holders of
Senior Secured Notes, is embodied in the Plan as a compromise and settlement
pursuant to Bankruptcy Rule 9019. The Debtors and their major creditor
constituencies believe that it is in the best interest of the Debtors' estates
and creditors to emerge from chapter 11 in the near-term pursuant to a
consensual plan of reorganization.
The principal terms of the compromise and settlement are as follows:
(a) Holders of Senior Secured Note Claims will receive 100% of the
equity of Reorganized aaiPharma, subject to dilution for any New Common Stock to
be issued pursuant to the Management Incentive Plan;
(b) Holders of General Unsecured Claims will receive (a) their Pro
Rata share of a $4 million cash distribution, and (b) interests in a Litigation
Trust;
(c) The Debtors will transfer to the Litigation Trust all of their
rights in certain Designated Litigation, specifically the KUDCO and Athlon
litigations;
(d) The Litigation Trust will be funded from the $4 million cash
distribution. The Plan Administration Committee will determine the amount of the
$4 million cash distribution that is to be used by the Litigation Trustee in
prosecuting the Designated Litigation;
(e) The Plan Administrator will receive $200,000 to fund any
objections to General Unsecured Claims. The Reorganized Debtors will not have
any right to prosecute any objections to General Unsecured Claims after the
Effective Date;
(f) The Debtors' Estates will waive all avoidance actions, including
preference claims;
(g) The Holders of Senior Secured Note Claims will waive any claims
they may have with regard to any deficiency in the value of their collateral to
support their claim. The Holders of Secured Note Claims will thus not share in
any of the distributions given to Holders of General Unsecured Claims on account
of their Senior Secured Note Claims; and
(h) Consistent with their waiver of any and all causes of action
they believe they may have against Holders of Senior Secured Notes, the
Pre-Petition Credit Agreement Lenders, and various other parties, the Creditors'
Committee allowed their deadline for investigating any such causes of action to
lapse.
THE SETTLEMENT IS PREDICATED ON CLASS 4 VOTING TO ACCEPT THE PLAN.
IF CLASS 4 DOES NOT VOTE TO ACCEPT THE PLAN, HOLDERS OF GENERAL UNSECURED CLAIMS
WILL NOT RECEIVE ANY OF THE BENEFITS DESCRIBED IN (b) THROUGH (e) ABOVE.
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ARTICLE VI.
SUMMARY OF 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, WHICH IS ATTACHED TO THIS DISCLOSURE
STATEMENT AS APPENDIX C. TO THE EXTENT THAT THE TERMS OF THIS DISCLOSURE
STATEMENT VARY WITH THE TERMS OF THE PLAN, THE TERMS OF THE PLAN WILL BE
CONTROLLING.
The Debtors believe that under the Plan, Holders of Claims will
obtain a recovery with a value substantially in excess of what otherwise would
be recovered by such Holders if the assets of the Debtors were liquidated under
chapter 7 of the Bankruptcy Code. See section 21.07 "Acceptance and Confirmation
of the Plan -- Best Interests Test."
6.01 General
Chapter 11 of the Bankruptcy Code is the principal business
reorganization chapter of the Bankruptcy Code. Under chapter 11 of the
Bankruptcy Code, a debtor is authorized to reorganize its business for the
benefit of itself and its creditors and stockholders. Upon the filing of a
petition for relief under chapter 11 of the Bankruptcy Code, section 362 of the
Bankruptcy Code generally provides for an automatic stay of all attempts to
collect claims or enforce liens that arose prior to the commencement of the
debtor's case under chapter 11 of the Bankruptcy Code or that otherwise
interfere with the debtor's property or business.
Formulation of a plan is the principal objective of a case under
chapter 11 of the Bankruptcy Code. In general, a plan under chapter 11 of the
Bankruptcy Code (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 effectuate the plan. Chapter 11 of
the Bankruptcy Code does not require each Holder of a claim or interest to vote
in favor of the plan of reorganization in order for the Court to confirm the
plan. However, a plan must be accepted by the Holders of at least one impaired
class of claims without considering the votes of "insiders" within the meaning
of the Bankruptcy Code. Generally, a claim or interest is "impaired," if its
legal, equitable or contractual rights are altered. A Holder of an impaired
claim or interest that will receive a distribution under the plan is entitled to
vote to accept or reject the plan.
Distributions made under the Plan will be made on the Effective
Date, as soon thereafter as is practicable, or at such other time or times
specified in the Plan.
6.02 Voting on the Plan
(i) Holders of Claims and Old Equity Interests Entitled to Vote
As more fully described below, the Plan designates seven separate
classes of Claims and Old Equity Interests. See section 6.03 "Summary of the
Plan -- Classification and Treatment of Claims and Old Equity Interests Under
the Plan." The Holders of Claims in Class 3 (Senior Secured Note Claims) and
Class 4 (General Unsecured Claims) are Impaired under the Plan and will be
entitled to vote to accept or reject the Plan. Class 6 (510 (b) Note Claims),
and
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Class 7 (Old Equity Interests) will not receive any distribution under the Plan
and are therefore deemed to reject the Plan and votes of Classes 6 and 7 will
therefore not be solicited. The Holders of Claims in Class 1 (Priority Claims),
Class 2 (Miscellaneous Secured Claims), and Class 5 (Convenience Claims) are
Unimpaired and are conclusively presumed to accept the Plan.
(ii) Votes Required for Class Acceptance
The Court will determine whether sufficient acceptances have been
received to confirm the Plan. In order for the Plan to be confirmed under
section 1129(b) of the Bankruptcy Code, among other requirements, at least one
class of Impaired Claims must have accepted the Plan which acceptance will be
determined without including any acceptances of the Plan by any "insider," as
defined in the Bankruptcy Code. The class of Senior Secured Note Claims (Class
3) or General Unsecured Claims (Class 4), as the case may be, has accepted the
Plan if the Plan has been accepted by Holders of Senior Secured Note Claims
(Class 3) or General Unsecured Claims (Class 4), as the case may be, that hold
at least two-thirds in amount and more than one-half in number of the Allowed
Senior Secured Note Claims (Class 3) or General Unsecured Claims (Class 4), as
the case may be, of such class held by Holders of Senior Secured Note Claims
(Class 3) or General Unsecured Claims (Class 4) that vote to accept or reject
the Plan. Because Holders of Claims in Class 6 (510(b) Note Claims), and Old
Equity Interests in Class 7 (Old Equity Interests) will not receive any
distribution under the Plan and, therefore, will be conclusively presumed to
reject the Plan as a matter of law, the Debtors must request that the Court
confirm the Plan pursuant to section 1129(b) of the Bankruptcy Code.
6.03 Classification and Treatment of Claims and Old Equity Interests
Under the Plan
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
class. The Debtors believe that all Claims and Old Equity Interests have been
appropriately classified in the Plan.
EXCEPT TO THE EXTENT THAT MODIFICATION OF CLASSIFICATION IN THE PLAN
ADVERSELY AFFECTS THE TREATMENT OF A HOLDER OF A CLAIM OR OLD EQUITY INTEREST
AND REQUIRES RESOLICITATION, ACCEPTANCE OF THE PLAN BY ANY HOLDER OF A CLAIM OR
OLD EQUITY INTEREST PURSUANT TO THE SOLICITATION WILL BE DEEMED TO BE A CONSENT
TO THE PLAN'S TREATMENT OF SUCH HOLDER REGARDLESS OF THE CLASS AS TO WHICH SUCH
HOLDER IS ULTIMATELY DEEMED TO BE A MEMBER.
The Bankruptcy Code also requires that a plan 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 they have complied with this standard of
equal treatment. To the extent that the Court finds that the Plan does not
satisfy such standard, the Court could deny confirmation if the holders of
Claims or Old Equity Interests affected do not consent to the treatment afforded
them under the Plan.
Only classes that are Impaired under the Plan, but that are not
deemed to have rejected the Plan as a matter of law, are entitled to vote to
accept or reject the Plan. Generally, a class of claims or interests is
considered to be "Unimpaired" under a plan of reorganization if such plan does
not alter the legal, equitable and contractual rights of the Holders of such
claims or
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Old Equity Interests. Under the Bankruptcy Code, Holders of claims and interests
in an Unimpaired class are conclusively presumed to have accepted a plan and are
not entitled to vote to accept or reject a plan.
As indicated below, two classes of unsecured Claims (Class 1 -
Priority Claims and Class 5 - Convenience Claims) and one class of secured
Claims (Class 2 - Miscellaneous Secured Claims) are Unimpaired under the Plan
and are conclusively presumed to have accepted the Plan. One class of secured
Claims (Class 3 - Senior Secured Note Claims) and one class of unsecured Claims
(Class 4 - General Unsecured Claims) are Impaired and are entitled to vote on
the Plan. The remaining classes, one class of unsecured Claims (Class 6 - 510(b)
Note Claims) and one class of Old Equity Interests (Class 7 - Old Equity
Interests) will receive no distribution under the Plan and the Claims and Old
Equity Interests in such classes will be extinguished. As a result, such classes
are deemed to have rejected the Plan.
Only Allowed Claims in Classes 1, 2, 3, 4, and 5 will receive
distributions under the Plan.
(i) Treatment of Administrative Expenses and Certain Priority
Claims
(a) Administrative Expenses. Administrative Expenses consist
of the actual and necessary expenses incurred during the Chapter 11 Cases. Such
expenses include costs incurred in the operation of the Debtors' businesses
after the commencement of the Chapter 11 Cases, the actual, reasonable fees and
expenses of professionals that they or any Committee appointed in the Chapter 11
Cases retains, post-petition taxes, if any, and certain other obligations
arising after the commencement of the Chapter 11 Cases, including the Bankruptcy
Fees.
Treatment of Administrative Expenses. The Debtors or the
Reorganized Debtors, as the case may be, will pay each Allowed Administrative
Expense in full, in Cash, on the later of (a) the Effective Date (or as soon
thereafter as is practicable), (b) the date on which the Bankruptcy Court enters
an order allowing such Administrative Expense, or (c) such other date to which
the Reorganized Debtors and the Holder of the Allowed Administrative Expense
otherwise agree; provided, however, that Allowed Administrative Expenses
representing (a) obligations incurred in the ordinary course of business or
assumed by the Debtors or the Reorganized Debtors, as the case may be, will be
paid in full or performed by the Debtors or Reorganized Debtors, as the case may
be, in the ordinary course of business, consistent with past practice, and (b)
obligations incurred to Professionals for services provided through the
Effective Date will be paid in accordance with the Court order approving the
fees and expenses of each such Professional; provided, further, however, that
Allowed Administrative Expenses incurred by the Debtors or the Reorganized
Debtors, as the case may be, after the Confirmation Date, including claims for
Professionals' fees and expenses, will not require application to the Court and
will be paid by the Debtors or Reorganized Debtors, as the case may be, in the
ordinary course of business and without further Court approval. All applications
for final allowance of compensation and reimbursement of expenses will be
subject to the authorization and approval of the Bankruptcy Court. Any
objections to such applications shall be filed no later than twenty (20) days
following the date on which a final fee application is filed with the Court. All
Obligations (as such term is defined in the DIP Financing Agreement) payable
under the DIP Financing Agreement and all other DIP Lender Claims, including any
Claims for reimbursement of expenses and fees of professionals employed by the
DIP Lenders shall constitute Allowed Administrative Expenses and shall be paid
in full, in cash, on the Effective Date without any
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setoff, defenses or counterclaims without the need for application to or
approval from the Court. All Indenture Trustee's Fees and Expenses and/or Senior
Secured Noteholder Fees (as such term is defined in the Final DIP Financing
Order) shall constitute Allowed Administrative Expenses and shall be paid in
full in cash on the Effective Date, without any setoffs, defenses or
counterclaims and without the need for application to, or approval of, any
court. The Indenture Trustee's Charging Lien will be discharged solely upon
payment in full of the Indenture Trustee's Fees and Expenses. No provision of
the Plan shall be deemed to impair, waive, or discharge the Indenture Trustee's
Charging Lien for any fees and expenses not paid by the Reorganized Debtors.
Full Settlement. As more specifically set forth in, and
without in any way limiting, section 15.01 of the Plan, the distributions
provided for in and when paid pursuant to section 2.01 of the Plan are in full
settlement and release of all Administrative Expenses.
(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.
Treatment of Priority Tax Claims. With respect to each Allowed
Priority Tax Claim, at the sole option of the Debtors, each Holder of an Allowed
Priority Tax Claim will be (i) paid in full in Cash by the Reorganized Debtors
in equal annual installments beginning on or before the first anniversary of the
Effective Date with the final installment being payable no later than the sixth
anniversary of the date of the assessment of such Allowed Priority Tax Claim,
together with interest on the unpaid balance of such Allowed Priority Tax Claim
from the Effective Date, calculated at the Market Rate, or (ii) given such other
treatment agreed to by the Holder of such Allowed Priority Tax Claim and the
Debtors.
Full Settlement. As more specifically set forth in, and
without in any way limiting, section 15.01 of the Plan, the distributions
provided for in and when paid pursuant to section 3.01 of the Plan are in full
settlement and release of all Priority Tax Claims.
(ii) Class 1 - Priority Claims
Class 1 consists of all Allowed Claims arising on or prior to the
Petition Date which are entitled to priority status in accordance with section
507(a) of the Bankruptcy Code, other than Administrative Expenses and Priority
Tax Claims. 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.
Treatment of Priority Claims. On the latest of (a) the Effective
Date (or as soon as practicable thereafter), (b) the date on which such Priority
Claim becomes an Allowed Priority Claim, or (c) such other date on which the
Debtors and the Holder of such Allowed Priority Claim may agree, each Holder of
an Allowed Priority Claim shall be entitled to receive Cash in an amount
sufficient to render such Allowed Priority Claim Unimpaired under section 1124
of the Bankruptcy Code; provided, however, that Allowed Priority Claims
representing obligations incurred in the ordinary course will be paid in full or
performed by the Debtors or Reorganized Debtors, consistent with past practice.
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Full Settlement. As more specifically set forth in, and without in
any way limiting section 15.01 of the Plan, the distributions provided in and
when paid pursuant to section 6.01 of the Plan are in full settlement and
release of each Holder's Priority Claim and all other Claims against any and all
of the Debtors, if any, of such Holder directly or indirectly related to or
arising out of the transactions, agreements or instruments upon which such
Priority Claim was based. Class 1 is Unimpaired.
(iii) Class 2 - Miscellaneous Secured Claims
Class 2 consists of all Miscellaneous Secured Claims.
Treatment of Miscellaneous Secured Claims. On the Effective Date, at
the sole option of the Debtors, (i) the legal, equitable and contractual rights
to which the Miscellaneous Secured Claim entitles the Holder of such Claim will
remain unaltered, and the Holder of such Claim shall retain any Liens and/or
security interests securing such Claim, or (ii) the Debtors will provide other
treatment that will render such Miscellaneous Secured Claim Unimpaired under
section 1124 of the Bankruptcy Code.
Full Settlement. As more specifically set forth in, and without in
any way limiting section 15.01 of the Plan, the distributions provided in and
when paid pursuant to section 6.02 of the Plan are in full settlement and
release of each Holder's Miscellaneous Secured Claim and all other Claims
against any and all of the Debtors, if any, of such Holder directly or
indirectly related to or arising out of the transactions, agreements or
instruments upon which such Miscellaneous Secured Claim was based. Class 2 is
Unimpaired.
(iv) Class 3 - Senior Secured Note Claims
Class 3 consists of all Senior Secured Note Claims.
Treatment of Senior Secured Note Claims The Senior Secured Note
Claims are Allowed in the amount of $187,811,020.83, without avoidance, setoff,
subordination, any defenses, counterclaims, or any other reduction of any kind.
On the Effective Date, in full satisfaction, release, and discharge of, and in
exchange for, all Allowed Senior Secured Note Claims, each Holder of an Allowed
Senior Secured Note Claim shall be entitled to receive (i) its Pro Rata share of
the Senior Secured Note Distribution and (ii) to the extent unpaid, payment in
cash in full of all Indenture Trustee's Fees and Expenses and/or Senior Secured
Noteholder Fees (as such term is defined in the Final DIP Financing Order).
Waiver of Deficiency Claims. Subject to the occurrence of the
Effective Date, if Class 4 votes to accept the Plan, each Holder of a Senior
Secured Note Claim waives any Noteholder Deficiency Claims, and by voting to
accept the Plan, Holders of Senior Secured Note Claims shall be deemed to have
directed the Indenture Trustee to waive any Noteholder Deficiency Claims. As
such, subject to the occurrence of the Effective Date and if Class 4 votes to
accept the Plan, Holders of Senior Secured Note Claims will not share in the
General Unsecured Cash Amount and shall not be Litigation Trust Interest
Holders.
Full Settlement. As more specifically set forth in, and without in
any way limiting section 15.01 of the Plan, the benefits provided in section
6.03 (when distributed to the Indenture Trustee in accordance with the Plan) to
the Holders of Senior Secured Note Claims are in full settlement and release of
each Holder's Senior Secured Note Claim and all other Claims
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against any and all of the Debtors, if any, of such Holder directly or
indirectly related to or arising out of the transaction, agreements or
instruments upon which such Senior Secured Note Claim was based. Class 3 is
Impaired.
(v) Class 4 - General Unsecured Claims
Class 4 consists of all General Unsecured Claims.
Treatment of General Unsecured Claims. Pursuant to the terms of a
settlement between the Debtors, the Holders of Senior Secured Note Claims and
the Holders of General Unsecured Claims, and provided that Class 4 votes to
accept the Plan, as soon as practicable following the earlier of (i) the Initial
Distribution Date and (ii) the date on which all Disputed General Unsecured
Claims have been resolved by Final Order of the Court, each Holder of an Allowed
General Unsecured Claim shall receive its Pro Rata share of (x) the General
Unsecured Cash Amount and (y) the Litigation Trust Interests in accordance with
sections 13.05 and 13.06 of the Plan.
Full Settlement. As more specifically set forth in, and without in
any way limiting section 15.01 of the Plan, the benefits provided in section
6.04 (and the payment or transfer of such benefits to the General Unsecured
Claim Reserve and the Litigation Trust, as the case may be) of the Plan to the
Holders of General Unsecured Claims are in full settlement and release of each
Holder's General Unsecured Claim and all other Claims against any and all of the
Debtors, if any, of such Holder directly or indirectly related to or arising out
of the transaction, agreements or instruments upon which such General Unsecured
Claim was based. Class 4 is Impaired.
(vi) Class 5 - Convenience Claims
Class 5 consists of all Convenience Claims.
Treatment of Convenience Claims
On the Effective Date (or as soon as practicable thereafter) each
Holder of an Allowed Convenience Claim, including Holders of General Unsecured
Claims who have elected to reduce such General Unsecured Claim to $250 by an
irrevocable written election pursuant to such Holders' Ballot, shall receive
Cash in an amount sufficient to render such Allowed Convenience Claim Unimpaired
under section 1124 of the Bankruptcy Code.
Full Settlement. As more specifically set forth in, and without in
any way limiting section 15.01 of the Plan, the distributions provided in and
the payments made pursuant to section 6.05 of the Plan are in full settlement
and release of each Holder's Convenience Claim and all other Claims against any
and all of the Debtors, if any, of such Holder directly or indirectly related to
or arising out of the transactions, agreements or instruments upon which such
Convenience Claim was based. Class 5 is Unimpaired.
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(vii) Class 6 - 510(b) Note Claims
Class 6 consists of all 510(b) Note Claims.
Treatment of 510(b) Note Claims. On the Effective Date, all 510(b)
Note Claims will be extinguished and no distributions will be made to Holders of
510(b) Note Claims. The Holders of 510(b) Note Claims are not entitled to
receive any distribution or retain any property under the Plan. Class 6 is
Impaired.
(viii) Class 7 - Old Equity Interests
Class 7 consists of all Old Equity Interests. As discussed in
section 3.04 - "Background - Pending Litigation" Old Equity Interests includes
claims asserted against the Debtors in certain pending litigation.
Treatment of Old Equity Interests. On the Effective Date, all Old
Equity Interests will be extinguished and no distributions will be made to
Holders of Old Equity Interests. The Holders of Old Equity Interests are not
entitled to receive any distribution or retain any property under the Plan.
Class 7 is Impaired.
ARTICLE VII.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Subject to the approval of the 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 pre-petition 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 would result in a claim for
damages that may be entitled to administrative expense status.
7.01 Assumption and Rejection of Executory Contracts and Unexpired Leases
The Debtors will have until the Confirmation Date to file a motion
or motions to assume or reject executory contracts and unexpired leases that
have not been previously assumed or rejected. Each executory contract or
unexpired lease that (i) has not been expressly assumed or rejected with
approval by order of the Court on or prior to the Confirmation Date, (ii) is not
the subject of a motion to reject pending as of the Confirmation Date, or (iii)
that is not specifically designated as a contract or lease to be rejected on
Schedule 8.01 of the Plan, which Schedule shall be filed as part of the Plan
Supplement and served on the counterparties to such contracts or leases, will,
as of the Confirmation Date, and subject to section 8.01(b) of the Plan, be
deemed to have been assumed by the Debtors.
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7.02 Cure of Defaults
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 section 8.01 of the Plan, the Debtors shall, pursuant to
the provisions of sections 1123(a)(5)(G) and 1123(b)(2) of the Bankruptcy Code
and consistent with the requirements of section 365 of the Bankruptcy Code,
within thirty (30) days after the Confirmation Date, file a pleading with the
Court listing the cure amounts of all executory contracts and unexpired leases
to be assumed. The parties to such executory contracts and unexpired leases to
be assumed by the Debtors shall have thirty (30) days to object to the cure
amounts listed by the Debtors. A party to an executory contract or unexpired
lease to be assumed by the Debtors that does not file an objection with the
Court on or before the deadline set by section 8.02 of the Plan for objections
to the cure amount shall be deemed to have waived its right to dispute such
amount. If there are any objections filed, the Court shall hold a hearing. In
the event the Court determines that the cure amount is greater than the cure
amount listed by the Debtors, the Reorganized Debtors may elect to reject the
executory contract or unexpired lease and not pay such greater cure amount. All
cure amounts to be paid pursuant to section 8.02 of the Plan will be paid by the
Reorganized Debtors and will not be payable from any of the funds held in the
General Unsecured Claim Reserve or the Litigation Trust.
7.03 Bar Date for Rejection Damages
Unless otherwise provided by an order of the Court entered prior to
the Confirmation Date, a Proof of Claim with respect to any Claim against the
Debtors arising from the rejection of any executory contract or unexpired lease
pursuant to an order of the Court (including the Confirmation Order) must be
filed with the Court within (a) the time period established by the Court in an
order of the Court approving such rejection, or (b) if no such time period is or
was established, thirty (30) days from the date of entry of such order of the
Court approving such rejection. Any Entity that fails to file a Proof of Claim
with respect to its Claim arising from such a rejection within the period set
forth above will be forever barred from asserting a Claim against the Debtors or
the Reorganized Debtors or any of their Subsidiaries or their respective
property or interests in property. All Allowed Claims arising from the rejection
of executory contracts or unexpired leases will be classified as General
Unsecured Claims (Class 4).
7.04 Employee Benefit Plans
On and after the Effective Date, pursuant to section 1129(a)(13) of
the Bankruptcy Code, the Reorganized Debtors shall continue to pay all retiree
benefits of the Debtors (within the meaning of section 1114 of the Bankruptcy
Code), if any, at the level established in accordance with section 1114 of the
Bankruptcy Code, at any time prior to the Confirmation Date, for the duration of
the period for which the Debtors had obligated themselves to provide such
benefits.
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ARTICLE VIII.
IMPLEMENTATION OF THE PLAN
8.01 Vesting of Property
On the Effective Date, title to all property of the Debtors' estates
will pass to and vest in the applicable Reorganized Debtor, free and clear of
all Claims, interests, Liens, security interests, charges and other encumbrances
(except as otherwise provided in the Plan); provided, however, that the General
Unsecured Claim Reserve and the Claims Objection Fund will pass to the Plan
Administrator and the Designated Litigation will pass to the Litigation Trust
each free and clear of all Claims, interests, Liens, security interests, charges
and other encumbrances, subject only to Litigation Trust Interests, the Claims
of held by Holders of General Unsecured Claims, and the reversion interest of
the Reorganized Debtors in accordance with section 10.02(b) of the Plan.
Confirmation of the Plan (subject to the occurrence of the Effective Date) will
be binding, and the Debtors' debts will, without in any way limiting section
15.01 of the Plan, be discharged as provided in section 1141 of the Bankruptcy
Code.
8.02 Substantive Consolidation
The Plan contemplates and is predicated upon entry of the
Confirmation Order effecting the substantive consolidation of the Chapter 11
Cases of the Debtors into a single Chapter 11 Case solely for the purposes of
all actions associated with confirmation and consummation of the Plan.
Substantive consolidation is an equitable remedy which a bankruptcy court may be
asked to apply in those chapter 11 cases involving affiliated debtors. As
contrasted with joint administration, substantive consolidation may affect the
substantive rights and obligations of creditors and debtors. Substantive
consolidation involves the pooling of the assets and liabilities of the affected
debtors (those to be substantively consolidated); all the debtors in the
substantively consolidated group are treated as if they were a single
corporate/economic entity. Consequently, a creditor of any of the substantively
consolidated debtors is treated as a creditor of the substantively consolidated
group of debtors and issues of individual corporate ownership of property and
individual corporate liability on obligations are ignored. However, substantive
consolidation under the Plan does not affect the debtors' separated corporate
existence or independent ownership of property for any purpose other than for
classification of the claims, voting on the plan and making distributions of
property under a plan of reorganization or otherwise as necessary to implement
such plan.
No creditors will be harmed by substantive consolidation of the
Chapter 11 Cases. Substantive consolidation will not affect the recovery of the
Holders of Senior Secured Note Claims. Holders of General Unsecured Claims are
not entitled to any recovery on account of their Claims, though such Holders
will be entitled to the distribution of the General Unsecured Cash Amount on the
condition that Holders of General Unsecured Claims vote to accept the Plan. As a
result, the Debtors believe that substantive consolidation of all of the
Debtors' Chapter 11 Cases is justified.
