Bankruptcy and Insolvency Accounting, Volume 2, Seventh Edition

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BANKRUPTCY AND INSOLVENCY ACCOUNTING

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Bankruptcy and Insolvency Accounting FORMS AND EXHIBITS Volume 2 Seventh Edition

GRANT W. NEWTON, CIRA, CPA, CMA Professor Emeritus of Accounting Pepperdine University

JOHN WILEY & SONS, INC.

C 2009 by John Wiley & Sons, Inc. All rights reserved. Copyright

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201748-6008. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Newton, Grant W. Bankruptcy and insolvency accounting / Grant W. Newton. – 7th ed. v. cm. Includes bibliographical references and index. ISBN 978-0-471-78762-4 (cloth) 1. Bankruptcy–United States. 2. Bankruptcy–United States–Forms. 3. Bankruptcy–United States–Accounting. I. Title. KF1527.N49 2010 346.7307 8 0269–dc22 2009010850 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

To Valda, Aaron, Paul, and Danae

About the Author GRANT W. NEWTON, Professor Emeritus in Accounting, Pepperdine University, Malibu, California, is the coauthor (with Robert Liquerman) of Bankruptcy and Insolvency Taxation (updated annually) and Corporate Bankruptcy (2003), also published by John Wiley & Sons. He is the Executive Director of the Association of Insolvency and Restructuring Advisors and he developed and teaches the three courses that lead to the Certified Insolvency and Restructuring Advisor (CIRA) designation. A CPA, CIRA, and CMA, he received a Ph.D. from New York University, a Master’s degree from the University of Alabama, and a B.S. Degree from the University of North Alabama. Dr. Newton was a member of the AICP’s Task Force on Financial Reporting by Entities in Reorganization Under the Bankruptcy Code that resulted in the issuance of the Statement of Position 90-7. He is coauthor of Consulting Services Practice Aid 02-1: Business Valuation in Bankruptcy and Providing Bankruptcy & Reorganization Services—Practice Aid, both published by the AICPA. He serves as a consultant and expert witness on issues dealing with financial reporting during and emerging from chapter 11, valuation, terms of plan, tax impact of plan, tax issues related to the bankruptcy estate, and recovery of assets.

vii

Contents About the Author vii Preface xv

PART ONE Bankruptcy and Insolvency Environment

1

1 Accountant’s Role in Perspective, 3 1.1 Parties Served by Accountants and Financial Advisors, 3 1.2 Services Often Rendered by Accountants and Financial Advisors in Business Turnarounds, Bankruptcies, and Reorganizations, 4 2 Economic Causes of Business Failures, 7 2.1

Illustration of Altman’s Z-Scores (REVCO), 7

PART TWO Legal Aspects of Bankruptcy and Insolvency Proceedings

17

3 Turnaround Process, 19 3.1

Turnaround Tool Box, Situation Analysis, First Few Weeks, 19

3.2

Turnaround Tool Box, Situation Analysis Checklist, 20

3.3

Turnaround Tool Box, Peer Group Analysis, 38

3.4

Turnaround Tool Box, Cash Flow Analysis, 43

4 Out-of-Court Settlements, 49 4.1

Composition or Extension Agreement with Creditors, 49

4.2

Agreement with Creditors and Debtor and Debtor’s Solicitation Letter (Disclosure Statement), 60 ix

x

Contents

4.3

Settlement Agreement with Creditors— Out-of-Court, 66

4.4

Restructuring Significant Amount of Debt Out of Court, 79

4.5

Recapitalization of Partners Interest with Purchase of New Equity, 81

4.6

Court Order Approving Blue Bird’s Prepackaged Bankruptcy, 87

5 Nature of Bankruptcy and Insolvency Proceedings, 97 5.1

Voluntary Petition, 97

5.2

Section 503(b)(9) Motion and Order to Pay Critical Vendor Claims, 117

5.3

Section 503(b)(9) Motion and Order to Pay 503(b)(9) Expenses, 131

PART THREE Accounting Services 6 Rehabilitation Proceedings under the Bankruptcy Code, 145 6.1

Motion and Order Authorizing the KMIP Plan of Reorganization Metric Payment, 145

6.2

Checklist for Determining the Merits of Substantive Consolidation, 160

6.3

U.S. Trustee’s Opposition to Appointment of Interim CEO and Request for Trustee Appointment, 163

6.4

Application for Order Approving Appointment of Trustee, 171

6.5

Appointment of Examiner with Expanded Powers, 178

6.6

Appointment of Examiner or Mediator in Plan Negotiations, 185

6.7

Cash Collateral Order, 193

6.8

Use of Cash Collateral and Debtor-in-Possession Financing for Tower Automotive, 197

6.9

Priming of Prepetition, First Lien, 218

6.10

Bankruptcy Court Guidelines/Orders for Motions Relating to Financing Agreements, 218

143

xi

Contents

6.11

Debtor-in-Possession Financing Agreement: No. 1, 227

6.12

Disclosure Statement, 244

6.13

Data Checklist for DIP Financing, 275

6.14

Factors Determining Success of Plan, 276

6.15

Plan of Reorganization, 280

6.16

Disclosure Statement Review Checklist, 320

6.17

Sample Disclosure Statement by Unsecured Creditors’ Committee (Selected Items), 323

6.18

Sample Disclosure Statement for Involuntary Filed Petition (Selected Data), 370

6.19

Standing Chapter 12 Trustee’s Instructions to Debtor’s Counsel, 389

7 Retention of the Accountant and Fees, 393 7.1

Protocol: Separating Interim Management from Financial Advisory Functions, 393

7.2

Declaration of Financial Advisor in Support of Debtors’ Application to Be Retained to Provide Fresh Start Reporting and Valuation Services, 396

7.3

Affidavit for Retention of Financial Advisor for Debtor, 420

7.4

Affidavit of Accountant for Unsecured Creditors’ Committee, 437

7.5

Affidavit of Investment Banker Filed Prior to Retention by Debtor, 441

7.6

Debtors’ Application for Retention of Financial Advisor to Provide Fresh Start Reporting and Valuation Services, 478

7.7

Application by Debtors for Authorization to Retain Financial Advisor, 488

7.8

Application for Order Authorizing Retention of Accountants and Financial Advisors for Trustee, 492

7.9

Application Retaining Financial Advisor for Unsecured Credit Committee, 499

7.10

Declaration of Subsequent Connections, 544

xii

Contents

7.11

Order Authorizing Retention of Financial Advisor to Provide Fresh Start Reporting and Valuation Services to Debtors, 577

7.12

Order for Retention of Financial Advisor for Debtors, 580

7.13

Order Authorizing Retention of Accountants and Financial Advisors for Trustee, 583

7.14

Accountant for Debtor, 585

7.15

Accountant’s Affidavit Requesting Retention on a Retainer as Accountant for the Debtor, 590

7.16

Procedures for Establishing Monthly Compensation and Reimbursement of Expenses of Professionals, 592

7.17

Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses, 596

7.18

District of Delaware Local Rule 2016-2 Motion for Compensation and Reimbursement of Expenses, 602

7.19

Petition for Fee Allowance and Reimbursement of Expenses, 604

8 Accounting and Financial Services for the Debtor-in-Possession or Trustee: Part I, 635 8.1

Order Authorizing Use of Present Cash Management System and Bank Accounts, 635

8.2

Sample Application for Order to Pay Prepetition Wages, 659

8.3

Sample Application Allowing Payments to Retail Customers (Warranty Claims), 694

8.4

Sample Application for Order to Honor Accrued Vacation Days, Sick Leave, and Other Personnel Policies, 696

8.5

Employee Questions and Answers, 698

8.6

Schedules, 701

8.7

Statement of Financial Affairs, 754

8.8

Rules for Filing Operating Statements, 795

8.9

U.S. Trustee Requirements, 807

8.10

Compensation for Insiders, 810

xiii

Contents

8.11

Operating Statements Guidelines, 812

8.12

SEC Reporting, 820

8.13

Pro Forma Financial Statements and Projections, 826

8.14

Excerpts from Report on “Investigation of Related Party Transactions and Perquisites”, 839

9 Accounting Services for the Debtor-in-Possession or Trustee: Part 2, 847

10

9.1

Business Plan, 847

9.2

Motion for Protective Order Authorizing Debtor to File Part of Business Plan Under Seal, 859

9.3

Valuation and Financial Projections, 866

9.4

Voting Procedures, 871

Accounting Services for the Creditors’ Committee, 881 10.1

11

Sample Report to Creditors’ Committee, 881

Valuation of a Business in Bankruptcy Proceedings, 889 11.1

Selection of Interest Rate for Valuation?, 889

11.2

Liquidation Value Under Chapter 7, 903

11.3

Example of Reorganization Value Determined by Discounted Cash Flows, 919

11.4

Determination of Value in Chapter 11 Case, 925

11.5

Present Fair Salable Value, Liquidation in Place, and Orderly Liquidation, 968

PART FOUR Auditing Procedures and Reports 12

13

Audit Procedures and Special Areas of Inquiry, 977 12.1

Report on Special Investigation, 977

12.2

Audit Program Guide, 983

Financial Reporting During Bankruptcy, 1003 13.1

First Financial Statements Issued During Chapter 11: Buffets, 1003

13.2

Financial Statements Issued During Chapter 11: Dura Automotive, 1011

13.3

Liabilities Subject to Compromise, 1033

975

xiv

Contents

14

Reporting Results of the Plan, 1037

15

14.1

Fresh-Start Reporting: Sunbeam-Oster, 1037

14.2

Financial Statements Based on SOP 90-7, 1044

14.3

Pro Forma Balance Sheet of USG Corporation, 1071

Reporting on an Insolvent Company, 1083 15.1

Example of Unqualified Opinion Containing Uncertainty About Going Concern, 1083

15.2

Example of Unqualified Opinion Explaining the Ability to Continue as a Going Concern, 1084

15.3

Sample of a Qualified Opinion with “Except for” Wording for Departure from GAAP, 1088

15.4

Sample of a Disclaimer of Opinion Issued to Creditors’ Committees and in Chapter 11 Reorganizations, 1089

15.5

Example of Adverse Opinion for Material Departures from GAAP, 1097

15.6

Report in Connection with Claims of Creditors, 1098

15.7

Report for Agreed-on Procedures Relating to Leveraged Buyout Transactions, 1099

15.8

Examination Report for Projected Financial Statements, 1102

15.9

Compilation Report for Projected Financial Statements, 1103

15.10

Disclaimer of Opinion on Projected Financial Statements, 1104

PART FIVE Taxes 16

1107

Tax Awareness, 1109 16.1

IRS Form 1041, 1109

16.2

IRS Form 982, 1109

16.3

Impact of Taxes on Potential Plan of Liquidation in Chapter 11 Proceeding, 1109

16.4

Tax Impact of Plan of Chapter 11 Corporate Reorganization, 1121

Preface This work is designed to provide a broad range of practical guidance for financial advisors, accountants, lawyers, bankruptcy trustees, and creditors of business enterprises in financial difficulty. It is presented in two volumes. This volume, Bankruptcy and Insolvency Accounting: Forms and Exhibits, Volume 2, contains examples of various forms and exhibits used by accountants and other professionals in bankruptcy cases and out-of-court workouts. The companion volume, Bankruptcy and Insolvency Accounting: Practice and Procedure, Volume 1, describes the economic, legal, accounting, and tax aspects of bankruptcy proceedings. Both volumes will be updated annually. The forms and exhibits in this volume are included as examples to assist practitioners in serving their clients. Chapter 2 of Volume 2 contains an example of the use of the bankruptcy prediction model developed by Altman. Chapter 4 contains examples of out-of-court agreements. An example of a bankruptcy petition is presented in Chapter 5. Chapter 6 presents a plan that was developed by the debtor. Excerpts from disclosure statements for two chapter 11 debtors are also included. Both statements contain good examples of cash projections that should be studied in conjunction with Chapter 8 of Volume 1 of Bankruptcy and Insolvency Accounting. Chapter 6 also contains examples of first day orders, management incentive plans, a cash collateral order, a debtor-in-possession financing agreement, excerpts from an order allowing the priming of a prepetition lien creditor, and instructions from a chapter 12 standing trustee. Chapter 7 consists of examples of affidavits, applications, and orders relating to the retention of accountants for the debtor and for the unsecured creditors’ committee in both large and small engagements. Other examples included are a petition for fee allowance and an order establishing the procedure for interim payment of fees and expenses. Guidelines from regions of U.S. trustee dealing with retention and fees are included. Examples of cash projections and of the type of information filed with the petition are found in Chapter 8. The chapter also contains several examples of orders that are obtainable shortly after a petition filing to facilitate payment of wages and other expenses, as well as examples of procedures to assist the debtor in preventing payment of unauthorized prepetition expenses. Chapter 9 also describes services that can be rendered by the debtor’s accountant and contains examples of forms and instructions for completing operating reports from several different offices of the U.S. trustee. Chapter 10 contains a report issued to the creditors’ committee, while Chapter 11 contains examples of valuations of companies in chapter 11. Audit xv

xvi

Preface

procedures and reports are shown in Chapter 12. Financial statements issued during a chapter 11 case are contained in Chapter 13 and examples of financial statements issued after the adoption of fresh-start reporting are in Chapter 14. Chapter 15 consists of examples of several types of reports that have been issued in chapter 11 cases. Finally, two tax forms used by companies in chapter 11 are located in Chapter 16. Neither volume of Bankruptcy and Insolvency Accounting could have been completed without the assistance of many friends who are professionally involved in reorganization and bankruptcy practice. I am especially grateful to the following individuals for providing information for this volume: Holly Felder Etlin, CIRA, AlixPartners, New York Daniel E. Armel, CIRA, The Fieldstone Group, LLC, Los Angeles Thomas Jeremiassen, CIRA, LECG, Los Angeles Soneet Kapila, CIRA, Kapila & Co., Ft. Lauderdale Alan Holtz, AlixPartners, New York William Lenhart, CIRA, BDO Seidman, New York James M. Lukenda, CIRA, Huron Consulting Group, New York Martin Nachimson, CIRA, Macquarie Capital Advisors, Los Angeles Michael A. Policano, CIRA, New Jersey Lisa Poulin, CIRA, CRG Partners, Bethesda, MD M. Freddie Reiss, CIRA, FTI Consulting, Los Angeles Nancy A. Ross, CIRA, High Ridge Partners, Chicago Jeffery J. Stegenga, CIRA, Alvarez & Marsal, Dallas Michael Sullivan, Huron Consulting Group, New York Finally, I thank Valda L. Newton for her editorial assistance, and for her patience and understanding during the preparation of this work. GRANT W. NEWTON Medford, OR August 2009

BANKRUPTCY AND INSOLVENCY ACCOUNTING

PART ONE

Bankruptcy and Insolvency Environment

1 Accountant’s Role in Perspective

1.1

Parties Served by Accountants1 and Financial Advisors

Objective. Listed here are the various parties accountants and financial advisors often represent in rendering services in the bankruptcy and insolvency area. The major topics involved in these services are described in §§ 1.5 through 1.12 of Volume 1. Out-of-Court Workouts 1 2 3 4 5 6

Accountant for debtor Accountant for creditors’ committee Accountant for major unsecured creditor Accountant for bank or other financial institution Accountant for major secured lender Accountant for principal shareholder

Chapter 7 1 2 3 4 5

Trustee Accountant for trustee Accountant for unsecured creditors’ committee, if elected Accountant for major bank or other secured creditors Accountant for stockholder

Chapter 11 1 2 3 4

Accountant for debtor-in-possession or trustee Trustee Examiner (may involve expanded role) Accountant for examiner, if court will make such an appointment (Bankruptcy Code does not provide for such an appointment.)

1 The

use of the word “accountant” includes the rendering of management advisory services or consulting services.

3

4

Accountant’s Role in Perspective

5 Accountant for unsecured creditors’ committee or committees (e.g., bondholders) 6 Accountant for secured creditors’ committee or individual secured creditor 7 Accountant for stockholders’ committee or individual stockholder 8 Accountant as “expert witness” for any of the above parties Chapters 12 and 13 1 2 3 4 5

Accountant for debtor or trustee Accountant for standing trustee Accountant for major unsecured or secured creditor Accountant for shareholder or partner (chapter 12 only) Accountant as “expert witness” for any of the above parties

1.2 Services Often Rendered by Accountants and Financial Advisors in Business Turnarounds, Bankruptcies, and Reorganizations Objective. The services rendered by accountants and financial advisors in business turnarounds and bankruptcy and insolvency proceedings can be divided into over a dozen categories. The parties that may be served were described in this volume in § 1.1 above. Among the types of services that may be rendered are the following: 1 Assists the debtor in analyzing operational problems, designing a turnaround strategy, and implementing the strategy. 2 Performs consulting activities (management advisory services) that provide information to assist the debtor in making decisions, including the development of a business plan. 3 Assists the debtor in determining the type of action to take to resolve its financial problems. 4 Provides the debtor’s counsel with the information needed to prepare the schedules, statement of affairs, and other forms necessary to file a petition. 5 Prepares special financial statements, including a balance sheet as of the date the petition is filed. 6 Provides the usual accounting services for the client. 7 Assists in the preparation of operating statements to be filed with the court. 8 Performs special investigative services, including an analysis of selected transactions, often to determine if preferences or fraudulent transfers exist. 9 Reconciles and evaluates creditors’ proofs of claims. After establishing the book balances for the unsecured creditors, these balances should be compared with the claims filed. If a claim has not been filed, the book balance is compared with the amount admitted on the debtor’s Schedules of Liabilities to determine its accuracy. Discrepancies are analyzed, and

1.2

10 11 12

13 14 15

Services Often Rendered by Accountants and Financial Advisors

5

if they are not reconcilable, this information is communicated to the trustee or counsel as well as the creditors’ committee. Determines or assists in determining the value of the business. Provides tax advice on several issues including the impact that debt discharge and the terms of the plan will have on the debtor’s tax liability. Assists the client in formulating a plan that will meet with the approval of creditors and at the same time allow the debtor to operate the business successfully. Develops or assists in the preparation of the disclosure statement that must be issued prior to or at the time acceptance of the plan is solicited. Renders other services including assistance in finding sources of credit. Some accountants and financial advisors expand their practice to involve the actual management of the company, often as an officer of the company.