Thus, the Plan contemplates and is predicated upon the substantive
consolidation of the Chapter 11 Cases of all the Debtors solely for the purposes
of the Plan, the distributions under the Plan, and all actions with respect to
confirmation and consummation of the Plan. On the Confirmation Date or such
other date as may be set by a Final Order of the Bankruptcy Court, but subject
to the occurrence of the Effective Date: (i) solely for the purposes of the Plan
and the distributions and transactions contemplated hereby, all assets and
liabilities of the
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Debtors shall be treated as though they were merged; (ii) any obligation of any
Debtor and all guarantees thereof executed by one or more of the Debtors shall
be deemed to be one obligation of the consolidated Debtors; (iii) any Claims
filed or to be filed in connection with any such obligation and such guarantees
shall be deemed one Claim against the consolidated Debtors; (iv) each and every
Claim filed in the individual Chapter 11 Case of any of the Debtors shall be
deemed filed against the consolidated Debtors in the consolidated Chapter 11
Case of the Debtors and shall be deemed a single obligation of all of the
Debtors under the Plan on and after the Confirmation Date; (v) all duplicative
claims (identical in both amount and subject matter) filed against more than one
of the Debtors will be automatically expunged so that only one Claim survives
against the consolidated Debtors but in no way shall such claim be deemed
Allowed by reason of section 9.02 of the Plan; and (vi) the consolidated Debtors
will be deemed, for purposes of determining the availability of the right of
set-off under section 553 of the Bankruptcy Code, to be one entity, so that,
subject to other provisions of section 553 of the Bankruptcy Code, the debts due
to a particular Debtor may be offset against claims against such Debtor or
another Debtor. On the Confirmation Date, and in accordance with the terms of
the Plan and the consolidation of the assets and liabilities of the Debtors, all
Claims based upon guarantees of collection, payment or performance made by the
Debtors as to the obligations of another Debtor or of any other person shall be
discharged, released and of no further force and effect; provided, however, that
section 9.02 of the Plan will not affect the obligations of each of the Debtors
under the Plan. Notwithstanding the provisions of section 9.02 of the Plan, but
subject to section 9.10 of the Plan, each of the Debtors will, as Reorganized
Debtors, continue to exist after the Effective Date as separate legal entities.
The substantive consolidation provided for in section 9.02 of the Plan will not
affect the obligations of each and every Debtor to pay Bankruptcy Fees to the
Office of the United States Trustee that may have come due prior to the
Effective Date. Notwithstanding anything to the contrary in section 9.02 of the
Plan, all Intercompany Claims will remain unimpaired; provided, however, no
distribution of Cash under the Plan will be made on account of such Intercompany
Claims.
8.03 Retention, Enforcement and Release of Causes of Action
In addition to the waivers of Causes of Action set forth in section
15.01(d) of the Plan, the Reorganized Debtors will waive all Causes of Action
that may exist under sections 542, 544 through 550 and 558 of the Bankruptcy
Code or under similar state laws, including any fraudulent conveyance claims,
other than any avoidance action claims that may exist against any of the
Debtors' former officers or directors who in connection with any act or omission
by such person in connection with or relating to the Debtors or their
businesses, has been or is hereafter (i) indicted or charged with any criminal
action, (ii) a person against whom civil charges are brought by the Securities
and Exchange Commission, or (iii) found by any court or tribunal to have acted
with gross negligence or willful misconduct. Notwithstanding the release of
Causes of Action set forth in section 9.03 of the Plan, the Plan Administrator
shall have the right and shall be deemed the Debtors' agent to pursue such
rights of action, including the Debtors' rights under section 502(d) of the
Bankruptcy Code, as a defensive measure, including, without limitation, for
purposes of setoff against distributions, if any, due to a Holder of a General
Unsecured Claim pursuant to the Plan; provided, however, that nothing in the
Plan will give the Plan Administrator or any other party the right to bring any
Claims now barred under paragraph 14 of the Final DIP Financing Order. The
Reorganized Debtors, as representatives of the chapter 11 estates of the
Debtors, will retain the exclusive right to enforce, in their sole discretion,
any and all Causes of Action of the Debtors not released pursuant to the terms
of the Plan or that are not transferred to the Litigation Trust or the Plan
Administrator. The Debtors are the plaintiffs in
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two actions brought prior to the Petition Date, which will be transferred to the
Litigation Trust, and which are discussed in section 3.04 - Background - Pending
Litigation. The Debtors are unable to predict the outcome of those litigations.
8.04 Implementation
Pursuant to the Confirmation Order and upon confirmation of the
Plan, the Debtors or the Reorganized Debtors, as the case may be, will be
authorized to take all necessary steps, and perform all necessary acts, to
consummate the terms and conditions of the Plan. The Reorganized Debtors shall
be authorized to execute, deliver, or record such contracts, instruments,
releases, indentures, and other agreements or documents, and take such actions
as may be necessary or appropriate to effectuate and further evidence the terms
and conditions of the Plan. On or before the Effective Date, the Debtors or the
Reorganized Debtors, as the case may be, may file with the Court the agreements
and documents as may be necessary or appropriate to effectuate or further
evidence the terms and conditions of the Plan. The Debtors or the Reorganized
Debtors, as the case may be, will thereby be authorized to execute the
agreements and documents and take such other actions as are necessary to
effectuate the transactions provided for in the Plan, without the need for any
required approvals, authorizations or consents.
8.05 New Credit Facility
On the Effective Date, the Reorganized Debtors will be authorized
under the Plan to enter into the New Credit Facility and to grant the liens
contemplated thereby.
8.06 Corporate Action
On the Effective Date, and as provided in the Plan, the adoption of
the Amended and Restated Certificates of Incorporation and the Amended and
Restated By-Laws, the selection of directors and officers of the Reorganized
Debtors, and all actions of the Debtors and the Reorganized Debtors contemplated
by the Plan will be deemed, without further action of any kind or nature, to be
authorized and approved in all respects (subject to the provisions of the Plan
and Confirmation Order). All matters provided for in the Plan involving the
corporate structure of the Debtors and the Reorganized Debtors and any corporate
action required by the Debtors and the Reorganized Debtors in connection with
the Plan, will be deemed to have timely occurred in accordance with applicable
state law and will be in effect, without any requirement of further action by
the security holders or directors or officers of the Debtors and the Reorganized
Debtors.
8.07 Issuance of New Securities
The issuance of the New Common Stock by Reorganized aaiPharma and
its distribution to Holders of the Senior Secured Notes is authorized under the
Plan, and directed without the need for any further corporate action, under
applicable law, regulation, order, rule or otherwise. Section 1145 of the
Bankruptcy Code applies with respect to the issuance and transfer of the New
Common Stock under the Plan, and therefore, the New Common Stock issued pursuant
to the Plan and its transfer will be exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act") and all rules and
regulations promulgated thereunder, as well as any and all applicable state and
local laws, rules, and regulations. For a
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detailed discussion of the application of the Securities Act to the issuance of
the New Common Stock, please see Article XVIII herein, entitled "Application of
Securities Act."
8.08 Stockholder and Registration Rights Agreements
On the Effective Date, Reorganized aaiPharma and each Holder of a
Senior Secured Note Claim will be deemed to have executed the Stockholder
Agreement and the Registration Rights Agreement on account of the New Common
Stock issued to Holders of Senior Secured Note Claims pursuant to the Plan.
8.09 Cancellation of Existing Securities and Agreements
On the Effective Date, the DIP Financing Agreement, the Pre-Petition
Indenture, the Senior Secured Notes, the Intercreditor Agreement, and Old Equity
Interests, as well as any and all securities or agreements relating to the DIP
Financing Agreement and/or the Pre-Petition Indenture shall be deemed
automatically canceled, terminated and of no further force or effect; without
further act or action under any applicable agreement, law, regulation, order, or
rule and the obligations of the Debtors and the Indenture Trustee, as
applicable, under the agreements, indentures, and certificates of designations
governing such Claims shall be discharged; provided, however, that the
Pre-Petition Indenture shall continue in effect for the limited purpose of
allowing the Indenture Trustee to make any distributions on account of Senior
Secured Notes pursuant to the Plan and to perform such other necessary
administrative functions with respect thereto, and to enforce the Indenture
Trustee Charging Lien to the extent applicable.
8.10 Dissolution
On the Effective Date, the Debtors listed in the applicable Plan
Supplement filing will be deemed dissolved for all purposes, without further
action. Notwithstanding the foregoing, from and after the Effective Date, the
Debtors or the Reorganized Debtors, as the case may be, may execute such
documents and take such other actions as they deem appropriate in connection
with the dissolution of such entities.
8.11 Amended and Restated Certificates of Incorporation; Amended and
Restated By-Laws
On the Effective Date, or as soon thereafter as practicable, the
Reorganized Debtors will amend their certificates of incorporation by filing the
Amended and Restated Certificates of Incorporation, and will be deemed to have
adopted the Amended and Restated By-Laws.
8.12 Directors and Officers of the Reorganized Debtors
On the Effective Date, the operations of the Reorganized Debtors
will become the general responsibility of the boards of directors of the
Reorganized Debtors, subject to, and in accordance with, the Amended and
Restated Certificate of Incorporation and Amended and Restated By-Laws of each
of the Reorganized Debtors. Subject to any requirement of Court approval
pursuant to section 1129(a)(5) of the Bankruptcy Code, the Debtors will
disclose, on or prior to the Confirmation Date, the identity and affiliations of
the new boards of directors and all Persons that will serve as an initial
officer of any or all of the Reorganized Debtors, and to the extent such person
is an Insider, the nature of any compensation for such person. Each such
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director or officer will serve from and after the Effective Date pursuant to the
terms of the respective Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws of the Reorganized Debtors and the applicable
corporation or limited liability company law, as applicable, of the state in
which the Reorganized Debtor is organized.
8.13 Management Agreements
It is contemplated that the Reorganized Debtors will enter into the
Senior Executive Employment Agreements on the Effective Date. The Senior
Executive Employment Agreements will supercede, govern, and satisfy all
agreements between the Debtors and the parties to the Senior Executive
Employment Agreements. The parties to the Senior Executive Employment Agreements
will be disclosed in the Plan Supplement, along with the material terms of the
Senior Executive Employment Agreements.
8.14 Transactions on Business Days
If the Effective Date or any other date on which a transaction may
occur under the Plan will occur on a day that is not a Business Day, the
transactions contemplated by the Plan to occur on such day will instead occur on
the next succeeding Business Day.
8.15 Termination of DIP Financing Agreement
Upon the payment of all Obligations (as such term is defined in the
DIP Financing Agreement) incurred under or pursuant to the DIP Financing
Agreement, in cash, as provided in section 2.01 of the Plan and the termination
or cash collateralization of all Letters of Credit issued in connection
therewith, the DIP Financing Agreement shall be deemed terminated. Upon payment
or satisfaction in full of all Obligations (as such term is defined in the DIP
Financing Agreement) under or pursuant to the DIP Financing Agreement in
accordance with the terms thereof, all Liens and security interests granted to
secure such obligations will be released and will be of no further force and
effect.
8.16 Ordinary Course Refunds
In the ordinary course of business, AAI Development Services
requires that customers provide advance payment to the Debtors for certain
development services work on behalf of that customer and the Debtors use those
advance payments to fund the work. If a portion of such advance payment remains
after completion of the development services work, the Debtors refund the
remainder of the advance payment to the client. Under the Plan, the Reorganized
Debtors will continue the Debtors' ordinary course practice of both performing
services for which payment had been previously advanced and refunding unutilized
portions of such advance payments upon completion of development services work.
ARTICLE IX.
LITIGATION TRUST
9.01 Establishment of the Litigation Trust; Funding
On the Effective Date, the Litigation Trust will be established as a
separate entity, without any further action of the directors or shareholders of
the Debtors or the Reorganized Debtors, and will become effective pursuant to
the Litigation Trust Agreement for the benefit of
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the Holders of Allowed General Unsecured Claims who hold Litigation Trust
Interests. Subject to the terms of the Plan and any contrary provision required
in connection therewith, the Litigation Trust Agreement shall contain provisions
customary to trust agreements utilized in comparable circumstances and will be
in form and substance acceptable to the Creditors' Committee.
Upon the occurrence of the Effective Date, all parties (including
the Debtors, the Reorganized Debtors, the Litigation Trustee, and Holders of
Allowed Claims in all classes, as appropriate) will be deemed to have executed
any documents or other instruments necessary to cause the transfer of the
relevant rights (including, where applicable, by license) to be transferred to
the Litigation Trust as of the Effective Date; provided, however, such transfer
will only be made to the extent necessary to prosecute and, if required, to
defend the Designated Litigation. Neither the Litigation Trust nor the
Litigation Trustee will have or acquire any Claim or Cause of Action other than
the Designated Litigation and any right of setoff in connection with the
Designated Litigation.
The Litigation Trust will be funded solely from the General
Unsecured Cash Amount in an amount to be determined prior to the Initial
Distribution Date by the Plan Administration Committee and neither the Debtors
nor the Reorganized Debtors will have any obligation to fund the Litigation
Trust in any way. Funds remaining in the Litigation Trust and not expended in
connection with the Designated Litigation will be returned to the General
Unsecured Claim Reserve.
9.02 Transfer of Designated Litigation to the Litigation Trust
On the Effective Date, the Debtors will transfer, and will be deemed
to have transferred to the Litigation Trust, for and on behalf of Litigation
Trust Interest Holders, all of the right, title, and interest in the Designated
Litigation. Any outstanding fees and costs incurred by the Debtors in connection
with the Designated Litigation transferred to the Litigation Trust prior to the
date of the transfer to the Litigation Trust will be paid by the Debtors. Upon
such transfer, the Debtors and the Reorganized Debtors will have no other
further rights or obligations with respect to the Designated Litigation or the
Litigation Trust; provided, however, the Reorganized Debtors and each of their
directors, officers, and employees will provide reasonable and necessary support
and cooperation to the Litigation Trust and to the professionals prosecuting or
defending any action transferred to the Litigation Trust, at the Litigation
Trust's cost and expense in connection with the Designated Litigation, and will
receive reasonable reimbursement from the Litigation Trust for any out-of-pocket
fees and expenses incurred in connection therewith (including any reasonable and
documented attorney fees and expenses up to an aggregate amount of $35,000).
The Plan Administration Committee must determine whether to
prosecute any Designated Litigation. In the event that the Plan Administration
Committee determines not to prosecute the Designated Litigation, it must
immediately advise the Reorganized Debtors in writing and file a notice with the
Court of such determination and all rights and obligations with respect to such
Designated Litigation will immediately revert to the Reorganized Debtors and the
Litigation Trust will have no other or further rights with respect to such
Designated Litigation; provided, however, the Litigation Trustee will reasonably
cooperate with the Reorganized Debtors in the transfer and transition of such
Designated Litigation to the Reorganized Debtors. From and after the date of
transfer of the Designated Litigation from the Litigation Trustee to the
Reorganized Debtors, the Reorganized Debtors will have the sole responsibility
and obligation to
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pay any costs and expenses (including legal and other professional fees)
incurred from and after the date of transfer to the Reorganized Debtors in
connection with the Designated Litigation.
Notwithstanding any right of setoff under section 553 of the
Bankruptcy Code, any and all Claims of any person or Entity that have been or
may be asserted in response to or in connection with Designated Litigation
against the Debtors will be discharged pursuant to section 1141 of the
Bankruptcy Code and the Plan.
In connection with the above-described rights and the Designated
Litigation, and in recognition of the common interest of the Debtors, the
Reorganized Debtors, the Creditors' Committee, and the Litigation Trust in
maximizing distributions to Holders of Allowed General Unsecured Claims under
the Plan, (i) any attorney-client privilege, work-product privilege, or other
privilege or immunity attaching to any documents or communications (whether
written or oral) with respect to the Designated Litigation (any such privilege
or immunity, a "Privilege") will be extended to the Litigation Trust, the Plan
Administrator, and the Plan Administration Committee and will vest in the
Litigation Trust, the Plan Administrator, and Plan Administration Committee, and
each of their representatives, and (ii) the Reorganized Debtors will also retain
any Privilege transferred to the Litigation Trust. The Debtors, the Reorganized
Debtors, the Plan Administrator, and the Litigation Trustee are authorized to
take all necessary actions to effectuate the extension of such Privileges,
including executing an appropriate joint defense agreement and any other
agreements necessary or appropriate to effectuate the terms of section 10.02(d)
of the Plan. Notwithstanding anything otherwise to the contrary, only the
Reorganized Debtors will have the right to waive or relinquish any Privilege
with regard to any communications or other documents concerning any
pharmaceutical or other product other than omeprazole.
If Class 4 does not vote to accept the Plan, no Litigation Trust
will be formed for the benefit of Holders of General Unsecured Claims and the
Reorganized Debtors will retain all of the right, title, and interest in the
Designated Litigation.
9.03 Litigation Trust Interests; Term
The Litigation Trustee will establish and maintain a registry of the
holders of Litigation Trust Interests. Litigation Trust Interests shall be
uncertificated and represented solely by the registry of the Litigation Trustee
and the Litigation Trust Interests shall not be transferable; provided, however,
that such Litigation Trust Interests will be transferable to the extent
permitted by applicable law without the need for registration upon the death of
the Litigation Trust Interest Holder by operation of applicable laws relating to
testamentary or intestate succession.
The Litigation Trust will be dissolved upon the earlier of the
distribution of the full amount of all recoveries obtained in connection with
the Designated Litigation or the reversion of the Designated Litigation to the
Reorganized Debtors pursuant to section 10.02(b) of the Plan.
9.04 Procedures for Distribution
The amount of Litigation Trust Interests to be distributed, the
procedures for such distributions, as well as the procedures for making annual
distributions in accordance with section 10.05 of the Plan will be set forth in
the Litigation Trust Agreement.
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9.05 Annual Distribution; Withholding
The Litigation Trust will distribute at least annually to the
Holders of Litigation Trust Interests any net proceeds from the Designated
Litigation and any other cash as determined by the Plan Administration Committee
by transferring the funds to the Plan Administrator, which shall act as the
disbursing agent for the Litigation Trust; provided, however, that the
Litigation Trust may retain such amounts (i) to pay reasonable administrative
expenses (including any taxes imposed on the Litigation Trust or in respect of
the assets of the Litigation Trust), (ii) to satisfy other liabilities incurred
or assumed by the Litigation Trust in accordance with the Plan or the Litigation
Trust Agreement, and (iii) to prosecute, reduce to judgment, or settle the
Designated Litigation. All such distributions shall be pro rata based on the
number of Litigation Trust Interests held by a Holder compared with the
aggregate number of Litigation Trust Interests outstanding. In accordance with
the Litigation Trust Agreement, the Litigation Trustee may withhold from amounts
distributable to any Litigation Trust Interest Holder any and all amounts,
determined in the Litigation Trustee's reasonable discretion (upon consultation
with the Plan Administration Committee) to be required by any law, regulation,
rule, ruling, directive, or other governmental requirement. In connection with
all such distributions, the Plan Administrator will serve as distribution agent
for the Litigation Trust.
9.06 Allocation of Litigation Trust Taxable Income
Allocations of Litigation Trust taxable income will be determined by
reference to the manner in which an amount of cash equal to such taxable income
would be distributed (without regard to any restrictions on distributions
described herein) if, immediately prior to such deemed distribution, the
Litigation Trust had distributed all of its other assets (valued for this
purpose at their tax book value) to the Holders of the Litigation Trust
Interests, taking into account all prior and concurrent distributions from the
Litigation Trust (including all distributions held in the General Unsecured
Claims Reserve pending the resolution of Disputed Claims). Similarly, taxable
loss of the Litigation Trust will be allocated by reference to the manner in
which an economic loss would be borne immediately after a liquidating
distribution of all of the assets of the Litigation Trust. The tax book value of
the assets of the Litigation Trust for this purpose will equal the fair market
value of such assets on the Effective Date or, if later, the date such assets
were acquired by the Litigation Trust, adjusted in either case in accordance
with tax accounting principals prescribed by the Tax Code, the regulations and
other applicable administrative and judicial authorities and pronouncements.
9.07 Litigation; Responsibilities of Litigation Trustee.
The Litigation Trustee will have the power to (i) prosecute, reduce
to judgment, or settle, for the benefit of the Litigation Trust, all Designated
Litigation, and (ii) to otherwise perform the functions and take the actions
provided for or permitted in the Plan or in any other agreement executed by the
Litigation Trustee pursuant to the Plan. Any and all proceeds generated from
such Designated Litigation will be the property of the Litigation Trust;
provided, however, that the Litigation Trustee will not intentionally admit any
unlawful, inequitable, or fraudulent conduct, or any other wrongdoing on the
part of the Debtors, the Reorganized Debtors, their Subsidiaries, their
Affiliates, or any current or former officers, directors, employees, attorneys,
or advisors other than with regard to any person or Entity that has admitted or
admits such conduct or wrongdoing.
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All costs and expenses associated with the administration of the
Litigation Trust, including those rights, obligations, and duties described in
this Plan, will be the responsibility of and paid by the Litigation Trust solely
from the portion of the General Unsecured Cash Amount made available to the
Litigation Trust by the Plan Administrator under the direction of the Plan
Administration Committee. Neither the Debtors nor the Reorganized Debtors will
have any obligation to fund the Litigation Trust in any way. Notwithstanding the
foregoing, the Debtors will have the sole responsibility and obligation to pay
any costs and expenses (including legal and other professional fees) incurred in
connection with any matter or claim transferred to the Litigation Trust which
were incurred prior to the date of transfer to the Litigation Trust.
The Litigation Trust may retain any law firms, accounting firms,
experts, advisors, consultants, investigators, appraisers, auctioneers, or other
professionals as the Litigation Trustee may deem necessary to retain in its sole
discretion on reasonable terms and conditions of employment or retention, to aid
in the performance of its responsibilities pursuant to the terms of this Plan,
including, without limitation, the prosecution, reducing to judgment, or
settlement of the Designated Litigation and the liquidation and distribution of
Litigation Trust assets. The Plan Administrator will serve as the Litigation
Trust's disbursing agent for the purposes of making any distributions to
Litigation Trust Interest Holders on behalf of the Litigation Trust. Neither the
Debtors nor the Reorganized Debtors will have any obligation to fund the
Litigation Trust in any way.
Unless otherwise required by applicable law, for federal income tax
purposes all persons (including the Debtors, the Litigation Trustee and the
Litigation Trust Interest Holders) will treat (i) the Litigation Trust as a
partnership owned by the Litigation Trust Interest Holders and (ii) the assets
transferred to the Litigation Trust as distributed by the Debtors to the
Litigation Trust Interest Holders and as subsequently transferred by the
Litigation Trust Interests Holders to the Litigation Trust.
ARTICLE X.
DISTRIBUTIONS UNDER THE PLAN
10.01 Timing of Distributions Under the Plan
Except as otherwise provided in the Plan, without in any way
limiting articles 13 and 14 of the Plan, and subject to section 16.02 of the
Plan, payments and distributions in respect of Allowed Claims will be made by
the Reorganized Debtors (or their designee) on or as promptly as practicable
after the Effective Date; provided, however, distributions to Holders of Allowed
General Unsecured Claims will be made by the Plan Administrator.
10.02 Payments and Distributions with Respect to Disputed Claims
No payments or distributions will be made in respect of a Disputed
Claim until such Disputed Claim becomes an Allowed Claim.
10.03 Allocation of Consideration
The aggregate consideration to be distributed to the Holders of
Allowed Claims in each Class under the Plan will be treated as first satisfying
an amount equal to the stated principal amount of the Allowed Claim for such
Holders and any remaining consideration as
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satisfying accrued, but unpaid, interest, if any, to the extent that interest is
payable under the Plan.
10.04 Cash Payments
Cash payments made pursuant to the Plan will be in U.S. dollars.
Cash payments to foreign Creditors may be made, at the option of the Reorganized
Debtors or the Plan Administrator, as applicable, in such funds and by such
means as are necessary or customary in a particular foreign jurisdiction. Cash
payments made pursuant to the Plan in the form of checks issued by the
Reorganized Debtors will be null and void if not cashed within 120 days of the
date of the issuance thereof. Requests for reissuance of any check must be made
directly to the Plan Administrator as set forth in section 11.12 of the Plan.
Distributions to Holders of Allowed General Unsecured Claims shall be made by
the Plan Administrator in accordance with section 11.04 of the Plan.
10.05 Payment of Statutory Fees
All Bankruptcy Fees as determined by the Court at the Confirmation
Hearing will be paid by the Debtors on or before the Effective Date, or by the
Reorganized Debtors as soon as practicable thereafter. All Bankruptcy Fees will
be paid until the Court enters a final decree closing the Chapter 11 Cases.
10.06 No Interest
Except with respect to Holders of Unimpaired Claims entitled to
interest under applicable non-bankruptcy law or as otherwise expressly provided
in the Plan, no Holder of an Allowed Claim will receive interest on the
distribution to which such Holder is entitled hereunder, regardless of whether
such distribution is made on the Effective Date or thereafter.
10.07 Setoffs
The Plan Administrator, the Litigation Trustee or the Reorganized
Debtors, as applicable, may (but will not be required to), pursuant to section
558 of the Bankruptcy Code or applicable non-bankruptcy law, exercise (i) the
setoff rights, of the Debtors or the Reorganized Debtors, as the case may be,
against any Allowed Claims and the distributions to be made pursuant to the Plan
on account of such Allowed Claims, and (ii) Claims of any nature whatsoever that
the Debtors or the Reorganized Debtors or their successors may hold (and could
have asserted) against the Holder of such Claim; provided, however, that neither
the failure to effect a setoff (or to utilize any other rights pursuant to
section 558 of the Bankruptcy Code) nor the allowance of any Claim hereunder
will constitute a waiver or release of any such Claims or rights against such
Holder, unless an order allowing such Claim otherwise so provides.
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10.08 Special Provision Regarding Unimpaired Claims
Except as otherwise provided in the Plan, the Confirmation Order,
any other order of the Court, or any document or agreement entered into and
enforceable pursuant to the terms of the Plan, nothing will affect the Debtors'
or Reorganized Debtors' rights and defenses, both legal and equitable, with
respect to any Unimpaired Claims, including all rights with respect to legal and
equitable defenses to setoffs or recoupments against Unimpaired Claims or to
request disallowance or subordination of any such Claim. In addition,
notwithstanding anything to the contrary, Unimpaired Claims are subject to all
applicable provisions of the Bankruptcy Code, including section 502(b) of the
Bankruptcy Code.
10.09 Fractional Securities
Pursuant to the Plan, and notwithstanding any other provision of the
Plan, only whole numbers of shares of New Common Stock will be issued or
transferred, as the case may be, pursuant to the Plan. The Reorganized Debtors
will not distribute any fractional shares of New Common Stock. For purposes of
distribution, fractional shares of New Common Stock will be rounded up or down
to the nearest share of New Common Stock, as applicable.
10.10 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) and/or withholding is required, the Reorganized Debtors or the Plan
Administrator, as applicable, will file such information return with the
Internal Revenue Service, provide any required statements in connection
therewith to the recipients of such distribution and/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 the Reorganized Debtors or the Plan
Administrator, as applicable, the Reorganized Debtors or the Plan Administrator,
as applicable, will withhold the amount required and distribute the balance to
such Entity.
10.11 Persons Deemed Holders of Registered Securities; Distribution Record
Date
As of the close of business on the Distribution Record Date, there
will be no further changes in the record Holders of any Claims or Old Equity
Interests. The Debtors, the Reorganized Debtors, the Plan Administrator, or
their designees will have no obligation to recognize any transfer of any Claims
or Old Equity Interests occurring after the close of business on the
Distribution Record Date, and will be entitled to recognize and deal for the
purposes under the Plan (except as to voting to accept or reject the Plan) with
only those Holders of record as of the close of business on the Distribution
Record Date. In the event of any dispute regarding the identity of any party
entitled to any payment or distribution in respect of any Claim under the Plan,
no payments or distributions will be made in respect of such Claim until the
Court resolves that dispute pursuant to a Final Order.