2 Economic Causes of Business Failures

2.1

Illustration of Altman’s Z-Scores (REVCO)

Objective. Shown here is the impact that a leveraged buyout (LBO) had on the Z-score of Revco, a retailer. (Accompanying notes to the consolidated financial statements have been omitted in this presentation.) The Z-score was developed by Professor Edward I. Altman to help predict companies that might file bankruptcy petitions. For a discussion of Altman’s model, see § 2.22 in Volume 1 of Bankruptcy and Insolvency Accounting. The financial statements of Revco for fiscal years 1986 and 1987 are presented below. Altman’s model for predicting bankruptcy failure is as follows: Z = 1.2x1 + 1.4x2 + 3.3x3 + .6x4 + .99x5 where x1 x2 x3 x4 x5

= = = = =

working capital/total assets retained earnings/total assets earnings before interest and taxes/total assets market value of equity/total liabilities sales/total assets

7

8

Economic Causes of Business Failures

The following ratios are used to calculate the Z-score for 1986 and 1987 (all values are in thousands, except ratios): 1986 x1 = x2 = x3 = x4 = x5 =

$639,586 − 253,581 = .391 $986,954 $411,729 = .417 $986,954 $125,343 = .127 $986,954 $1,203,3701 = 2.024 $594,424 $2,743,178 = 2.779 $986,954

1987 $866,515 − $440,530 $1,887,787 $ (22,419) $1,887,787 $109,883 $1,887,787 $ (22,384)2 $1,910,171 $2,679,580 $1,887,787

= .226 = −.012 = .058 = −.012 = 1.419

1986 : Z = 1.2(.391) + 1.4(.417) + 3.3(.127) + .6(2.024) + .99(2.779) = 5.44 1987 : Z = 1.2(.226) + 1.4(−.012) + 3.3(.058) + .6(−.012) + .99(1.419) = 1.84 In using these Z-scores, the reader should recall that Altman developed this ratio from manufacturing companies. It is not entirely appropriate to use it for a retail firm. The asset turnover ratio will most likely be higher for Revco than for a manufacturing concern. Considering this factor, it is still interesting to note how much the Z-score decreased as a result of the LBO.

1 Shares

outstanding of 32,414,012 times $37.125 per share at May 31, 1986. market value of equity is not known because the stock of Revco was no longer traded on the public exchanges following the LBO. However, the book value may be representative of the market value because the assets were restated as of December 30, 1986—the effective date of the LBO. It should be remembered that, because Revco filed a bankruptcy petition within two years after this date, the deficit in equity may be much larger than reported. 2 The

9

Net earnings per common share

Net earnings (loss)

State and local

Net sales Cost of sales, including occupancy costs Warehouse, selling, administrative and general expenses Depreciation and amortization Operating profit Interest expense Interest income Unusual items Earnings (loss) before income taxes Income taxes Federal Current Deferred

(Dollars in Thousands, Except Per Share Amounts)

18,545 6,392 24,937 (1,000) 23,937 $31,741

76 10 86 444 530 $(21,905)

$.97

$1,688,396 1,249,085 347,537 23,168 68,606 19,427 (1,481) (5,018) 55,678

$1.72

21,501 14,399 35,900 8,800 44,700 $56,934

$2,743,178 2,018,149 563,248 36,438 125,343 28,989 (2,465) (2,815) 101,634

52 Weeks Ended May 31, 1986

Predecessor Corporation June 1, 1986 to December 29, 1986

$991,184 733,344 190,540 26,023 41,277 64,682 (2,030) — (21,375)

December 30, 1986 to May 30, 1987

Revco D.S., Inc. and Subsidiaries Periods from December 30, 1986 to May 30, 1987 and June 1, 1986 to December 29, 1986 and Fiscal Years ended May 31, 1986 and June 1, 1985

(a) Consolidated Statements of Earnings

$1.06

17,441 5,659 23,100 6,100 29,200 $38,906

$2,395,640 1,790,731 493,659 30,125 81,125 14,796 (1,777) — 68,106

52 Weeks Ended June 1, 1985

10

Less accumulated depreciation and amortization Property, equipment, and leasehold improvements, net Leasehold interests, less accumulated amortization of $4,387 Excess of cost over fair value of net assets acquired, less accumulated amortization of $6,042 and $800, respectively Other assets

ASSETS Current assets: Cash, including temporary cash investments Accounts receivable—trade and other, less allowance for doubtful accounts of $2,826 and $3,074, respectively Notes receivable Inventories Prepaid expenses Net assets of operations to be divested Total current assets Property, equipment, and leasehold improvements, at cost: Land, land improvements, and buildings Equipment and fixtures Leasehold improvements Construction in progress

(Dollars in Thousands)

Revco D.S., Inc. and Subsidiaries May 30, 1987 and May 31, 1986

(b) Consolidated Balance Sheets

$45,074 67,554 980 501,956 24,022 — 639,586 62,929 223,328 105,388 36,386 428,031 126,684 301,347 — 13,500 32,521 $986,954

$49,632 75,689 37,164 453,749 19,462 230,819 866,515 48,862 120,373 36,315 46 205,596 8,388 197,208 160,867 562,236 100,961 $1,887,787

1987

Predecessor Corporation 1986

11

Treasury stock, at cost Total common stockholders’ equity Commitments and contingencies

LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt Accounts payable, trade Accounts payable, other Accrued salaries and wages Accrued interest Other accrued liabilities Current portion of restructuring reserve Federal, state and local income taxes Total current liabilities Long-term debt, less current portion Restructuring reserve, less current portion Deferred income taxes Holding redeemable preferred stock, $328,406 redemption amount Holding common stock and common stock puts Holding common stock subject to put options Common stockholders’ equity: Common stock, par value one cent per share. Authorized 7,653,061; issued 5,325,000 Predecessor Corporation common stock; par value one dollar per share. Authorized 100,000,000; issued 36,742,762 shares Additional paid-in capital Retained earnings (deficit) $4,490 155,179 21,904 22,705 7,407 35,454 — 6,442 253,581 304,885 — 35,958 — — —

— 36,743 41,764 411,729 490,236 (97,706) 391,530 $986,954

$144,141 141,576 20,148 24,680 48,344 28,050 29,238 4,353 440,530 1,154,858 38,596 — 263,576 2,545 10,066

35 — — (22,419) (22,384) — (22,384) $1,887,787

12 Common Stock $ 36,593 48 — — — — — 35,641 102 — — —

(Dollars in Thousands, Except Per Share Amounts)

Predecessor corporation: Balance at June 2, 1984 Proceeds from stock option plans Compensation on restricted stock plans Federal income tax benefits derived from stock option plans Reclassification Net earnings Cash dividends declared, $.80 per share Balance at June 1, 1985 Proceeds from stock option plans Purchase of treasury stock Treasury stock sold to profit sharing and savings plan Compensation on restricted stock plans

— — — — (3,145) — — (3,145) — (4,376,280) 50,675 —

Shares

$— — — — (80) — — (80) — (98,778) 1,152 —

Dollars

Treasury Stock


(c) Consolidated Statements of Stockholders’ Equity

$38,638 279 144 133 — — — 39,194 1,295 — 360 144

Additional Paid-in Capital

$371,895 — — — — 38,906 (29,282) 381,519 — — — —

Retained Earnings (Deficit)

13

Post-Merger: Balance at December 30, 1986, after acquisition Accretions of original issuance discount on redeemable preferred stock Amortization of deferred costs on redeemable preferred stock Net loss Exchangeable preferred stock dividends Convertible preferred stock cash dividends Junior preferred stock accumulated dividends Balance at May 30, 1987

Federal income tax benefits derived from stock option plans Net earnings Cash dividends declared, $.80 per share Balance at May 31, 1986 Proceeds from stock option plans Treasury stock sold to profit sharing and savings plan Federal income tax benefits derived from stock option plans Net earnings Cash dividends declared, $.60 per share Balance at December 29, 1986, before acquisition $35 — — — — — — $35

— — — 36,743 3 — — — — $36,746 — — — — — — — —

— — — (4,328,750) — 48,204 — — — (4,280,546) $— — — — — — — $—

— — — (97,706) — 1,087 — — — $(96,619) $23,511 (2,151) (417) — (14,093) (5,149) (1,701) $—

771 — — 41,764 81 660 2,036 — — $44,541

$— — — (21,905) — — (514) $(22,419)

— 56,934 (26,724) 411,729 — — — 31,741 (19,461) $424,009

14

Net cash flows from operating activities: Net earnings (loss) Interest expense, net Net earnings before interest expense, net Noncash items included in net earnings (loss): Depreciation and amortization Loss (gain) on disposals of property and equipment Gains on sales of divisions, net of tax Deferred income taxes Treasury stock sold to profit sharing and savings plan Working capital provided by operating activities Decrease (increase) in receivables Decrease (increase) in inventories Decrease (increase) in prepaids Increase (decrease) in accounts payable Increase (decrease) in accrued liabilities Other Net cash flows provided by operating activities

(Dollars in Thousands) $31,741 17,946 49,687 23,168 (101) (3,488) 4,469 1,747 75,482 (22,126) (79,423) (3,245) 57,995 342 (2,235) 26,790

26,023 425 — — — 67,195 (8,423) 103,311 4,844 (52,697) 746 3,811 118,787

36,438 299 (6,166) 8,546 1,512 124,087 5,977 6,693 2,355 7,229 10,923 926 158,190

$56,934 26,524 83,458

52 Weeks Ended May 31, 1986

30,125 273 — 5,375 — 87,698 (21,880) (19,712) (7,654) 7,256 (1,241) (5,923) 38,544

$38,906 13,019 51,925

52 Weeks Ended June 1, 1985

Predecessor Corporation June 1, 1986 to December 29, 1986

$(21,905) 62,652 40,747

December 30, 1986 to May 30, 1987


(d) Consolidated Statements of Changes in Financial Position

15

Net cash flows from investing activities: Purchase of Revco D.S., Inc. common stock Costs related to the purchase of Revco D.S., Inc. Purchase of Carls Drug Co., Inc. Additions to property and equipment Additions to computer software Proceeds from sales of property and equipment Proceeds from sales of divisions, net of tax Decrease in restructuring reserve, net of noncash changes Increase in net assets of operations to be divested Decrease (increase) in notes receivable Interest income received Net cash flows used by investing activities Net cash flows from financing activities: Proceeds from preferred stock issued Proceeds from common stock puts, common stock subject to put options and common stock issued Proceeds from long-term debt issued Deferred financing costs Reductions in long-term debt Increase (decrease) in short-term borrowings Purchases of common stock for treasury Proceeds from stock plans Compensation on restricted stock option plans Federal income tax benefits derived from stock option plans Interest payments Cash dividend payments Net cash flows provided (used) by financing activities Net increase (decrease) in cash and equivalents — (6,235) — (22,276) (1,363) 14,154 35,358 — — (23,023) 1,495 (1,890) — — — — (2,006) — — 84 24 2,036 (18,434) (19,461) (37,757) $(12,857)

(1,253,155) (5,814) — (5,420) (379) 4,414 19,700 (19,455) (9,678) (13,785) 1,370 (1,282,202) 245,117 36,157 1,158,750 (78,660) (150,082) — — — — — (24,291) (2,599) 1,184,392 $20,977

261,399 (4,197) (5,056) (120,939) (98,778) 1,397 195 771 (22,309) (26,724) (14,241) $36,922

— —

— — (35,000) (82,415) (1,513) 1,795 7,978 — — (30) 2,158 (107,027)

11,729 (595) (4,539) 70,031 — 327 367 133 (14,603) (29,282) 33,568 $(10,439)

— —

— — — (90,173) (2,128) 6,345 — — — 1,487 1,918 (82,551)

PART TWO

Legal Aspects of Bankruptcy and Insolvency Proceedings

3 Turnaround Process

3.1

Turnaround Tool Box, Situation Analysis, First Few Weeks

Objective. This detailed checklist identifies a large number of specific tasks that must often be performed during the first few weeks to “stop the bleeding.”1 It is often important that cash flows from operations become positive rather quickly. Thus, “stop the bleeding” involves eliminating negative cash flows from operations. Key Issues: Getting a handle on the current situation Forming a crisis management team Stopping the bleeding ✔ Getting control over cash resources ✔ Balance sheet and income statement strategies ✔ Daily cash position worksheet ✔ Cash flow forecasting on a short-term basis Building a war chest; buying enough time to prevent liquidation Determining viability ✔ Core business ✔ Capital structure—cause of financial difficulty Workout vs. bankruptcy Dealing with creditors ✔ Lenders ✔ Vendors Identifying and coordinating alternative sources of financing Stabilizing the management team and staff resources ✔ Form crisis management team

1 Adapted

from George Blanco, “Turnaround Tool Box; Situation Analysis, First Few Weeks,” Proceedings 13th Annual Bankruptcy and Reorganization Conference (Medford, OR: Association of Insolvency and Restructuring Advisors, 1997), pp. 1–2. Used by permission of Baymark Strategies, LLC.

19

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Turnaround Process

✔ Determine who stays and who goes ✔ Clarify the current situation and what’s required Coordinating with legal counsel and assessing need for outside bankruptcy counsel Verifying accuracy of financial information and availability of management reporting information Developing short-term “punch list” of required actions ✔ Cash flow improvement ✔ Clean up the clutter ✔ Setting reasonable priorities Managing corporate risk ✔ Payment of employee payroll taxes ✔ Insurance & liability coverage ✔ Determine total exposure on deliquent payments Leases—warehouse, office building, store locations, equipment Interest & principal payments

Crisis communication program ✔ Crisis management team ✔ Restrict who can speak to the media ✔ Coordinating communication with management and employees ✔ Coordinating professionals ✔ Procedures to handle vendor, customer, shareholder, bondholder, and other pertinent calls ✔ Replace fear with information

3.2

Turnaround Tool Box, Situation Analysis Checklist

Objective. This checklist covers in-depth situation analysis of general operational information; review of assets and liabilities; environmental and land-use information; creditor composition; third-party analysis; and lender, bondholder, and investor profiles.2 The analysis also covers litigation, internal organization and control; financial structure; audits and investigations; applications, filings, and reports; cash management and profit analysis; intercompany and insider transactions; accounting and legal services; public issues, fraud; and acquisitions. General Operational Information 1 What pressures have creditors already exerted? Have suppliers refused to make shipments? Has the debtor been on COD with vendors? 2 Adapted

from George Blanco, “Turnaround Tool Box; Situation Analysis Checklist,” Proceedings 13th Annual Bankruptcy and Reorganization Conference (Medford, OR: Association of Insolvency and Restructuring Advisors, 1997), pp. 1–2. Used by permission of Baymark Strategies, LLC.

3.2


2

3

4

5

6

7

21

Have creditors commenced debt collection actions? What is the status with shippers for the debtor? Are the shippers creditors? Will they ship without payment? Payments to creditors: Has the company been issuing checks that have been dishonored? Are postdated checks outstanding? What payments are being made to creditors? Meetings with creditors: Has the debtor company held any meetings or discussions with creditors, either individually or as a group, regarding its financial conditions? What has been discussed at the meetings? What promises and/or agreements resulted? Insurance: Does the debtor face the danger of cancellation of any existing insurance? Are insurance premiums paid on a periodic basis or is a large lump sum due soon? Problems with customers: Is an analysis of existing purchase orders available? What is the relationship between the backlog of purchase orders and the debtor company’s ability to produce and meet its delivery schedules? What lead time is required to make purchases for the production of goods? To what extent is it possible to produce goods without substantial additional inventory purchases? Do vendors require inventory purchases in quantities that are larger than would be required by existing purchase orders? Are customers canceling purchase orders? Do any of the customers supply tooling, inventory, or other materials? Are these customer assets segregated and identified? Vendor and customer claims to property held by debtor: Is any property held by the debtor on consignment, toll metal, or other contractual arrangements whereby the supplier of the property claims ownership in the property, but the debtor company has the right to sell the property? Does the debtor company process material or goods belonging to customers? Employee and retiree problems: Does the debtor company have any union contracts? What is the state of relations with the union? How soon will the company be involved in contract negotiations?

22

8

9

10

11

Turnaround Process

With respect to fringe benefits, union dues, or any items for which it is the responsibility of the debtor company to withhold amounts from wages or to make payment for the benefit of employees or retirees, has the company defaulted in its obligations? (These items include life insurance, health and accident insurance, pension fund, charitable contributions, vacation pay, and withholding taxes.) When will vacation pay become due for employees? Has provision been made for the next vacation payment due? If curtailment of operations is required, what are the prospects for retention of necessary employees? Is the retention of certain skilled labor essential, even with a curtailment of the workforce? What is the state of employee morale? Are good employees seeking other jobs? Are there restrictions in union or employment contracts relating to merger, change of location of business, or other significant changes in the operation of the business that would be relevant when considering options in the workout? Pension plan liability: Does the company have a private pension plan? How is the plan funded? Is the company part of a multiemployer pension plan? What potential liability would be imposed if the company were to withdraw from the multiemployer pension plan? What pension fund liability does the company have now? Is the pension plan overfunded? Can cash be made available for working capital from the overfunded pension plan? Financial information: What financial information has the debtor provided to creditors or other parties within the past two years? Who has received the financial statements? Are current financial statements available? Cash flow: How serious is the existing cash flow problem? Has the company made cash flow projections based on the limited availability of financial resources? What assumptions regarding sales, credit terms, and receivable collections have been made in order to produce the cash flow projections? Lender relations: What working capital facility does the debtor have? Is the debtor within lending line and formula requirements? Will the working capital lender continue to advance funds? If so, under what terms and conditions?

3.2


23

12 Quality control: Is the debtor’s financial stress causing product quality problems? Is the debtor experiencing greater than normal product returns? 13 Customer base: Is the debtor company the sole source of supply for any of its customers? If the company could not complete existing contracts, would some customers suffer great damage because of their own large contracts that are dependent on product from the debtor company? How readily can the majority of customers find an alternative source for the product purchased from the company? Are special inspection and quality control standards necessary to fill certain customer requirements? 14 Vendor base: Are any of the debtor’s vendors offshore? Do any of the vendors have special tooling, molds, or other special assets needed to manufacture for the debtor company that were supplied and/or paid for by the debtor? What are the essential terms of contracts with vendors relating to price, default, termination, ownership of special assets, and the like? Are any of the important vendors in financial difficulty? 15 Voidable transfers: Has the company made substantial payments that may be preferential under the Bankruptcy Code? Has the company made transfers of property that may be deemed voidable under state or federal law? Review of Debtor’s Assets 1 General asset review and evaluation: Is there a complete inventory of the fixed assets? When was the last physical inventory taken? What is the breakdown of raw material, work in process, and finished goods? Have the accounts receivable been verified by the accountants? What real estate does the company own? Are there patents, trademarks, licenses, or other special assets? Are there contracts that are critical to the continued viability of the business? Does the company own motor vehicles, road equipment, other rolling stock, ships, or airplanes? What appraisal, tax information, and other relevant information is available with regard to the assets? What assets are leased? Where are the assets located?

24

Turnaround Process

2 Inventory: What is the inventory mix of raw material, work in process, and finished goods? Are the finished goods readily salable, or is a substantial portion obsolete or slow moving? Is the inventory excessive in relation to pending orders? Is the inventory balanced, or will substantial purchases in certain areas be required even though portions of the inventory are excessive? What percentage of current purchase orders can be filled entirely from existing inventory? What is the extent that existing inventory can be used to fill current purchase orders when some new purchases are required? What is the dollar amount of inventory that has been owned for more than three years? If disposition of excessive inventory is indicated, what is the best method for such disposition? Are there peculiar problems with respect to the disposition of excess inventory having to do with brand names of customers, market conditions, or distribution problems? 3 Accounts receivable: Are the accounts receivable collectible in the ordinary course of business? What is the quality and aging of the accounts receivable? To what extent is the collectibility of the accounts receivable related to the completion of contracts by the debtor? Are there substantial contracts with chargebacks relating to advertising, promotional arrangements, or other considerations? Are there substantial amounts due from customers that are themselves vendors to the debtor, thus creating an offset against existing accounts receivable? Is there a heavy concentration of accounts receivable with a few important customers? 4 Machinery and equipment: Is the machinery and equipment standard or specialized? What is the condition of the machinery and equipment? Is the machinery and equipment modern or old? Is there very large machinery and equipment that, if removed, would create problems with a lessor or mortgagee? Is all the machinery and equipment owned, or are certain key machinery and equipment leased? Are there special requirements for the maintenance of the machinery and equipment? Is any of the machinery and equipment underutilized? What is the best method to dispose of excess equipment? Is important tooling related to certain machinery owned by customers or other third parties?

3.2


25

5 Real estate interests: What is the location and use of each property? As to each property owned, is it essential for business viability, and, if not, is it readily salable? Are recent appraisals available? What liens are there against each property? If real estate is leased, what are the essential terms of the lease regarding the rent, term, use of premises, right of assignment and sublease, option to buy, default, and termination? As to all premises occupied by the debtor company, whether owned or leased, are there environmental problems relating to the property? 6 Special assets: Does the debtor own or lease airplanes, vessels, rolling equipment, box cars, construction equipment, or the like? If so, where is the equipment located? What is the exact ownership of the equipment? Does the company have any offshore interests? Does the company have syndicate participations, racehorses, precious metals, or other special assets or interests? 7 Patents, trade secrets, proprietary items: Are there patents, trade secrets, or proprietary items essential to the continued viability of the business? Are there relevant expiration dates or other factors leading to the termination of exclusive rights? Are there special security problems related to the preservation of rights? Does the company have the means and resources to protect its position in exclusive areas? 8 Governmental licenses, permits, and certificates of authority: What licenses, permits, or certificates of authority are necessary for operations? Is there danger of revocation or sanction from any regulatory authority? What effect would the filing of a chapter 11 petition have with respect to the license, permit, or certificate of authority? Is the license, permit, or certificate of authority transferable? What are the conditions of transfer? Is the license, permit, or certificate of authority valuable? Does it create a competitive advantage? 9 Deposits, prepayments, refunds, and credit balances: What deposits, prepayments, refunds, and credit balances exist in favor of the company? Are they substantial? Can funds be freed and become available to the company? Are any of these funds subject to setoff, attachment, or execution?

26

Turnaround Process

10 Off-balance-sheet asset value: Are there assets of value not on the balance sheet (e.g., company name)? Are balance sheet values for any assets substantially lower than market value? 11 Are some important assets owned (or claimed to be owned) by third parties? Tooling. Raw materials. Work in process. Inventory for processing. Can the claimed assets be easily identified? 12 Information pertaining to use of assets: Are significant assets devoted to functions that could be purchased from other sources more economically (e.g., heat treating and painting)? Does the company own real estate when it could be leasing under more advantageous circumstances? What are the debtor’s product lines? Are all the assets necessary for the production of the profitable product lines? Are there substantial assets that are not essential to the continued viability of the debtor that can be sold or used as collateral to produce working capital? How long would it take to dispose of such assets? What is the likely economic result of such a disposition and the general effect on the debtor company? 13 Tort, contract, and other claims against third parties: Are the claims important to the viability and profitability of the business? What is the status of negotiations or litigation? What is the likelihood of a successful outcome? 14 Letter of credit beneficiary status: Is the company the beneficiary of any letters of credit? What are the terms and conditions for drawing on the letters of credit? Special Contractual Relationships 1 Lease, franchise, royalty, license, distributorship, and other contractual agreements: What lease, franchise, license, or other contractual obligations exist? Are they beneficial or burdensome? Are there defaults? Can the defaults be cured? Is there danger of termination of important contractual arrangements? What is the nature of the debtor’s obligations under each contract?

3.2


27

2 Supply and sales contracts: Are there important supply contracts from vendors or energy suppliers? Are they beneficial or burdensome? What are their default provisions? Are there significant contracts with customers? Are they beneficial or burdensome? 3 Special industry contracts: Are there toll metal agreements? Are there consignment agreements? Are there barter agreements? Are the agreements beneficial or burdensome? Are the agreements enforceable against third parties? Review of Debtor’s Liabilities 1 General liability review and evaluation: What is the nature and extent of the trade obligations? What is the aging of the accounts payable? What is the effect of slow payment of accounts payable on sources of supply? Are the trade obligations unmanageable to the point of requiring major balance sheet adjustment? How is the debtor presently handling the payment of accounts payable? Do any of the trade creditors have purchase-money security interests in the assets of the debtor? Are they enforceable? What is the nature and extent of nontrade unsecured obligations (e.g., subordinated debt, bonds, debentures)? Is the nontrade debt in default or likely to be in default in the near future? 2 Short-term debt: What working capital bank facility exists? Is the debt secured? What is the nature and extent of the collateral? Is the lender continuing to advance funds? What is the status of the lender–borrower relationship? Is the debt guaranteed? If so, by whom? Has a workout already started between the lender and the debtor? Does the short-term lender have participants in the lending facility? Who are they? How are decisions made within the lender group?

28

Turnaround Process

3 Term debt: What institutional debt exists? What public debt exists? Is the debt secured? If so, what is the collateral? Is there a trustee for bondholders? What defaults exist? What subordination agreements are there? From whom to whom? Are there subordinations of debt and collateral priority, or only collateral priority? 4 Tax obligations: What past-due obligations are owed to tax authorities? Are payroll taxes and workers’ compensation payments in default? What actions have already been taken by tax authorities? Is there personal liability or criminal liability for officers and other responsible parties with respect to tax obligations? 5 Warranty and product liability: What is the customary warranty provided on the company’s products? Will potential warranty or product liability claims affect the collectibility of accounts receivable? Are there significant potential warranty and/or product liability problems known to the company but not known in the marketplace or by the customers? Is there a potential for product recall? Is there a serious risk for significant product liability exposure? What insurance does the business entity have with respect to its warranty obligations and product liability? 6 Unfunded and unpaid employee and retiree liabilities: Unfunded pension obligations. Unfunded accrued vacation pay. Unfunded health benefits. Unpaid wages and salaries. Unpaid commissions. Unpaid expense reimbursements. Unpaid withholding taxes. What is the magnitude of these problems? 7 Contingent liabilities to guarantors, sureties, and issuers of letters of credit for obligations of the debtor: Guarantors of notes and other obligations. Surety bonds. Financial guaranty bonds. Standby letters of credit. Performance bonds.

3.2


29

Who are the parties and what is their relationship to the business entity? What is the nature of the reimbursement obligation of the company to the guarantor, surety, or issuer of the letter of credit? Has the business entity pledged collateral to secure the reimbursement obligation of the company in the event of payment by the guarantor, surety, or letter of credit issuer? 8 Obligations relating to compliance with environmental laws and regulations: Is there a known problem to be corrected? What steps have been taken to determine the cost of correction of the problem? Is the debtor primarily liable for the costs, or will the company have a claim for reimbursement against a third party? 9 Fines and penalties: Is the company subject to fines and penalties? What will the economic and public relations effect be if fines and penalties are imposed? Employee Agreements and Benefits 1 Executive and other employment contracts: Are the contracts burdensome to the company? Are key employees bound by enforceable noncompetition agreements? Do any of the contracts have large severance provisions? Will downsizing of the company involve large severance payments? 2 Collective bargaining agreements: Are the economic terms of the collective bargaining agreement an impediment to rehabilitation of the company? Is renegotiation feasible? Will contract provisions prevent sale, merger, downsizing, or other possible action needed to create viability for the company? What is the state of labor–management relations? Environmental and Land-Use Information What effort has the company made to comply with environmental and land-use laws, codes, and regulations? Do noncompliance problems exist? Will the workout itself produce activity in the environmental and landuse area requiring action on the part of the debtor company? What is the cost of compliance, where required? Will environmental or land-use problems affect the likelihood of sale or merger or other changes that might result from the development of a workout plan? Could the environmental and land-use problems be sufficiently serious to affect the viability of the company?

30

Turnaround Process

Creditor Composition 1 Unsecured creditors: How many creditors does the company have? What is the breakdown of creditors by size of claim and geographic location? What are the 20 largest creditors? What industries are represented by the 20 largest creditors? What are the long-term goals and interests of the largest creditors in relation to the debtor? Are credit associations likely to be active in the workout process? Are particular business interrelationships among the creditors possibly relevant in the workout? 2 Secured creditors: What information is available about the secured creditors as to the type of debt, nature and extent of collateral, and enforceability of the secured position? What Uniform Commercial Code searches, real estate record searches, and other document searches will be necessary? Who has documents sufficient to provide accurate information about the debt, collateral, and priority position with respect to all secured creditors? Utilities Is the debtor company sufficient in the payment of utility obligations? If not, what is the magnitude of the past-due payment problem? Does the company have seasonal periods of especially high energy use? Third-Party Analysis What are the major creditors, bondholders, investors, and other parties whose participation in the workout will be important? What is the nature of the various interests? To what extent will the actions of any of these parties affect the others? Will the character of any of these parties require the filing of a chapter 11 petition? Will the character of any of these parties create special problems in a chapter 11 proceeding that could impair the likelihood of a consensual chapter 11 plan? Lender, Bondholder, and Investor Profile

Is there public debt (e.g., debentures and bonds)? Is there a trustee? What discretion does the trustee have in dealing with default problems? Is there default now?

3.2


31

Is common or preferred stock held by employees, private investors, or a larger group? Were the securities laws with respect to both registration and disclosure complied with when the public issues were sold? Are there outstanding rights of rescission as a result of a failure to disclose properly in accordance with securities laws? Are copies of the original offering, disclosure statement, or prospectus available, together with any subsequent disclosures and filings? Are there lender, bondholder, and investor groups that require a majority or larger vote to provide the company with consents, waivers, approvals, or other action under default conditions? What is the likely effect on the company of the lender, bondholder, or investor group decision-making process during the workout? Can the group decision-making process be made more flexible to deal with day-to-day problems? What is the leadership structure in each lender, bondholder, or investor group? Are all the participants in the lender, bondholder, or investor group known to the company? Litigation Analysis Is the company involved in major litigation? What are the details? Have shareholders individually or as a class commenced suit against the company? If so, what relief are the shareholders seeking? What is the nature of the case? If not already commenced, is such shareholder litigation likely during the workout? Management Profile, Internal Organization, and Control 1 Internal organization: Is there an organizational chart for management? Who are the key employees below the management level? Are there employees who are of critical importance to the company because of special knowledge, special relationships, or unique skills? 2 Management profile: Can management deal effectively with the problems of the workout? What is the background of senior management (e.g., financial, engineering, sales, credit)? What are the personal interests, goals, agenda items, and obsessions of management? Do management and shareholders own important assets used or leased by the company?

32

Turnaround Process

Do management and shareholders have special relationships with vendors, customers, lenders, lessors, or others that have an important relationship with the company? Does management have stock ownership in the company? Are patents, licenses, franchises, permits, or other important rights held by management and shareholders? Does management have stock options? What company obligations are guaranteed by management or shareholders? Is management or are other employees subject to potential criminal or civil liability for unpaid wages or taxes? Is there possible fraud liability for management or shareholders under securities or other laws? Does management have employment contracts? Are there any other facts or circumstances arising out of personal interests and possible liability that may affect the judgment and motivation of management in the conduct of a workout? 3 Control: Who has sufficient power in the exercise of voting rights to control policy determinations and management of the debtor company? Is there division among those who have control sufficient to create an impediment to the development of a successful workout? Are there interrelationships among those who control the voting power of the debtor company and creditors? Can these interrelationships create a serious conflict-of-interest problem? Financial Structure of Debtor Is the general debt and equity structure of the company reasonable? Is there a basic problem in the debt and equity structure of the debtor company that must be addressed before serious attention may be given to a workout plan? Should the retention of a financial analyst be considered to provide assistance? Is there anything about the company or its industry that will make it especially difficult to use conventional lending sources as part of a restructuring? Financial Statements, Audits, Investigations, Applications, Filings, and Reports 1 Financial statements: What financial statements are available for review? Have the financial statements been qualified? What special information or problems are disclosed in the notes to the financial statements?

3.2


33

2 Filings: For public companies, what are the most recently available securities law filings? What other governmental filings has the company made to regulatory or other types of governmental agencies or authorities? What information is available from the filings? Is the information public? Are copies available? 3 Brochures, applications, and proposals: Has the debtor prepared informational brochures, loan applications, or proposals for contracts that describe the debtor’s business and financial condition? What information is available from the brochures, applications, and proposals? Is the information public? Can copies be obtained? 4 Audits: Do company accountants, creditors, government agencies, or contracting parties audit the debtor on a regular basis and issue audit reports? What is the nature of the audit? Are the audit reports available? 5 Have there been any special investigations of the debtor company from regulatory or criminal justice authorities? 6 Is the information contained in the financial statements, audit reports, applications, filings, brochures, and investigation reports consistent? 7 Is the information from these sources consistent with information available from other sources? Company Capacity to Produce Financial and Operational Information Is the company able to produce weekly, monthly, or other periodic financial and operational information reports concerning sales, shipments, purchases, payments, profit and loss, cash flow, and other information necessary and useful in the workout process? How reliable will the information be? Who will prepare the information? Analysis of Debtor’s Cash Flow Problems 1 The immediate problem: Is there an immediate cash flow problem that will affect the debtor company’s ability to meet its next payroll? Is there an immediate solution to the cash flow problem? Will the company be required to close temporarily?