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10.12 Surrender of Existing Securities
As a condition to receiving any distribution under the Plan, and
except as otherwise provided in section 11.13 of the Plan, each Holder of an
Instrument evidencing a Claim must surrender such Instrument to the Reorganized
Debtors or their designee. Any Holder of a Claim that fails to (a) surrender
such Instrument or (b) execute and deliver an affidavit of loss and/or indemnity
reasonably satisfactory to the Reorganized Debtors or their designee before the
later to occur of (i) the second anniversary of the Effective Date and (ii) six
months following the date such Holder's Claim becomes an Allowed Claim, will be
deemed to have forfeited all rights and Claims and may not participate in any
distribution under the Plan. Upon compliance with section 11.12 of the Plan, the
Holder of a Claim evidenced by any such lost, stolen, mutilated or destroyed
Instrument will, for all purposes under the Plan, be deemed to have surrendered
such Instrument.
10.13 Undeliverable or Unclaimed Distributions
(i) Any Entity that is entitled to receive a Cash distribution under
the Plan but that fails to cash a check within 120 days of its issuance shall be
entitled to receive a reissued check from the Reorganized Debtors or the Plan
Administrator (as applicable) for the amount of the original check, without any
interest, if such Entity requests in writing the Reorganized Debtors, or the
Plan Administrator (as applicable), or their designee to reissue such check and
provides the Reorganized Debtors, or the Plan Administrator (as applicable), or
their designee, as the case may be, with such documentation as the Reorganized
Debtors or their designee request to verify in their reasonable discretion that
such Entity is entitled to such check, prior to the second anniversary of the
Effective Date. If an Entity fails to cash a check within 120 days of its
issuance and fails to request reissuance of such check prior to the later to
occur of (i) the second anniversary of the Effective Date and (ii) six months
following the date such Holder's Claim becomes an Allowed Claim, such Entity
shall not be entitled to receive any distribution under the Plan. If the
distribution to any Holder of an Allowed Claim is returned to the Reorganized
Debtors, or the Plan Administrator (as applicable), or their designee as
undeliverable, no further distributions will be made to such Holder unless and
until the Reorganized Debtors, or the Plan Administrator (as applicable), or
their designee are notified in writing of such Holder's then-current address.
Undeliverable distributions will remain in the possession of the Reorganized
Debtors, or the Plan Administrator (as applicable), or their designee pursuant
to section 9.01 of the Plan until such time as a distribution becomes
deliverable.
(ii) All claims for undeliverable distributions must be made on or
before the later to occur of (i) the second anniversary of the Effective Date
and (ii) 6 months following the date the Claim underlying such distribution
becomes an Allowed Claim. After such date, all unclaimed property shall revert
to the Reorganized Debtors or the Plan Administrator (as applicable) and the
Claim of any Holder or successor to such Holder with respect to such property
shall be discharged and forever barred notwithstanding any federal or state
escheat laws to the contrary.
10.14 Distributions on Account of Senior Secured Notes
All distributions, if any, on account of Senior Secured Note Claims
will be made by the Reorganized Debtors on the Effective Date to the Indenture
Trustee, who will serve as the Reorganized Debtors' designee for purposes of
making distributions under the Plan to Holders of Senior Secured Note Claims.
The Reorganized Debtors will pay the Indenture Trustee its
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reasonable fees and expenses for making distributions under the Plan to Holders
of Senior Secured Note Claims. The Indenture Trustee is required to make all of
its distributions of New Common Stock within 10 days following the Effective
Date. To the extent the Indenture Trustee provides services related to
distributions pursuant to the Plan, such Indenture Trustee will receive from the
Reorganized Debtors, without further court approval and upon presenting to the
Reorganized Debtors adequate documentation, reasonable compensation for such
services and reimbursement of reasonable expenses incurred in connection with
such services. These payments will be made on terms agreed to between the
Indenture Trustee and the Reorganized Debtors.
10.15 Exemption From Certain Transfer Taxes
Pursuant to Section 1146(c) of the Bankruptcy Code, the issuance,
transfer, or exchange of a security, or the making or delivery of an instrument
of transfer from a Debtor to a Reorganized Debtor or any other person or Entity
pursuant to this Plan, including the granting or recording of any Lien or
mortgage on any property under the New Credit Facility Documents will not be
subject to any stamp tax or other similar tax, and the Confirmation Order will
direct the appropriate state or local governmental officials or agents to forego
the collection of any such tax or governmental assessment and to accept for
filing and recordation any of the foregoing instruments or other documents
without the payment of any such tax or governmental assessment.
10.16 Rule 9019 Settlement and Compromise of Disputes Between the Debtors,
Holders of Senior Secured Note Claims and Holders of General
Unsecured Claims
The provisions of the Plan will constitute a good faith compromise
and settlement of all Causes of Action or disputes among the Debtors, Holders of
General Unsecured Claims, and Holders of Senior Secured Note Claims. The Plan
will be approved by the Bankruptcy Court as a settlement of all Causes of Action
and disputes between the Debtors, Holders of General Unsecured Claims, and
Holders of Senior Secured Note Claims. Entry of the Confirmation Order will
constitute the Bankruptcy Court's approval of this settlement pursuant to
Bankruptcy Rule 9019 and its finding that this is a good faith settlement
pursuant to any applicable state laws, given and made after due notice and
opportunity for hearing.
ARTICLE XI.
PLAN ADMINISTRATION
11.01 Duties
On and after the Effective Date, the Plan Administrator will be
authorized to (i) make distributions required under the Plan to Holders of
Allowed General Unsecured Claims, (ii) transfer to the Litigation Trust the
amount of the General Unsecured Cash Amount determined by the Plan
Administration Committee, and (iii) prosecute objections to and settle General
Unsecured Claims in accordance with section 13.01 of the Plan. The Plan
Administrator will report to and consult with the Plan Administration Committee
in connection with the performance of its duties under the Plan. Notwithstanding
anything to the contrary in the Plan, neither the Debtors or the Reorganized
Debtors will have any liability for any act or omission by the Plan
Administrator.
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11.02 Funding
On the Effective Date, the Debtors will transfer the Claims
Objection Fund to the Plan Administrator. The Claims Objection Fund will be the
sole source of funding for the Plan Administrator to prosecute objections to
General Unsecured Claims pursuant to section 13.01 of the Plan and neither the
Debtors nor the Reorganized Debtors will have any obligation to fund the Claims
Objection Fund or the Plan Administrator in any other way. In the event that any
funds remain in the Claims Objection Fund after no Disputed General Unsecured
Claims remain, such remaining funds shall be deposited in the General Unsecured
Claim Reserve for distribution to Holders of Allowed General Unsecured Claims.
11.03 Distributions
The Plan Administrator will make distributions to Holders of Allowed
General Unsecured Claims on the Initial Distribution Date and each Periodic
Distribution Date in accordance with the terms of the Plan.
11.04 Retention of Professionals
The Plan Administrator may retain any law firms, accounting firms or
other professionals as the Plan Administrator may deem necessary to retain, on
reasonable terms and conditions of retention or employment, to aid in the
performance of its responsibilities pursuant to the terms of this Plan. Any
costs and expenses associated with such retentions will be satisfied from the
Claims Objection Fund.
11.05 Succession
The Plan Administrator may be replaced by the Plan Administration
Committee at any time and for any reason. If the Plan Administrator resigns or,
in the case of an individual, becomes incapacitated or dies, the Plan
Administration Committee will appoint a successor and will timely file a notice
with the Court identifying such successor.
11.06 Cooperation
The Reorganized Debtors and each of their directors, officers, and
employees will provide reasonable support to the Plan Administrator at the Plan
Administrator's sole cost and expense in connection with the Plan
Administrator's duties and will receive reimbursement from the Plan
Administrator for any out-of-pocket fees and expenses incurred in connection
therewith. The Reorganized Debtors and the Plan Administrator will reasonably
cooperate in filing any motions to reclassify Claims from General Unsecured
Claims to other Claims or from other Claims to General Unsecured Claims and with
regard to settlement of such motions or objections; provided, however, that
nothing in section 12.06 of the Plan will prevent the Debtors or the Reorganized
Debtors from objecting to any motion by the Plan Administrator to reclassify a
General Unsecured Claim as a Claim in Classes 1 through 3 and 5 through 7; and
nothing in section 12.06 of the Plan will prevent the Plan Administrator from
objecting to any motion by the Reorganized Debtors to reclassify any Claim as a
General Unsecured Claim. The Plan Administrator will not seek to reclassify any
General Unsecured Claim as a Class 3 Senior Secured Note Claim.
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11.07 Failure by Class 4 to Accept the Plan
In the event that Class 4 does not vote to accept the Plan, (i)
there will be no Plan Administrator, Plan Administration Committee, or Claims
Objection Fund and (ii) all matters relating to the prosecution of objections to
and settlement of all Claims will be the sole responsibility of the Reorganized
Debtors.
ARTICLE XII.
PROVISIONS FOR TREATMENT OF DISPUTED GENERAL UNSECURED CLAIMS
12.01 Objections to General Unsecured Claims; Disputed General Unsecured
Claims
Except to the extent that the Plan Administrator consents, only the
Plan Administrator shall have the authority to file, settle, compromise,
withdraw or litigate to judgment objections to General Unsecured Claims after
the Effective Date; provided, however, that the Plan Administrator shall not be
permitted to incur costs in excess of the Claims Objection Fund in carrying out
the provisions of section 13.01 of the Plan. Subject to an order of the Court
providing otherwise, only the Plan Administrator may object to General Unsecured
Claims by filing an objection with the Court and serving such objection upon the
Holder of such General Unsecured Claim not later than one hundred and twenty
(120) days after the Effective Date or one hundred and twenty (120) days after
the filing of the proof of such Claim, whichever is later, or such other date
determined by the Court upon motion to the Court, which motion may be made
without further notice or hearing.
12.02 Estimation of General Unsecured Claims
For purposes of effectuating the reserve provisions of this Plan and
the allocations and distributions to Holders of Allowed General Unsecured
Claims, the Court will, on or prior to the Initial Distribution Date, pursuant
to Section 502 of the Bankruptcy Code, fix or liquidate the amount of any
contingent or unliquidated General Unsecured Claim, in which event the amount so
fixed will be deemed the Allowed amount of such Claim for purposes of this Plan
or, in lieu thereof, the Court will determine the maximum contingent or
unliquidated amount for such Claim, which amount will be the maximum amount in
which such Claim ultimately may be Allowed under this Plan, if such Claim is
Allowed in whole or part. The Court's entry of an estimation order may limit the
distribution to be made on individual Disputed Claims, regardless of the amount
finally Allowed on account of such Disputed Claims, and no Holder will have
recourse against the Plan Administrator as such Holder's sole recovery will be
from the General Unsecured Cash Amount.
Upon the occurrence of the Effective Date, the Debtors will deposit
the General Unsecured Cash Amount in the General Unsecured Claim Reserve. The
General Unsecured Claim Reserve and all amounts therein (including any interest
actually earned theron) will be maintained by the Plan Administrator for
distribution in accordance with section 6.04 of the Plan to Holders of Allowed
General Unsecured Claims
12.03 Timing of Payments and Distributions With Respect to Disputed
General Unsecured Claims
Subject to the provisions of the Plan, payments and distributions
with respect to each Disputed General Unsecured Claim that becomes an Allowed
General Unsecured Claim,
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that would have otherwise been made had such General Unsecured Claim been an
Allowed General Unsecured Claim on the Effective Date (including distributions
on account of Litigation Trust Interests), will be made promptly on the next
Periodic Distribution Date after such Disputed General Unsecured Claim becomes
an Allowed General Unsecured Claim. Holders of Disputed General Unsecured
Claims, regardless of whether such Disputed General Unsecured Claims become
Allowed General Unsecured Claims, will be bound, obligated and governed in all
respects by the provisions of the Plan.
12.04 General Unsecured Claims Reserve
(i) Estimation. For purposes of effectuating the reserve provisions
of the Plan and the allocations and distributions to Holders of Allowed General
Unsecured Claims (including distributions on account of Litigation Trust
Interests) the Court will, on or prior to the Initial Distribution Date,
pursuant to Section 502 of the Bankruptcy Code, fix or liquidate the amount of
any contingent or unliquidated General Unsecured Claim, in which event the
amount so fixed will be deemed the Allowed amount of such Claim for purposes of
the Plan or, in lieu thereof, the Court will determine the maximum contingent or
unliquidated amount for such Claim, which amount will be the maximum amount in
which such Claim ultimately may be Allowed under the Plan, if such Claim is
Allowed in whole or part. The Court's entry of an estimation order may limit the
distribution to be made on individual Disputed Claims, regardless of the amount
finally Allowed on account of such Disputed Claims, and no Holder will have
recourse against the Plan Administrator, the Litigation Trustee, or the
Reorganized Debtors as such Holder's sole recovery will be from the General
Unsecured Cash Amount.
(ii) Creation of General Unsecured Claims Reserve. Upon the
occurrence of the Effective Date, the Debtors will deposit the General Unsecured
Cash Amount in the General Unsecured Claim Reserve. The General Unsecured Claim
Reserve and all amounts therein (including any interest actually earned theron)
will be maintained by the Plan Administrator for distribution in accordance with
section 6.04 of the Plan to Holders of Allowed General Unsecured Claims.
12.05 Distributions After Allowance of Disputed General Unsecured Claims
Distributions to each Holder of a Disputed General Unsecured Claim,
to the extent that such General Unsecured Claim ultimately becomes an Allowed
General Unsecured Claim, will be made in accordance with the provisions of the
Plan. From and after the Initial Distribution Date, as soon as practicable after
the date that the order or judgment of the Court allowing any Disputed General
Unsecured Claim becomes a Final Order, the Plan Administrator will distribute to
the Holder of such Allowed General Unsecured Claim its Pro Rata share of the
General Unsecured Claim Reserve, based on the Maximum Allowable Amount, on the
next Periodic Distribution Date. All amounts actually earned in respect of the
General Unsecured Cash Amount (including all interest) will be for the benefit
of Holders of Allowed General Unsecured Claims. To the extent that any payment
to be made to a Holder of an Allowed General Unsecured Claim on any Periodic
Distribution Date would be in an amount less than $[10].00, such payment will
not be made by the Plan Administrator unless a request for such payment is made
in writing to the Plan Administrator.
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12.06 Distributions After Disallowance of Disputed General Unsecured
Claims
Holders of Allowed General Unsecured Claims that receive an initial
distribution after allowance of such Holder's General Unsecured Claim as set
forth in section 13.05 of the Plan, may receive subsequent distributions if and
to the extent that other General Unsecured Claims are disallowed or expunged, as
follows: on a Periodic Distribution Date, each Holder of an Allowed General
Unsecured Claim that has previously received any distributions pursuant to
sections 6.04 or 13.05 of the Plan, will receive a distribution in an amount
equal to the difference, if any, between such Holder's Pro Rata share of the
General Unsecured Claim Reserve and the aggregate payments previously paid to
such Holder under sections 6.04 or 13.05 of the Plan (excluding interest) and
any interest actually earned thereon, (except for a final distribution after all
Disputed General Unsecured Claims are either Allowed or expunged) until all
Disputed General Unsecured Claims have been Allowed or expunged, in whole or
part, and no additional distribution will be made prior thereto. The Plan
Administrator may, in its discretion, make each Periodic Distribution Date more
frequent than every four (4) months. If after all Disputed Claims are resolved
and all distributions are made in accordance with section 13.06 of the Plan, at
least $1,000 remains in the General Unsecured Claim Reserve, each Holder of an
Allowed General Unsecured Claim will receive its Pro Rata share of the remaining
Cash. If less than $1,000 remains, such amount may be donated to a charity to be
designated by the Plan Administrator.
ARTICLE XIII.
PROVISIONS FOR TREATMENT OF DISPUTED CLAIMS OTHER THAN GENERAL
UNSECURED CLAIMS
13.01 Objections to Claims; Disputed Claims
Except to the extent that the Debtors or the Reorganized Debtors
consent, only the Debtors and the Reorganized Debtors shall have the authority
to file, settle, compromise, withdraw or litigate to judgment objections to
Claims, other than General Unsecured Claims, after the Effective Date. Prior to
the Effective Date, but after the Confirmation Date, the Reorganized Debtors
will have full authority to file, settle, compromise, withdraw or litigate to
judgment objections to General Unsecured Claims. Subject to an order of the
Court providing otherwise, the Debtors or the Reorganized Debtors, as the case
may be, may object to Administrative Expenses and Claims, other than General
Unsecured Claims, by filing an objection with the Court and serving such
objection upon the Holder of such Administrative Expense or Claim not later than
one hundred and twenty (120) days after the Effective Date or one hundred and
twenty (120) days after the filing of a request for payment of an Administrative
Expense or the proof of such Claim, whichever is later, or such other date
determined by the Court upon motion to the Court, which motion may be made
without further notice or hearing.
13.02 Estimation of Claims
The Debtors or the Reorganized Debtors, as the case may be, may, at
any time, request that the Court estimate any contingent or unliquidated Claim,
other than General Unsecured Claims, pursuant to section 502(c) of the
Bankruptcy Code, regardless of whether the Debtors or the Reorganized Debtors
have previously objected to such Claim or whether the Court has ruled on any
such objection, and the Court will retain jurisdiction to estimate any Claim,
other than General Unsecured Claims, at any time during litigation concerning
any objection to any Claim, other than General Unsecured Claims, including
during the pendency of
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any appeal related to any such objection. Prior to the Effective Date, but after
the Confirmation Date, the Reorganized Debtors, in consultation with the
Creditors' Committee will have full authority to request that the Court estimate
any General Unsecured Claim. In the event the Court estimates any contingent or
unliquidated Claim, other than General Unsecured Claims, that estimated amount
will constitute either the Allowed amount of such Claim or a maximum limitation
on such Claim, as determined by the Court. If the estimated amount constitutes a
maximum limitation on such Claim, the Debtors or the Reorganized Debtors, as the
case may be, may elect to pursue any supplemental proceedings to object to any
ultimate payment of such Claim. All of the aforementioned objection, estimation
and resolution procedures are cumulative and are not necessarily exclusive of
one another. Claims, other than General Unsecured Claims, may be estimated and
thereafter resolved by any permitted mechanism. On and after the Effective Date,
except to the extent that the Reorganized Debtors consent, or with respect to
the fee Claims of Professionals, only the Reorganized Debtors will have the
authority to file, settle, compromise, withdraw, or litigate to judgment
objections to, and requests for estimation of, Administrative Expenses and
Claims, other than General Unsecured Claims.
13.03 Timing of Payments and Distributions with Respect to Disputed Claims
other than General Unsecured Claims
Subject to the provisions of the Plan, payments and distributions
with respect to each Disputed Claim, other than a General Unsecured Claim, that
becomes an Allowed Claim, that would have otherwise been made had such Allowed
Claim been an Allowed Claim on the Effective Date, will be made promptly on the
next Periodic Distribution Date after such Disputed Claim becomes an Allowed
Claim. Holders of Disputed Claims, regardless of whether such Disputed Claims
become Allowed Claims, will be bound, obligated and governed in all respects by
the provisions of the Plan.
13.04 Distributions After Allowance of Disputed Claims other than General
Unsecured Claims
Distributions to each Holder of a Disputed Claim, other than a
General Unsecured Claim, to the extent that such Claim ultimately becomes an
Allowed Claim, will be made in accordance with the provisions of the Plan. As
soon as practicable after the date that the order or judgment of the Court
allowing any Disputed Claim, other than a General Unsecured Claim, becomes a
Final Order, the Holder of such Allowed Claim will receive payment from the
Reorganized Debtors in accordance with the Plan.
13.05 Prosecution of Objections
After the Confirmation Date, the Reorganized Debtors, in
consultation with the Creditors' Committee, will have the authority to file
objections, settle, compromise, withdraw, or litigate to judgment objections to
Claims (in consultation with the Creditors' Committee) other than General
Unsecured Claims. From and after the Effective Date, the Reorganized Debtors may
settle or compromise any Disputed Claim, other than a Disputed General Unsecured
Claim, without approval of the Court.
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ARTICLE XIV.
DISCHARGE, INJUNCTIONS, RELEASES AND SETTLEMENT OF CLAIMS
AS DISCUSSED BELOW, THE PLAN PROVIDES FOR VARIOUS RELEASES THAT ARE
TO BECOME EFFECTIVE AS OF THE CONFIRMATION DATE BUT SUBJECT TO THE OCCURRENCE OF
THE EFFECTIVE DATE. AS NOTED ABOVE, THE RELEASES BEING PROVIDED UNDER THE PLAN
ARE A CRITICAL PART OF THE COMPROMISE AND SETTLEMENT BETWEEN THE HOLDERS OF
GENERAL UNSECURED CLAIMS, THE HOLDERS OF SENIOR SECURED NOTE CLAIMS, AND THE
DEBTORS THAT IS EMBODIED IN THE PLAN. THE RELEASES ARE BEING PROVIDED IN
CONSIDERATION OF, AMONG OTHER THINGS, THE SERVICES PROVIDED TO THE DEBTORS BY
THEIR PRESENT AND FORMER SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES,
AFFILIATES, AGENTS, ADVISORS, FINANCIAL ADVISORS, ACCOUNTANTS, INVESTMENT
BANKERS, ATTORNEYS, AND REPRESENTATIVES, AS WELL AS THE EFFORTS EXPENDED BY THE
AD HOC COMMITTEE OF SECURED NOTEHOLDERS, THE CREDITORS' COMMITTEE, THE PRESENT
AND FORMER HOLDERS OF THE SENIOR SECURED NOTES, THE DIP FINANCING AGENT AND DIP
LENDERS, AND THEIR RESPECTIVE PRESENT AND FORMER MEMBERS AFFILIATES, OFFICERS,
DIRECTORS, SHAREHOLDERS, ATTORNEYS, ACCOUNTANTS, FINANCIAL ADVISORS, INVESTMENT
BANKERS, ADVISORY AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS, WHICH
RESULTED IN A CONSENSUAL PLAN THAT (a) MAXIMIZES THE VALUE OF THE DEBTORS'
BUSINESSES, (b) PROVIDES DISTRIBUTIONS TO CONSTITUENCIES THAT THE DEBTORS'
VALUATION SHOWS ARE OUT OF THE MONEY AND (c) PROVIDES FOR AN EXPEDIENT EMERGENCE
FROM CHAPTER 11.
AS INDICATED BELOW, THE RELEASES BEING PROVIDED BY HOLDERS OF
GENERAL UNSECURED CLAIMS WILL ONLY BE EFFECTIVE IF CLASS 4 VOTES TO ACCEPT THE
PLAN AND WILL NOT BE BINDING ON ANY HOLDER OF A GENERAL UNSECURED CLAIM THAT
ELECTS TO "OPT-OUT" OF THE RELEASES ON SUCH HOLDER'S BALLOT. ADDITIONALLY, AS
SET FORTH BELOW, THE RELEASES DO NOT APPLY TO ANY PERSON WHO HAS BEEN OR IS
HEREAFTER FOUND TO HAVE ACTED WRONGFULLY, (OR IN CERTAIN INSTANCES, IS CHARGED)
WITH CERTAIN MISCONDUCT.
14.01 DISCHARGE OF ALL CLAIMS AND OLD EQUITY INTERESTS AND RELEASES
(a) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THE PLAN, THE
CONFIRMATION OF THE PLAN (SUBJECT TO THE OCCURRENCE OF THE EFFECTIVE DATE) WILL
DISCHARGE THE DEBTORS AND THE REORGANIZED DEBTORS FROM ANY DEBT THAT AROSE
BEFORE THE CONFIRMATION DATE AND ANY DEBT OF THE KIND SPECIFIED IN SECTIONS
502(g), 502(h) OR 502(i) OF THE BANKRUPTCY CODE, WHETHER OR NOT A PROOF OF CLAIM
IS FILED OR IS DEEMED FILED, WHETHER OR NOT SUCH CLAIM IS ALLOWED AND WHETHER OR
NOT THE HOLDER OF SUCH CLAIM HAS VOTED ON THE PLAN. CONFIRMATION OF THE PLAN
WILL NOT DISCHARGE ANY DIP LENDER CLAIMS OR OTHER OBLIGATIONS (AS THAT TERM IS
DEFINED IN THE DIP FINANCING AGREEMENT) UNDER THE DIP FINANCING AGREEMENT UNLESS
AND UNTIL ALL SUCH DIP LENDER CLAIMS AND OBLIGATIONS (AS THAT TERM IS DEFINED IN
THE DIP FINANCING AGREEMENT) ARE PAID IN FULL, IN CASH AND ALL LETTERS OF CREDIT
ISSUED IN ACCORDANCE WITH THE DIP FINANCING AGREEMENT HAVE BEEN TERMINATED OR
CASH COLLATERALIZED.
(b) FURTHERMORE, BUT IN NO WAY LIMITING THE GENERALITY OF THE
FOREGOING, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED BY THE PLAN, THE
DISTRIBUTIONS AND RIGHTS THAT ARE PROVIDED IN THE PLAN WILL BE IN COMPLETE
SATISFACTION, DISCHARGE AND RELEASE, EFFECTIVE AS OF THE CONFIRMATION DATE (BUT
SUBJECT TO THE OCCURRENCE OF THE EFFECTIVE DATE), OF ALL CLAIMS AND CAUSES OF
ACTION AGAINST, LIABILITIES OF, LIENS ON, OBLIGATIONS OF AND OLD EQUITY
INTERESTS IN THE DEBTORS OR THE REORGANIZED DEBTORS OR THE DIRECT OR INDIRECT
ASSETS AND PROPERTIES OF THE DEBTORS OR THE REORGANIZED DEBTORS, WHETHER KNOWN
OR UNKNOWN, REGARDLESS OF WHETHER A PROOF OF CLAIM OR INTEREST WAS FILED,
WHETHER OR NOT ALLOWED AND
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WHETHER OR NOT THE HOLDER OF THE CLAIM OR OLD EQUITY INTEREST HAS VOTED ON THE
PLAN, OR BASED ON ANY ACT OR OMISSION, TRANSACTION OR OTHER ACTIVITY OR
SECURITY, INSTRUMENT OR OTHER AGREEMENT OF ANY KIND OR NATURE OCCURRING, ARISING
OR EXISTING PRIOR TO THE EFFECTIVE DATE THAT WAS OR COULD HAVE BEEN THE SUBJECT
OF ANY CLAIM OR OLD EQUITY INTEREST, IN EACH CASE REGARDLESS OF WHETHER A PROOF
OF CLAIM OR INTEREST WAS FILED, WHETHER OR NOT ALLOWED AND WHETHER OR NOT THE
HOLDER OF THE CLAIM OR OLD EQUITY INTEREST HAS VOTED ON THE PLAN.