34

Turnaround Process

2 Cash flow projections: Have cash flow projections been prepared based on workout conditions? Does the debtor company understand that workout conditions require changes in assumptions previously used for cash flow projections? 3 Factors that require changes in assumptions used for workout cash flow projections: Lower sales Shorter credit terms, even a COD requirement Slower accounts receivable collections Lump-sum payments required where periodic payments had previously been accepted Severance pay as terminations are required Price changes from vendors based on lower purchases Increased professional fees Higher employee turnover, increased training costs, and lower efficiency Cash Management Does the company have its own cash management control system, or is it involved with a related entity or third party? What are the details of related entity or third-party cash management control? Are the funds clearly identified as company funds or comingled? In whose name is the account, centralized or otherwise? What are the mechanics for the movement of funds? Where are the company bank accounts located? How many accounts are there? In what names are the accounts? Are there special bank accounts for deposits or other moneys to which a third party may make claim? Is there an asset-based lending or factoring system in place that affects cash collections and management? What are the details of the arrangement? What rights of setoff exist as a result of the cash-management system? Who actually has control of cash on a day-to-day basis? Are there special problems resulting from the control? Should there be a change in the control of cash? Cost and Expense Analysis Are there significant opportunities for expense reduction? Can expense reduction be undertaken without serious negative side effects?

3.2


35

Will outside consultants be needed to suggest expense reduction and identify appropriate areas, or can management implement reductions? Is the company paying too much for purchases of goods and services? If so, what are the reasons? Is it possible to institute policies that will enable the debtor company to reduce the costs of goods and services? Intercompany Transactions and Officer Loans Are there loans to or from officers, directors, shareholders, or other insiders? What are the circumstances under which the insider loan transactions occurred? What transfers have been made to or from related business entities within the past three years? What transfers have been made to insiders within the past three years? Have there been any stock redemptions involving significant amounts of money within the past three years? Corporate, Partnership, or Other Business Structure; Business Records Is the debtor’s business concentrated in a single entity or is there a complex corporate and/or partnership structure? Which entities operate which parts of the business? Have the entities been treated as though they were separate entities by the management, or have their activities been so blended as to require some form of consolidation? Are there different creditors and other parties with different interests in the several entities? What intercompany transfers have been made? Is the complex structure of the debtor in and of itself an impediment to a successful workout? Where are the records located? Are the records complete? Are the records up-to-date? Who has control over the records? Control over Information

Does the debtor company have a computer? What information is stored on the computer? Who has access to the computer? If the computer is leased from an outside source, what is this source’s status as a creditor?

Accounting and Legal Services What accounting and legal services does the debtor company use? Are there weaknesses in the accounting or legal services?

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Turnaround Process

What is the history of the professional relationships? How often have changes been made? What caused the changes? Will additional professional services be required?

Analysis of Legal Problems Is there an immediate prospect of litigation that would disrupt the business? Is there an immediate prospect of levy, attachment, or repossession of important assets? Is immediate legal action necessary in order to protect and preserve certain important rights and property of the debtor company? Is the debtor a defendant in burdensome litigation? Are there defaults under loan agreements that require immediate action to prevent cross-defaults? Is there potential litigation from shareholders, franchises, customers, or governmental entities arising out of the debtor’s failure to comply with applicable laws? What is the extent of the exposure to liability or compliance? Does the debtor company itself have major claims against third parties? Is it able to prosecute necessary litigation to advance the claims? Public and Political Dimensions and Public Issue Problems 1 Public and political dimensions: Is the company a large employer in its geographic area? Is the company a significant supplier of goods and services to government entities? What would be the effect on the public, business, industry, and government if the company were to cease operations? Will business, industry, and government take an interest in and assist in the process of the workout? When they surface publicly, will the problems of the debtor company attract wide attention? 2 Public issue problems: Are there securities law disclosure problems that will create major disruption? Will the publication of defaults and other negative information create serious marketing or trade credit problems? Will news of financial difficulty create problems with sales representatives and others who may lose confidence in the company? Is the debtor aware of its securities law problems? Fraud Information Are there indications of fraud or irregularities in the finances or operations of the debtor?

3.2


37

What safeguards has the debtor instituted to protect against fraud? What additional controls should be instituted to prevent fraud or irregular activities? Industry and Pricing Analysis 1 Industry analysis: Does the debtor company occupy a unique position within a particular industry? Will the future viability of the debtor company depend on identifiable trends within a particular industry? Will a market or other industry survey be required before final evaluations are made? What industry surveys and general industry information are already available? 2 Pricing of products: Who within the debtor company determines the prices of products? How does the pricing compare with the price of similar products within the industry? Is the pricing realistic? If there were to be a price increase or decrease, what would the result be in the marketplace? What would be the ultimate effect of a price change on the debtor company? Leveraged Buyout or Other Acquisition Was the debtor’s business the subject of a leveraged buyout or other acquisition within three years? What are the details of the transaction, with particular attention to sources of funding, application of funds, collateral given for borrowed funds, and the working capital requirements of the business entity at the time? Does the transaction require legal analysis under state or federal bankruptcy fraudulent transfer rules? Root Causes of Debtor’s Problems Is there an easily identifiable cause for the debtor’s financial difficulties? Is the cause a onetime problem? If the cause is not easily identifiable, is it necessary to make the determination? Should some form of special investigation be required to determine sources of loss, with a view toward possible litigation? Possible Preliminary Sources for Rehabilitation Sale of business Merger

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Turnaround Process

New financing Equity capital Disposition of excess assets Elimination of unprofitable operations Relief from burdensome contracts Relief from oppressive litigation Advantageous market changes Management changes New products Governmental assistance

Reference Rome, D. L., “Business Workouts Manual.” Warren, Gorham & Lamont, Boston, 1992. 3.3

Turnaround Tool Box, Peer Group Analysis

Objective. Part of the environmental analysis involves evaluating competitors or peer groups. It is difficult to evaluate the strengths and weaknesses of the debtor without comparing its performance with those of its competitors.3 The specific objectives of the peer group analysis are: 1 To identify a target company’s strengths and weaknesses by comparing its financial and operating performance to its peer group/competitors 2 To form an opinion and understand the target company’s viability and potential for improvements 3 To assist in the evaluation of management QUANTITATIVE PEER GROUP ANALYSIS This type of analysis involves the accumulation and analysis of financial and operational data concerning the target company and its peer group/competitors that is obtained from numerous sources: Examples of Quantitative Analysis: Analysis of gross margins Preparation of financial statement ratios (liquidity, solvency, profitability) Preparation of activity ratios (accounts receivable/inventory turnover) Side-by-side “Vertical Analysis”

3 Adapted

from David J. Bell, “Turnaround Tool Box; Peer Group Analysis,” Proceedings 13th Annual Bankruptcy and Reorganization Conference (Medford, OR: Association of Insolvency and Restructuring Advisors, 1997), pp. 1–8. Used by permission.

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39

QUANTITATIVE PEER GROUP ANALYSIS—WHERE TO START? A. Identify the industry and peer group—There are two primary ways of accomplishing this. 1. Discussions with management—Ascertain management’s view of their industry, peer group, and key competitors. 2. Standard Industrial Classifications (SIC) Codes—The use of Standard Industrial Classification Codes (SIC) developed by the U.S. government can help to identify the target company’s industry, peer group, and competitors. B. Accumulation of data and information—Quantitative analysis commences with the accumulation of data and information. Such data and information can be obtained from many different sources as follows: 1. The target company—Management should be able to provide pertinent information about their company, peers, competitors, and industry. Such information could include key financial and operating data, and productivity measurements, which management has used to evaluate and measure its performance relative to peers, competitors, and industry benchmarks. Management’s inability to provide this could be an indication that they have not performed this type of analysis and may be a key indicator of the competency, quality, and effectiveness of management. 2. Other sources—Data and information on peer group/competitors and industry are available from numerous sources. Some of the more commonly used sources are as follows: Peer group/competitors SEC filings (10Ks, 10Qs, 8Ks, registration statements) Annual Reports Disclosure, Inc. Moody’s Standard & Poor’s Internet, World Wide Web, On-Line Services Wall Street analysts’ reports on peer group/competitor companies (Note that information on privately held companies will be difficult to obtain, and a peer group analysis may have to be limited to public companies.) Industry Trade groups Industry-specific groups: Music industry—Soundscan Convenience stores—National Association of Convenience Stores The Johnson Redbook Service Kaplan Reports—radio Wall Street analysts’ industry reports

40

Turnaround Process

PEER GROUP ANALYSIS PROCESS 1 “Side-by-side” vertical analysis—An analytical process that consists of comparing the financial statements of the target company with companies in its peer group. The process is referred to as vertical due to the format and methodology employed in conducting the analysis. A typical format for side-by-side vertical analysis appears as follows:

Target Company Amount %

Peer Grp Co #1 Amount %

Peer Grp Co #2 Amount %

Sales Cost of Sales Gross Margin Gross Margin % Operating Exp Operating Inc EBITDA

2 Financial Statement Ratio Analysis—An analytical process that consists of a detailed top-to-bottom analysis of the target company’s financial statements, and the development of comprehensive financial ratios on the target company. This analysis, also referred to as Financial Statement Ratio Analysis, consists of calculating the following types of ratios: Liquidity Ratios Current ratio Quick ratio Solvency Ratios Debt-to-equity Debt-to-assets Times interest earned Average cost of debt Profitability Ratios Earnings per share Dividends per share Dividend payout rate Return on equity Return on sales Return on assets Earnings–price ratio Price–earnings ratio Dividend yield Book value per share

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Activity Ratios Accounts receivable turnover Average collection period Inventory turnover Average holding period Accounts payable turnover Average payment period Total asset turnover 3 Use of other measurements—Another approach is to apply analytical procedures using nonfinancial statement data. Examples of the use of other measurements in various industries are as follows: Retail # of stores square footage headcount sales per square foot

Hotel occupancy % average daily rate (“ADR”)

Technology book-to-bill ratio backlog

Construction costs-in-excess of billings billings-in-excess of costs backlog

OTHER ITEMS TO CONSIDER 1 Comparability of information—Accurate and reliable analysis requires that information be consistently presented. Accounting policies must be understood for the target company and its peer group and differences eliminated for comparative purposes. GAAP allows for some latitude and the user should satisfy himself that accounting policies are consistent. Examples Use of LIFO vs. FIFO for inventory valuation Nonrecurring adjustments/extraordinary items Financial statement classification 2 Consistency of ratios—It is of the utmost importance when performing vertical analysis that financial ratios be consistently computed; note that there is more than one way to compute many ratios. INTERPRETATION/EVALUATION SIGNIFICANCE Decide what the financial statement relationships and ratios mean. Are they good or bad, informative or not informative? How does the target company compare to other companies in its peer group or its industry? Evaluation generally has three stages: 1 Compare the target company’s relevant ratios to standard or benchmark ratios. Developing benchmarks in a particular industry may make the

42

Turnaround Process

ratios more meaningful, and enable the target company to compare its performance to that of its peer group and competitors. Industry benchmark ratios may be developed during the peer group analysis by selecting the most favorable financial ratios of companies in the peer group as the benchmark. 2 Analyze changes in the target company’s ratios over time and attempt to discern patterns that have developed or may be developing (known as time series analysis). 3 “Decomposition analysis”; an in-depth examination of each financial relationship, or breaking the ratios down into their individual components and examining each in detail. The purpose of this is to determine the quality of a ratio. The target company’s financial ratios should be compared to the ratios of firms in its industry. 1 The use of industry averages as standards of reference implies the assumption that the industry is correct. 2 Industry averages can be obtained for many ratios and most industries from credit reporting firms: Robert Morris Associates Dun and Bradstreet Standard & Poor’s Examples of areas that are exposed as a result of this analytical process and related observations follow: Area

Observation

Inventory turnover

Target company inventory turned less than peer group; could be indicative of numerous management problems, including poor production scheduling and forecasting processes. Target company DSO higher than peer group; could be indicative of service problems, collection problems, etc. Target company days are lower than peer group; could be indicative of poor use of trade credit, less favorable credit terms, poor working capital management.

Accounts receivable DSO Accounts payable days

QUALITATIVE PEER GROUP ANALYSIS A more difficult analysis than quantitative—highly judgmental. Steps may include: 1 Interview key management of the target company; determine strengths and weaknesses by functional area as compared to peer group/competitors: “What do your competitors do better than you and why?”

3.4

Turnaround Tool Box, Cash Flow Analysis

43

2 Analyze the company profile section of the 10K and other data sources for both the target company and its competitors. Other data such as plant locations, number of employees, recent acquisitions, brand names and product lines, and information systems may be relevant. This information can be informative and useful in understanding the target company. 3 Analyze analyst reports. Collectively, this information can provide greater insight into the workings of the industry, the viability of the target company’s position in the industry, and its chances/opportunities for improvement. Other Topics 1 2 3 4

3.4

“Model Company Analysis” Management process analysis Viability analysis Industry trend analysis and changes in market dynamics


Objective. Cash flow analysis is involved in almost all of the stages discussed in Volume 1, Chapter 3.4 The practice suggestions contained here go beyond the emergency action stage and have the following specific objectives: 1 To identify the potential for a future cash crisis a. Possibility of bankruptcy b. Possibility of loan defaults 2 To evaluate the adequacy of cash flows for meeting a company’s needs/plans a. Working capital requirements (seasonality) b. Revolver requirements c. Debt service capacity d. Cash available for discretionary use 3 To evaluate and measure a. Financial performance b. Profitability c. Liquidity d. Cash flow relative to other periods/years e. The cash-generating productivity of continuing operations f. Current and projected cash flow adequacy

4 Adapted

from John T. Policano, “Turnaround Tool Box; Cash Flow Analysis,” Proceedings 13th Annual Bankruptcy and Reorganization Conference (Medford, OR: Association of Insolvency and Restructuring Advisors, 1997), pp. 1–8. Used by permission.

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Turnaround Process

COMMON CASH FLOW FORECASTING SHORTFALLS AND REMEDIES A. Companies frequently forecast cash flow on a “bank basis” (when checks clear, when deposits become available funds); as a result, cash flow does not readily reconcile to income statement and balance sheet forecasts. 1. Cash flows should be forecast on a book basis in addition to a bank basis to ensure accuracy and to facilitate subsequent comparisons to actual results. 2. Cash flow forecast should reconcile to income statement and balance sheet forecasts to facilitate analyzing accuracy/reasonableness. B. The forecast horizon is too short to be a meaningful management tool. 1. Generally a 13-week cash flow forecast should be prepared on a weekto-week or daily basis. 2. Detail cash flows forecast on a longer term basis generally tend to lose specificity and accuracy. C. Categories used to forecast cash flows can be too general and inadequate to analyze and ascertain accuracy. 1. Cash flows should be forecast on a basis that can be easily evaluated and compared to actual results. 2. Adequate detail and relevant categories for receipts and disbursements should be used. D. Categories used to forecast cash flows cannot be compared or easily compared to actual results. 1. Cash flows should be forecast on a classification basis that can be easily tracked and monitored against actual results. E. Companies fail to monitor their cash flow forecast by comparing actual results to forecast and make appropriate changes to their forecasting or cash management process. 1. Actual results should be compared to forecast results. Significant variations should be analyzed and explained to determine whether differences are temporary (timing differences) or permanent in nature. Accordingly, a temporary or permanent increase or decrease in cash can be identified. 2. Differences must also be analyzed to determine whether management must make changes to their forecasting process or to their cash management process. F. Averages and historical run rates used in forecasting cash flows may be inaccurate. 1. A company, depending on the nature of its business, must address seasonality and changes to working capital requirements when forecasting cash flow. Seasonality affects the timing and amount of purchasing raw materials, paying vendors, and collecting receivables, which can significantly impact working capital requirements and cash flows. 2. Changes in vendor terms during the course of a year may impact cash flows. As a normal practice, certain industries may offer

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45

extended terms at specific times (e.g., holiday season extended dating for retailers). 3. Promotional sales programs and policies must be considered. Practices of offering customers extended dating (longer payment terms for early ordering) can significantly impact working capital requirements and cash flows. Sales discounts offered to customers also impact not only the timing but the amount of cash receipts. G. Cash flow forecasts are prepared at an inadequate level of detail and lack precision. Cash flows should be forecast on a more detail, precise and specific basis. The forecasting process should consider the following information: 1. Accounts receivable A rollforward of trade receivables should be completed and consider the following: r Actual opening balances r Aging of the opening receivables balances r Detail historical sales and forecasted sales by customer, by product line, etc. r Actual sales order backlog and shipping commitments r Historical collection experience for amount and timing r Customer terms, sales dating programs, and discounts offered r Historical bad debt experience r Historical returns, allowances, and chargeback experience r Historical, current, and forecasted DSO r Changes in the reserve for bad debts r Anticipated changes in the receivable collection efforts r Anticipated changes in sales terms Activity must reconcile with sales plans and other plans that will impact any of the items listed above (e.g., bad debt write-offs). A drawback to the average DSO calculations is that it is sensitive to changing sales patterns. The DSO calculation will rise with an increase in sales and fall with a decrease in sales. Therefore changes in the DSO can be misleading and businesses with seasonal sales must be careful when analyzing receivable patterns when using DSO calculations. An alternative approach to forecast collections that may be more reliable is to evaluate and estimate a normal collection experience pattern of credit sales. For example, current collection experience may indicate that a sale is collected over a period of time (5% of sales are collected in the current month of the sale, 50% of sales are collected in the month following the sale, and the balance is collected by the end of the second month following the sale). 2. Inventory A rollforward of inventory should be completed and consider the following: r Actual opening balances r Actual open purchase commitments

46

Turnaround Process

r Detail production and purchasing plans by product line r Forecast of raw material purchases and payments by product line by inventory component (raw materials, work-in-process, finished goods) r Lead time requirements to purchase raw materials r Inventory cycle—time from purchasing raw materials to shipping finished goods r Historical, current, and forecasted inventory turnover r Seasonality r Safety stock r Throw-out rate/waste r Obsolete inventory r Changes to the reserve for obsolete, slow moving, or lower quality inventory Activity must reconcile with inventory production and purchasing plans and to the cost of sales forecast. 3. Sometimes companies’ forecasted balance sheet accounts for fixed assets do not agree with capital expenditure disbursements, and capital expenditures are usually forecast evenly through the year. r It is unlikely that capital expenditures will be incurred and or paid evenly throughout the year. r A detail capital expenditure plan should be prepared indicating the amount and timing of such expenditures and their related payments. r Asset retirement and asset sales plans must be developed and considered in preparing the forecast for fixed assets. r The forecast for capital expenditure payments should reconcile to the change in the fixed asset accounts on the balance sheet. 4. Accounts payable balances are sometimes “plugged” by companies. A rollforward of trade payables should be completed and consider the following: r Actual opening balances r Past-due trade payables balances r Current vendor terms/trade support and any anticipated changes r Actual open purchase commitments r Incoming letters of credit and anticipated changes to LC requirements r Forecast of raw material purchases and payments r Capital spending forecast r Forecasted operating expense disbursements r Actual current and historical operating costs run rates and payment terms Activity must reconcile with inventory production plans, purchasing plans, and capital spending plans. Trade support frequently diminishes in troubled situations and is also frequently mismanaged.

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5. Accrued liabilities are sometimes “plugged” by companies. A rollforward of accrued liabilities should be completed and consider the following: r Actual opening balances—detail actual accrued liability balances and the nature of each account should be analyzed. r Current and past-due balances. r Forecasted operating expense disbursements. r The adequacy of environmental reserves. r The adequacy of legal reserves for litigation. r The required funding for profit sharing/pension plans. 6. A rollforward for other forecasted balance sheet accounts that should be produced includes the following: r Income taxes—the company’s current tax status (tax refunds, estimated tax payments, NOL) should be completely understood. r Prepaid expenses—payments for insurance premiums, real estate taxes, sales tax, and income taxes should be specifically forecast rather than using an average-based method to forecast changes in prepaid expense accounts. r Other receivables. r Other assets. r Other liabilities. H. Items frequently overlooked in forecasting cash flows: 1. Professional restructuring fees. 2. Lenders restructuring fees. 3. Tax payments—sales tax, real estate tax, excise tax, and estimated state and federal income tax payments. 4. Tax refunds. 5. Directors & Officers insurance/other insurance policies and increase/ decreases to policy premiums. 6. Litigation settlements. 7. Severance payments. 8. Bonus payments. 9. Environmental liability settlements/requirements. 10. Seasonality—may need to build up inventory. 11. Sales dating programs—receivables may build up as collections are deferred. 12. Presentation of letters of credit. 13. Changes to letter of credit requirements (both increases and decreases). 14. Other expenditures that are nonrecurring items.

4 Out-of-Court Settlements

4.1

Composition or Extension Agreement with Creditors

Objective. This creditors’ agreement contains suggestions as to how an outof-court settlement might be drafted. The draft agreement provides, in document form, specific items that should be included. Schedule B shows how the agreement can be constructed to provide that, in case a chapter 11 petition is filed, the voting that took place prior to filing of the chapter 11 petition is still applicable. Creditors’ Agreement [Date] , by and among Debtor Corporation This agreement of (hereinafter “Debtor”), the Creditors’ Committee named in Paragraph B below, and those unsecured creditors of Debtor who shall sign this Agreement or assent thereto by separate instrument or by negotiating a check bearing a restrictive endorsement assenting to this Agreement (hereinafter collectively referred to as the “Creditors”), is made with reference to the following facts: A Debtor is indebted to the Creditors and desires [to effect a composition with its creditors and] an extension of time for the payment of its obligations. The Creditors are willing to forgo their present rights to enforce payment under the terms and conditions set forth below. [Date] , an inB At a general meeting of Creditors held formal Creditors’ Committee (hereinafter called the “Committee”) was [Names of Comelected, which Committee is now composed of . The Committee has employed [Name mittee Members] as its Counsel. [Secretary’s Name] of Counsel] is Secretary to the Committee (hereinafter “Secretary”). C [Here add any special recitations applicable to your situation.] Based upon the foregoing, it is agreed: 1 Creditors hereby constitute and appoint the persons named in Paragraph B above, and their respective successors, as the Committee, with all the rights, privileges, powers, authority, and immunities given to and vested in the Committee during the period of deferment. 49

50

Out-of-Court Settlements

2 The Committee and Debtor shall by audit or otherwise determine the amount of indebtedness or liability of Debtor to Creditors as of [Key Date—the date for fixing Creditors, claims] , and such indebtedness is hereinafter called the “Extended Debt.” If so determined by the Committee, Extended Debt shall include all unsecured indebtedness of Debtor as of said date owing to Creditors and to nonconsenting creditors. [The second sentence is optional. It affords Debtor and Committee an opportunity to make pro rata distributions to all creditors having claims as of the key date. See note to paragraph 6.] [The indebtedness might be evidenced by promissory notes, rather than controlled, as here, by the general language of the Agreement. But see Lipton & Katz, “‘Notes’ Are (Are Not?) Always Securities—A Review,” Business Lawyer, Vol. 29 (April 1974), pp. 861–866. Securities Acts problems are not avoided, however, by elimination of promissory notes.] 3 Subject to all terms, provisions, and conditions hereof, each and all of the Creditors shall and do hereby extend the time [and method] of payment of their respective claims, as they existed at the close of [Key Date] , in accordance with Schedule business on A attached hereto and made a part hereof. The scheduled date for the last of such payments shall hereinafter be referred to as the “Termination Date.” In the event, however, that the Committee in its sole discretion shall determine that the best interests of Creditors and of Debtor will be served by the further extension of time of payment of all or any part of the claims of Creditors, the Committee, upon written notice to all Creditors and to Debtor, and without the requirement of any further assent in writing from any of them, is hereby empowered and authorized to grant a further extension of the time of payment of all or any part thereof and thereafter for such further period or periods of time as the Committee in its sole discretion may determine. The Termination Date as to each such extension shall be the date so specified by the Committee. [The use of Schedule A affords an opportunity to attach a schedule of payments by the Debtor to the Committee and a schedule of payments by the Committee to the Creditors.] 4 For the purpose of this Agreement, the term “Period of Deferment,” as heretofore and hereafter used in this Agreement, shall mean the period from the effective date of this Agreement until the Termination Date, or until such later date as shall be specified by the Committee, unless the Period of Deferment shall be sooner terminated pursuant to paragraph 11 hereof. So long as the Period of Deferment shall continue, each Creditor agrees that it will not commence or prosecute any action or proceeding against Debtor, levy any execution, attachment, or any process against the property of Debtor by reason of the debt owing prior to moratorium to such Creditor as of the date of this Agreement, or

4.1


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file or join in any Petition, or in any proceeding under Title 11 of the United States Code or its amendments, or any other proceeding having for its object the appointment of a Receiver or Trustee for Debtor. Notwithstanding the foregoing sentence, if the amount of the Extended Debt of any Creditor is disputed by Debtor, such Creditor may commence and prosecute suit on such disputed claim, but any judgment obtained thereon shall not be enforced and payment thereof shall be deferred and extended in the same manner as all other Extended Debt. Secretary shall advise Debtor in writing of all creditor confirmations of Extended Debt amounts. Within 60 days of receipt from Secretary, Debtor shall notify Secretary of all disputes. Absent such notification by Debtor within such 60-day period, as among only the Committee, Debtor, and Secretary or such other agent as the Committee shall select, the claim of each such Creditor shall be conclusively deemed to be in the amount indicated by the Creditor, less all payments received on such claim by such Creditor since [Key Date] . 5 Debtor shall keep such books of account and other records of its acts, property, and transactions as may be required by law and in accordance with generally accepted accounting practice. Debtor shall supply access to the Committee of all Debtor’s books, records, and affairs and shall furnish to the Committee such operating statements, balance sheets, and other financial information as the Committee shall reasonably require, including all reports and papers filed under any of the Securities Acts. The Committee shall, upon demand, be entitled to examine all state and federal income tax returns. [Adapt this to require such specialized reports as the case may warrant.] 6 A. Debtor shall make the payments required by the Schedule of Payments (Schedule A attached hereto) to Secretary, as the agent for Creditors, or to such other agent as the Committee may, from time to time, designate. The Secretary shall distribute sums so received pro rata to all Creditors, and, if so determined, to all unsecured Creditors, determined in accordance with paragraphs 2 and 4 above. [This subparagraph permits pro rata payment to all Creditors, whether consenting or not. See paragraph 2. It is not uncommon to find that “nonconsenting creditors” are merely apathetic or bound by red tape. If the dividend check contains a carefully drawn form of consent above the space provided for endorsement, some or most of the “nonconsenting creditors” will become a part of the program upon endorsing and cashing the first check. Thereafter, Debtor and the Committee may decide whether to transmit unlegended checks to Creditors who refused to endorse the first check.] [Here, as in other places in the Agreement, the Committee is given certain powers. Committee Counsel should draft these paragraphs with care to avoid the possibility that the Committee will be held

52


accountable for the acts of the Debtor. See, for example, Sommer, “Who’s ‘In Control’?—S.E.C.,” Business Lawyer, Vol. 21 (April 1966), pp. 559–612); § 15 of the Securities Act of 1933; § 20a of the Securities Exchange Act of 1934. See note to paragraph 12i.] [Furthermore, taking too much of an active role in the operation of the Debtor by the Creditors’ Committee could result in members of the Committee being considered insiders if a bankruptcy petition is filed. Such a classification could severely affect the amount committee members receive from the Debtor’s estate.] [In some extension or composition agreements, the Committee insists on holding the stock of the Debtor in escrow, along with the right to cause a dissolution, liquidation, or other insolvency proceeding upon the happening of an event of default. These rights, too, might create problems for the Committee. Often, the Committee will wish that it had never taken an escrow of the Debtor’s stock. In many instances, it is more convenient and economical to permit a responsible Debtor to act as its own disbursing agent.] B. Each Creditor hereby waives his right to assert in any proceeding at law, in equity, or in bankruptcy that any payment made pursuant to this Agreement or with the consent of the Committee constitutes an improper, voidable, or preferential payment. C. Debtor shall make no payments to unsecured creditors as to their [Key Date] unless prior conclaims existing as of sent thereto from the Committee is obtained by Debtor. Except as set forth herein, all payments to unsecured creditors shall be made or caused to be made by the Committee and shall be pro rata to Debtor’s Creditors [or all the unsecured creditors], as provided above, unless the Committee decides that it is in the best interests of the Creditors to make payment in greater than pro rata amounts to unsecured creditors who are not consenting Creditors as defined herein. Furthermore, the Committee may cause payment in full of the balance of any claim of unsecured creditors . or consenting Creditors that is less than $ [Secret preferences may render the composition voidable, but small claims may be separately classified and preferred. Also, creditors may waive preferences. Farmers Bank v. Sellers, 167 Ark. 152, 267 S.W. 591 (1925).] [Provision is made for Committee-approved preferences to nonconsenting creditors in order to preserve the business. If a nonconsenting or secured creditor becomes unmanageable, a chapter 11 filing might be required. See paragraph 13.] D. Upon payment of the amounts determined under paragraphs 2 and 4 in accordance with the terms of this Agreement and the modifications thereof authorized by the Committee, all claims of Creditors shall be deemed to have been satisfied and Creditors shall have no further rights in connection therewith. 7 In consideration of the extension granted hereunder, but with respect only to Creditors as defined herein, Debtor consents and agrees

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that any and all statutes of limitations, either state or federal, shall be tolled, insofar as the Extended Debt is concerned, during the Period of Deferment and any additional extension granted by the Committee. 8 During the Period of Deferment, Debtor shall not, without prior written consent of the Committee: a. Conduct its business in a manner inconsistent with good business practice. b. Liquidate, dissolve, or enter into any consolidation, acquisition, or merger, or cause or permit any of its subsidiaries to do so, except that any subsidiary may liquidate, dissolve, or merge into Debtor or a wholly owned subsidiary of Debtor. c. Redeem or purchase any of its outstanding securities or issue for cash or cash equivalent any of its securities, except as required under existing agreements or provisions of outstanding convertible preferred stock, stock purchase warrants, or options of Debtor. However, Debtor may, at its option, retire presently existing debt by issuance of its capital stock, and, further, Debtor may, at its option, issue its securities for cash or cash equivalent, percent of the proceeds therefrom (after deducting the if costs and expenses of issuance, including without limitation, commissions, finders’ fees, and the like) upon receipt by Debtor shall be paid to the Committee for distribution to unsecured creditors or Creditors in accordance with this Agreement. Said proceeds shall be applied forthwith upon receipt by the Committee toward the payment of the last installments of principal due prior to moratorium [and thereafter toward the payment of unpaid accrued interest] to unsecured creditors or Creditors pursuant to Schedule A. “Securities,” as used in this Agreement, shall mean the capital stock of Debtor or any instrument giving the holder thereof the right to purchase or otherwise obtain such capital stock. “Capital Stock,” as used in this Agreement, shall mean the preferred or common stock of Debtor regardless of the terms thereof. d. Declare cash or asset dividends in favor of its common stock, but Debtor may pay dividends on its preferred stock in accordance with the rights of its preferred stockholders so long as at the time said dividends are paid Debtor is not in default under this Agreement. e. Increase above said rate the total compensation of any officers whose maximum rate of compensation at any time in 20 was per year, except for cost of living increases, nor in excess of $ per year the total compensation of any officer increase above $ or employee of Debtor now or hereafter earning less than $ per annum, except for cost of living increases. f. Encumber, hypothecate, or pledge any of its assets except in connection with new borrowings approved by the Committee, as

54


distinguished from replacement or renewal of existing secured indebtedness, or the purchase or replacement of equipment. g. Make any loans to anyone, excluding wholly owned divisions or subsidiaries, which during the Period of Deferment aggregate in at any time. excess of $ h. Make any capital expenditure, whether for cash, Securities, or per other consideration, by purchase or lease, in excess of $ in the fiscal year of 20 , or $ in project, or in excess of $ the fiscal year of 20 . The right to make capital expenditures in said amounts shall be cumulative. i. Sell any of its assets out of the ordinary course of business inin any one volving an aggregate sales price of more than $ transaction; provided, however, that this limitation shall not apply to an exchange of equipment or a sale in direct connection with replacement of equipment. j. Default in the payment of any obligations due to any taxing [Key agencies or fail to pay its obligations incurred after within 30 days following maturity or any grace Date] period provided therein, unless, in either case, Debtor is disputing in good faith the amount due or the terms of payment thereof. Ordinary trade debt after said date shall be paid in accordance with terms and as set forth in paragraph 10. [This paragraph should be expanded or contracted according to the needs of the case. Probably the Committee would want to know about the filing of any suit, but might not desire all the listed powers. Often, the Committee will wish to stay aloof from certain internal business affairs. See note to paragraph 6A.] [Subparagraph c contains a bracketed provision for interest. Trade debt commonly waives interest in insolvency or business distress cases. This is especially true in compositions where creditors are not paid in full. Occasionally, creditors—and less occasionally, debtors—insist on payment of interest. If so, this form should be examined in its entirety for appropriate insertions and revisions.] 9 At the time of giving notice to its Board of Directors, Debtor shall give notice to the Committee Counsel of each meeting of the Board of Directors of Debtor and shall grant observer status to a designated member of the Committee or other designated person mutually acceptable to the Committee and Debtor. The observer shall agree not to disclose any information learned at the meetings of the Board of Directors to any person other than members of the Committee and Counsel to the Committee and to refrain from participating in the deliberations of the Board of Directors. The Committee hereby agrees that all such information shall not be disclosed to anyone other than its members, Counsel, and Secretary, except when disclosure is necessary to preserve or protect the rights and powers granted the Creditors or Committee by this Agreement, and, in any case, the Committee agrees not to use information obtained in a manner violative of law. The Committee shall be reimbursed by Debtor for the

4.1


55

fee charged to the Committee by the observer, provided this amount shall not exceed $ per Board meeting attended by the observer. [Here, again, participation in the affairs of the Debtor should be approached with caution. See note to paragraph 6A.] [Key Date] , 10 It is anticipated that Debtor will, after operate on a cash, discount, or [30] [60] [90] day credit basis and may from time to time require unsecured or secured loans or advances in connection with its operation. Creditors do hereby subordinate their respective extended indebtedness including postpetition interest, to the claims of such loaned moneys (and moneys loaned in accordance with paragraph 8f), and the same shall be repaid before the extended indebtedness shall be repaid without reference to the time of payment thereof or whether the payment be in due course of business, through voluntary or involuntary liquidation, or through any proceeding under any chapter of Title 11 or otherwise. The extended indebtedness shall be similarly subordinated to the claims of suppliers of merchandise or services on credit to the Debtor after the above date. Nothing contained in this Agreement shall be construed or deemed to release or discharge any rights and/or remedies that any Creditor may now or hereafter have against any endorser, guarantor, or surety who may now or hereafter be liable to any such Creditor upon any debt within the purview of this Agreement, and each such right and remedy is hereby reserved by any such Creditor. [Concerning sureties, endorsers, or guarantors, see New York University Law Quarterly Review, Vol. 11 (1933), p. 287, “Restatement of Security” §§ 122, 129 (1941). The Debtor should try to get the surety’s consent, because the surety retains rights of reimbursement against the debtor.] [This paragraph could be considerably expanded to include subordination to “Institutional Debt” or “Senior Debt,” as specifically defined. It is adapted from W. Douglas and C. Shanks, Cases and Materials on Corporate Reorganization (St. Paul: West Publishing, 1931), p. 495.] [On subordinations generally, and for a broader clause for use in the event of a bankruptcy petition, see Calligar, “Subordination Agreements,” Yale Law Journal, Vol. 70 (January 1961), p. 379. Calligar calls this type of subordination an “inchoate subordination.”] [Many agreements call for the assignment of claims to these favored creditors as part of the subordination process. Calligar, id. at 395–398, sees little benefit in the assignment, except possibly where both the principal debtor and the subordinating creditor file bankruptcy proceedings. In our case, where the subordination is “inchoate,” a present assignment “in gross” does not appear feasible. But it could be tried.] 11 The occurrence of any of the following events shall constitute a default by Debtor under this Agreement if the Committee elects to declare a default by written notice to Debtor, in which event the Period of Deferment shall end, and all of the Extended Debt shall become due and payable 30 days after said written notice of