(c) IN ADDITION, BUT IN NO WAY LIMITING THE GENERALITY OF THE
FOREGOING, ANY HOLDER OF A SENIOR SECURED NOTE CLAIM OR GENERAL UNSECURED CLAIM
THAT VOTES TO ACCEPT THE PLAN WILL BE AGREEING TO THE RELEASE PROVISIONS OF THE
PLAN AND WILL BE PRESUMED CONCLUSIVELY TO HAVE RELEASED THE DEBTORS, THE
REORGANIZED DEBTORS, THE SUBSIDIARIES, THE AD HOC COMMITTEE OF SECURED
NOTEHOLDERS, THE CREDITORS' COMMITTEE, THE DIP LENDERS, THE DIP FINANCING AGENT,
THE INDENTURE TRUSTEE, AND THE PRESENT AND FORMER MEMBERS OF ANY OF THE
FOREGOING (TOGETHER WITH THE ADVISORY AFFILIATES AND ADVISED AFFILIATES OF SUCH
MEMBERS), THEIR RESPECTIVE SUCCESSORS, ASSIGNS, AND EACH OF THEIR RESPECTIVE
AGENTS, ATTORNEYS, ADVISORS, ACCOUNTANTS, FINANCIAL ADVISORS, AND INVESTMENT
BANKERS, AS WELL AS THE DEBTORS' OFFICERS, DIRECTORS, AND EMPLOYEES WHO HOLD
SUCH POSITIONS ON THE CONFIRMATION DATE AND ANY ENTITY CLAIMED TO BE LIABLE
DERIVATIVELY THROUGH ANY OF THE FOREGOING, FROM ANY CAUSE OF ACTION BASED ON THE
SAME SUBJECT MATTER AS THE CLAIM ON WHICH THE DISTRIBUTION IS RECEIVED;
PROVIDED, HOWEVER, THAT THE FOREGOING RELEASES SHALL NOT APPLY TO ANY PERSON OR
ENTITY WHO, IN CONNECTION WITH ANY ACT OR OMISSION BY SUCH PERSON OR ENTITY IN
CONNECTION WITH OR RELATING TO THE DEBTORS OR THEIR BUSINESSES, HAS BEEN OR IS
HEREAFTER (i) INDICTED OR CHARGED WITH ANY CRIMINAL ACTION, (ii) A PERSON
AGAINST WHOM CIVIL CHARGES ARE BROUGHT BY THE SECURITIES AND EXCHANGE
COMMISSION, OR (iii) FOUND BY ANY COURT OR TRIBUNAL TO HAVE ACTED WITH GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT; PROVIDED, FURTHER, HOWEVER, THAT THE FOREGOING
RELEASES SHALL NOT APPLY TO ANY HOLDER OF A GENERAL UNSECURED CLAIM (i) IF SUCH
HOLDER "OPTS-OUT" OF THE RELEASES PROVIDED IN SECTION 15.01(c) OF THE PLAN BY A
WRITTEN ELECTION PURSUANT TO SUCH HOLDER'S BALLOT OR (ii) IF CLASS 4 DOES NOT
ACCEPT THE PLAN.
(d) ADDITIONALLY, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED BY
THE PLAN OR THE CONFIRMATION ORDER, THE CONFIRMATION OF THE PLAN (SUBJECT TO THE
OCCURRENCE OF THE EFFECTIVE DATE) SHALL ACT AS A DISCHARGE AND RELEASE OF ALL
CAUSES OF ACTION (INCLUDING CAUSES OF ACTION OF A TRUSTEE AND DEBTOR IN
POSSESSION UNDER THE BANKRUPTCY CODE) OF THE DEBTORS AND REORGANIZED DEBTORS,
WHETHER KNOWN OR UNKNOWN, AGAINST (IN EACH CASE, ONLY IN THE SPECIFIED
CAPACITY): (i) THEIR PRESENT AND FORMER DIRECTORS, SHAREHOLDERS, OFFICERS AND
EMPLOYEES, AGENTS, ATTORNEYS, ADVISORS, ACCOUNTANTS, FINANCIAL ADVISORS,
INVESTMENT BANKERS; (ii) THE AD HOC COMMITTEE OF SECURED NOTEHOLDERS AND THE
CREDITORS' COMMITTEE, EACH IN SUCH CAPACITY, AND THEIR RESPECTIVE PRESENT AND
FORMER MEMBERS AND THE PRESENT AND FORMER AFFILIATES, OFFICERS, DIRECTORS,
SHAREHOLDERS, ATTORNEYS, ACCOUNTANTS, FINANCIAL ADVISORS, INVESTMENT BANKERS,
ADVISORY AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS OF EACH OF THE AD
HOC COMMITTEE OF SECURED NOTEHOLDERS AND THE CREDITORS' COMMITTEE AND THEIR
RESPECTIVE PRESENT AND FORMER MEMBERS; (iii) THE PRESENT AND FORMER HOLDERS OF
THE SENIOR SECURED NOTES, EACH IN SUCH CAPACITY, AND THEIR RESPECTIVE PRESENT
AND FORMER AFFILIATES, OFFICERS, DIRECTORS, SHAREHOLDERS, ATTORNEYS,
ACCOUNTANTS, FINANCIAL ADVISORS, INVESTMENT BANKERS, ADVISORY AFFILIATES,
EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS; (iv) THE INDENTURE TRUSTEE AND ITS
PRESENT AND FORMER AFFILIATES, OFFICERS, DIRECTORS, SHAREHOLDERS, ATTORNEYS,
ACCOUNTANTS, FINANCIAL ADVISORS, INVESTMENT BANKERS, ADVISORY AFFILIATES,
EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS; (v) THE DIP AGENT AND DIP LENDERS AND
THEIR
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RESPECTIVE PRESENT AND FORMER AFFILIATES, OFFICERS, DIRECTORS, SHAREHOLDERS,
ATTORNEYS, ACCOUNTANTS, FINANCIAL ADVISORS, INVESTMENT BANKERS, ADVISORY
AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS; AND (vi) ANY ENTITY
CLAIMED TO BE LIABLE DERIVATIVELY THROUGH ANY OF THE FOREGOING (INCLUDING CLAIMS
ASSERTED DERIVATIVELY ON BEHALF OF THE DEBTORS IN LITIGATION PENDING IN THE
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA, WESTERN
DIVISION, CAPTIONED VINCENT V. SANCILIO, ET AL., CIVIL ACTION NO.
7:04-CV-166-D). NOTWITHSTANDING THE GENERALITY OF THE FOREGOING, NOTHING IN THE
PLAN SHALL RELEASE ANY CLAIMS OF ANY DEBTORS OR REORGANIZED DEBTORS, AS THE CASE
MAY BE, AGAINST ANY SUBSIDIARIES THAT ARE NOT DEBTORS OR REORGANIZED DEBTORS, AS
THE CASE MAY BE; PROVIDED, HOWEVER, THAT THE FOREGOING RELEASES SHALL NOT APPLY
TO ANY PERSON OR ENTITY WHO, IN CONNECTION WITH ANY ACT OR OMISSION BY SUCH
PERSON OR ENTITY IN CONNECTION WITH OR RELATING TO THE DEBTORS OR THEIR
BUSINESSES, HAS BEEN OR IS HEREAFTER (i) INDICTED OR CHARGED WITH ANY CRIMINAL
ACTION, (ii) A PERSON AGAINST WHOM CIVIL CHARGES ARE BROUGHT BY THE SECURITIES
AND EXCHANGE COMMISSION, OR (iii) FOUND BY ANY COURT OR TRIBUNAL TO HAVE ACTED
WITH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
14.02 EXCULPATION
THE DEBTORS, THE REORGANIZED DEBTORS, ANY COMMITTEES AND THEIR
PRESENT AND FORMER MEMBERS, THE PLAN ADMINISTRATOR, THE LITIGATION TRUSTEE, AND
THE MEMBERS OF THE PLAN ADMINISTRATION COMMITTEE, THE DIP LENDERS, THE DIP
FINANCING AGENT, THE INDENTURE TRUSTEE, AND EACH OF THE RESPECTIVE PRESENT AND
FORMER OFFICERS, DIRECTORS, MEMBERS, EMPLOYEES, AND AGENTS, ATTORNEYS, ADVISORS,
ACCOUNTANTS, FINANCIAL ADVISORS, AND INVESTMENT BANKERS OF THE FOREGOING
(INCLUDING ANY PROFESSIONALS RETAINED BY SUCH PERSONS OR ENTITIES) WILL HAVE NO
LIABILITY FOR ANY ACT OR OMISSION IN CONNECTION WITH, OR ARISING OUT OF, THE
PURSUIT OF APPROVAL OF THE DISCLOSURE STATEMENT OR THE PLAN OR THE SOLICITATION
OF VOTES FOR OR CONFIRMATION OF THE PLAN, OR THE CONSUMMATION OF THE PLAN, OR
THE TRANSACTIONS CONTEMPLATED AND EFFECTUATED BY THE PLAN OR THE ADMINISTRATION
OF THE PLAN OR THE PROPERTY TO BE DISTRIBUTED UNDER THE PLAN, OR ANY OTHER ACT
OR OMISSION DURING THE ADMINISTRATION OF THE DEBTORS' ESTATES OR IN
CONTEMPLATION OF THE CHAPTER 11 CASES EXCEPT FOR GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT AS DETERMINED BY A FINAL ORDER OF THE COURT, AND IN ALL RESPECTS,
WILL BE ENTITLED TO RELY UPON THE ADVICE OF COUNSEL WITH RESPECT TO THEIR DUTIES
AND RESPONSIBILITIES UNDER THE PLAN; PROVIDED, HOWEVER, THAT THE FOREGOING
RELEASES SHALL NOT APPLY TO ANY PERSON OR ENTITY WHO, IN CONNECTION WITH ANY ACT
OR OMISSION BY SUCH PERSON OR ENTITY IN CONNECTION WITH OR RELATING TO THE
DEBTORS OR THEIR BUSINESSES, HAS BEEN OR IS HEREAFTER (I) INDICTED OR CHARGED
WITH ANY CRIMINAL ACTION, (II) A PERSON AGAINST WHOM CIVIL CHARGES ARE BROUGHT
BY THE SECURITIES AND EXCHANGE COMMISSION, OR (III) FOUND BY ANY COURT OR
TRIBUNAL TO HAVE ACTED WITH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
14.03 INJUNCTION
SECTIONS 15.01, 15.02 AND 15.04 OF THE PLAN WILL ALSO ACT AS AN
INJUNCTION AGAINST ANY ENTITY COMMENCING OR CONTINUING ANY ACTION, EMPLOYMENT OF
PROCESS, OR ACT TO COLLECT, OFFSET OR RECOVER ANY CLAIM, INTEREST OR CAUSE OF
ACTION SATISFIED, RELEASED OR DISCHARGED UNDER THE PLAN.
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14.04 Guarantees and Claims of Subordination.
(i) Guarantees. The classification and the manner of satisfying all
Claims under the Plan take into consideration (i) the possible existence of any
alleged guarantees by the Debtors of obligations of any Entity or Entities, and
(ii) that the Debtors may be joint obligors with another Entity or Entities with
respect to the same obligation. The Holder of Claims will be entitled to only
one distribution with respect to any given obligation of the Debtors and their
Subsidiaries.
(ii) Claims of Subordination. Except as specifically provided herein
with respect to the subordination of 510(b) Note Claims and Old Equity
Interests, to the fullest extent permitted by applicable law, all Claims and Old
Equity Interests in the Debtors, and all rights and claims between or among
Holders of Claims or Old Equity Interests relating in any manner whatsoever to
Claims or Old Equity Interests, based on any contractual or legal rights, will
be terminated on the Effective Date and discharged in the manner provided in the
Plan, and all such Claims, Old Equity Interests and rights so based and all such
contractual and legal rights to which any Entity may be entitled will be
irrevocably waived upon the Effective Date. To the fullest extent permitted by
applicable law, the rights afforded and the distributions that are made in
respect of any Claims or Old Equity Interests under the Plan will not be subject
to levy, garnishment, attachment or like legal process by any Holder of a Claim
or Old Equity Interest by reason of any contractual or legal rights, so that,
notwithstanding any such contractual or legal rights, each Holder of a Claim or
Old Equity Interest will have and receive the benefit of the rights and
distributions set forth in the Plan.
Pursuant to Bankruptcy Rule 9019, and any applicable state law, and
as consideration for the distributions and other benefits provided under the
Plan, the provisions of section 15.04(b) of the Plan will constitute a good
faith compromise and settlement of any Causes of Action relating to the matters
described in section 15.04(b) of the Plan which could be brought by any Holder
of a Claim or Old Equity Interest against or involving another Holder of a Claim
or Old Equity Interest, which compromise and settlement is in the best interests
of Creditors and Holders of Old Equity Interests and is fair, equitable and
reasonable. Pursuant to the Confirmation Order, this settlement will be approved
by the Court as a settlement of all such Causes of Action. The Court's approval
of this settlement pursuant to Bankruptcy Rule 9019 and its finding that this is
a good faith settlement pursuant to any applicable state law, given and made
after due notice and opportunity for hearing, will bar any such Cause of Action
relating to the matters described in section 15.04(b) of the Plan which could be
brought by any Holder of a Claim or Old Equity Interest against or involving
another Holder of a Claim or Old Equity Interest.
14.05 Survival of Indemnification Obligations.
Pursuant to their respective certificates of incorporation, by-laws,
contractual obligations, and/or applicable state laws, the Debtors have certain
obligations to indemnify their directors, officers, agents, employees and
representatives. Certain directors, officers, and employees have been named as
defendants in various lawsuits in connection with the performance of their
duties as directors, officers, and employees of the Debtors. In consideration of
the continued service of those individuals to the Debtors during the pendency of
the Chapter 11 Cases, the Debtors have determined, with the consent of the Ad
Hoc Committee of Secured Noteholders, that the Reorganized Debtors will honor
the Debtors' indemnification obligations with respect to those individuals who
remain with the Debtors through the Confirmation Date,
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subject to a cap of $3 million (with such individual caps as to be determined by
the Debtors in consultation with the Creditors' Committee and the Ad Hoc
Committee of Secured Noteholders), which shall be the total amount available to
satisfy any and all indemnification obligations. In consideration of the
foregoing, ANY DIRECTORS, OFFICERS, AGENTS, EMPLOYEES, AND REPRESENTATIVES OF
THE DEBTORS THAT RECEIVE INDEMNIFICATION FROM THE REORGANIZED DEBTORS UNDER
SECTION 15.05 OF THE PLAN SHALL BE DEEMED TO RELEASE ANY AND ALL CLAIMS, OTHER
THAN SENIOR SECURED NOTE CLAIMS OR CLAIMS FOR SALARY, EMPLOYEE BENEFITS,
VACATION, AND EXPENSE REIMBURSEMENT, THEY MAY HAVE AGAINST THE DEBTORS AND THE
REORGANIZED DEBTORS, AND THE PRESENT AND FORMER MEMBERS OF ANY OF THE FOREGOING
(TOGETHER WITH THE ADVISORY AFFILIATES AND ADVISED AFFILIATES OF SUCH MEMBERS),
THEIR RESPECTIVE SUCCESSORS, ASSIGNS, AND EACH OF THEIR RESPECTIVE PRESENT AND
FORMER DIRECTORS, SHAREHOLDERS, OFFICERS, AGENTS, ATTORNEYS, ADVISORS,
ACCOUNTANTS, FINANCIAL ADVISORS, INVESTMENT BANKERS AND EMPLOYEES AND ANY ENTITY
CLAIMED TO BE LIABLE DERIVATIVELY THROUGH ANY OF THE FOREGOING. No officer,
director, employee, agent, or representative who, in connection with any act or
omission by such person in connection with or relating to the Debtors or their
businesses, has been or is hereafter (i) indicted or charged with any criminal
action, (ii)a person against whom civil charges are brought by the Securities
and Exchange Commission, or (iii) found by any court or tribunal to have acted
with gross negligence or willful misconduct shall be entitled to receive such
indemnification. Furthermore, any person who receives indemnification pursuant
to section 15.05 of the Plan and is subsequently (i) indicted or charged with
any criminal action, (ii) a person against whom civil charges are brought by the
Securities and Exchange Commission, or (iii) found by any court or tribunal to
have acted with gross negligence or willful misconduct shall be required to
disgorge to the Reorganized Debtors any amounts received pursuant to section
15.05 of the Plan. Neither the Debtors nor the Reorganized Debtors shall have a
General Unsecured Claim by way of subrogation or otherwise for payments made
pursuant to section 15.05 of the Plan. Notwithstanding anything to the contrary
in the Plan, the Reorganized Debtors will honor the indemnification obligations
set forth in section 12.15 of the DIP Financing Agreement.
14.06 Cooperation with Litigation Trustee
Notwithstanding anything to the contrary in the Plan, any former
officer, director, or employee that fails to reasonably cooperate with the
Litigation Trustee in accordance with section 10.02(a) of the Plan, will not
receive the benefit of any of the releases, injunctions, or exculpation provided
for in article 15 of the Plan.
ARTICLE XV.
CONDITIONS TO CONFIRMATION AND EFFECTIVE DATE
15.01 Conditions to Confirmation
The following conditions must occur and be satisfied or waived in
accordance with section 16.03 of the Plan by the Debtors on or prior to the
Confirmation Date:
(i) Confirmation Order
The Confirmation Order shall be in form and substance satisfactory
to the Ad Hoc Committee of Secured Noteholders and the Creditors' Committee; and
(ii) New Credit Facility Documents
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The Debtors must have received a firm written commitment for the New
Credit Facility.
15.02 Conditions to Effective Date
The following conditions must occur and be satisfied or waived in
accordance with section 16.03 of the Plan by the Debtors on or before the
Effective Date for the Plan to be effective on the Effective Date:
(i) Entry of Confirmation Order
The Confirmation Order shall have become a Final Order;
(ii) Creation of General Unsecured Claim Reserve
Provided that Class 4 votes to accept the Plan, the Debtors or the
Reorganized Debtors, as the case may be, must have deposited the General
Unsecured Cash Amount in the General Unsecured Claim Reserve;
(iii) Creation of the Claims Objection Fund.
Provided that Class 4 votes to accept the Plan, the Debtors or the
Reorganized Debtors, as the case may be, must have deposited the Claims
Objection Fund into a segregated interest bearing account in the name and under
the control of the Plan Administrator.
(iv) Distribution of New Common Stock
The New Common Stock must have been issued to the Indenture Trustee
in accordance with the terms set forth in the Plan.
(v) Authorizations, Consents and Approvals
All authorizations, consents and regulatory approvals in connection
with the consummation of the Plan have been obtained and not revoked;
(vi) New Credit Facility Documents
If applicable, all conditions to the New Credit Facility Documents,
other than the occurrence of the Effective Date of the Plan, must have been
satisfied or waived (such waiver requiring the consent of the Ad Hoc Committee
of Secured Noteholders, which consent shall not be unreasonably delayed,
conditioned or withheld) pursuant to the terms thereof; and
15.03 Waiver of Conditions
The Debtors or the Reorganized Debtors, as the case may be, with the
consent of the Ad Hoc Committee of Secured Noteholders, which will not be
unreasonably withheld, may waive one or more of the conditions precedent to the
confirmation or effectiveness of the Plan set forth in sections 16.01 and 16.02
of the Plan , other than 16.02(b) and 16.02(c), without any other notice to
parties in interest or the Court and without a hearing.
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15.04 Effect of Failure of Conditions
If all the conditions to effectiveness and the occurrence of the
Effective Date have not been satisfied or duly waived on or before the first
Business Day that is more than 180 days after the date the Court enters the
Confirmation Order, or by such later date as is proposed by the Debtors, agreed
to by any Committee, and approved, after notice and a hearing, by the Court,
then upon motion by the Debtors made before the time that all of the conditions
have been satisfied or duly waived, the Confirmation Order will be vacated by
the Court; provided, however, that notwithstanding the filing of such a motion,
the Confirmation Order will not be vacated if each of the conditions to
consummation is either satisfied or duly waived before the Court enters an order
granting the relief requested in such motion. If the Confirmation Order is
vacated pursuant to section 16.04 of the Plan, the Plan will be null and void in
all respects, and nothing contained in the Plan will (a) constitute a waiver or
release of any Claims against or Old Equity Interests in the Debtors or (b)
prejudice in any manner the rights of the Holder of any Claim or Old Equity
Interest in the Debtors.
ARTICLE XVI.
MISCELLANEOUS PROVISIONS OF THE PLAN
16.01 Retention of Jurisdiction
The business and assets of the Debtors shall remain subject to the
jurisdiction of the Court until the Effective Date. From and after the Effective
Date, the Court shall retain and have exclusive jurisdiction of all matters
arising out of, and related to the Chapter 11 Cases or the Plan pursuant to, and
for purposes of, subsection 105(a) and section 1142 of the Bankruptcy Code and
for, among other things, to:
(a) Determine any and all disputes relating to Administrative
Expenses, Claims and Old Equity Interests, including the allowance and amount
thereof, and any right to setoff;
(b) Determine any and all disputes among creditors with
respect to their Claims;
(c) Determine any and all disputes relating to the Litigation
Trust, the Plan Administrator and the Plan Administration Committee;
(d) Determine any and all disputes regarding any assertion of
a waiver or relinquishment of any Privilege through the transfer of the
Designated Litigation to the Litigation Trust or by sharing any Privileged
information with the Litigation Trustee, the Plan Administrator, or the
Creditors' Committee;
(e) Determine any and all objections to cure amounts required
pursuant to section 8.02 of the Plan;
(f) Consider and allow any and all applications for
compensation for professional services rendered and disbursements incurred up to
and including the Confirmation Date in connection therewith;
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(g) Determine any and all applications, motions, adversary
proceedings and contested or litigated matters pending on the Effective Date and
arising in or related to the Chapter 11 Cases or the Plan;
(h) Remedy any defect or omission or reconcile any
inconsistency in the Plan or the Confirmation Order;
(i) Enforce the provisions of the Plan relating to the
distributions to be made hereunder;
(j) Issue such orders, consistent with section 1142 of the
Bankruptcy Code, as may be necessary to effectuate the consummation and full and
complete implementation of the Plan;
(k) Enforce and interpret any provisions of the Plan;
(l) Determine such other matters as may be set forth in the
Confirmation Order or that may arise in connection with the implementation of
the Plan;
(m) Determine the amounts allowable as Administrative Expenses
pursuant to section 503(b) of the Bankruptcy Code;
(n) Hear and determine disputes arising in connection with the
interpretation, implementation, or enforcement of the Plan, the Sale Transaction
and any agreements or documents necessary to effectuate the terms and conditions
of the Plan, or any orders entered by the Court during the pendency of the
Chapter 11 Cases;
(o) Hear and determine any issue for which the Plan or any
document related to or ancillary thereto requires a Final Order of the Court;
(p) Hear and determine matters concerning state, local, and
federal taxes in accordance with sections 346, 505, and 1146 of the Bankruptcy
Code;
(q) Hear and determine any issue related to the composition of
the New Boards of Directors of each of the Reorganized Debtors;
(r) Hear any other matter not inconsistent with the Bankruptcy
Code; and
(s) Enter a final decree closing the Chapter 11 Cases.
16.02 Binding Effect
The provisions of the Plan will be binding upon and inure to the
benefit of the Debtors, the Reorganized Debtors, any Holder of a Claim or Old
Equity Interest, their respective predecessors, successors, assigns, agents,
officers and directors and any other Entity affected by the Plan. Except as
expressly set forth therein, nothing in the Plan is intended to affect or will
affect any rights or interests of the DIP Lenders or the DIP Financing Agent
under the DIP Financing Agreement or the Final DIP Financing Order.
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16.03 Authorization of Corporate Action
The entry of the Confirmation Order will constitute a direction and
authorization to and of the Debtors or the Reorganized Debtors, as the case may
be, to take or cause to be taken any corporate action necessary or appropriate
to consummate the provisions of the Plan prior to and through the Effective Date
(including the filing of the Amended and Restated Certificates of Incorporation
and dissolution of those Debtors listed in the Plan Supplement that will be
dissolved pursuant to section 9.10 of the Plan), and all such actions taken or
caused to be taken will be deemed to have been authorized and approved by the
Court. Any corporate action required by the Debtors or the Reorganized Debtors
in connection with the Plan, including the approval of Reorganized aaiPharma's
Amended and Restated Certificate of Incorporation by the requisite number of
stockholders of Reorganized aaiPharma, will, as of the Effective Date, be deemed
to have occurred and will be effective as provided in the Plan and will be
authorized and approved in all respects without any requirement of further
action under applicable law, regulation, order, or rule, including any action by
the security holders or directors of the Debtors or the Reorganized Debtors.
16.04 Modification of the Plan
The Plan may be altered, amended or modified by the Debtors before
or after the Confirmation Date, as provided in section 1127 of the Bankruptcy
Code.
16.05 Withdrawal of the Plan
The Debtors reserve the right, at any time prior to the entry of the
Confirmation Order, to revoke or withdraw the Plan. If the Debtors revoke or
withdraw the Plan then the Plan will be deemed null and void. In such event,
nothing contained herein shall constitute or be deemed a waiver or release of
any Claims by or against the Debtors or any other person, or an admission
against interests of the Debtors, nor shall it prejudice in any manner the
rights of the Debtors or any person in any further proceeding involving the
Debtors.
16.06 Nonvoting Stock
In accordance with section 1123(a)(6) of the Bankruptcy Code, the
Amended and Restated Certificates of Incorporation will contain a provision
prohibiting the issuance of nonvoting equity securities by each of the
Reorganized Debtors, subject to further amendment of such Amended and Restated
Certificates of Incorporation as permitted by applicable law.
16.07 Dissolution of any Committee
On the Effective Date, all Committees, except for the Ad Hoc
Committee of Secured Noteholders, will cease to exist and its members and
employees or agents (including attorneys, investment bankers, financial
advisors, accountants and other professionals) will be released from all further
authority, duties, responsibilities and obligations relating to and arising from
and in connection with the Chapter 11 Cases and no subsequent fees will accrue
to any Committee, including the Ad Hoc Committee of Secured Noteholders, other
than in connection with any application for final allowance of compensation and
reimbursement of expenses in accordance with Section 2.01 of the Plan.
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16.08 Section 1125(e) of the Bankruptcy Code
The Debtors (and each of their respective Affiliates, agents,
directors, officers, employees, advisors and attorneys) have, and upon
confirmation of the Plan will be deemed to have, solicited acceptances of the
Plan in good faith and in compliance with the applicable provisions of the
Bankruptcy Code.
The Debtors and each of the members of any Committee (and each of
its respective Affiliates, agents, directors, officers, employees, advisors, and
attorneys) have, and upon confirmation of the Plan will be deemed to have,
participated in good faith and in compliance with the applicable provisions of
the Bankruptcy Code with regards to the distributions of the New Common Stock
under the Plan, and therefore are not, and on account of such distributions will
not be, liable at any time for the violation of any applicable law, rule, or
regulation governing the solicitation of acceptances or rejections of the Plan
or such distributions made pursuant to the Plan.
16.09 Post-Confirmation Obligations
The Reorganized Debtors will pay fees assessed against each of the
Debtors' estates under 28 U.S.C. Section 1930(a)(6) until entry of an order
closing the respective Chapter 11 Cases.
ARTICLE XVII.
CERTAIN FACTORS
HOLDERS OF CLAIMS ENTITLED TO VOTE TO ACCEPT OR REJECT THE PLAN
SHOULD READ AND CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW AND THE DOCUMENTS
DELIVERED TOGETHER WITH THIS DISCLOSURE STATEMENT AND INCORPORATED BY REFERENCE
IN THIS DISCLOSURE STATEMENT, PRIOR TO VOTING TO ACCEPT OR REJECT THE PLAN.