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default, and Creditors may then assert all the remedies afforded by law: a. Debtor’s failure to pay the installments required by Schedule A within 7 days of the respective due dates thereof. b. Debtor’s breach of any of the other covenants, terms, or conditions of this Agreement and, as to any curable breach, failure to cure the breach within 20 days following written notice of it. c. Acceleration by a creditor of any debt based upon Debtor’s breach or default of any provision of Debtor’s agreements with said creditor, unless such acceleration is rescinded or the breach of default is cured within 20 days after acceleration. d. Preferential treatment of any Creditor with respect to extended Debt without prior written consent of the Committee, except as set forth herein. e. At any time during the Period of Deferment, the net worth of , Debtor is less than $ , the working capital is less than $ or the total indebtedness, including accrued liabilities, is more . than $ f. The audited financial statement of Debtor for the fiscal year [Date] reflects material adverse change in ended the financial condition of Debtor relative to the financial condition reflected in the pro forma financial statement of Debtor for the same period previously furnished to the Committee. g. The filing of any proceeding by or against Debtor seeking any relief under any chapter of Title 11, except a chapter 11 petition as provided in this Agreement. [Date] of the present Loan h. Termination prior to Agreement with banks, unless a replacement loan is obtained by Debtor from another financial institution before the termination. i. Any modification of the existing agreements between Debtor and its other creditors or capital stockholders that is material and adverse to Creditors. [This paragraph should be expanded or contracted according to the facts.] 12 The Committee, for itself and its successors, shall act as the Committee hereunder and shall have the privileges, powers, authorities, and immunities herein given to and vested in the Committee, which include but are not limited to the power and authority to amend this Agreement, declare or waive defaults, extend the period of deferment, consent or decline to consent to actions by Debtor requiring Committee consent, authorize and cause the payment of the Committee’s expenses, including fees to the Secretary, and legal fees and costs from funds supplied by Debtor in accordance with Schedule A or otherwise, and commence and prosecute on behalf of Creditors and the Committee any suits necessary to enforce this Agreement.

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57

a. The members of the Committee shall serve without compensation except as otherwise provided herein. b. The Committee is authorized and empowered to appoint one or more subcommittees, composed of a lesser number of its members, and to fix their authority and duties. c. The Committee and its members, as well as its agents and employees, shall not be liable for the acts, default, or misconduct of any other member of the Committee hereunder, nor shall any member be liable for anything but his own willful misconduct, and the Committee and its members, agents, and employees shall not be answerable for the acts, default, or misconduct of any agent or other person employed by it if selected with reasonable care. d. The Committee assumes no responsibility for the execution of this Agreement by persons other than the Committee and its members, or for the performance of the agreements embodied herein by persons other than the Committee and its members, but the Committee undertakes in good faith to execute this Agreement and to seek to obtain the consent to it by Debtor’s other unsecured creditors entitled to join in this Agreement. Committee members, in executing this Agreement, are doing so solely as Committee members and not on behalf of their respective employers. e. The Committee may consult with Counsel, and the opinion of Counsel shall be full protection and justification to the Committee and its members for anything done or omitted or suffered to be done in accordance with that opinion. f. The Committee and its members shall not be required to give any bond for the performance of its or their duties. g. As quickly as possible after the first meeting of the Committee, each member thereof shall designate in writing a person who shall serve in his place and stead should he become unable to do so. In the event of a vacancy caused by inability to serve, the person so designated shall serve as the replacement. In the event no such designation is made or in the event of death, resignation, disqualification, or other inability to serve, the remaining members of the Committee shall fill the vacancy. Preference shall be given to the person designated by the firm employing the member who is unable to serve. h. The Committee shall act by a majority of its members with or without formal meeting, but written or telegraphic notice of any meeting shall be given to all members at least one (1) day prior to any formal or informal meeting. Members of the Committee shall have the right, but shall not be required, to act by properly designated proxy to another member of the Committee or to give instructions and votes by telephone. i. Each member of the Committee may, in his individual capacity or as an officer, director, or employee of a Creditor of Debtor

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whom he represents, have the usual business relations with Debtor. [These attempts at absolution might not be as effective in the event of wrongdoing, but committees could be afforded the benefit of the doubt lest participation by creditors is discouraged.] [Perhaps some of the duties of committee members are similar to committees in Chapters X and XI. See Walsh, “The Creation, Rights, Duties, and Compensation of Creditors’ Committees Under Chapter X and XI of the Bankruptcy Act,” Brooklyn Law Review, Vol. 40 (Summer 1973) pp. 35–76; Levy, “Creditors’ Committees and their Responsibilities,” Commercial Law Journal, Vol. 74 (December 1969), p. 355; W. Douglas and C. Shanks, Cases and Materials on Corporate Reorganization (St. Paul: West Publishing, 1931), p. 395; note to paragraph 6A.] [It is not unusual to include a provision that the Debtor will continue to trade with its existing Creditors, “price, terms and service being satisfactory,” but this type of clause could cause more trouble than it is worth. The Debtor would be foolish to cease trading with existing Creditors.] 13 In the event that Debtor becomes a debtor in a proceeding under chapter 11 of Title 11 and proposes a Plan with terms of payment for the Extended Debt equivalent, or more favorable, to Creditors than those contained in this Agreement, then the Creditors shall be deemed to have accepted said Plan in writing without the need for a further or separate acceptance. The consent attached hereto as Schedule B shall constitute such acceptance. [The prepetition solicitation of acceptance must be in compliance with any applicable nonbankruptcy law, rules, or regulation governing the adequacy of disclosure and, if none is applicable, then the solicitation must follow disclosure requirements of the Bankruptcy Code (11 U.S.C. §§ 1125–1126).] [Schedule B attempts to follow the requirements of Interim Bankruptcy Rule 3007 and Form No. 25. Counsel should make whatever amendments or additions the case requires.] 14 This Agreement becomes binding upon Creditors, the Committee, percent of the dollar amount of unsecured and Debtor when [Key Date] entitled to join creditors of Debtor as of in this Agreement have assented to this Agreement by executing the Consent attached hereto as Schedule B or by otherwise consenting hereto; provided, however, that Debtor may waive this condition by giving written notice to the Committee that it is waived, in which event this Agreement shall become binding upon Creditors, the Committee, and Debtor. [It is the general practice to set a high percentage of acceptances—for example, 95 percent.] [Be careful to avoid leading creditors to believe that 100 percent consent will be required. The error could be incurable. See Texas Belting & Mill Supply Co. v. C. R. Daniels, Inc., 401 S.W.2d 157 (Civ. App. Tex. 1966).]

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SCHEDULE B BALLOT Consent to Creditors’ Agreement (and Acceptance of Plan under Chapter 11) [Name of Debtor] , does The undersigned, a Creditor of hereby assent to, and join in, the Creditors’ Agreement dated [Date] , between Debtor, its Creditors’ Committee, and certain of its unsecured creditors and acknowledges receipt of a copy of the same. Undersigned does hereby accept that certain chapter 11 plan of the Debtor, if one is filed hereafter, incorporating the terms of said Creditors’ Agreement. $ (Name of Creditor)

(Amount of Claim)

By Attach a copy of the invoices supporting your claim and return to: Secretary [Address]

Source: Adapted [to comply with Title 11 of United States Code) from Bernard Shapiro, “A Composition or Extension Agreement.” Copyright 1977 by the American Law Institute. Reprinted with the permission of the The Practical Lawyer. This article appeared in the September 1, 1977, issue of The Practical Lawyer, pages 28–40.

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4.2 Agreement with Creditors and Debtor and Debtor’s Solicitation Letter (Disclosure Statement) Objective. This actual out-of-court settlement (which was subsequently approved by the creditors and implemented) was developed using the documents shown. The agreement, which provided for the payment of 20 percent of the allowed claim of unsecured creditors over a period of 18 months, was accompanied by a combination solicitation letter and disclosure statement of the debtor. February 28, 20XX , Inc. To the Creditors of C , Massachusetts and N Massachusetts S Undoubtedly, you are aware that the debtor is engaged in the retail sale of wearing apparel for men, women, and children. Since December 3, 19XX we have had a number of meetings with creditors’ representatives and their counsel. The purpose of said meetings was to determine whether it would be best to liquidate the assets, or whether we should consider a plan of reorganization that is feasible and in the best interest of creditors, and would allow debtor to remain in business. In order to reach a decision, we had the assets, consisting of inventory, furniture, fixtures and equipment, appraised and the books and records of the company thoroughly examined by the creditors’ committee in accordance with its accountants’ report, a copy of which is enclosed [omitted]. It is clear that, on forced liquidation and after payment of administration costs and expenses, taxes, and other priority claims, there would be available to general unsecured creditors a dividend of less than 10%. Normally, payment would be made in or within 12 to 18 months after the first meeting of creditors. The national average for costs and expenses in the administration of a bankruptcy estate is approximately 25% of the total realized assets. Therefore, since the appraised assets, including cash on hand, total $56,562.71 and the estimated cost of administration is 25% of that amount, or approximately $14,140.63, there would be left about $42,422.08. If we then deducted all priority claims for taxes, wages, and other amounts owed, the total of said sums would be $25,140.00. There would then be available to general unsecured creditors $17,282.06 which represents less than 10% of the total due to general unsecured creditors, and would not be distributed until the case is closed, usually 12–18 months after the filing. After a number of meetings, a plan was proposed which contemplated the formation of a new corporation which would acquire all of the assets of the old corporation. The officers and directors of the new corporation would be the same as the old corporation, as follows: President and Treasurer: D Vice President: M Clerk: R Directors: D M R

T T T T T T

. . . . . .

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Agreement with Creditors and Debtor and Debtor’s Solicitation Letter

The stockholders would also be the same in the new corporation as in the old and each would own 25% of the 100 shares of stock outstanding, as follows: D M R V

T T T T

25 shares. 25 shares. 25 shares. 25 shares.

The new corporation’s name is to be W , Inc. Said corporation will , Inc. and to pay the following: agree to purchase the assets of C (1) All taxes and priorities, in cash, in full. (2) To pay to general unsecured creditors a sum equal to 20% of the allowed claims in four installments: a 5% down. b 5% in 6 months. c 5% in 12 months. d 5% in 18 months. (3) Agree to pay all fees and expenses of the settlement, which are estimated to be in the neighborhood of $14,000 or $15,000, as follows: a $5,000 down. b Balance in monthly installments of $1,500 until paid. All of the officers will continue to be employed by the new corporation and to perform the same duties and to receive the same compensation as they had received from the debtor corporation. The weekly compensation and duties of the officers of W , Inc. will be as follows: D M R

T T T

, Buyer and General Manager , Manager of the N location , Manager of the S location

$500.00 $250.00 $150.00

The new corporation has entered into an agreement with the debtor corporation and an executed copy is available for examination at this office. , Inc., is to give, as security for its promise The new corporation, W to make payments as heretofore mentioned, the following: R of B A Trust Indenture and Security Agreement to B , Massachusetts, counsel for Creditors’ Committee, and I W , counsel for the Debtor, as co-trustees, covering all the assets of the debtor, including inventory, accounts receivable, furniture, fixtures and equipment [omitted]. B A pledge of all the issued and outstanding stock of the newly formed corporation. ,T , is to personally guarantee in writing the payment C D of the amount promised to be paid to the creditors heretofore mentioned. As security for his guaranty, he is to give a mortgage on a house which has been appraised as having a current market value of $45,000 and upon which there is a first mortgage balance of $19,000.

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The agreement mentioned will include the usual safeguards with regard to amount of salaries paid to officers and principals of the debtor; a right to declare the entire balance due in the event the company defaults in any payment when due or it sustains a loss beyond the aggregate sum of $15,000; and prohibiting payment of dividends or issuance of additional shares of stock. The foregoing is a brief summary of the Plan and should not be relied upon for voting purposes. Creditors are urged to read the Plan in full. Creditors are further urged to consult with counsel, or with each other, in order to fully understand the Plan. An intelligent judgment concerning the Plan cannot be made without understanding it. No representations concerning the Debtor (particularly as to the value of its property) are authorized by the Debtor other than as set forth in this statement. Any representations or inducements made to secure acceptance of the Plan that are other than as contained in this statement should not be relied upon by any Creditor. The information contained herein has not been subject to a certified audit. The records kept by the Debtor are not warranted or represented to be without any inaccuracy, although every effort has been made to be accurate. In order to hasten the distribution referred to above in an out of court arrangement, we have prepared and herewith enclose an acceptance form that could be used in the event a reorganization under Chapter 11 of the Federal Bankruptcy Code is found necessary in order to conclude the settlement. If you accept our recommendation for an early consummation of the proposed settlement, please execute and return the enclosed acceptance form to this office, together with a statement of your account, showing amount due as of December 3, 19XX. If you have any questions, please write to this office. Very truly yours, W I

Creditors’ Agreement This agreement of February 28, 20XX by and among C , Inc., a corpoin the ration duly organized by law and having its principal offices in N , Commonwealth of Massachusetts, hereinafter called “Debtor,” and W Inc., a corporation duly organized by law and having its principal offices in S in said Commonwealth, hereinafter called the “new corporation,” and R and I W , both having places of business B in said Commonwealth, hereinafter called “Trustees,” and those in B unsecured creditors of Debtor who sign this agreement or consent hereto by separate instrument, hereinafter called “Creditors,” is made with reference to the following facts: 1 Debtor is indebted to a number of Creditors and desires to effect a settlement of its obligations with said Creditors and an extension of time for the payment of the agreed settlement amount by the new corporation. The new corporation will purchase all the assets of the Debtor, and will give, as security for Creditors, a Trust Indenture and Security R , counsel for the Creditors Committee Agreement to B

4.2


2

3

4

5

6

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and I W , counsel for the Debtor, as co-trustees, covering all the assets of the Debtor, including inventory, accounts receivable, furniture, fixtures, and equipment, and including the usual safeguards with regard to amount of salaries paid to officers and principals of the Debtor; a right to declare the entire balance due in the event the company defaults in any payment when due or it sustains a loss beyond the aggregate sum of $15,000; and prohibiting payment of dividends or issuance of additional shares of stock. Creditors agree with each other and are willing to forgo their present rights to enforce present payment of the agreed settlement amount of the terms and conditions set forth herein below. Subject to all the terms, provisions and conditions herein, each and all the Creditors shall and do hereby settle and extend the amount and time of payment of their respective claims as they existed on the effective date of this agreement as defined in paragraph 8 herein, in accordance with the schedule of payments contained in Schedule A which is attached hereto and made a part hereof. From the period beginning on the effective date of this agreement, until the termination date (the date of the last payment to Creditors pursuant to Schedule A), or until such later date or dates as may be agreed on by each individual Creditor, each Creditor agrees that it will not commence or prosecute any action or proceeding against the Debtor or the new corporation, levy any execution, attachment, or any process against the property of the Debtor or the new corporation by reason of the debt owing to such Creditor as of the effective date of this agreement, or file or join in any petition or any proceeding under the Bankruptcy Code or its amendments, 11 U.S.C. §§ 101 et seq. (1978), or any other proceeding having for its object the appointment of a receiver, assignee, trustee or other custodian for the Debtor or the new corporation or the assets of either. However, it is specifically understood, if the amount of the debt of any Creditor is disputed by the Debtor, or the new corporation, that such Creditor may commence and prosecute suit on the disputed claim, but any judgment by such Creditor in connection with such disputed claim shall not be enforced and payment thereof, in the same percentage as is paid to other Creditors hereunder, shall be settled and extended in the same manner as all other debts. The new corporation shall make the payments required by the schedule of payments in accordance with Schedule A to the Trustees; who shall distribute the sum so received to each Creditor in accordance with the time for payments set forth. Each Creditor hereby waives his right to assert in any proceeding at law, in equity or in bankruptcy, that any payment made pursuant to this agreement constitutes an improper, voidable or preferential payment. Nothing contained in this agreement shall be construed or deemed to release or discharge any rights or remedies that any Creditor may now or hereafter have against any endorser, guarantor, or surety who may now or hereafter be liable to any such Creditor upon any debt settled or deferred by the provisions of this agreement, and each such right and remedy is hereby reserved to any such Creditor.

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7 In the event that the Debtor or the new corporation becomes a debtor in a proceeding under Chapter 11 of the Federal Bankruptcy Code and proposes a Plan of Reorganization with terms of payment for the debt settled and extended herein in an equivalent (or more favorable amount) to creditors other than those contained in this agreement, then the Creditors who have accepted this agreement shall be deemed to have accepted said Plan of Reorganization in writing without the need for further or separate acceptance. The Ballot for Accepting or Rejecting the Creditors’ Agreement and Plan of Reorganization Under Chapter 11, hereinafter “Ballot,” which is attached hereto and marked Schedule B, shall also constitute such Acceptance or Rejection of a Plan under Chapter 11 of the Bankruptcy Code. In this way it is intended to protect each Creditor who executes the Ballot attached as Schedule B, to ensure that each Creditor shall receive as much as any other Creditor in the event of a Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code. 8 This agreement shall become binding on all Creditors, Debtor, new corporation, and Trustees in the event ninety-eight (98%) percent in number and dollar amount of unsecured Creditors of the Debtor as of the effective date, who are entitled to join in this agreement, have assented to this agreement by executing and returning to the Trustees the Ballot attached as Schedule B; provided, however, that Debtor may waive the ninetyeight (98%) percent condition by giving written notice to the Creditors that it is waived, in which event this agreement shall become binding upon the Creditors, the Debtor, the new corporation and the Trustees; that date shall be deemed “the effective date” of this agreement. 9 This agreement shall bind and benefit the parties hereto and each of their respective heirs, administrators, successors and assigns. 10 Acceptances and/or notices which may be required to be given hereunder shall be given either by certified mail or first class mail, postage prepaid, as follows: To the Debtor: To the new corporation: To the Trustees:

[Counsel] [Counsel] [Counsel]

11 This agreement may be executed in multiple counterparts. C By:

, Inc., DEBTOR President

W By:

, Inc. President

B R Trustee and not individually I W Trustee and not individually

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65

SCHEDULE A Schedule of Payments to Creditors All general unsecured creditors shall be paid twenty (20%) percent of their claims as follows: 1 Five (5%) percent in cash of the agreed amount of the debt once the agreement becomes binding according to the terms set forth in paragraph 8 of this agreement. 2 Five (5%) percent in cash six months from the date of the first payment. 3 Five (5%) percent in cash 12 months from the date of the first payment. 4 Five (5%) percent in cash 18 months from the date of the first payment. SCHEDULE B C

, Incorporated , Massachusetts M Ballot for Accepting or Rejecting Creditors’ Agreement and Plan of Reorganization Under Chapter 11 The undersigned, the holder of a general unsecured claim against C , Inc., in the unpaid principal amount indicated below, does hereby [Check one box] Accept Reject the Creditors’ Agreement dated February 4, 20XX, between C , Inc., Debtor, and certain of the holders of general unsecured claims against said Debtor. The undersigned acknowledges the receipt of a copy of said Creditors’ Agreement. The undersigned further consents to the use of this ballot, if a petition is filed for a Reorganization under Chapter 11 of the new Bankruptcy Code, 11 U.S.C. §§ 101 et. seq. (1978), for the acceptance or rejection of any Plan of Reorganization which incorporates the terms of the aforesaid Creditors’ Agreement of February 4, 20XX, or embodies said terms in principle, or which plan is held not to impair nor materially and adversely affect the interests of the holders of general unsecured claims under said Agreement. $ Amount of claim Print or type name: Signed: If appropriate (By: (As: Street or Box City, State, Zip Code

Please sign on the line above (if a corporation, it must be acknowledged by the Secretary of the corporation; if a partnership, this must be signed by a partner; if an individual, then signed by the individual; or, if an individual who

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is a d/b/a in particular company name, then the individual’s signature with the d/b/a must be set forth). Please return this ballot with a statement of your account (copies of invoices, etc.) so that it will be received on or before March 30, 20XX; allow adequate time for delivery if returned by mail. Return To: [Counsel]

4.3

Settlement Agreement with Creditors—Out-of-Court

Objectives. This actual settlement agreement provided for a payment of 60 percent to the unsecured creditors, factors, and unsecured note holder. Additionally, note payments were allowed, but limited to the owner of the business. The settlement provided for partial payment of a note from an insider. Included in the agreement are both negative and affirmative covenants. Also contained in this settlement agreement are defined roles of a committee during the negotiations and on supervising the operations of the debtor after the agreement becomes effective. TOM CORP., TIM CORP., THOMAS INTERNATIONAL, INC., SETTLEMENT AGREEMENT Settlement Agreement (“Agreement”), DATED NOVEMBER 5, 2000 among Tom Corp., Tim Corp. and Thomas International, Inc., each a New York corporation, with an office at 2572 5th Avenue, New York, N.Y. (COLLECTIVELY THE “Debtor”) and the creditors THE names OF WHICH appear on the signature page hereof and all persons or organizations who have agreed to the terms hereof by executing an Acceptance in the form attached hereto as Exhibit “A”, (the “Acceptance Form”): RECITALS 1. Debtor is engaged in the business of selling and converting fabrics. 2. Debtor has experienced certain difficulties involving its ability to pay its creditors, and Debtor wishes to achieve a nonjudicial resolution as to the repayment of its obligations outstanding as of August 10, 2000, as set forth in the Schedule annexed hereto as Exhibit B. NOW, THEREFORE, the parties hereto, in consideration of the foregoing and of the mutual covenants recited herein, and intending to be legally bound hereby, agree as follows: ARTICLE I 1.1 Definitions. As used in the Agreement, the following terms shall have the respective meanings given to them in this Article I. (a) Affected Creditor. Any person listed on Exhibit “B”.

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67


(b) Affected Obligation. Any obligation, including interest owed by Debtor to an Affected Creditor as of August 10, 1995. Annexed as Exhibit “B” are the amounts owed to each Affected Creditor as reflected in the books and records of Debtor as of August 10, 2000 [Exhibit not included]. Affected Obligations shall not include the obligations due by Debtor under the factoring agreements with New York Bank, with the exception of the amount set forth on Exhibit B as due and owing to said factor. The Acceptance Form contains a provision for each Affected Creditor to assert the indebtedness it believes is due and owing from Debtor. Resolution of disputes shall be governed by Section 7.3 which provides a mechanism for distribution and the resolution of disputed amounts. (c) Chairman. Sally Company (“Sally”), as represented by Louise Walker. (d) Committee. The group of major creditors formed to administer this Agreement, initially comprised of those creditors listed on Exhibit “C” [Exhibit not included]; , P.C., as represented by , Esq. (e) Committee Counsel. , Esq. and (f) Effective Date. The earlier of (i) the date on which the conditions precedent to the effectiveness of this Agreement as set forth in Section 6.1 are satisfied, (ii) the date on which Debtor delivers a waiver of such conditions precedent to the Chairman or Committee Counsel pursuant to Section 6.1, (iii) or the date, subject to the provisions of Section 3.5 of this Agreement, upon which Debtor and the Committee declare this Agreement to be effective. (g) Net Profits shall mean NET PROFIT OR LOSS BEFORE INCOME TAXES FOR ANY FISCAL YEAR IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (“GAAP”), AS DETERMINED BY THE INDEPENDENT ACCOUNTANT TO THE DEBTOR, ADJUSTED BY ADDING BACK DEPRECIATION AND AMORTIZATION LOSSES AND SUBTRACTING ALL PAYMENTS MADE TO CREDITORS REQUIRED UNDER THE AGREEMENT. THE FOLLOWING IS A CALCULATION OF “NET PROFIT” BASED UPON THE DEBTOR’S PROJECTIONS:

8/31/01 8/31/02 8/31/03

Net Profit Before Income Taxes

Depreciation

$ 97,718 1,189,138 1,331,553

$42,000 42,000 42,000

Settlement Payments

Net Profit or (Loss)

$ (977,405) (1,147,700)

= $(837,687) = 83,438 = 185,153

(1,188,400) 8/31/04

1,340,072

42,000

(h) Unsecured Note shall mean

(1,369,995)

= 12,077

THAT CERTAIN UNSECURED PROMISSORY

NOTE IN THE PRINCIPAL AMOUNT OF BY TIM CORP. TO NEW YORK BANK.

$2 MILLION EXECUTED AND DELIVERED

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(i) New York Bank Settlement Agreement shall mean THE SETTLEMENT AGREEMENT BETWEEN DEBTOR AND NEW YORK BANK, DATED THE DATE HEREOF, WHICH ADDRESSES THE REPAYMENT OF THE UNSECURED NOTE AND MODIFICATIONS TO THE FACTORING AGREEMENTS BETWEEN THE DEBTOR AND NEW YORK BANK.

ARTICLE II 2.1 Payment of Affected Obligations. Debtor agrees to pay the Affected Obligations (OTHER THAN THE UNSECURED NOTE EXCEPT AS EXPRESSLY PROVIDED THEREIN) in full satisfaction thereof, without interest, as follows: (a) Sixty (60%) percent in weekly installments commencing on the Effective Date and on a like day of each week thereafter, which installments shall each be in the amount of $10,000 THROUGH MAY 31, 2001, the next installments COMMENCING JUNE 7, 2001 each of which shall be in the amount of $15,000 THROUGH AUGUST 2001, THE NEXT INSTALLMENTS COMMENCING SEPTEMBER 6, 2001 EACH OF WHICH shall be in the amount of $20,000 THROUGH FEBRUARY 2002, THE NEXT INSTALLMENTS COMMENCING MARCH 6, 2002 EACH OF WHICH SHALL BE IN THE AMOUNT OF $25,000 THROUGH FEBRUARY 2003, THE NEXT INSTALLMENTS COMMENCING MARCH 2003 EACH OF WHICH SHALL BE IN THE AMOUNT OF $30,000 THROUGH JULY 2003 PAYMENT AND FINAL PAYMENT OF THE UNPAID BALANCE ON AUGUST 31, 2003. Said installment payments shall be distributed pro rata to the Affected Creditors in repayment of the Affected Obligations, IN ACCORDANCE WITH THE PROJECTIONS PREPARED BY THE DEBTOR, A COPY OF WHICH IS APPENDED AS EXHIBIT D [EXHIBIT NOT INCLUDED]. COMMITTEE COUNSEL HEREWITH ACKNOWLEDGES RECEIPT OF $82,192 AS PAYMENT DUE AFFECTED CREDITORS THROUGH NOVEMBER 3, 2000. NEW YORK BANK, HEREWITH ACKNOWLEDGES RECEIPT OF PAYMENT OF $114,402.64 WITH RESPECT TO THE UNSECURED NOTE THROUGH NOVEMBER 3, 2000 INCLUDING PREPAYMENTS OF SUMS DUE NEW YORK BANK, FOR 26 WEEKS COMMENCING NOVEMBER 10, 2000. (b) Not less than 150 days after the close of Debtor’s fiscal year ended DECEMBER 31, 2001 and on a like day of each of the three (3) successive years thereafter, an amount equal to 50% of the first $200,000 of Net Profits of the Debtor earned for such year and 25% of the Net Profits of the Debtor for such year in excess of $200,000. Said payments shall be distributed pro rata BY THE DEBTOR to the Affected Creditors in repayment of the Affected Obligations INCLUDING THE UNSECURED NOTE, AND SHALL BE IN ADDITION TO AND NOT A CREDIT AGAINST THE PAYMENTS TO BE MADE UNDER SECTION 2.1(A) AND UNDER THE NEW YORK BANK SETTLEMENT AGREEMENT WITH RESPECT TO THE UNSECURED NOTE. (c) Subject to and conditioned upon receipt of all payments required to be made under this Section 2.1, payment by Debtor of the expenses of the Committee as provided in Section 2.2 and compliance with all other conditions of the Agreement, Debtor, its officers and directors shall be released from any and all claims which any Affected Creditor has or may have with respect to any Affected Obligations.

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2.2 Administrative Expenses. Debtor agrees to pay the reasonable expenses incurred by the Committee in connection with the preparation and administration of this Agreement and the transactions contemplated herein, including, without limitation, the following AMOUNTS unless otherwise agreed to in writing by Debtor and the Committee: (a) As at the Effective Date and payable not later than date thereof. P.C., (“Committee Counsel”), the sum of $27,500 (heretofore (i) paid) plus such additional amounts which said firm may incur for reasonable fees and expenses up to the Effective Date. , (“Accountants to the Committee”), the sum of $20,500 (ii) (heretofore paid) plus such additional amounts which said firm may incur for reasonable fees and expenses up to the Effective Date. (b) Subsequent to the Effective Date, the reasonable fees and expenses of Committee Counsel and Accountants to the Committee payable monthly and approved by the Committee.

ARTICLE III 3.1 The Committee. The Committee shall initially consist of the persons set forth in Exhibit “C” annexed hereto. In the event that a vacancy occurs by reason of death or resignation or because a member of the Committee shall no longer be employed by the Affected Creditor by whom such member had been employed, the resulting vacancy shall be filled within thirty (30) days thereafter by such Affected Creditor who is a member of the Committee. In the event such Affected Creditor fails to designate a successor to serve on the Committee within such period, the vacancy shall be filled by a designee of the majority of the remaining members of the Committee from among the employees or representatives of the Affected Creditor or from any other Affected Creditor who is not a member of the Committee. In the event an Affected Creditor assigns its claims, a vacancy will be deemed to have occurred and the Committee shall have the option of filling the vacancy from amongst other Affected Creditors. The Committee shall function as such, whether or not vacancies are filled PROVIDED, HOWEVER, THERE SHALL BE NO LESS THAN THREE (3) MEMBERS OF THE COMMITTEE ACTING AS SUCH AT ALL TIMES. A member of the Committee shall be deemed to have resigned from the Committee at such time as the Affected Creditor by whom such member is employed receives all the payments to which it is entitled under Section 2.1. In the event that a vacancy occurs in the position of Committee Chairman by reason of death or resignation or because the Committee Chairman shall no longer be employed by the Affected Creditor by whom such Committee Chairman had been employed, the resulting vacancy shall be filled within thirty (30) days thereafter by a designee of the majority of the remaining members of the Committee from among the representatives of the remaining members of the Committee.

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3.2 Voting; Notice of Meetings. A majority of the Committee shall constitute a quorum qualified to act. The vote of a majority of the members of the Committee present at the time of the vote, if a quorum was present at the outset of the meeting, shall be the act of the Committee. The Committee may act on the written consent of the majority of the members of the Committee without a meeting and may act without written consent, and without a meeting, as determined by the Chairman. Meetings of the Committee shall be called by the Chairman or Committee Counsel. When a meeting is called, the Chairman or Committee Counsel shall fix a time and place for and give notice of the time, place and purposes of such meeting to the Committee and to Debtor if notice to Debtor is deemed appropriate by the Committee Chairman or by Committee Counsel. Notices may be delivered personally, by mail, telephone or telecopy to all members of the Committee and to Debtor. Such notices shall be given, if by mail, and if possible, at least three (3) days before the day on which the meeting is to be held, or, if by personal delivery, telephone or telecopy, if possible, not later than the day before the day on which the meeting is to be held. Any member of the Committee may designate a proxy to act for it at any meeting, which designation may be oral unless requested to be made in writing by the Chairman. 3.3 No Compensation. The members of the Committee shall serve without compensation. 3.4 Waivers. The Committee shall have the power and right to waive performance by Debtor of any condition or covenant on the part of Debtor to be performed under this Agreement, exclusive of the power or right to waive the time of payment of any of the payments provided for in this Agreement in Sections 2.1 and 2.2, except as provided in Section 3.5 herein which waiver shall be binding upon the Affected Creditors which are parties to this Agreement. Such waiver must be in writing signed by the Chairman or Committee Counsel. 3.5 Postponements. The Committee shall have the power and right to postpone the time of payment of any of the payments provided for in this Agreement, in whole or in part for one or more periods, not exceeding thirty (30) days for each such period. No postponement shall be granted if more than two (2) payments are currently outstanding and no postponement of the Effective Date of this Agreement shall be beyond JANUARY 15, 2001. Any such postponement shall be binding on the Affected Creditors which are parties to this Agreement. Such postponement must be in writing signed by the Chairman. 3.6 Subcommittee. The Committee shall have the power to form one or more subcommittees. Such subcommittee shall have such powers as the Committee may determine. 3.7 Advisors. The Committee may consult with attorneys, accountants and agents, and the opinions of the same shall be full protection and justification to the Committee, its members and the Affected Creditors for anything done or admitted or suffered to be done in accordance with said opinions. The Committee and its members shall not be

4.3


3.8

3.9

3.10

3.11 3.12

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required to give any bond for the faithful performance of its or their duties hereunder. Dissolution. When all payments provided for HEREUNDER have been made to the Affected Creditors, the duties, powers and responsibilities of the Committee, its members, agents, attorneys and accountants shall terminate forthwith, and the Committee shall dissolve. Reports. The Committee may, after consultation with Debtor, circulate information and reports that, in the sole discretion of the Committee, are deemed advisable in order to fully inform the Affected Creditors concerning the business operations of Debtor and all matters relating to the effectuation of this Agreement. Such reports shall be deemed confidential and shall be held in confidence by the Affected Creditors and such reports shall not be published or released to any entity which is not an Affected Creditor, except the Committee may release such reports to Committee Counsel or the Accountants to the Committee. No Liability. Neither the Committee, its members, THE Committee Counsel or the Accountants to the Committee nor the Affected Creditors by whom such members are employed shall be liable for the act, default or misconduct of any other member of the Committee, nor shall any member be liable for anything other than such member’s own willful misconduct or fraud, and the Committee, its members, Committee counsel, advisors, and the Affected Creditors by whom such members are employed shall not be answerable or liable for the act, default, misconduct or fraud of any of the persons employed by or acting for or on behalf of the Committee. Resignation. Any member of the Committee may resign from his position upon written notice to Committee Counsel. Removal. Within thirty (30) days after a demand to Committee Counsel made by the holders of a majority, in dollar amount, of all Affected Obligations, any member of the Committee shall agree to resign from his position hereunder in accordance with the terms and conditions of Section 3.11 hereof. In the event that a member of the Committee, who has been instructed or directed to resign from his position hereunder, and has refused to do so, such Committee member’s vote shall be of no force and effect after the expiration of thirty (30) days after an appropriate demand has been made for such resignation in accordance with the terms and conditions hereunder.