17.01 Certain Bankruptcy Law Considerations
(i) Parties in Interest May Object to the Debtors' Classification
of Claims and Old Equity Interests
Section 1122 of the Bankruptcy Code provides that a plan of
reorganization may place a class or interest in a particular class only if such
claim or interest is substantially similar to the other claims or interests in
such class. The Debtors believe that the classification of Claims and Old Equity
Interests under the Plan complies with the requirements set forth in the
Bankruptcy Code. However, there can be no assurance that the Court will reach
the same conclusion.
(ii) Risk of Non-Confirmation or Modification of the Plan
Although the Debtors believe that the Plan will satisfy all
requirements necessary for its confirmation under the Bankruptcy Code, there can
be no assurance that the Court will reach the same conclusion. Moreover, there
can be no assurance that modifications of the Plan
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will not be required for such confirmation or that such modifications would not
necessitate the resolicitation of votes.
There can be no assurance that the requisite acceptances of the Plan
will be received. Even if the requisite acceptances are received, there can be
no assurance that the Court will confirm the Plan. The Court could decline to
confirm the Plan if it found that any of the statutory requirements for its
confirmation had not been met, including the requirement that the terms of the
Plan are fair and equitable to a non-accepting class of Claims or Old Equity
Interests. Section 1129 of the Bankruptcy Code sets forth the requirements for
confirmation of a plan of reorganization and requires, among other things, a
finding by the Court that (i) such plan "does not unfairly discriminate" and is
"fair and equitable" with respect to any non-accepting classes, (ii)
confirmation of the plan is not likely to be followed by a liquidation or a need
for further financial reorganization and (iii) the value of distributions to
non-accepting Holder of Claims and Old Equity Interests within a particular
class under the plan will not be less than the value of distributions such
Holder would receive if the debtors were liquidated under chapter 7 of the
Bankruptcy Code. While there can be no assurance that these requirements will be
met, the Debtors believe that the Plan will not be followed by a need for
further financial reorganization and that non-accepting Holders of Claims will
receive distributions no less than would be received following a liquidation
under chapter 7 of the Bankruptcy Code when taking into consideration all
administrative claims and costs associated with any such case under chapter 7 of
the Bankruptcy Code.
If the Plan is not confirmed by the Court, it is unclear whether a
restructuring of the Debtors could be implemented and what distributions Holders
of Claims or Old Equity Interests ultimately would receive with respect to their
Claims or Old Equity 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 and Old Equity Interests would
receive substantially less favorable treatment than they would receive under the
Plan.
Holders of Claims or Old Equity Interests may assert, among other
things, that Chanin's valuation analysis set forth herein is incorrect or that
the Plan is not "fair and equitable" and provides a greater than permitted
recovery to certain classes of Claims. Although the Debtors stand by Chanin's
valuation analysis, and although the Plan has the support of both the Ad Hoc
Committee of Secured Noteholders and the Creditors' Committee, there can be no
assurance that any such assertions by Holders of Claims or Old Equity Interests
will not delay the Debtors' emergence from chapter 11 of the Bankruptcy Code or
prevent confirmation of the Plan. One of aaiPharma's directors, Dr. Sancilio,
has asserted that he believes the valuation analysis performed by Chanin
undervalues the Debtors. Dr. Sancilio has retained his own financial advisor -
Scouler Andrews - who has performed its own valuation of the Debtors. That
valuation analysis concludes that Holders of Senior Secured Note Claims are
receiving a greater than permitted recovery and that the Plan is therefore not
fair and equitable. As noted herein, the Debtors, the Creditors' Committee, and
the Ad Hoc Committee of Secured Noteholders disagree with the assertions made in
the report by Scouler Andrews.
The Debtors, subject to the terms and conditions of the Plan,
reserve the right to modify the terms of the Plan as necessary for its
confirmation. Such modification could result in a less favorable treatment of
any non-accepting class or classes, as well as of any classes junior to such
non-accepting classes, than the treatment currently provided in the Plan. Such
less favorable treatment could include a distribution of property to the class
affected by the
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modification of a lesser value than currently provided in the Plan or no
distribution of property whatsoever under the Plan.
(iii) The Debtors May Object to the Amount or Classification of a
Claim or Old Equity Interest
Except as otherwise provided in the Plan, and except with regard to
General Unsecured Claims after the Effective Date, the Debtors reserve the right
to object to the amount or classification of any Claim except any such Claims or
Old Equity Interests that are deemed Allowed under the Plan. The estimates set
forth in this Disclosure Statement cannot be relied on by any Holder of a Claim
or Old Equity Interest where such Claim or Old Equity Interest is subject to an
objection. Any Holder of a Claim or Old Equity Interest that is subject to an
objection may not receive its specified share of the estimated distributions
described in this Disclosure Statement. In addition, the estimated recoveries
included in the Disclosure Statement are based on an estimate of Allowed Claims.
Because distributions under the Plan are linked to the amount and value of the
Allowed Claims, any material increase in the amount of Allowed Claims over the
amounts estimated by the Debtors would materially reduce the recovery to Holders
of Allowed Claims under the Plan. Further, the Debtors have transferred all of
the right to prosecute objections to claims of General Unsecured Creditors to
the Plan Administrator, and have agreed to fund up to $200,000 of such
prosecution. The Debtors can make no assurances as to the final Allowed amount
of any General Unsecured Claims or the efficacy of the Plan Administrator in
prosecuting such objections.
(iv) Risk of Non-Occurrence of the Effective Date
Although the Debtors believe that the Effective Date may occur as
soon as one (1) Business Day after the date upon which the Confirmation Order
becomes a Final Order, there can be no assurance as to such timing. Moreover, if
the conditions precedent to the Effective Date have not occurred and have not
been waived as provided under the Plan, the Plan would be deemed null and void
and the Debtors may propose and solicit votes on an alternative plan of
reorganization that may not be as favorable to parties in interest as the Plan.
In addition, a party-in-interest may appeal the entry of the Confirmation Order,
which could prevent the Confirmation Order from becoming a Final Order for an
extended period of time.
(v) Effect of the Chapter 11 Cases on the Debtors' Business
The impact, if any, that the Chapter 11 Cases may have on the
operations of the Debtors or the Reorganized Debtors cannot be accurately
predicted or quantified. The continuation of the Chapter 11 Cases, particularly
if the Plan is not approved or confirmed in the time frame currently
contemplated, will adversely affect the Debtors' or the Reorganized Debtors'
relationship with their customers, suppliers and employees and will, therefore,
have a negative impact on their operations. The Debtors believe that the Chapter
11 Cases and consummation of the Plan in an expeditious manner will have a
minimal adverse long-term impact on relationships with customers, employees and
suppliers of the Debtors or the Reorganized Debtors.
If confirmation and consummation of the Plan do not occur
expeditiously, the Chapter 11 Cases will result in, among other things,
increased costs for professional fees and similar expenses. In addition,
prolonged Chapter 11 Cases may make it more difficult for the Debtors to retain
and attract management and other key personnel and would require senior
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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.
(vi) Holders of General Unsecured Claims May Receive No Cash
Distribution
The Plan provides that Holders of General Unsecured Claims will
receive, as part of their distribution, Litigation Trust Interests. The
Litigation Trust will be funded, at the discretion of the Plan Administration
Committee, by all or a portion of the General Unsecured Cash Amount distributed
on the Effective Date. As such, the cash recovery to be received by Holders of
General Unsecured Claims on the Effective Date and on any Periodic Distribution
Date will vary materially based on the amount of cash that the Plan
Administrator allocates to prosecute the Designated Litigation. The Debtors
cannot predict the amount of funds that the Plan Administrator will use to
prosecute the Designated Litigation nor the success of the Plan Administrator in
prosecuting the Designated Litigation, and can provide no assurances that
Holders of General Unsecured Claims will receive any cash distribution under
this Plan.
(vii) Holders of General Unsecured Claims May Receive No
Distribution on Account of Their Litigation Trust Interests
As noted above, to the extent that the Litigation Trust prosecutes
any of the Designated Litigation, there can be no assurance that the Litigation
Trustee will be able to realize any value from the Designated Litigation. The
Debtors cannot predict the outcome of the Designated Litigation. The Debtors can
provide no assurances that the Plan Administration Committee will fund the
Litigation Trust, in which case the Designated Litigation will revert to the
Reorganized Debtors.
17.02 Risks Related to the Debtors' Business
(i) The Reorganized Debtors May Incur Significant Financial
Liability with Respect to their Brethine Product Line
Pursuant to the terms of the Purchase Agreement, Xanodyne did not
purchase the Debtors' Brethine product line. As such, the Debtors still own the
rights to the Brethine branded product line and remain liable for returns and
chargebacks in connection with units of Brethine distributed to wholesalers and
retailers but unable to be sold, as well as for Medicaid rebate payments with
respect to Brethine sales to Medicaid recipients. Prior to the Petition Date,
the Debtors' operating results were affected, in part, by the amount of Brethine
previously sold into the wholesale channel. Brethine has since become subject to
competition from generic products, thereby greatly limiting the salability of
Brethine.
As such, the Debtors anticipate that they will be liable for the
return of a significant amount of Brethine as products held by wholesalers and
retailers approach their expiration date. Due to competition from generic
products, in order to sell Brethine, retailers must offer a substantial price
discount. In accordance with industry practice and aaiPharma policy, those
retailers are entitled to chargeback to the Debtors the difference between their
purchase price and the ultimate discounted sale price of their stock of
Brethine. Finally, the Debtors are obligated to make Medicaid rebate payments
with respect to sales of Brethine to Medicaid recipients. The Debtors are
obligated to make those rebate payments as though all sales of Brethine were at
a price determined by the federal government. The Medicaid rebate price may
therefore greatly exceed the actual sale price of Brethine. The Debtors believe
that
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any liability with respect to Brethine would be a pre-petition liability that
will be discharged upon confirmation of the Plan, and intend to vigorously
oppose any assertions that such liabilities are not discharged upon
confirmation. However, there can be no assurances that any such liability will
be treated as such. If the Debtors' liability with respect to Brethine is found
to be a post-petition liability, it may have a significant impact on the
Reorganized Debtors' financial condition.
(ii) The Reorganized Debtors May Not Receive Royalty Payments
Pursuant to the Purchase Agreement
Pursuant to the terms of the Purchase Agreement, the Reorganized
Debtors are entitled to certain royalty payments upon the development and
successful commercialization of certain pharmaceutical products. There can be no
assurances that Xanodyne will be able to successfully develop or commercialize
such products and thus there can be no assurances that the Reorganized Debtors
will earn the royalty payments contemplated under the Purchase Agreement.
(iii) The Debtors are Unable to Predict the Outcome of the
Investigations Being Conducted by Certain Governmental Units
As noted above, certain Governmental Units are conducting ongoing
investigations of the Debtors. While the Debtors believe that claims of those
Governmental Units in connection with the investigations, if any, will be
subordinate to other claims filed against the Debtors, there can be no
assurances that such claims will be treated as such. In addition, there can be
no assurance that (i) the United States Attorney's Office for the Western
District of North Carolina will not bring criminal charges against Reorganized
aaiPharma in connection with its investigation or (ii) the SEC will not bring
any claims or charges against the Reorganized Debtors. If criminal charges are
brought against Reorganized aaiPharma, certain customers may no longer continue
doing business with the Reorganized Debtors, which may have a significant impact
on the Reorganized Debtors' financial condition.
17.03 Factors Affecting the Value of the Securities
(i) The Projections set forth in this Disclosure Statement May Not
be Achieved
The Projections cover the operations of Reorganized aaiPharma
through the period ending December 31, 2010. The Projections are based on
numerous assumptions that are an integral part thereof, including confirmation
and consummation of the Plan in accordance with its terms, the anticipated
future performance of Reorganized aaiPharma, industry performance, general
business and economic conditions, competition, adequate financing, absence of
material claims, the ability to make necessary product development and capital
expenditures, the ability to establish strength in new markets and to maintain,
improve and strengthen existing markets, consumer purchasing trends and
preferences, the ability to increase gross margins and control future operating
expenses and other matters, many of which are beyond the control of Reorganized
aaiPharma, including regulatory actions by the FDA or its foreign counterparts,
and some or all of which may not materialize. In addition, unanticipated events
and circumstances occurring subsequent to the date of this Disclosure Statement
may affect the actual financial results of the operations of Reorganized
aaiPharma. These variations may be material and adverse. Because the actual
results achieved throughout the periods
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covered by the Projections will vary from the projected results, the Projections
should not be relied upon as a guaranty, representation, or other assurance of
the actual results that will occur.
(ii) The New Credit Agreement May Impose Restrictions on
Reorganized aaiPharma's Businesses
The New Credit Agreement may contain covenants imposing significant
restrictions on Reorganized aaiPharma's businesses. These restrictions may
affect Reorganized aaiPharma's ability to operate its businesses and may limit
its ability to take advantage of potential business opportunities as they arise.
Reorganized aaiPharma's ability to comply with these agreements may be affected
by events beyond its control, including prevailing economic, financial and
industry conditions, all of which are subject to the risks described in this
section. The breach of any of these covenants or restrictions could result in a
default under the New Credit Agreement. An event of default under the New Credit
Agreement may permit some of Reorganized aaiPharma's lenders to declare all
amounts borrowed from them to be immediately due and payable. In such case,
Reorganized aaiPharma may be unable to pay such amounts. In addition, due to
various business, financial, economic or other factors, Reorganized aaiPharma
may be unable to make payments required under the New Credit Agreement as they
become due, including repaying the principal amount thereof.
(iii) There is No Public Market for the New Common Stock and
Reorganized aaiPharma Will Not Assure Any of the Holders of
the Pre-Petition Senior Secured Note Claims That a Market for
Any of the New Common Stock Will Develop
Holders of the New Common Stock who are deemed to be "underwriters"
as defined in Subsection 1145(b) of the Bankruptcy Code, or who are otherwise
deemed to be "affiliates" or "control persons" of Reorganized aaiPharma within
the meaning of the Securities Act, will be unable to freely transfer or sell
their New Common Stock after the Effective Date, except pursuant to an available
exemption from registration under the Securities Act and under equivalent state
securities or "blue sky" laws or pursuant to an effective registration of such
New Common Stock under the Securities Act.
Upon emergence from chapter 11, the Debtors currently contemplate
that Reorganized aaiPharma will be a privately-held company. No established
trading market exists for the New Common Stock and no assurance can be given
that such a trading market will develop following the Effective Date or, if the
trading market for such New Common Stock develops, no assurance can be given as
to the liquidity of such a trading market. Reorganized aaiPharma does not intend
to file a registration statement with respect to the initial issuance on the
Effective Date of the New Common Stock under the Securities Act.
(iv) Reorganized aaiPharma's Ability to Pay Any Dividends on the
New Common Stock will be Limited
Reorganized aaiPharma cannot assure the Holders of the New Common
Stock that it will be able to pay dividends. Its ability to pay any cash or
non-cash dividends on its stock is subject to the availability of adequate cash
(or other consideration) to pay dividends, applicable provisions of state law
and the terms of the New Credit Agreement and any other credit facilities that
it may enter into in the future. Furthermore, even if Reorganized aaiPharma has
such cash or non-cash property available and provisions and terms of its
financing
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agreements would not be violated by the payment of dividends, the payment of any
dividend is subject to the discretion of the board of directors of Reorganized
aaiPharma.
ALTHOUGH THE DEBTORS' MANAGEMENT HAS USED ITS REASONABLE BEST
EFFORTS TO ENSURE THE ACCURACY OF THE FINANCIAL INFORMATION PROVIDED IN THIS
DISCLOSURE STATEMENT, SOME OF THE FINANCIAL INFORMATION CONTAINED IN THIS
DISCLOSURE STATEMENT HAS NOT BEEN AUDITED AND IS BASED UPON AN ANALYSIS OF DATA
AVAILABLE AT THE TIME OF THE PREPARATION OF THE PLAN AND THIS DISCLOSURE
STATEMENT. WHILE THE DEBTORS' MANAGEMENT BELIEVES THAT SUCH FINANCIAL
INFORMATION FAIRLY REFLECTS THE FINANCIAL CONDITION OF THE DEBTORS, THE DEBTORS'
MANAGEMENT IS UNABLE TO REPRESENT OR WARRANT THAT THE INFORMATION CONTAINED
HEREIN AND ATTACHED HERETO IS WITHOUT INACCURACIES.
THESE RISK FACTORS CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS THAT
ARE SUBJECT TO A NUMBER OF ASSUMPTIONS, RISKS AND UNCERTAINTIES, MANY OF WHICH
ARE BEYOND THE CONTROL OF THE DEBTORS, INCLUDING, AMONG OTHERS, CURRENCY
EXCHANGE RATE FLUCTUATIONS, TERRORIST ACTIONS OR ACTS OF WAR, OPERATING
EFFICIENCIES, LABOR RELATIONS, ACTIONS OF GOVERNMENTAL BODIES AND OTHER MARKET
AND COMPETITIVE CONDITIONS. HOLDERS OF CLAIMS AND OLD EQUITY INTERESTS ARE
CAUTIONED THAT THE FORWARD-LOOKING STATEMENTS SPEAK AS OF THE DATE MADE AND ARE
NOT GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER
MATERIALLY FROM THE EXPECTATIONS EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING
STATEMENTS AND THE DEBTORS UNDERTAKE NO OBLIGATION TO UPDATE ANY SUCH
STATEMENTS.
ARTICLE XVIII.
APPLICATION OF SECURITIES ACT
18.01 Issuance and Resale of New Securities Under the Plan
(i) Section 1145 of the Bankruptcy Code
Section 1145 of the Bankruptcy Code generally exempts the issuance
of a security from registration under the Securities Act (and any equivalent
state securities or "blue sky" laws) if the following conditions are satisfied:
(i) the security is issued by a debtor (or its successor) under a chapter 11
plan, (ii) the recipient of the security holds a claim against, an interest in,
or a claim for an administrative expense against, the debtor and (iii) the
security is issued entirely in exchange for such claim or interest, or is issued
"principally" in exchange for such claim or interest and "partly" for cash or
property.
Securities exempt from registration under section 1145 of the
Bankruptcy Code may be resold without registration under the Securities Act or
other federal securities laws pursuant to the exemption provided by section 4(l)
of the Securities Act, unless the Holder is an "underwriter" with respect to
such securities, as that term is defined in the Bankruptcy Code (see discussion
below), an "affiliate" of the issuer of such securities or a "dealer." In
addition, such securities generally may be resold without registration under
state securities laws pursuant to
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various exemptions provided by the respective laws of the several states.
HOWEVER, RECIPIENTS OF SECURITIES ISSUED UNDER THE PLAN ARE ADVISED TO CONSULT
WITH THEIR OWN COUNSEL AS TO THE AVAILABILITY OF ANY SUCH EXEMPTION FROM
REGISTRATION UNDER STATE LAW IN ANY GIVEN INSTANCE AND AS TO ANY APPLICABLE
REQUIREMENTS OR CONDITIONS TO SUCH AVAILABILITY.
Section 1145(b) of the Bankruptcy Code defines "underwriter" under
section 2(11) of the Securities Act as an entity 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 a claim or interest;
(B) offers to sell securities offered or sold under a plan for the Holder of
such securities; (C) offers to buy securities offered or sold under a plan from
the Holder of such securities, if such offer to buy is (i) with a view to
distribution of such securities, and (ii) under an agreement made in connection
with the plan, with the consummation of a plan, or with the offer or sale of
securities under a plan; or (D) is an issuer, as used in section 2(11) of the
Securities Act, with respect to such 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 purports to include 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,
otherwise called "affiliates" under section 2(11) of the Securities Act.
"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. Under section 2(12)
of the Securities Act, a "dealer" is any person who engages either for all or
part of his or her time, directly or indirectly as agent, broker or principal,
in the business of offering, buying, selling or otherwise dealing or trading in
the securities of such issuer.
Notwithstanding the foregoing, statutory underwriters, affiliates
and dealers may be able to sell securities without registration pursuant to the
resale limitations of Rule 144 under the Securities Act which, in effect,
permits the resale of securities received by statutory underwriters, affiliates
and dealers pursuant to a chapter 11 plan, subject to applicable volume
limitation, notice and manner of sale requirements, and certain other
conditions. Parties which believe they may be statutory underwriters, affiliates
or dealers as defined in section 1145 of the Bankruptcy Code are advised to
consult with their own counsel as to the availability of the exemption provided
by Rule 144.
There can be no assurance that an active market for any of the
securities to be distributed under the Plan will develop and no assurance can be
given as to the prices at which they might be traded.
BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER
A PARTICULAR HOLDER MAY BE AN UNDERWRITER, AFFILIATE OR DEALER, THE DEBTORS MAKE
NO REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE
SECURITIES TO BE DISTRIBUTED UNDER THE PLAN.
MOREOVER, SUCH SECURITIES, OR THE DOCUMENTS THAT ESTABLISH THE TERMS
AND PROVISIONS THEREOF, MAY CONTAIN TERMS AND LEGENDS THAT RESTRICT OR INDICATE
THE EXISTENCE OF RESTRICTIONS ON THE TRANSFERABILITY OF SUCH SECURITIES.
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THE DEBTORS RECOMMEND THAT RECIPIENTS OF SECURITIES UNDER THE PLAN
CONSULT WITH LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO
DISPOSE OF SUCH SECURITIES.
18.02 New Common Stock
The Plan provides that (i) all Old Common Stock will be cancelled as
of the Effective Date and that, (ii) certain Holders will receive stock
distributions.
The Debtors believe that the New Common Stock that is distributed
will be exempt from the registration requirements of the Securities Act and
equivalent state securities or "blue sky" laws pursuant to the exemption, and
subject to exceptions and limitations, contained in section 1145 of the
Bankruptcy Code, as described in article XVIII "Application of Securities Act."
ARTICLE XIX.
FINANCIAL PROJECTIONS, VALUATION AND ASSUMPTIONS USED
The projected financial and valuation information set forth below
(the "Projections") should be read in conjunction with the assumptions,
qualifications, limitations and explanations set forth herein and the other
information set forth herein. (12)
19.01 Valuation of aaiPharma
In conjunction with formulating the Plan, the Debtors requested that
Chanin undertake an analysis of the estimated enterprise value of the business
and operations of the Debtors at the time of the Debtors' emergence from chapter
11. For purposes of this analysis, Chanin assumed an emergence date of December
31, 2005.
In performing its analysis, among other things, Chanin (i) reviewed
certain recent publicly available financial results of the Debtors, (ii)
reviewed certain internal financial and operating data of the Debtors, including
the Debtors' business plan (dated September 8, 2005) and the projections
contained in that plan, and (iii) discussed and reviewed with members of the
management of the Debtors the business plan and the Debtors' past performance
and future prospects. In preparing its analysis, Chanin relied upon the accuracy
and completeness of the financial and other information furnished to Chanin by
the Debtors, and did not attempt to independently audit or verify such
information. Moreover, with respect to financial forecasts provided to Chanin by
senior management of the Debtors, the Debtors represented to Chanin that such
information (and the assumptions and bases therefore) had been reasonably
prepared on a basis reflecting management's best currently available estimate
and judgment as to the future financial performance of the Debtors.
In order to determine a range of enterprise values for the Debtors,
Chanin performed a sum of the parts analysis comprised of distinct valuations
for (i) the Debtors' contract research organization ("CRO") operations, and (ii)
the Debtors' additional intellectual
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(12) Further information regarding the Debtors' historical financial
information, as well as business, is set forth in aaiPharma's Form 10-K
for the fiscal year ended December 31, 2004 and aaiPharma's Form 10-Q for
the quarterly period ended March 31, 2005, which are attached to this
Disclosure Statement as Appendices D and E, respectively.
property assets. In determining the value of the CRO, Chanin used the following
three methodologies: (i) a comparison of the Debtors and their projected
financial performance to the market values of publicly traded companies (the
"Publicly Traded Company Analysis"); (ii) a comparison of the Debtors and their
projected financial performance to aggregate purchase prices paid for target
companies in precedent transactions (the "Precedent Transaction Analysis"); and
(iii) a calculation of the present value of the CRO's projected free cash flows,
including an estimation of the CRO operation's value at the end of the
projection period (the "Discounted Cash Flow Analysis"). Additionally, under the
Sale Transaction the Debtors expect to earn certain future royalty payments from
the sale of certain drugs that are currently in development. Therefore, as part
of its valuation analysis of the CRO, Chanin performed a calculation of the net
present value of expected cash flows from royalty revenues expected to be
derived by the Debtors. In addition, with respect to the Debtors' remaining
intellectual property assets, Chanin utilized the market or auction approach to
determine the value of such assets, and with respect to certain other
intellectual property, Chanin performed an analysis incorporating the Debtors'
probability weighted net present value analysis.
A Publicly Traded Company analysis estimates value based on a
comparison of the subject company's financial statistics with the financial
statistics of public companies that are similar to the target company. The
analysis establishes a benchmark for asset valuation by deriving the value of
"comparable" assets, standardized using a common financial variables. The
analysis includes a review of each company's financial performance and business
trends. Based on these analyses, a number of financial multiples and ratios are
calculated to gauge each company's relative performance and valuation. A key
factor to this approach is the selection of companies with relatively similar
business and operational characteristics to the target company. Criteria for
selecting comparable companies include, among other relevant characteristics,
similar lines of businesses, business risks, target market segments, growth
prospects, maturity of businesses, market presence, size, and scale of
operations. The selection of truly comparable companies is often difficult and
subject to interpretation. However, the underlying concept is to develop a
premise for relative value, which, when coupled with other approaches, presents
a foundation for determining firm value.
A Precedent Transactions Analysis estimates value by examining
public merger and acquisition transactions. An analysis of the disclosed
purchase price as a multiple of certain operating statistics reveals industry
acquisition multiples for companies in similar lines of businesses to the
Debtors. These transaction multiples are calculated based on the purchase price
(including any debt assumed) paid to acquire companies that are comparable to
the Debtors. These multiples are then applied to the relevant Debtors' operating
statistics, to determine the total enterprise value. There are unique
characteristics that manifest themselves in a precedent transaction analysis
including the following: (i) the buyer may be paying a "control premium"; (ii)
circumstances surrounding a merger transaction may introduce "noise" into the
analysis (e.g., an additional premium may be extracted from a buyer in the case
of a competitive bidding contest); (iii) the market environment may not be
identical for transactions occurring at different periods of time; and (iv)
circumstances pertaining to the financial position of a company may have an
impact on the resulting purchase price (e.g., a company in financial distress
may receive a lower price due to perceived weakness in its bargaining leverage).
As with the Publicly Traded Company Analysis, because no acquisition
used in any analysis is identical to a target transaction, valuation conclusions
cannot be based solely on quantitative results. The reasons for and
circumstances surrounding each acquisition transaction
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are specific to such transaction, and there are inherent differences between the
businesses, operations and prospects of each. Therefore, qualitative judgments
must be made concerning the differences between the characteristics of these
transactions and other factors and issues that could affect the price an
acquirer is willing to pay in an acquisition.
The Discounted Cash Flow ("DCF") valuation methodology relates the
value of an asset or business to the present value of expected future cash flows
to be generated by that asset or business. The DCF methodology is a "forward
looking" approach that discounts the expected future cash flows by a theoretical
or observed discount rate determined by calculating the average cost of debt and
equity for publicly traded companies that are similar to the Debtors. The
expected future cash flows have two components: the present value of the
projected unlevered after-tax free cash flows for a determined period and the
present value of the terminal value of cash flows (representing firm value
beyond the time horizon of the projections). This approach relies on the
company's ability to project future cash flows with some degree of accuracy.
Because the Debtors' projections reflect significant assumptions made by the
Debtors' management concerning anticipated results, the assumptions and
judgments used in the Projected Financial Information may or may not prove
correct and, therefore, no assurance can be provided that projected results are
attainable or will be realized. Chanin cannot and does not make any
representations or warranties as to the accuracy or completeness of the Debtors'
projections.
Based upon the methods described above, the estimated enterprise
value for the Debtors (including the Debtors' non-Debtor Subsidiaries) at the
Effective Date is between $146 and $180 million. The Debtors estimate that at
the Effective Date, the Reorganized Debtors' funded indebtedness is expected to
be approximately $15 million. After deducting this amount from the estimated
enterprise value, the Reorganized Debtors' total equity value is likely to be
between $131 million and $165 million, with $148 million used as the Debtor's
estimate of the total equity value at the Effective Date.
THE ESTIMATES OF VALUE REPRESENT HYPOTHETICAL REORGANIZED ENTERPRISE
VALUES ASSUMING THE IMPLEMENTATION OF THE BUSINESS PLAN AS WELL AS OTHER
SIGNIFICANT ASSUMPTIONS. SUCH ESTIMATES WERE DEVELOPED SOLELY FOR PURPOSES OF
FORMULATING AND NEGOTIATING A PLAN OF REORGANIZATION AND ANALYZING THE PROJECTED
RECOVERIES THEREUNDER. IN PERFORMING ITS ANALYSIS, CHANIN AND THE DEBTORS MADE
NUMEROUS ASSUMPTIONS WHICH ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES
AND CONTINGENCIES BEYOND THE CONTROL OF THE DEBTORS. ACCORDINGLY, THERE CAN BE
NO ASSURANCE THAT THE RANGES REFLECTED IN THE VALUATION WOULD BE REALIZED IF THE
PLAN WERE TO BECOME EFFECTIVE, AND ACTUAL RESULTS COULD VARY MATERIALLY FROM
THOSE SHOWN HERE.
THE ESTIMATED 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, NONE OF WHICH ARE GUARANTEED. NO
RESPONSIBILITY IS TAKEN FOR CHANGES IN MARKET CONDITIONS AND NO OBLIGATION IS
ASSUMED TO REVISE THESE ESTIMATES TO REFLECT EVENTS OR CONDITIONS WHICH
SUBSEQUENTLY OCCUR.
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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 VALUE, IF ANY,
MAY BE MATERIALLY DIFFERENT FROM THE REORGANIZED EQUITY VALUE RANGES ASSOCIATED
WITH THE VALUATION ANALYSIS. NEITHER THE DEBTORS, CHANIN, THE DEBTORS' OTHER
ADVISORS, NOR ANY OTHER PERSON ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OF
THE VALUE CONTAINED HEREIN.
THE SUMMARY SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF THE ANALYSES PERFORMED BY CHANIN. THE PREPARATION OF AN ESTIMATED
ENTERPRISE VALUE INVOLVES VARIOUS DETERMINATIONS AS TO THE APPROPRIATE AND
RELEVANT METHODS OF FINANCIAL ANALYSIS AND THE APPLICATION OF THESE METHODS IN
THE PARTICULAR CIRCUMSTANCES AND, THEREFORE, SUCH AN ESTIMATE IS NOT READILY
SUSCEPTIBLE TO SUMMARY DESCRIPTION. THE VALUE OF AN OPERATING BUSINESS IS
SUBJECT TO UNCERTAINTIES AND CONTINGENCIES THAT ARE DIFFICULT TO PREDICT AND
WILL FLUCTUATE WITH CHANGES IN FACTORS AFFECTING THE FINANCIAL CONDITIONS AND
PROSPECTS OF SUCH A BUSINESS. AS A RESULT, THE ESTIMATE OF EQUITY VALUE SET
FORTH HEREIN IS NOT NECESSARILY INDICATIVE OF ACTUAL OUTCOMES WHICH MAY BE
SIGNIFICANTLY MORE OR LESS FAVORABLE THAN THOSE SET FORTH HEREIN. THE ESTIMATES
PREPARED BY CHANIN ASSUME THAT THE REORGANIZED DEBTORS WILL CONTINUE AS THE
OWNERS AND OPERATORS OF THEIR BUSINESS AND ASSETS. DEPENDING ON THE RESULTS OF
THE DEBTORS' OPERATIONS OR CHANGES IN FINANCIAL MARKETS, ACTUAL TOTAL ENTERPRISE
VALUE MAY DIFFER FROM CHANIN'S VALUATION ANALYSIS DISCLOSED HEREIN.
19.02 Financial Projections
The Projections attached hereto as Appendix A reflect numerous
assumptions, including various assumptions with respect to the anticipated
future performance of the Reorganized Debtors after the restructuring
contemplated under the Plan is consummated, industry performance, general
business and economic conditions and other matters, some of which are beyond the
control of the Reorganized Debtors. In addition, unanticipated events and
circumstances may affect the actual financial results of the Reorganized Debtors
in the future. THEREFORE, WHILE THE PROJECTIONS ARE NECESSARILY PRESENTED WITH
NUMERICAL SPECIFICITY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE FISCAL YEARS
ENDING DECEMBER 2005-2010 (the "PROJECTED PERIOD") MAY VARY FROM THE PROJECTED
RESULTS. THESE VARIATIONS MAY BE MATERIAL. ACCORDINGLY, NO REPRESENTATION CAN BE
MADE OR IS MADE WITH RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY
OF THE REORGANIZED DEBTORS TO ACHIEVE THE PROJECTED RESULTS. See Article XVII
herein, entitled "Certain Factors" for a discussion of certain factors that may
affect the future financial performance of the Reorganized Debtors and
non-Debtor Subsidiaries and of the various risks associated with the securities
of the Reorganized Debtors to be issued pursuant to the Plan.
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The Debtors do not, as a matter of course, make public projections
of their anticipated financial position or results of operations. Accordingly,
the Debtors do not anticipate that they will, and disclaim any obligation to,
furnish updated projections in the event that actual industry performance or the
general economic or business climate differs from that upon which the
Projections have been based. Further, the Debtors do not anticipate that they
will include such information in documents required to be filed with the SEC, or
otherwise make such information public.
The Projections have been prepared by the Debtors' management, and
while they believe that the assumptions underlying the Projections for the
Projected Period, when considered on an overall basis, are reasonable in light
of current circumstances, no assurance can be given or is given that the
Projections will be realized. The Projections were not prepared in accordance
with standards for projections promulgated by the American Institute of
Certified Public Accountants or with a view to compliance with published
guidelines regarding projections or forecasts. The Projections have not been
audited, reviewed or compiled by the Debtors' independent public accountants.
Although presented with numerical specificity, the Projections are based upon a
variety of assumptions, some of which have not been achieved to date and may not
be realized in the future, and are subject to significant business, litigation,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Debtors. Consequently, the Projections should not be
regarded as a representation or warranty, by the Debtors or any other person,
that the Projections will be realized.
Neither the Debtors' independent public accountants, nor any other
independent accountants or financial advisors, have compiled, examined or
performed any procedures with respect to the projected consolidated financial
information contained herein, nor have they expressed any opinion or any other
form of assurance on such information or its achievability, and assume no
responsibility for, and disclaim any association with, the projected financial
information.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995: These Projected Financial Statements contain statements which
constitute "forward-looking statements" within the meaning of the Securities Act
of 1933 and the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. "Forward-looking statements" in these
Projected Financial Statements include the intent, belief or current
expectations of the Debtors and members of their Management teams with respect
to the timing of, completion of and scope of the current restructuring,
reorganization plan, strategic business plan, bank financing, and debt and
equity market conditions and the Debtors' future liquidity, as well as the
assumptions upon which such statements are based. While Management believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance, and involve risks and uncertainties, and that actual results may
differ materially from these contemplated by such forward-looking statements.
Important factors currently known to Management that could cause actual results
to differ materially from those contemplated by the forward-looking statements
in these Projected Financial Statements include, but are not limited to, further
adverse developments with respect to the Debtors' liquidity position or
operations of the various businesses of the Reorganized Debtors, adverse
developments in the bank financing or public or private markets for debt or
equity securities, or adverse developments in the timing or results of the
Debtors' current strategic business plan (including
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the timeline to emerge from chapter 11) and the possible negative effects that
could result from potential economic and political factors around the world in
the various foreign markets in which the Reorganized Debtors operate.
The projections included herein for the Reorganized Debtors are:
(a) Projected Consolidated Statement of Operations for the
fiscal years ending December 31, 2005, December 31, 2006, December 31, 2007,
December 31, 2008, December 31, 2009 and December 31, 2010.
(b) Projected Consolidated Balance Sheets as of December 31,
2005, December 31, 2006, December 31, 2007, December 31, 2008, December 31, 2009
and December 31, 2010.
(c) Projected Consolidated Statements of Cash Flows for the
fiscal years ending December 31, 2006, December 31, 2007, December 31, 2008,
December 31, 2009 and December 31, 2010.
(d) Pro-forma Fresh Start Balance Sheet as of January 1, 2006.
The projections are based on a number of important assumptions, as
further set forth below:
(i) Summary of Significant Assumptions
(a) The Projections were developed by the management of the
Debtors and are based on: a) current and projected market conditions; b) each of
the wholly owned subsidiaries remaining part of the Reorganized Debtors; c) the
ability to maintain sufficient liquidity to fund operations; and d) confirmation
and consummation of the Plan.
(b) The Projections assume the Plan will be consummated in
accordance with its terms and that all transactions contemplated by the Plan
will be consummated by the Effective Date, which for purposes of the Projections
is assumed to be January 1, 2006. A significant delay in the Effective Date may
have a significant negative impact on the operations and financial performance
of the Debtors.
(c) The Fiscal Year 2005 Statement of Operations includes the
activity related to the Pharmaceutical Division. Substantially all of the assets
of this division were sold to Xanodyne pursuant to the Sale Transaction. This
transaction closed on July 25, 2005.
(ii) Statement of Operations Assumptions
Key assumptions underlying the Fiscal Year 2005 through Fiscal Year
2010 projected consolidated statement of operations include:
(a) Backlog
The Debtors' order backlog consists of anticipated net revenues from
signed fee-for-service contracts for which services have not been completed. The
order backlog does not include anticipated net revenues for work performed for
internal clients or for any variable-
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priced contracts. During the course of a project, a client may substantially
adjust the requested scope of services, in such event, a corresponding
adjustment is made.
(b) Sales
Core Development Services:
Core development services revenues, including the impact of Xanodyne
related development and support revenues, are assumed to grow at a compounded
annual growth rate ("CAGR") of approximately 21% during the Projected Period.
This growth is primarily driven by the Reorganized Debtors' clinical services
operations both in the U.S. and Europe in line with present and future market
opportunity. It is supported by a balanced growth of the core non-clinical
business especially in the bio-analysis and bio-equivalence area, as well as in
the biotech market segment in the short-term. In the longer-term, growth is
expected to come from integrated product development programs and the regulatory
support these integrated projects require. The European business is expected to
grow steadily with an acceleration of growth in the later years caused by the
increasing importance of the growing clinical business, as the Reorganized
Debtors start to execute larger global development programs.
Royalty Revenue:
The royalty revenues generated from the pharmaceutical products sold
to Xanodyne are projected to generate approximately $31 million of cash during
the period Fiscal Year 2007 through Fiscal Year 2010. Other royalty revenues are
projected to generate approximately $2.7 million in Fiscal Year 2006 and $2.0
million thereafter.
(c) Gross Margin
The projections assume that Total Consolidated Gross Margins will
increase from approximately 28.4% of revenues in Fiscal Year 2006 to 43.2% in
Fiscal Year 2010, due to better utilization of existing capacity, growth related
to Xanodyne Royalty Revenues, increased sales volumes, a product mix shift
towards Clinical operations and improved management of the billable employee and
non-billable employee ratio.
(d) Selling, General & Administrative Expenses (SG&A)
The projections assume that Total Consolidated SG&A as a percentage
of Total Consolidated Net Revenues will decrease from approximately 29.9% of
revenues in Fiscal Year 2006 to 23.3% in Fiscal Year 2010. SG&A includes the
following expense categories: Development Services Sales and Marketing,
Communications, Business Development, Corporate and Shared Services, Third-Party
Legal costs and other General and Administrative expenses.
(e) Interest Expense
Interest expense is calculated on the projected outstanding New
Credit Facility balance multiplied by an assumed applicable interest rate. The
assumed applicable interest rate is based on LIBOR plus a spread that is
consistent with the underlying risk of the investment. The Projections also
include estimated expenses related to projected unused commitment fees and
various administrative fee associated with the New Credit Facility.
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(f) Income Taxes
The Projections assume the Reorganized Debtors will pay taxes by
Fiscal Year 2008. The Projections assume a marginal tax rate of approximately
40%. The Projections also assume the use of surviving net operating losses in
accordance with the annual limitation rules of section 382 of the United States
Internal Revenue Code calculated using the interest rate published by the
Internal Revenue Service for November 2005 of 4.24%. Since the Reorganized
Debtors have yet to complete their analysis, the annual limitation used for
purposes of the projections does not reflect any adjustment for net unrealized
built-in gains, if any. (13)
(iii) Balance Sheet Assumptions
Key assumptions underlying the Fiscal Year 2005 through Fiscal Year
2010 projected balance sheets include:
(a) Working Capital
Working capital is estimated based on working capital performance
metrics such as days sales outstanding, inventory turns and days payable.
Accounts receivable days sales outstanding are projected to improve related to
negotiations with customers with accounts receivable balances over 90 days and
an increased focus on trade cycle days. Inventory turns are projected to remain
relatively consistent with historical experience. Overall trade accounts payable
days are assumed to remain relatively flat until mid-2006 then improve to
historical levels primarily related to the extension of terms from vendors after
the Reorganized Debtors emerge from chapter 11. Customer advances are assumed to
be between 20% and 15% of annual development services revenue.
(b) Exit Financing
The Projections assume that the Reorganized Debtors will obtain a
$40 million New Credit Facility on the Effective Date, which will be secured by
certain assets of the Reorganized Debtors. In addition, the Projections assume
that the Reorganized Debtors will also obtain access to the New Credit Facility
at market terms, and that the proceeds of the New Credit Facility will be used
for working capital needs and general corporate purposes. The projections assume
that the outstanding credit facility balance as of the Effective Date of the
Plan will be approximately $15 million.
(iv) Cash Flow Assumptions
Key assumptions underlying the Fiscal Year 2006 through Fiscal Year
2010 statements of cash flows include:
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(13) In preparing the Projections, the Debtors have treated taxable income on a
worldwide consolidated basis and have assumed (i) a 40% statutory tax rate
and (ii) the applicability of all net operating losses in accordance with
section 382 of the Internal Revenue Code.
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(a) Property, Plant & Equipment / Capital Expenditures
Capital expenditures reflect projected maintenance and new capital
expenditures that management believes are necessary to meet its business plan.
In addition, PP&E estimates assume that no significant asset sales will take
place during the Projected Period.
(v) Fresh Start Accounting Assumptions
With regard to the Pro Forma Fresh-Start Balance Sheet, as of July
1, 2006, please note the following:
Fresh-start reporting requires that the reorganization value of the
Reorganized Debtors be allocated to its assets in conformity with the Financial
Accounting Standards Board SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. Preliminary fresh-start reporting
adjustments have been made to reflect the projected adjustments necessary to
adopt fresh-start reporting in accordance with SOP 90-7 Financial Reporting by
Entities in Reorganization under the Bankruptcy Code. The fresh start reporting
ultimately implemented by the Reorganized Debtors may vary materially from the
preliminary fresh-start reporting presented as part of this Disclosure
Statement.
The mid-point of the total enterprise value range of Chanin's
valuation analysis - approximately $163 million - was used in preparing the Pro
Forma Consolidated Balance Sheet of the Reorganized Debtors. Based on the
projected net indebtedness under the New Credit Facility of approximately $15
million as of the Effective Date, the projected total equity value of the
Reorganized Debtors is approximately $148 million as of the Effective Date. This
estimate was used to record the projected equity value on the fresh-start
balance sheet of the Reorganized Debtors.
The reorganization value is subject to adjustment to reflect any
fluctuations in these Projections on which the valuation is based. The
allocation of the reorganization value to individual assets and liabilities is
subject to change after the Effective Date and could result in material
differences to the allocated values estimated in these Projections.
The significant fresh-start reporting adjustments reflected in the
Projections are summarized as follows:
(a) Record Settlement of Liabilities Subject to Compromise
The recorded settlement of liabilities subject to compromise totaled
approximately $220 million. The new consideration given for the cancellation of
debt includes approximately $148 million or 100% of the New Common Stock of the
Reorganized Debtors as part of the Senior Secured Note Distribution. The
recorded settlement of liabilities subject to compromise also includes a cash
payment of $4,200,000 as part of the General Unsecured Cash Amount and the
Claims Objection Fund and approximately $14,000 related to the Convenience
Claims. The remaining amount of approximately $68 million is recorded as a gain
on debt discharge.
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(b) Record Settlement of Old Common Stock
The recorded settlement of Old Common Stock eliminates the Old
Common Stock par value of approximately $29,000 and Old Common Stock paid in
capital of approximately $91 million. Old Equity Interests will not receive any
distribution under the Plan.
(c) Record Elimination of Retained Deficit
The Debtors accounted for the reorganization using fresh-start
reporting. Accordingly, all assets and liabilities are restated to reflect their
reorganization value, which approximates fair value at the date of the
reorganization. As part of the adoption of fresh-start reporting, the Debtors
eliminated a retained deficit of approximately ($237) million and recorded new
goodwill of approximately $109 million.
ARTICLE XX.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain United States federal
income tax consequences of the Plan to U.S. Holders (as defined below) of Senior
Secured Note Claims that receive New Common Stock and to U.S. Holders of General
Unsecured Claims that receive cash. The discussion is for general purposes only,
and is based upon the Internal Revenue Code of 1986, as amended (the "Tax
Code"), the United States Treasury regulations (including temporary and proposed
regulations) promulgated thereunder (the "U.S. Regulations"), judicial
authorities and current administrative rulings and practice, all as of the date
hereof and all of which are subject to change, possibly retroactively. This
summary does not discuss all aspects of United States federal income taxation
which may be important to particular holders in light of their individual
investment circumstances, including, but not limited to, financial institutions,
broker-dealers, traders, insurance companies, real estate investment trusts,
tax-exempt organizations, traders or dealers in securities, holders reporting
gain on the installment method, U.S. Holders whose functional currency is not
the United States dollar, non-U.S. Holders and U.S. Holders who hold Senior
Secured Note Claims, General Unsecured Claims or New Common Stock as part of a
hedging transaction, straddle, conversion transaction, constructive sale, wash
sale or other integrated transaction. In addition, this summary does not address
state, local or foreign tax consequences. The tax consequences of certain
aspects of the Plan are uncertain because of the lack of applicable legal
authority and may be subject to administrative or judicial interpretations that
differ from the discussion below. No ruling has been requested from the Internal
Revenue Service ("IRS") with respect to any of the matters discussed herein, and
no opinion of counsel has been sought or obtained with respect thereto.
As used herein, a "U.S. Holder" means a beneficial owner of Senior
Secured Note Claims, General Unsecured Claims, or New Common Stock that is, for
U.S. federal income tax purposes,
- a citizen or resident of the United States;
- a corporation organized in or under the laws of the United
States or any political subdivision thereof;
- an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
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- a trust if, (i) the trust is subject to the supervision of a
court within the United States and the control of one or more
"United States persons" as described in section 7701(a)(30) of
the Tax Code or (ii) the trust has a valid election in effect
under applicable U.S. Regulations to be treated as a "United
States person."
If a partnership (or other entity classified as a partnership for
United States federal income tax purposes) is the beneficial owner of a Claim,
the United States federal income tax treatment of a partner in the partnership
will generally depend on the status of the partner and the activities of the
partnership. If you are a partnership that is a beneficial owner of a Claim or a
partner in such a partnership, you should consult your own tax advisor regarding
the United States federal income tax consequences of the Plan.
PURSUANT TO U.S. TREASURY DEPARTMENT CIRCULAR 230, WE ARE INFORMING
YOU THAT (A) THIS DISCUSSION IS NOT INTENDED AND WAS NOT WRITTEN TO BE USED, AND
CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES UNDER THE
U.S. FEDERAL TAX LAWS THAT MAY BE IMPOSED ON THE TAXPAYER, (B) THIS DISCUSSION
WAS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING BY THE DEBTORS OF THE
PLAN, AND (C) EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR
CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
THE TAX CONSEQUENCES TO HOLDERS OF CLAIMS MAY VARY BASED UPON THE
INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER. THERE CAN BE NO ASSURANCE THAT THE IRS
WILL NOT CHALLENGE ANY OF THE TAX CONSEQUENCES DESCRIBED HEREIN, OR THAT SUCH A
CHALLENGE, IF ASSERTED, WOULD NOT BE SUSTAINED. ACCORDINGLY, ALL HOLDERS OF
CLAIMS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES OF THE PLAN TO THEM. THE DEBTORS ARE NOT MAKING ANY REPRESENTATIONS
REGARDING THE PARTICULAR TAX CONSEQUENCES OF APPROVAL AND IMPLEMENTATION OF THE
PLAN AS TO ANY HOLDER OF CLAIMS, NOR ARE THE DEBTORS OR THEIR COUNSEL RENDERING
ANY FORM OF LEGAL OPINION AS TO SUCH TAX CONSEQUENCES.
20.01 Federal Income Tax Consequences to the Debtors
(i) Cancellation of Indebtedness and Reduction of Tax Attributes
The Debtors generally will realize cancellation of indebtedness
("COI") income on the discharge of existing indebtedness exchanged for property
of the Debtors (including New Common Stock) to the extent that the fair market
value of any such property is less than the adjusted issue price (plus the
amount of any accrued but unpaid interest) of the indebtedness discharged
thereby.
Under section 108 of the Tax Code, however, COI income will not be
recognized if the COI income occurs in a case brought under the Bankruptcy Code,
provided the taxpayer is under the jurisdiction of the court in such case and
the cancellation of indebtedness is granted by the court or is pursuant to a
plan approved by the court (the "Bankruptcy Exception"). Accordingly, because
the cancellation of the Debtors' indebtedness will occur in a case brought under
the Bankruptcy Code, the Debtors will be under the jurisdiction of the
Bankruptcy Court in
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such case and the cancellation of the Debtors' indebtedness will be pursuant to
the Plan, the Debtors will not be required to recognize any COI income realized
as a result of the implementation of the Plan.
Under section 108(b) of the Tax Code, a taxpayer that does not
recognize COI income under the Bankruptcy Exception will be required to reduce
certain tax attributes, including its net operating losses and loss
carryforwards ("NOLs") (and certain other losses, credits and carryforwards, if
any) and its tax basis in its assets (but not below the total amount of
liabilities remaining immediately after the discharge of indebtedness), in an
amount generally equal to the amount of COI income excluded from income under
the Bankruptcy Exception. Where a taxpayer is a member of a group filing
affiliated returns, complex rules apply in determining how the taxpayer's and
the affiliated group's tax attributes are reduced as a result of the COI of a
member. The federal income tax return that included the Debtors for the fiscal
year that ended December 31, 2004 reflects an NOL attributable to the Debtors of
approximately $46 million, after adjustment for carry backs to previous taxable
years. Additionally, the Debtors expect significant losses for the current
fiscal year.
As a result of the application of section 108(b) of the Tax Code,
the Debtors expect that the Debtors' NOLs (and possibly other attributes) will
be reduced by reason of consummation of the Plan. The Debtors nonetheless
expect, based on the Debtors' enterprise value being used for purposes of the
plan and on estimates of losses for the current fiscal year, that significant
NOLs will remain after attribute reduction. As discussed below, section 382 of
the Tax Code may apply to limit the ability of the Debtors to utilize any
remaining NOLs in future years.
(ii) Section 382 Limitations on NOLs
Under section 382 of the Tax Code, if a corporation with NOLs (a
"Loss Corporation") undergoes an "Ownership Change," the use of such NOLs (and
certain other tax attributes) will generally be subject to an annual limitation
as described below. In general, an "Ownership Change" occurs if the percentage
of the value of the Loss Corporation's stock owned by one or more direct or
indirect "five percent shareholders" has increased by more than 50 percentage
points over the lowest percentage of that value owned by such five percent
shareholder or shareholders at any time during the applicable "testing period"
(generally, the shorter of (i) the three-year period preceding the testing date
or (ii) the period of time since the most recent Ownership Change of the
corporation). The Plan should trigger an Ownership Change of the Debtors on the
Effective Date under the Tax Code.
When a Loss Corporation undergoes an Ownership Change, an annual
limitation (the "Annual Section 382 Limitation") generally limits the ability of
the Loss Corporation to utilize historic NOLs, capital loss carryforwards and
certain subsequently recognized "built-in" losses and deductions (i.e., losses
and deductions that have economically accrued but are unrecognized as of the
date of the Ownership Change) if the Loss Corporation has a net unrealized
built-in loss on the date of the Ownership Change. As a general rule, the Annual
Section 382 Limitation equals the product of the value of the stock of the
corporation (with certain adjustments) immediately before the Ownership Change
and the applicable "long-term tax-exempt rate, which for Ownership Changes
occurring in the month of November 2005 is 4.24%." Subject to certain
limitations, any unused portion of the Annual Section 382 Limitation may be
available in subsequent years. A Loss Corporation must meet certain continuity
of
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business enterprise requirements for at least two years following an Ownership
Change in order to preserve the Annual Section 382 Limitation.
A special rule under section 382 applicable to a Loss Corporation
under the jurisdiction of a Bankruptcy Court will apply in calculating the
Annual Section 382 Limitation. Under this special rule, the limitation will be
calculated by reference to the lesser of the value of the corporation's newly
issued stock (with certain adjustments) immediately after the Ownership Change
(as opposed to immediately before the Ownership Change, as discussed above) or
the value of the company's assets (determined without regard to liabilities)
immediately before the Ownership Change. Although such calculation may
substantially increase the Annual Section 382 Limitation, the Debtors' use of
any NOLs, built-in losses and deductions remaining after the implementation of
the Plan may still be substantially limited after an Ownership Change.
As stated above, the Debtors should undergo an Ownership Change as a
result of the implementation of the Plan. The Debtors have not yet determined
whether any of them will have a net unrealized built-in loss on the Effective
Date. If an Ownership Change occurs, the ability of the Reorganized Debtors to
utilize any NOLs that may remain after the implementation of the Plan will be,
and their ability to utilize certain subsequently recognized built-in losses and
deductions (if any) may be, subject to an Annual Section 382 Limitation, as
described above.
(iii) Special Bankruptcy Exception
An exception to the foregoing annual limitation rules generally
applies where qualified (so-called "old and cold" and certain ordinary course
trade and business) creditors of a debtor receive, in respect of their claims,
at least 50% of the vote and value of the stock of the reorganized debtor (or a
controlling corporation if also in bankruptcy) pursuant to a confirmed chapter
11 plan. Under this exception, a debtor's pre-change losses are not limited on
an annual basis but, instead, are required to be reduced by the amount of any
interest deductions claimed during the three taxable years preceding the
effective date of the reorganization, and during the part of the taxable year
prior to and including the reorganization, in respect of all debt converted into
stock in the bankruptcy proceeding. Moreover, if this exception applies, any
further ownership change of the debtor within a two-year period after the
consummation of the chapter 11 plan will preclude the debtor's future
utilization of any pre-change losses existing at the time of the subsequent
ownership change.
The Debtors have not determined whether the receipt of the New
Common Stock by holders of Senior Secured Note Claims pursuant to the Plan may
qualify for this exception. Even if the Debtors qualify for this exception, the
Debtors are likely to elect not to have the exception apply and instead remain
subject to the annual limitation described above. Such election would have to be
made in the Debtors' federal income tax return for the taxable year in which the
change occurs.
(iv) Alternative Minimum Tax
In general, a federal alternative minimum tax ("AMT") is imposed on
a corporation's alternative minimum taxable income at a 20% rate to the extent
that such tax exceeds the corporation's regular federal income tax. For purposes
of computing taxable income for AMT purposes, certain tax deductions and other
beneficial allowances are modified or eliminated. In particular, even though a
corporation otherwise might be able to offset all of its taxable income for
regular tax purposes by available loss carryforwards, only 90% of a
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corporation's taxable income for AMT purposes may be offset by available loss
carryforwards (as computed for AMT purposes).
In addition, if a corporation undergoes an Ownership Change and is
in a net unrealized built-in loss position on the date of the ownership change,
the corporation's aggregate tax basis in its assets would be reduced for certain
AMT purposes to reflect the fair market value of such assets as of the change
date.
Any AMT that a corporation pays generally will be allowed as a
nonrefundable credit against its regular federal income tax liability in future
taxable years when the corporation is no longer subject to the AMT.
(v) Establishment of Litigation Trust
Pursuant to the Plan, the Debtors will treat the transfer of certain
litigation claims to the Litigation Trust as a distribution of assets by the
Debtors to the holders of General Unsecured Claims in a taxable transaction
followed by a transfer of such assets by the Holders of General Unsecured Claims
to the Litigation Trust, which will be treated as a partnership for U.S. federal
income tax purposes. These deemed distributions for federal income tax purposes
should cause the Debtors to recognize gain or loss equal to the difference
between the fair market value of the distributed assets and the adjusted tax
basis of the Debtors in such assets. There can be no assurance that the IRS will
agree with the classification of the Litigation Trust as a partnership for
federal income tax purposes and a different classification of the Litigation
Trust could result in income tax consequences to the Debtors other than those
described above.
20.02 Federal Income Tax Consequences of the Plan to U.S. Holders of
Senior Secured Note Claims
The United States federal income tax consequences to U.S. Holders of
Senior Secured Note Claims may vary depending upon, among other things, whether
the U.S. Holder has taken a "bad debt" deduction with respect to its Senior
Secured Note Claim, and whether the Senior Secured Note Claims constitute
"securities" for purposes of the reorganization provisions of the Tax Code. U.S.
Holders should evaluate the tax consequences of the Plan to them based on their
own particular circumstances and should not rely solely on the general
discussion herein.
The determination of whether a debt obligation constitutes a
security for U.S. federal income tax purposes depends upon an evaluation of the
nature of the debt obligation. Important factors to be considered include, among
other things, length of time to maturity, degree of continuing interest in the
issuer, similarity of the debt instrument to a cash payment, and the purpose of
the borrowing. Generally, a maturity on corporate debt instruments when issued
of less than five years is an indication that the instrument is not a security.
A maturity on corporate debt instruments when issued of more than ten years is
an indication that the instrument is a security. Claims for accrued interest
generally are not securities.
The Senior Secured Notes had an original maturity of approximately 8
years. In light of the above, it is uncertain whether the Senior Secured Notes
will be treated as securities for federal income tax purposes.
If the Senior Secured Notes are treated as securities, then the
exchange of the Senior Secured Note Claims for New Common Stock should
constitute a tax-free reorganization
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for federal income tax purposes. Accordingly, if the exchange is so treated for
such purposes, a U.S. Holder of Senior Secured Note Claims would, subject to the
discussion below regarding market discount, not recognize any income or gain on
the exchange, except for income recognized with respect to accrued interest on
the Senior Secured Notes, as discussed below. In addition, a U.S. Holder of
Senior Secured Note Claims would not recognize any loss, except as discussed
below with respect to Claims for accrued and previously taxed interest on the
Senior Secured Notes. Further, a U.S. Holder's tax basis in the New Common Stock
received in respect of its Senior Secured Notes Claim (not including any New
Common Stock received for accrued interest) would equal the U.S. Holder's tax
basis in such Senior Secured Notes Claim (adjusted to take into account the
amount of any bad debt deduction previously taken with respect to such Senior
Secured Notes Claim and excluding any tax basis attributable to its Claim for
accrued interest in respect of the Senior Secured Notes), increased by the
amount of any gain recognized in respect of accrued market discount on the
exchange by such U.S. Holder, as described below. A U.S. Holder's holding period
for the New Common Stock (other than New Common Stock, if any, received for a
Claim for accrued interest on the Senior Secured Notes or on account of any
accrued market discount with respect to which taxable gain is recognized, as
described below) would include the period during which the U.S. Holder held the
Senior Secured Notes Claim exchanged therefor. U.S. Holders should consult their
tax advisors with respect to reporting requirements required of persons
receiving stock and securities in a tax-free exchange in connection with a
corporate reorganization.
If the Senior Secured Notes are not treated as securities, then the
exchange of the Senior Secured Note Claims for New Common Stock would be treated
as a taxable transaction under section 1001 of the Tax Code. Accordingly, if the
exchange is so treated for such purposes, a U.S. Holder should recognize gain or
loss equal to the difference between (i) the fair market value of the New Common
Stock (as of the Effective Date) received in exchange for a Senior Secured Notes
Claim (other than New Common Stock, if any, received for a Claim for accrued
interest on the Senior Secured Notes), and (ii) the U.S. Holder's adjusted tax
basis in the Senior Secured Notes Claim (excluding any tax basis attributable to
its Claim for accrued interest in respect of the Senior Secured Notes). Such
gain or loss should be capital gain or loss if the Senior Secured Note Claims
are held as capital assets (subject to the "market discount" rules described
below), and will be long term capital gain or loss if, as of the Effective Date,
the Senior Secured Note Claims have been held by such Holder for more than one
year. Long-term capital gains recognized by individuals are currently taxed at a
maximum rate of 15%. Net capital gains on the disposition of capital assets held
for one year or less are subject to U.S. federal income tax at ordinary income
tax rates. For a corporate U.S. Holder, all capital gains are currently taxed at
the same rate as ordinary income. The deductibility of capital losses is subject
to limitations.
To the extent that a portion of the New Common Stock received in
exchange for a Senior Secured Notes Claim is allocable to accrued interest, (i)
a U.S. Holder may recognize ordinary income, as discussed below (ii) a Holder's
tax basis in such New Common Stock received should equal the fair market value
of the New Common Stock as of the Effective Date and (iii) a Holder's holding
period for such New Common Stock should begin on the day following the Effective
Date.
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(i) Market Discount
The market discount provisions of the Tax Code may apply to U.S.
Holders of certain Claims. In general, a debt obligation with a fixed maturity
of more than one year that is acquired by a U.S. Holder on the secondary market
(or, in certain circumstances, upon original issuance) is a "market discount
bond" as to that U.S. Holder if its stated redemption price (or revised issue
price, in the case of a debt obligation issued with original issue discount) at
maturity exceeds the tax basis of the debt obligation in the U.S. Holder hands
immediately after its acquisition. However, a debt obligation will not be a
"market discount bond" if such excess is less than a statutory de minimis
amount.
Under the market discount rules, gain recognized by a U.S. Holder
with respect to a "market discount bond" will generally be treated as ordinary
interest income to the extent of the market discount accrued on such bond during
the U.S. Holder's period of ownership, unless the U.S. Holder elected to include
accrued market discount in gross income currently. A U.S. Holder of a market
discount bond that was required under the market discount rules of the Tax Code
to defer deduction of all or a portion of interest on indebtedness incurred or
maintained to acquire or carry the bond may be allowed to deduct such interest,
in whole or in part, on a taxable disposition of such bond.
Notwithstanding the rule described above regarding non-recognition
of gain to U.S. Holders of Senior Secured Note Claims if the Senior Secured Note
Claims are treated as securities for federal income tax purposes, it is possible
that under the market discount rules of the Tax Code, gain realized by a U.S.
Holder on the exchange of its Senior Secured Note Claims for New Common Stock
must be recognized as ordinary income to the extent of any accrued market
discount on the Senior Secured Notes that was not previously included in its
gross income, even if such exchange is treated as a tax-free reorganization
under the Tax Code. However, the market discount rules in the Tax Code also
provide that, under U.S. Regulations to be promulgated by the United States
Treasury, recognition of accrued market discount on exchanges such as the
exchange of Senior Secured Note Claims for New Common Stock may be limited to
the amount of gain that would be recognized without regard to the market
discount rules. In this case, the application of such a provision would result
in a U.S. Holder recognizing no income or gain except for income recognized with
respect to accrued interest, as discussed below. Any accrued market discount
that is not recognized by a U.S. Holder would be carried to the New Common Stock
received by the U.S. Holder in the exchange. Upon the disposition of the New
Common Stock, a U.S. Holder would recognize as ordinary income, to the extent of
any gain recognized on the disposition, the accrued market discount carried to
the New Common Stock. It should be noted that such U.S. Regulations have not yet
been issued and thus it is unclear whether this limitation on recognition of
accrued market discount will apply to U.S. Holders of Senior Secured Note Claims
and whether any accrued but unrecognized market discount will be so treated.
All U.S. Holders of Senior Secured Note Claims are urged to consult
their own tax advisors regarding the application of the market discount rules to
them.
(ii) Allocation of Consideration Received
Under the Plan, consideration distributed to holders of Allowed
Claims will be treated first as satisfying an amount equal to the stated
principal amount of the Allowed Claim and then, to the extent of any excess, as
satisfying accrued but unpaid interest, if any. Certain
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legislative history indicates that an allocation provided in a bankruptcy plan
may be binding for federal income tax purposes. However, the IRS may take the
position that the consideration received by holders of Allowed Claims should be
allocated in some other manner. U.S. Holders of Senior Secured Note Claims
should consult their own tax advisors regarding the proper allocation of the
consideration received under the Plan.
(iii) Claims for Accrued Interest
A U.S. Holder of a Claim for accrued interest that has not
previously been included in its gross income will be required to recognize
ordinary income equal to the fair market value of New Common Stock received
under the Plan with respect to such Claim. Conversely, a U.S. Holder generally
would recognize a deductible loss to the extent that any accrued interest
previously included in gross income is not paid in full. A U.S. Holder's tax
basis in any New Common Stock received in exchange for a Claim for accrued
interest will be the fair market value of the New Common Stock on the Effective
Date. The U.S. Holder's holding period for the New Common Stock so received will
begin on the day after the Effective Date of the Plan.
20.03 Federal Income Tax Consequences to U.S. Holders of General Unsecured
Claims
Pursuant to the Plan, Holders of General Unsecured Claims will
receive cash and Litigation Trust Interests. U.S. Holders of General Unsecured
Claims should generally recognize income, gain or loss equal to the amount
realized under the Plan in respect of their claims less their respective tax
basis in those claims (excluding any tax basis attributable to a Claim for
accrued interest in respect of a General Unsecured Claim). The amount realized
for this purpose generally will equal the amount of the cash received under the
Plan (other than cash and other consideration received for a Claim for accrued
interest on the General Unsecured Claim) and the fair market value of the
Litigation Trust Interests.
20.04 Consequences of Owning Litigation Trust Interests and Tax Treatment
of the Litigation Trust
Unless otherwise required by applicable law, the Debtors, the
Litigation Trustee and the Litigation Trust Interest Holders are required under
the Plan to treat the Litigation Trust as a partnership for federal income tax
purposes. If such treatment is respected, the Litigation Trust will not be
subject to U.S. federal income tax. Instead, each U.S. Holder of a Litigation
Trust Interest will be required to report on its federal income tax return, and
will be taxed upon, its allocable share of the Litigation Trust's income, gain,
loss, deduction and credit (as provided in the Litigation Trust Agreement) for
each taxable year of the Litigation Trust ending within such U.S. Holder's
taxable year, whether or not such U.S. Holder receives any distributions from
the Litigation Trust in such taxable year. There can be no assurance that the
IRS will agree with the classification of the Litigation Trust as a partnership
for federal income tax purposes, and a different classification of the
Litigation Trust could result in income tax consequences to the Litigation Trust
Interest Holders and the Litigation Trust other than those described herein.
A U.S. Holder of a Litigation Trust Interest should have an initial
tax basis in its Litigation Trust Interest equal to the fair market value of the
Litigation Trust Interest on the Effective Date. Distributions to a U.S. Holder
of a Litigation Trust Interest should not result in the recognition of gain or
loss by such holder, except that gain will be recognized to the extent
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that cash distributed exceeds the holder's adjusted tax basis in the Litigation
Trust Interest. Any such gain will generally be treated as capital gain.
The deduction by a U.S. Holder of a Litigation Trust Interest of its
allocable share of the Litigation Trust's losses will be limited to its tax
basis in its Litigation Trust Interest and, in the case of Litigation Trust
Interest Holders that are individuals and certain closely held corporations,
such deductions will be limited to the amount for which the Exchanging Note
Holder is considered to be "at risk" for U.S. federal income tax purposes, if
such amount is less than its tax basis.
The Code permits the deduction of losses from "passive activities,"
which are generally trade or business activities in which the taxpayer does not
materially participate, only to the extent of the taxpayer's income from those
passive activities. This restriction generally applies to individuals, estates,
trusts and certain closely held corporations and personal service corporations.
A Litigation Trust Interest Holder's allocable share of the Litigation Trust
losses may constitute losses from passive activities for this purpose and may be
subject to the foregoing limitation. Passive losses that are not deductible
because they exceed a Litigation Trust Interest Holder's income from passive
activities will carry forward and will be allowable to the extent of its income
from passive activities in succeeding taxable years. A Litigation Trust Interest
Holder's suspended passive activity losses may be deducted in full when the
holder disposes of its entire investments in the Litigation Trust interest in a
fully taxable transaction, which should include a complete abandonment of the
Litigation Trust Interest. The passive activity loss rules are applied after
other applicable limitations on deductions, including the at risk rules and the
basis limitation.
The Litigation Trust Agreement is expected to provide that the
Litigation Trustee is to decide how to report tax items on the Litigation
Trust's information returns, and all Litigation Trust Interest Holders are
required under the Code to treat the items consistently on their own returns,
unless they file a statement with the IRS disclosing the inconsistency. In the
event the income tax returns of the Litigation Trust are audited by the IRS, the
tax treatment of the Litigation Trust's income and deductions generally is
determined at the partnership level in a single proceeding rather than by
individual audits of the members.
20.05 Federal Income Tax Consequences of Ownership and Disposition of New
Common Stock
(i) Distributions
Distributions paid with respect to the New Common Stock will
generally be includable in the gross income of a U.S. Holder to the extent that
such distributions are paid out of Reorganized aaiPharma's current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes) when the distribution is actually or constructively received by the
U.S. Holder. The dividends included in a non-corporate U.S. Holder's income for
distributions occurring during taxable years beginning before January 1, 2009
may be eligible for U.S. Federal income taxation at long-term capital gain
rates. Distributions in excess of Reorganized aaiPharma's current or accumulated
earnings and profits, as determined for U.S. federal income tax purposes, will
be treated as a non-taxable return of capital to the extent of the U.S. Holder's
tax basis in the New Common Stock and thereafter as capital gain.
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(ii) Dispositions of the New Common Stock
Upon the sale, exchange or other taxable disposition of New Common
Stock, a U.S. Holder will recognize gain or loss for federal income tax purposes
in an amount equal to the difference between the amount realized on the
disposition and the U.S. Holder's tax basis in the New Common Stock. If the New
Common Stock is held as a capital asset, any such gain or loss will be a capital
gain or loss and will be long-term if the New Common Stock has been held for
more than one year as of the time of disposition. However, any gain attributable
to accrued market discount in respect of a U.S. Holder's Senior Secured Notes
Claim carried over to the New Common Stock will be ordinary income, as discussed
above. Net capital gains on the disposition of capital assets held for one year
or less are subject to U.S. federal income tax at ordinary income tax rates. For
a corporate U.S. Holder, all capital gains are currently taxed at the same rate
as ordinary income. The deductibility of capital losses is subject to
limitations.
20.06 Information Reporting and Backup Withholding
In general, information reporting requirements and backup
withholding may apply to all payments and distributions to non-corporate U.S.
Holders of Allowed Claims and to payments to non-corporate U.S. Holders of
principal, interest, dividends or other reportable payments paid in respect of
the New Common Stock and New Warrants. In general, "backup withholding" applies
to such payments if the U.S. Holder fails to provide an accurate taxpayer
identification number or is notified by the IRS that it has failed to report all
interest and dividends required to be shown on its federal income tax returns.
Any amounts withheld under the backup withholding rules from payment
to a beneficial owner would be allowed as a refund or credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the Internal Revenue Service.
IN ADDITION, U.S. REGULATIONS GENERALLY REQUIRE DISCLOSURE BY A
TAXPAYER ON ITS FEDERAL INCOME TAX RETURN OF CERTAIN TYPES OF TRANSACTIONS IN
WHICH THE TAXPAYER PARTICIPATED, INCLUDING, AMONG OTHER TYPES OF TRANSACTIONS,
THE FOLLOWING: (1) CERTAIN TRANSACTIONS THAT RESULT IN THE TAXPAYER'S CLAIMING A
LOSS IN EXCESS OF SPECIFIED THRESHOLDS; AND (2) CERTAIN TRANSACTIONS IN WHICH
THE TAXPAYER'S BOOK-TAX DIFFERENCES EXCEED A SPECIFIED THRESHOLD IN ANY TAX
YEAR. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THESE
REGULATIONS AND WHETHER THE TRANSACTIONS CONTEMPLATED BY THE PLAN WOULD BE
SUBJECT TO THESE REGULATIONS AND REQUIRE DISCLOSURE ON THE HOLDERS' TAX RETURNS.
THE FOREGOING SUMMARY HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY. ALL
HOLDERS OF CLAIMS RECEIVING A DISTRIBUTION UNDER THE PLAN ARE URGED TO CONSULT
THEIR TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES APPLICABLE UNDER THE PLAN.
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ARTICLE XXI.
ACCEPTANCE AND CONFIRMATION OF THE PLAN
Described below are certain important considerations under the
Bankruptcy Code in connection with confirmation of the Plan.
21.01 Solicitation of Acceptance
The Debtors will solicit in good faith and in compliance with the
applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, the
acceptance of the Plan from all record Holders of Claims entitled to vote
whether to accept or reject the Plan. The solicitation of acceptances from
Holders of Claims in Unimpaired classes is not required under the Bankruptcy
Code. In addition, the solicitation of acceptances of the Plan from the Holders
of Old Equity Interests is not required because, under the Bankruptcy Code, such
Holders are deemed to have rejected the Plan. The following classes are Impaired
and are entitled to vote on the Plan:
Class 3 - Senior Secured Note Claims; and
Class 4 - General Unsecured Claims.
The record date for determining whether Holders of Claims are
entitled to accept or reject the Plan is _________, 2005 with respect to both
Holders of Senior Secured Note Claims, and Holders of General Unsecured Claims.
The Debtors believe that this classification of Claims and Old
Equity Interests complies with section 1122 of the Bankruptcy Code and is in the
best interests of the Debtors, their estates and Holders of Claims and Old
Equity Interests.
21.02 Confirmation Hearing
On November 4, 2005, the Debtors filed the Disclosure Statement and
their Plan and sought an order that scheduled the hearing to consider
confirmation of the Plan. The Court has scheduled the confirmation hearing for
__________, 2006.
The Plan provides that the Effective Date of the Plan will be the
first Business Day immediately following the date upon which all conditions to
the Effective Date set forth in section 16.02 of the Plan have been satisfied or
waived by the Debtors or the Reorganized Debtors, as the case may be; provided,
however, that if a stay of the Confirmation Order is in effect on such date, the
Effective Date will be the first Business Day after such stay is no longer in
effect.
Section 1128(a) of the Bankruptcy Code requires the Court, after
notice, to hold a confirmation hearing. Section 1128(b) of the Bankruptcy Code
provides that any party in interest may object to confirmation of the Plan.
Notice of the Confirmation Hearing will be provided to all Holders
of Claims and Old Equity Interests or their representatives and other parties in
interest (the "Confirmation Notice"). The Confirmation Hearing may be adjourned
from time to time by the Court without further notice except that an
announcement of the adjourned date must be made at the Confirmation Hearing or
any adjournment thereof. Objections to confirmation of the Plan must be made in
writing, specifying in detail the name and address of the person or entity
objecting,
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the grounds for the objection and the nature and amount of the Claim or Old
Equity Interest held by the objector. Objections must be filed with the Court,
together with proof of service, and served upon the parties so designated in the
Confirmation Notice on or before the time and date designated in the
Confirmation Notice as being the last date for serving and filing objections to
confirmation of the Plan. Objections to confirmation of the Plan are governed by
Bankruptcy Rule 9014 and the local rules of the Court.
21.03 Requirements for Confirmation of the Plan
As discussed below, the Debtors intend to request confirmation of
the Plan pursuant to section 1129(b) of the Bankruptcy Code. In order for the
Plan to be confirmed pursuant to section 1129(b) of the Bankruptcy Code, the
Plan must satisfy all of the provisions of section 1129(a) of the Bankruptcy
Code, except for section 1129(a)(8) therein. Specifically, the Court must
determine, among other things, that (i) the Plan was accepted by the requisite
votes of Holders of Claims entitled to vote on the Plan (see this Article XXI
"Acceptance and Confirmation of the Plan"), (ii) the Plan is in the "best
interests" of all Holders of Claims and Old Equity Interests (that is, that each
Holder of a Claim or Old Equity Interest who does not vote to accept the Plan
will receive at least as much pursuant to the Plan as he, she or it would
receive in a liquidation under chapter 7 of the Bankruptcy Code) (see section
21.07 "Acceptance and Confirmation of the Plan -- Best Interests Test" and the
Liquidation Analysis attached hereto as Appendix B) and (iii) the Plan is
feasible (that is, there is a reasonable probability that the Reorganized
Debtors will be able to perform their obligations under the Plan and continue to
operate their business without further financial reorganization or liquidation)
(see section 21.08 "Acceptance and Confirmation of the Plan -- Feasibility").
The Debtors, the Ad Hoc Committee of Secured Noteholders, and the
Creditors' Committee believe that, upon acceptance of the Plan by Class 3 Senior
Secured Note Claims, the Plan will satisfy all the statutory requirements of
chapter 11 of the Bankruptcy Code, that the Debtors have complied or will have
complied with all of the requirements of chapter 11 of the Bankruptcy Code and
that the Plan is being proposed and will be submitted to the Court in good
faith.
21.04 Confirmation of the Plan under Section 1129(b)
Generally, a class of claims or interests is considered to be
"unimpaired" under a plan of reorganization if the plan does not alter the
legal, equitable and contractual rights of the Holders of such claims or
interests. Classes of claims or interests that are not impaired under a plan of
reorganization are conclusively presumed to have accepted the plan of
reorganization and are not entitled to vote. Classes of claims or interests that
are impaired under a plan of reorganization that receive no distribution or
retain no property in respect of such claims or interests are deemed to have
rejected the plan of reorganization and are also not entitled to vote.
Acceptances of the Plan are being or will be solicited only from
those Holders of Claims in an Impaired class and who are entitled to receive a
distribution under the Plan. Under the Plan, Classes 1 (Priority Claims), 2
(Miscellaneous Secured Claims), and 5 (Convenience Claims) are Unimpaired.
Classes 3 (Senior Secured Note Claims) and 4 (General Unsecured Claims) are
Impaired, are entitled to a distribution under the Plan and, therefore, are
entitled to vote on the Plan. Classes 6 (510(b) Note Claims) and 7 (Old Equity
Interests) are Impaired, not entitled to receive a distribution under the Plan
and, therefore, deemed to reject the Plan as a matter of law. As a result, the
Debtors must request that the Court confirm the Plan pursuant to
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section 1129(b) of the Bankruptcy Code. See section 6.03 "Summary of the Plan --
Classification and Treatment of Claims and Old Equity Interests Under the Plan."
Acceptance of the Plan is being solicited from Holders of Claims in Classes 3
and 4. See section 1.01 "Introduction and Summary -- The Solicitation."
The Debtors will request confirmation of the Plan pursuant to the
provisions of section 1129(b) of the Bankruptcy Code. Under these provisions,
the Court will confirm the Plan despite the lack of acceptance by an Impaired
class or classes if the Court finds that (a) the Plan does not discriminate
unfairly with respect to each non-accepting Impaired class, (b) the Plan is
"fair and equitable" with respect to each non-accepting Impaired class, (c) at
least one Impaired class has accepted the Plan (without counting acceptances by
Insiders) and (d) the Plan satisfies the other requirements set forth in section
1129(a) of the Bankruptcy Code except for section 1129(a)(8) thereof.
21.05 No Unfair Discrimination
A plan of reorganization does not "discriminate unfairly" with
respect to a nonaccepting class if the value of the cash and/or securities to be
distributed to the nonaccepting class is equal or otherwise fair when compared
to the value of distributions to other classes whose legal rights are the same
as those of the nonaccepting class. The Debtors believe that the Plan would not
discriminate unfairly against any nonaccepting class of Claims or Old Equity
Interests.
21.06 Fair and Equitable Test
The "fair and equitable" test of section 1129(b) of the Bankruptcy
Code requires absolute priority in the payment of claims and interests with
respect to any nonaccepting class or classes. The "fair and equitable" test
established by the Bankruptcy Code is different for secured claims, unsecured
claims and equity interests and includes the following treatment:
(i) Secured Claims
A plan is fair and equitable with respect to a nonaccepting class of
secured claims if (1) the Holder of each claim in such class will retain its
lien or liens and receive deferred cash payments totaling the allowed amount of
its claim, of a value, as of the effective date of the plan, equal to the value
of such Holder's interest in the collateral, (2) the Holder of each claim in
such class will receive the proceeds from the sale of such collateral or (3) the
Holder of each claim in such class will realize the indubitable equivalent of
its allowed secured claim.
(ii) Unsecured Claims
A plan is fair and equitable with respect to a nonaccepting class of
unsecured claims if (1) the Holder of each claim in such class will receive or
retain under the plan property of a value, as of the effective date of the plan,
equal to the allowed amount of its claim or (2) Holders of claims or interests
that are junior to the claims of such creditors will not receive or retain any
property under the plan on account of such junior claim or interest.
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(iii) Equity Interests
A plan is fair and equitable with respect to a nonaccepting class of
interests if the plan provides that (1) each member of such class receives or
retains on account of its interest property of a value, as of the effective date
of the plan, equal to the greatest of the allowed amount of any fixed
liquidation preference to which such Holder is entitled, any fixed redemption
price to which such Holder is entitled or the value of such interest or (2)
Holders of interests that are junior to the interests of such class will not
receive or retain any property under the plan on account of such junior
interests.
21.07 Best Interests Test
Whether or not the Plan is accepted by each class of Claims and Old
Equity Interests, in order to confirm the Plan, the Court must independently
determine that the Plan is in the best interests of each class of Claims or Old
Equity Interests Impaired by the Plan -- that is, with respect to each Impaired
class, (a) each Holder of a Claim or Old Equity Interest has accepted the Plan
or (b) that Holders of Impaired Claims and Old Equity Interests will receive at
least as much pursuant to the Plan as they would receive in a liquidation under
chapter 7 of the Bankruptcy Code.
To determine the value that Holders of Impaired Claims and Old
Equity Interests would receive if the Debtors were liquidated, the Court must
determine the dollar amount that would be generated from the liquidation of the
Debtors' assets in the context of a liquidation case under chapter 7 of the
Bankruptcy Code. The Cash amount which would be available for satisfaction of
Administrative Expenses, Priority Claims, unsecured Claims and Old Equity
Interests in the Debtors would consist of the proceeds resulting from the
disposition of the assets of the Debtors, augmented by the Cash held by the
Debtors at the time of the commencement of the case under chapter 7 of the
Bankruptcy Code. Any such Cash amount then would be reduced by the amount of any
Claims secured by such assets, the costs and expenses of the liquidation and any
additional Administrative Expenses and Priority Claims that may result from the
termination of the Debtors' businesses and the use of chapter 7 of the
Bankruptcy Code for the purposes of liquidation. Finally, the present value of
such allocations (taking into account the time necessary to accomplish the
liquidation) is compared to the value of the property that is proposed to be
distributed under the Plan on the Effective Date.
The Debtors' costs of liquidation under chapter 7 of the Bankruptcy
Code would include the fees payable to a trustee in bankruptcy, as well as those
which might be payable to attorneys and other professionals that such a trustee
may engage, plus any unpaid expenses incurred by the Debtors during the Chapter
11 Cases and allowed in cases under chapter 7 of the Bankruptcy Code, such as
compensation for attorneys, financial advisors, appraisers, accountants and
other professionals, and costs and expenses of members of any statutory
committee of unsecured creditors appointed by the United States Trustee pursuant
to section 1102 of the Bankruptcy Code and any other such appointed committee.
In addition, as described above, Claims may arise by reason of the breach or
rejection of obligations incurred and executory contracts entered into by the
Debtors during the pendency of Chapter 11 Cases by reason of the rejection of
executory contracts or leases which otherwise would have been assumed in a
reorganization under chapter 11 of the Bankruptcy Code.
To determine whether the Plan is in the best interests of each
Impaired class, the present value of the distributions from the proceeds of the
liquidation of the Debtors' assets and
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properties, after subtracting the amounts attributable to the foregoing Claims,
costs and expenses, are then compared with the value of the property offered to
such classes of Claims and Old Equity Interests under the Plan.
In applying the "best interests test," it is possible that Claims
and Old Equity Interests in cases under chapter 7 of the Bankruptcy Code may not
be classified according to the seniority of such Claims and Old Equity Interests
as provided in the Plan. In the absence of a contrary determination by the
Court, all pre-petition unsecured Claims which have the same rights upon
liquidation would be treated as one class for purposes of determining the
potential distribution of the liquidation proceeds resulting from such cases
under chapter 7 of the Bankruptcy Code. The distributions from the liquidation
proceeds would be calculated ratably according to the amount of the Claim held
by each Creditor. Creditors who claim to be beneficiaries of any contractual
subordination provisions might seek to enforce such contractual subordination
provisions in the Court or otherwise. Section 510 of the Bankruptcy Code
specifies that such contractual subordination provisions are enforceable in a
case under chapter 7 of the Bankruptcy Code. The rule of absolute priority of
distributions applicable in cases under chapter 7 of the Bankruptcy Code
provides that no junior creditor may receive any distribution or retain any
property until all senior creditors are paid in full with interest.
Consequently, the Debtors believe that if the Debtors were liquidated under
chapter 7 of the Bankruptcy Code, the Holders of Claims in all Classes would
receive distributions of a value significantly less than the value of the
distributions provided to the Creditors in such classes under the Plan, and that
Holders of Claims in Classes 4 and 5 and Holders of Old Equity Interests would
receive no distributions under chapter 7 of the Bankruptcy Code. See the
Liquidation Analysis attached hereto as Appendix B.
The Debtors have considered the effects that a liquidation under
chapter 7 of the Bankruptcy Code would have on the ultimate proceeds available
for distribution to creditors in a case under chapter 11 of the Bankruptcy Code,
including (i) the increased costs and expenses of liquidation under chapter 7 of
the Bankruptcy Code arising from fees payable to a trustee in bankruptcy and
professional advisors to such trustee, (ii) the erosion in value of assets in
cases under chapter 7 of the Bankruptcy Code in the context of the expeditious
liquidation required under chapter 7 of the Bankruptcy Code and the "forced
sale" atmosphere that would prevail and (iii) the substantial increases in
Claims which would be satisfied on a priority basis or on parity with creditors
in a case under chapter 11 of the Bankruptcy Code. Therefore, the Debtors have
determined that confirmation of the Plan will provide each Holder of a Claim in
all classes with a recovery that is not less (and is expected to be
substantially more) than it would receive pursuant to liquidation of the Debtors
under chapter 7 of the Bankruptcy Code. The Ad Hoc Committee of Secured
Noteholders and the Creditors' Committee agree with this determination. For
Class 7, confirmation of the Plan and liquidation under chapter 7 of the
Bankruptcy Code yields the same result, i.e., no distribution, and therefore,
the Debtors believe the best interests test is satisfied with respect to this
class as well.
21.08 Feasibility
Even if the Plan is accepted by each class of Claims and even if the
Court determines that the Plan satisfies the "best interests" test, section
1129(a)(11) of the Bankruptcy Code requires that, in order for the Plan to be
confirmed by the Court, it must be demonstrated that consummation of the Plan is
not likely to be followed by the liquidation or the need for further financial
reorganization of the Debtors. This requirement is the so-called "feasibility"
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test. For purposes of determining whether the Plan meets this requirement, the
Debtors have analyzed their ability to meet their obligations under the Plan. As
part of such analysis, the Debtors' management has prepared the projections of
the balance sheet, cash flow and net income of the Reorganized Debtors (assuming
the transactions contemplated by the Plan are consummated) for the fiscal years
2005 through 2010 and set forth in section 19.02 "Financial Projections,
Valuation and Assumptions Used -- Financial Projections" (the "Projections").
The significant assumptions on which the Projections are based are set forth in
section 19.01 "Financial Projections, Valuation and Assumptions Used --
Valuation of aaiPharma." Based on the Projections, the Debtors' management
believes that the Reorganized Debtors will be able to make all payments required
to be made pursuant to the Plan.
THE DEBTORS' MANAGEMENT HAS PREPARED THE PROJECTIONS TO COMPLY WITH
THE REQUIREMENTS OF THE BANKRUPTCY CODE. THE ACCOMPANYING PROSPECTIVE FINANCIAL
INFORMATION WAS NOT PREPARED WITH A VIEW TOWARD PUBLIC DISCLOSURE OR WITH A VIEW
TOWARD COMPLYING WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS WITH RESPECT TO PROSPECTIVE FINANCIAL INFORMATION,
BUT, IN THE VIEW OF THE DEBTORS' MANAGEMENT, WAS PREPARED ON A REASONABLE BASIS,
REFLECTS THE BEST CURRENTLY AVAILABLE ESTIMATES AND JUDGMENTS, AND PRESENTS, TO
THE BEST OF MANAGEMENT'S KNOWLEDGE AND BELIEF, THE EXPECTED COURSE OF ACTION AND
THE RESPECTIVE EXPECTED FUTURE FINANCIAL PERFORMANCE OF THE REORGANIZED DEBTORS.
HOWEVER, THIS INFORMATION IS NOT FACT AND SHOULD NOT BE RELIED UPON AS BEING
NECESSARILY INDICATIVE OF FUTURE RESULTS, AND HOLDER OF CLAIMS ENTITLED TO VOTE
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE PROJECTIONS. IN PARTICULAR,
THIS INFORMATION SHOULD NOT BE RELIED UPON TO DETERMINE HOW TO PROCEED IN
CONNECTION WITH THE SOLICITATION. ACCORDINGLY, THE DEBTORS DO NOT INTEND, AND
DISCLAIM ANY OBLIGATION, TO (a) FURNISH UPDATED PROJECTIONS TO HOLDERS OF CLAIMS
PRIOR TO THE EFFECTIVE DATE OR TO HOLDERS OF NEW COMMON STOCK OR ANY OTHER PARTY
AFTER THE EFFECTIVE DATE OR (b) OTHERWISE MAKE SUCH UPDATED INFORMATION PUBLICLY
AVAILABLE. NEITHER THE DEBTORS' INDEPENDENT AUDITORS, NOR ANY OTHER INDEPENDENT
ACCOUNTANTS OR FINANCIAL ADVISORS, HAVE COMPILED OR EXAMINED THE ACCOMPANYING
PROSPECTIVE FINANCIAL INFORMATION TO DETERMINE THE REASONABLENESS THEREOF AND,
ACCORDINGLY, HAVE NOT EXPRESSED AN OPINION OR ANY OTHER FORM OF ASSURANCE WITH
RESPECT THERETO.
THE PROJECTIONS, WHILE PRESENTED WITH NUMERICAL SPECIFICITY, ARE
NECESSARILY BASED ON A VARIETY OF ESTIMATES AND ASSUMPTIONS WHICH, THOUGH
CONSIDERED REASONABLE BY MANAGEMENT, MAY NOT BE REALIZED AND ARE BEYOND THE
DEBTORS' CONTROL. NO REPRESENTATIONS OR WARRANTIES CAN BE MADE AS TO THE
ACCURACY OF THE PROJECTIONS OR TO THE REORGANIZED DEBTORS' ABILITY TO ACHIEVE
THE PROJECTED RESULTS. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE.
FURTHER, EVENTS AND CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE DATE ON WHICH THE
PROJECTIONS WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED OR, ALTERNATIVELY,
MAY HAVE BEEN UNANTICIPATED, AND THUS THE OCCURRENCE OF THESE EVENTS MAY AFFECT
FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY ADVERSE MANNER. THE PROJECTIONS,
THEREFORE, MAY NOT BE RELIED UPON AS A REPRESENTATION OR WARRANTY OR OTHER
ASSURANCE BY EITHER DEBTOR THAT THE RESULTS OF THE PROJECTIONS WILL BE ACHIEVED.
The Projections are based on the assumption that the Effective Date
would occur on or about January 1, 2006. A significant delay in the Effective
Date may have a significant negative impact on the operations and financial
performance of the Debtors including an increased risk of the Debtors' inability
to meet sales and profitability forecasts.
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ARTICLE XXII.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION
OF THE PLAN
If the Plan is not confirmed by the Court and consummated, the
alternatives to the Plan include (a) liquidation of the Debtors under chapter 7
of the Bankruptcy Code and (b) an alternative plan of reorganization.
22.01 Liquidation Under Chapter 7 of the Bankruptcy Code
If no plan of reorganization of the Debtors is confirmed, the
Chapter 11 Cases may be converted to cases under chapter 7 of the Bankruptcy
Code, pursuant to which a trustee would be elected or appointed to liquidate the
assets of the Debtors for distribution to Holders of Claims and Old Equity
Interests in accordance with the priorities established by the Bankruptcy Code.
A discussion of the effects that a liquidation under chapter 7 of the Bankruptcy
Code would have on the recovery of Holders of Claims and Old Equity Interests is
set forth under section 21.07 "Acceptance and Confirmation of the Plan -- Best
Interests Test." For the reasons discussed thereunder, the Debtors believe that
confirmation of the Plan will provide each Holder of a Claim and Old Equity
Interest entitled to receive a distribution under the Plan with a recovery that
is not less (and is expected to be substantially more) than such Holder would
receive pursuant to liquidation of the Debtors under chapter 7 of the Bankruptcy
Code.
22.02 Alternative Plan
If the Plan is not confirmed, the Debtors (or if the Debtors'
exclusive period in which to file a plan of reorganization of the Debtors has
expired, any other party in interest) could file a different plan. Such a plan
might involve either a reorganization and continuation of the Debtors'
businesses or an orderly liquidation of their assets. With respect to an
alternative plan, the Debtors have explored various other alternatives in
connection with the formulation and development of the Plan. In a liquidation
under chapter 11 of the Bankruptcy Code, the Debtors' assets would be sold in an
orderly fashion over a more extended period of time than in a liquidation under
chapter 7 of the Bankruptcy Code, probably resulting in somewhat greater (but
indeterminate) recoveries than would be obtained in a liquidation under chapter
7 of the Bankruptcy Code. Further, if a trustee were not appointed because such
appointment is not required in a case under chapter 11 of the Bankruptcy Code,
the expenses for professional fees would most likely be lower than those
incurred in a case under chapter 7 of the Bankruptcy Code. Although preferable
to a liquidation under chapter 7 of the Bankruptcy Code, the Debtors believe
that any alternative liquidation under chapter 11 of the Bankruptcy Code is a
much less attractive alternative to Holders of Claims and Old Equity Interests
than the Plan because of the greater recovery provided for by the Plan.
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ARTICLE XXIII.
THE BANKRUPTCY PLAN -- VOTING INSTRUCTIONS AND PROCEDURES
23.01 General
The Debtors are soliciting the acceptance of the Plan from Holders
of (i) Class 3 Senior Secured Note Claims and (ii) Class 4 General Unsecured
Claims. The Holders of Class 1 Priority Claims, Class 2 Miscellaneous Secured
Claims, and Class 5 Convenience Claims are Unimpaired under the Plan and are
conclusively presumed to have accepted the Plan. All Holders of Class 6 510(b)
Note Claims and Class 7 Old Equity Interests are Impaired, not entitled to
receive or retain any property under the Plan, and thus deemed to have rejected
the Plan.
A Ballot to be used to accept or reject the Plan has been enclosed
with all copies of this Disclosure Statement mailed to Holders of (i) Class 3
Senior Secured Note Claims and (ii) Class 4 General Unsecured Claims.
The Plan provides that Priority Claims will remain Unimpaired under
the Plan. The Plan also provides that Holders of 510(b) Note Claims and Old
Equity Interests are not entitled to receive or retain any property under the
Plan and therefore are deemed to have rejected the Plan. Accordingly, this
Disclosure Statement (and the appendices hereto), together with the accompanying
Ballot and the related materials delivered together herewith, are only being
furnished to Holders of (i) Class 3 Senior Secured Note Claims and (ii) Class 4
General Unsecured Claims and may not be relied upon or used for any purpose by
such Holders other than to determine whether or not to vote to accept or reject
the Plan.
23.02 Voting Deadline
IT IS IMPORTANT THAT THE HOLDERS OF CLAIMS IN CLASS 3 AND CLASS 4
EXERCISE THEIR RIGHTS TO VOTE TO ACCEPT OR REJECT THE PLAN. All known Holders of
Claims entitled to vote on the Plan have been sent a Ballot together with this
Disclosure Statement. Such Holders should read the Ballot carefully and follow
the instructions contained therein. Please use only the Ballot that accompanies
this Disclosure Statement.
The Debtors have engaged Bankruptcy Services, LLC as the Voting
Agent to assist in the transmission of voting materials and in the tabulation of
votes with respect to the Plan. FOR YOUR VOTE TO COUNT, YOUR VOTE MUST BE
RECEIVED AT THE FOLLOWING ADDRESS BEFORE THE VOTING DEADLINE OF __:__ _.M.,
PREVAILING EASTERN TIME, ON _________, 2005:
AAIPHARMA INC. CLAIMS PROCESSING CENTER
C/O BANKRUPTCY SERVICES LLC
757 THIRD AVENUE
NEW YORK, NY 10017
IF YOU HAVE BEEN INSTRUCTED TO RETURN YOUR BALLOT TO YOUR BANK,
BROKER, OR OTHER NOMINEE, OR TO THEIR AGENT, YOU MUST RETURN YOUR BALLOT TO THEM
IN SUFFICIENT TIME FOR THEM TO
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PROCESS IT AND RETURN IT TO THE VOTING AGENT AT THIS ADDRESS BEFORE THE VOTING
DEADLINE.
IF A BALLOT IS DAMAGED OR LOST, OR FOR ADDITIONAL COPIES OF THIS
DISCLOSURE STATEMENT, YOU MAY CONTACT THE DEBTORS' VOTING AGENT, BANKRUPTCY
SERVICES, LLC. ANY BALLOT WHICH IS EXECUTED AND RETURNED BUT WHICH DOES NOT
INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN WILL BE DEEMED TO BE A VOTE TO
ACCEPT THE PLAN. IF YOU HAVE ANY QUESTIONS CONCERNING VOTING PROCEDURES, YOU MAY
CONTACT THE VOTING AGENT AT THE ADDRESS SPECIFIED ABOVE.
23.03 Holders of Claims Entitled to Vote
The Claims in the following Classes are Impaired under the Plan and
entitled to receive a distribution; consequently, each Holder of such Claim, as
of the Record Date established by the Debtors for purposes of this solicitation,
may vote to accept or reject the Plan:
Class 3 -- Senior Secured Note Claims
(Holders of the Senior Secured Note Claims)
Class 4 -- General Unsecured Claims
(Holders of the General Unsecured Claims)
23.04 Vote Required for Acceptance by a Class
The Bankruptcy Code defines acceptance of a plan by a class of
claims as acceptance by Holders of at least two-thirds in dollar amount and more
than one-half in number of the claims of that class which cast ballots for
acceptance or rejection of the plan. Thus, acceptance by a class of claims
occurs only if Holders of at least two-thirds in dollar amount and a majority in
number of the claims in such class which actually vote cast their Ballots in
favor of acceptance.
A vote may be disregarded if the Court determines, after notice and
a hearing, that such acceptance or rejection was not solicited or procured in
good faith or in accordance with the provisions of the Bankruptcy Code.
23.05 Voting Procedures
The Debtors are providing copies of this Disclosure Statement,
Ballots, and where appropriate, Master Ballots, to all registered Holders (as of
the Record Date) of Senior Secured Note Claims in Class 3 and General Unsecured
Claims in Class 4. For further information regarding voting procedures, please
consult the Disclosure Statement Approval Order.
Registered Holders of Senior Secured Note Claims in Class 3 may
include brokers, banks, and other nominees. If such registered Holders do not
hold for their own accounts, they or their agents (collectively with such
registered Holder, "Nominees") should provide copies of this Disclosure
Statement and appropriate Ballots to their customers and to beneficial owners.
Any beneficial owner who has not received a Ballot should contact his, her, or
its Nominee, or the Voting Agent.
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(i) Holders of Class 4 General Unsecured Claims
As part of the consensual settlement between the Holders of Senior
Secured Notes and Holders of General Unsecured Claims, the Holders of Class 4
General Unsecured Claims who vote to accept the Plan are deemed to agree to the
releases set forth in the Plan in section 15.01 unless such Holders elect to
"opt-out' of granting such releases. If any such Holder wishes to "opt-out" of
such releases, the Holder should check the appropriate box on the Ballot. A
decision to "opt-out" of granting such releases will not affect such Holder's
distribution under the Plan.
(ii) Holders of Class 3 Senior Secured Note Claims
Beneficial Owners. Any beneficial owner, as of the Record Date, of
Class 3 Senior Secured Note Claims in his, her, or its own name can vote by
completing and signing the enclosed Ballot and returning it directly to the
Voting Agent (using the enclosed pre-addressed postage-paid envelope) so as to
be received by the Voting Agent before the Voting Deadline. If no envelope was
enclosed, contact the Voting Agent for instructions.
Any beneficial owner holding, as of the Record Date, Senior Secured
Notes in "street name" through a Nominee can vote by completing and signing the
Ballot (unless the Ballot has already been signed, or "prevalidated," by the
Nominee), and returning it to the Nominee in sufficient time for the Nominee to
then forward the vote so as to be received by the Voting Agent before the Voting
Deadline of 4:30 p.m. (prevailing Eastern Time) on ________, 2005. Any Ballot
submitted to a Nominee will not be counted until such Nominee properly completes
and timely delivers a corresponding Master Ballot to the Voting Agent. IF YOUR
BALLOT HAS ALREADY BEEN SIGNED (OR "PREVALIDATED") BY YOUR NOMINEE, YOU MUST
COMPLETE THE BALLOT AND RETURN IT DIRECTLY TO THE VOTING AGENT SO THAT IT IS
RECEIVED BY THE VOTING AGENT BEFORE THE VOTING DEADLINE.
A Nominee which is the registered Holder for a beneficial owner, as
of the Record Date, of Senior Secured Notes, can obtain the votes of the
beneficial owners of such securities, consistent with customary practices for
obtaining the votes of securities held in "street name," in one of the following
two ways:
The Nominee may "prevalidate" a Ballot by (i) signing the Ballot,
(ii) indicating on the Ballot the name of the registered Holder, the amount of
securities held by the Nominee for the beneficial owner, and the principal
amount and the appropriate account numbers for the accounts in which such
securities are held by the Nominee, and (iii) forwarding such Ballot, together
with the Disclosure Statement, return envelope, and other materials requested to
be forwarded, to the beneficial owner for voting. The beneficial owner must then
indicate his, her or its vote on the Plan, review the certifications contained
in the Ballot, and return the Ballot directly to the Voting Agent in the
pre-addressed, postage-paid envelope so that it is received by the Voting Agent
before the Voting Deadline. A list of the beneficial owners to whom
"prevalidated" Ballots were delivered should be maintained by Nominees for
inspection for at least one year from the Voting Deadline.
OR
If the Nominee elects not to "prevalidate" Ballots, the Nominee may
obtain the votes of beneficial owners by forwarding to the beneficial owners the
unsigned Ballots, together
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with the Disclosure Statement, a return envelope provided by, and addressed to,
the Nominee, and other materials requested to be forwarded. Each such beneficial
owner must then indicate his, her or its vote on the Plan, review the
certifications contained in the Ballot, execute the Ballot, and return the
Ballot to the Nominee. After collecting the Ballots, the Nominee should, in
turn, complete a Master Ballot compiling the votes and other information from
the Ballots, execute the Master Ballot, and deliver the Master Ballot to the
Voting Agent so that it is received by the Voting Agent before the Voting
Deadline. All Ballots returned by beneficial owners should be retained by
Nominees for inspection for at least one year from the Voting Deadline. Please
note: The Nominee should advise the beneficial owners to return their Ballots to
the Nominee by a date calculated by the Nominee to allow it to prepare and
return the Master Ballot to the Voting Agent so that the Master Ballot is
received by the Voting Agent before the Voting Deadline.
(iii) Other
If a Ballot is signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations, or others acting in a
fiduciary or representative capacity, such persons should indicate such capacity
when signing, and unless otherwise determined by the Debtors, must submit proper
evidence satisfactory to the Debtors of their authority to so act.
For purposes of voting to accept or reject the Plan, the beneficial
owners of such securities will be deemed to be the "Holder" of such claims
represented by such securities.
All Claims, as the case may be, in a Class that are voted by a
beneficial owner must be voted either to accept or to reject the Plan and may
not be split by the beneficial owner within such Class. Unless otherwise ordered
by the Court, Ballots or Master Ballots which are signed, dated, and timely
received, but on which a vote to accept or reject the Plan has not been
indicated, will be deemed to be a vote to accept the Plan. The Debtors, in their
discretion, may request that the Voting Agent attempt to contact such voters to
cure any such defects in the Ballots or Master Ballots.
Except as provided below, unless the Ballot or Master Ballot is
timely submitted to the Voting Agent before the Voting Deadline together with
any other documents required by such Ballot or Master Ballot, the Debtors may,
in their sole discretion, reject such Ballot or Master Ballot as invalid, and
therefore, decline to utilize it in connection with seeking confirmation of the
Plan by the Court.
In the event of a dispute with respect to a Claim, any vote to
accept or reject the Plan cast with respect to such Claim will not be counted
for purposes of determining whether the Plan has been accepted or rejected,
unless the Court orders otherwise.
The Debtors at this time are not requesting the delivery of, and
neither the Debtors nor the Voting Agent will accept, certificates representing
any notes or equity securities. Prior to the Effective Date, the Debtors will
furnish all such Holder with appropriate letters of transmittal to be used to
remit such securities in exchange for the distribution under the Plan.
Information regarding such remittance procedure (together with all appropriate
materials) will be distributed by the Debtors after confirmation of the Plan.
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ARTICLE XXIV.
CONCLUSION AND RECOMMENDATION
BASED ON ALL OF THE FACTS AND CIRCUMSTANCES, the debtors, THE AD HOC
COMMITTEE OF SECURED NOTEHOLDERS, AND THE CREDITORS' COMMITTEE BELIEVE THAT
CONFIRMATION OF THE PLAN IS IN THE BEST INTERESTS OF THE DEBTORS, THEIR
CREDITORS, THEIR STOCKHOLDERS AND THEIR ESTATES. The Plan provides for an
equitable and early distribution to Holders of Claims and preserves the going
concern value of the Debtors. The Debtors believe that alternatives to
confirmation of the Plan could result in significant delays, litigation and
costs. FOR THESE REASONS, the Debtors, THE AD HOC COMMITTEE OF SECURED
NOTEHOLDERS, AND THE CREDITORS' COMMITTEE URGE YOU TO RETURN YOUR BALLOT AND
VOTE TO ACCEPT THE PLAN.
Dated: Wilmington, North Carolina
November 4, 2005
Respectfully submitted,
aaiPharma Inc. (for itself and on behalf of
each of the other Debtors)
By: ______________________________________
Matthew E. Czajkowski
Chief Financial Officer and
Chief Administrative Officer
________________________________
Mark D. Collins (No. 2981)
Rebecca L. Booth (No. 4031)
Karen M. McKinley (No. 4372)
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Tel: (302) 651-7700
Fax: (302) 651-7701
- - and -
Bonnie Steingart, Esq.
Gary L. Kaplan, Esq.
Arik Preis, Esq.
FRIED, FRANK, HARRIS, SHRIVER
& JACOBSON LLP
One New York Plaza
New York, New York 10004
Tel: (212) 859-8000
Fax: (212) 859-4000
Counsel for Debtors and
Debtors in Possession