ARTICLE IV 4.1 Negative Covenants. During the term of this Agreement, Debtor shall not, without the written consent of the Committee: (a) Declare or pay any dividend on its capital stock, whether in cash, stock or any other form, nature or description. (b) In any way liquidate, dissolve or consent to a merger, acquisition or consolidation.

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(c) Make loans to any person, or guarantee loans made by others except in the normal course of business not to exceed $2500 per person and $10,000 in the aggregate outstanding at any time in the aggregate. , , (d) Increase the compensation or remuneration of , and/or their immediate family members. (e) Create or permit to exist any consensual lien or encumbrance upon any of its assets, except (i) liens under the existing factoring AGREEMENTS entered into between Debtor and New York Bank AS MODIFIED BY THE NEW YORK BANK SETTLEMENT AGREEMENT; (ii) factoring agreements entered into by the Debtor subsequent to August 10, 2000, WITH NEW YORK BANK AND OTHER FACTORS as approved by the Committee which approval shall not unreasonably be withheld; (iii) liens granted by Debtor to Trust Company Bank and other factors on Debtor’s non factored accounts receivable or (iv) for purchase money security interests on equipment acquired by Debtor. (f) Change the general type of business it presently conducts. (g) Sell, transfer or otherwise dispose of assets of Debtor, except for fair consideration or end of season closeouts. (h) Sell any merchandise or other assets at prices below cost or current market value, except those sales utilized as promotional sales for the generation of business, or end of season or return or damaged inventory closeouts. (i) Make payments of any loan due to any shareholder, officer or director of Debtor, or any spouse or relative of any of the foregoing, except as approved by the Committee OR PROVIDED FOR IN THIS AGREEMENT. 4.2 Affirmative Covenants. During the term of this Agreement, Debtor, shall, unless otherwise waived in writing by the Committee: (a) Distribute to the Committee such financial data and financial statements as the Committee may reasonably request. (b) Furnish to each member of the Committee, Committee Counsel and the Accountants to the Committee, within thirty (30) days of the end of each month, a report which shall reflect, among other things, (i) the sales and collections for that month and the inventory on hand by manufacturer and processor and (ii) a profit and loss statement for that month, all of which shall be certified by the Chief Financial Officer of Debtor as true and correct to the best of said officer’s knowledge, information and belief and in form reasonably acceptable to the Committee. (c) Furnish to each member of the Committee, Committee Counsel and the Accountants to the Committee, within sixty (60) days of the close of each quarter or within ten (10) days after completion, whichever is sooner, quarterly profits and loss reports of Debtor’s operations certified by the Chief Financial Officer of Debtor as true and correct to the best of said officer’s knowledge, in form acceptable to the Committee. (d) Furnish to each member of the Committee, Committee Counsel, and the Accountants to the Committee, within one hundred and

4.3


(e) (f)

(g)

(h)

(i)

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fifty (150) days of the close of each fiscal year or thirty (30) days after receipt by Debtor, whichever is sooner, an audited financial statement, prepared by independent public accountants to Debtor, for the fiscal year-end. At all times employ a certified public accounting firm reasonably acceptable to the Committee. Sign, execute and acknowledge any document, undertaking, waiver, agreement, instrument or any paper of any kind, nature or description, reasonably required in the opinion of the Committee and agreed to by Debtor, to carry out any and all terms, conditions and provisions hereof and to further the purposes hereof. Enter into any such factoring or financing agreements as Debtor deems appropriate subject to approval by the Committee, which approval shall not unreasonably be withheld. Debtor may, in connection with such factoring or financing agreements, and subject to intercreditor agreements among the factors, sell, transfer, mortgage, pledge, hypothecate, grant liens upon, give as security, or otherwise dispose of, any of the assets of Debtor as the Committee may approve, which approval shall not unreasonably be withheld. Permit reasonable access by the Committee, Committee Counsel or the Accountants to the Committee to all records maintained by Debtor. Pay its debts in a timely manner to persons (i) extending credit to Debtor subsequent to the Effective Date, (ii) to whom Debtor is otherwise indebted for amounts less than $10,000 and who are being paid on a repayment schedule other than that set forth in this Agreement, or (iii) who, after the Debtor has used its best efforts AND SUBJECT TO APPROVAL OF THE COMMITTEE have refused to become parties to this Agreement as Affected Creditors. (1) Advise Committee Counsel, the Chairman and Agent within five (5) business days of learning of the same of: (i) action, of any nature, prosecuted against or brought by Debtor involving $10,000 or more, including, but not limited to, actions brought under the United States Bankruptcy Code and any collection actions; (ii) the referral by any creditor of Debtor to collection agencies of amounts in excess of $10,000 due such creditor by Debtor, whether or not such amount is disputed by Debtor;

ARTICLE V 5.1 Warranties of Debtor. Debtor hereby represents and warrants that, as of the date hereof and as of the Effective Date: (a) Debtor is a corporation duly organized and validly existing under the laws of the State of New York and the consummation of the transactions contemplated by this Agreement will not breach the Certificate of Incorporation or By-Laws or any resolution of the Board of Directors or stockholders of Debtor, and will not breach, constitute

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a default under, or result in the acceleration of any obligation under, any loan agreement, indenture or other agreement to which Debtor is a party. ARTICLE VI 6.1 Conditions Precedent to Agreement. This Agreement shall be effective if and only if it is accepted by 100% OF Affected Creditors HOLDING CLAIMS OF NOT LESS THAN $100,000 AGAINST THE DEBTOR AND NOT LESS THAN 90% IN AMOUNT OF Affected Obligations SET FORTH ON EXHIBIT B HOLDING CLAIMS OF LESS THAN $100,000. Acceptance of this Agreement shall be evidenced by delivering to Committee Counsel an Acceptance in the form attached , 2000. In its sole discretion, Debtor hereto as Exhibit “A” on or before may elect to waive, in whole or in part, this condition precedent. Any such waiver shall be in writing signed by the President or Secretary of Debtor and shall be delivered to the Chairman or Committee Counsel. In its sole discretion, the Committee may elect to extend the date by which Acceptances are to be received but not beyond the Effective Date as may be postponed pursuant to Paragraph 3.5 of this Agreement. The dollar amount, for voting purposes, of the Affected Obligations owed by Debtor to any Affected Creditor shall be the amount set forth on Exhibit “B” except as otherwise provided in this Agreement and unless the Affected Creditor in the Acceptance executed by such Affected Creditor reflects a different amount in which event, for voting and distribution purposes, the different amount shall be used, unless objection is made by Debtor as set forth in Section 7.2 in which event the amount set forth on Exhibit “B” shall be utilized unless THE amount is resolved between the parties. All resolutions on claim amounts shall be subject to review and approval by the Committee as set forth in Section 7.3. The Effective Date shall be the date of receipt by counsel to Debtor of written advice by Committee Counsel, Agent or Committee Chairman that the condition precedent has been achieved or has been waived by Debtor or achieved to the extent waived. 6.2 Subordination of Certain Claims. Tim Jones, president shall subordinate all obligations which he alleges are due and owing to him by Debtor, (which he represents is approximately $2.6 million) to the payment of the Affected Obligations. Notwithstanding the foregoing and provided no Event of Default exists, $686,295 of the obligations due from Debtor (the “Jones Non Subordinate Debt”) shall not be subordinate to payment of the Affected Obligations from and after, provided no Event of Default exists, and further provided all weekly installment payments due to the Affected Creditors are current, from and after OCTOBER 1, 2001, Tim Jones may receive payment of the Jones Non Subordinate Debt in equal weekly installments AS SET FORTH IN THE PROJECTIONS until the Jones Non Subordinate Debt has been paid in the entirety. This Agreement shall only become effective provided Tim Jones has executed a subordination agreement in form reasonably satisfactory to the Committee. NOTWITHSTANDING THE FOREGOING AND PROVIDED TIM JONES AND

4.3


75

DEBTOR ARE IN COMPLIANCE WITH THIS PARAGRAPH, AND THE AGREEMENT, TIM JONES MAY, DURING 2000, RECEIVE PAYMENT OF AN AMOUNT NOT TO EXCEED $10,000 OF THE JONES NON SUBORDINATE DEBT PROVIDED HIS ANNUAL SALARY FOR THE YEAR 2000 IS REDUCED BY AN AMOUNT AT LEAST EQUAL TO ANY SUCH PAYMENT HEREIN DESCRIBED. 6.3 Account No. 2 Agreements. This Agreement is conditioned upon Debtor entering into Account No. 2 Agreements with one or more of its factors, Corporation, or New York Bank and other agreements with its Corporation all of which agreements factors New York Bank and being in form and substance reasonably satisfactory to the Committee.

ARTICLE VII 7.1 Acceptance by Affected Creditors. Each Affected Creditor, by delivering an Acceptance to Committee Counsel in the form attached hereto as Exhibit “A”, agrees that: (i) the amount of Affected Obligation set forth in such Acceptance is the total amount of Affected Obligations owed to such Affected Creditor as of August, 2000 (except where an Affected Obligation is asserted in a different amount by the Affected Creditor); (ii) so long as no Event of Default has occurred and is continuing, it shall accept all payments made hereunder as partial satisfaction of Debtor’s Affected Obligations to it and shall not commence any proceeding against Debtor with respect to any Affected Obligation; and (iii) upon receipt of all payments required to be made under Section 2.1 and payment by Debtor of expenses of the Committee as provided in this Agreement and compliance by the Debtor of the terms of this Agreement, Debtor is released from any and all claims which such Affected Creditor has or may have in the future with respect to any Affected Obligations which existed as of August 10, 1995. On or prior to the Effective Date Committee Counsel shall deliver the Acceptances to Debtor’s counsel. 7.2 Objections to Claims. Any objection which Debtor may have to the amount of Affected Obligations set forth on an Acceptance form submitted by an Affected Creditor shall be in writing and sent to the Affected Creditor which submitted such Acceptance, by certified mail, return receipt requested, within 20 business days of Debtor’s receipt of a copy of the Acceptance with a copy to Debtors’ Committee. Absent such objection, Debtor shall be bound by the amount set forth on the Acceptance, which amount is subject to review and approval by the Committee, which approval shall not be unreasonably withheld by the Committee. 7.3 Resolution of Disputes. In the event that any dispute arises as to the amount or validity of Debtor’s Affected Obligations to an Affected Creditor, which has executed an Acceptance, Debtor shall deposit sufficient sums into a Special Account with Debtor’s counsel specifically designated for payment of disputed claims which fund shall be distributed when the disputed portions of such Affected Obligations have been resolved by the parties, or by a final order of an arbitrator having jurisdiction, or by a final judgment of a court of competent jurisdiction, where

76


the rights of final appeal have been exhausted, waived or barred by lapse of time or otherwise. Debtor shall make payment when due of the undisputed portion of the claim of an Affected Creditor.

ARTICLE VIII 8.1 Events of Default. (i) The occurrence of any of the following shall constitute an Event of Default under this Agreement: (a) Failure to make any payment required to be made under this Agreement (unless as otherwise provided under this Agreement) including, but not limited to, payments required to be made under Sections 2.1 (a) and (b) and 2.2 hereof, or the breach of any material term, condition or covenant in this Agreement. (b) Debtor shall (i) apply for or consent to the appointment of or the taking of possession by a receiver, custodian, trustee or liquidator or of all or a substantial part of its property, (ii) admit in writing its inability, or be generally unable, to pay its debts (other than the Affected Obligations) as such debts become due, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, (v) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against itself in an involuntary case under such Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing. (c) A proceeding or case shall be commenced involuntarily, without the application or consent of Debtor, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, windingup or composition or readjustment of debts of Debtor, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of Debtor or of all or any substantial part of its assets, or (iii) similar relief in respect to Debtor under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition and adjustment of debts or entry of an order for relief under the Bankruptcy Code or any successor statute, provided it shall not be an Event of Default if the bankruptcy or other proceeding is dismissed within sixty (60) days after its commencement OR IF DEBTOR CONTINUES TO MAKE payments on the Affected Obligations as provided in the Agreement DURING THE PENDENCY OF ANY SUCH BANKRUPTCY CASE. (d) The entry of any judgment or imposition of any non-consensual lien resulting in any lien on, or levy or execution against the assets of Debtor, in excess of $15,000, which is not satisfied or bonded within thirty (30) days after entry of the judgment. (e) Any representation or warranty made by Debtor in this Agreement shall have been false or misleading in any material respect at the time made.

4.3


77

(f) Debtor shall have ten (10) days to remedy any default, except a default in payment of amounts due under this Agreement OR UNDER THE NEW YORK BANK SETTLEMENT AGREEMENT WITH RESPECT TO THE UNSECURED NOTE.

8.2 Remedies upon Default. (a) Upon the occurrence of an Event of Default, which is not cured, Committee may, at its option, as herein provided, after written Notice to Debtor take any one or more of the following remedial steps: (i) Declare the entire outstanding amount of all unpaid Affected Obligations to be immediately due and payable in full. (ii) Take any remedy permitted by law. (b) Upon the occurrence of a declared Event of Default by the Committee, each Affected Creditor may proceed, as in its sole discretion it may deem appropriate, subject to the powers granted to the Committee herein, to collect, enforce or otherwise recover the entire outstanding amount of the Affected Obligations as well as any other obligation owed by the Debtor to it incurred after August 10, 2000. (c) The failure or delay by the Committee to declare the occurrence of an Event of Default shall not constitute a waiver or release of the right to declare the occurrence of an additional or further Event of Default at any subsequent time (assuming no cure of the same pursuant to the provisions of this Agreement) nor shall it constitute a waiver or release of the right to declare an Event of Default based upon any subsequent default. ARTICLE IX (Miscellaneous) 9.1 Chapter 11 Case. Debtor and the Affected Creditors who are parties to this Agreement hereby agree that, in the event that Debtor shall become the subject of any Chapter 11 proceeding or similar capacity under any successor statute during the pendency of this Agreement: (a) Debtor shall use its best efforts to have the Committee nominated as the official creditors committee for the purpose of such proceedings. (b) Debtor shall use its best efforts to propose a feasible plan of reorganization substantially similar to the within Agreement and identical as to the terms of repayment and in such event the Acceptances of this Agreement may be utilized as acceptances to the plan of reorganization. However, in the event that any payment as set forth at Section 2.1 hereof, is delayed for a period greater than ninety (90) days then in that event, the Committee on behalf of all Affected Creditors may withdraw the previously executed Acceptances. (c) All remaining unpaid claims of Affected Creditors shall be reinstated in full together with interest from date of default under this Agreement. 9.2 Choice of Law. This Agreement shall be construed, interpreted, and enforced in accordance with the laws of the State of New York.

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9.4 Written Consents. All references in this Agreement to the written consent or written advice of the Committee shall be deemed to refer to a document executed by the Committee, by its Chairman, Committee Counsel or other party as approved by the Committee, and any reference herein to the written consent of Debtor shall be by a document executed by an officer of Debtor, counsel to Debtor or such other party as is designated in writing by Debtor. 9.5 Data Requests and Notices. All references herein to requests for data by the Committee shall be deemed to include requests for data by the Chairman, Committee Counsel, or such other party as designated by the Committee. All references to distribution of data for notices or otherwise shall be construed as follows: 9.6 Headings. All headings utilized herein shall not be construed to be of any substantive effect and are utilized solely and simply for reading convenience. 9.7 Non-Accepting Creditors. Debtor and the Committee shall have authority to negotiate with any creditor who may refuse to accept the terms of this Agreement. However, such action shall be subject to the prior approval of the Committee. 9.8 Claims Against Third Parties. Nothing herein contained shall be deemed to discharge or release any claims, rights and remedies that any of the Affected Creditors may have now or hereafter against any guarantor, surety or any other party who may or hereafter be liable or have responsibility to any of them and nothing herein contained shall discharge or affect any liens, security interest or right and remedies as pledgee, mortgagee or seller in possession which any Affected Creditor now has or may hereafter have against the property of the Debtor, and each such right and remedy is thereby expressly reserved by the Affected Creditors. 9.9 Counterparts. This Agreement may be executed in several counterparts each of which shall be an original and all of which shall constitute but one and the same instrument. 9.10 Modifications: This Agreement may not be modified except by a writing signed by the Committee and Debtor. No material modification shall occur without the consent of the Affected Creditors except as to the exercise of the Committee powers, including, without limitation, the postponement of payments and waivers under Section 3.4, in which instances such actions do not require the consent of Affected Creditors. Tim Corp. By: Title: ATTEST:

Tom Corp. By Title Thomas INTERNATIONAL, INC. Title

4.4

Restructuring Significant Amount of Debt Out of Court

ATTEST:

[CREDITOR]

ATTEST:

Name: Title: [CREDITOR]

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Name: Title:

EXHIBIT A: ACCEPTANCE FORM The undersigned, an unsecured creditor of Corp. and International, Inc. (“Debtor”) in the amount set forth below, does as an Affected Creditor, accept payment of its Affected Obligations, in accordance with and , 2000, among as provided in the SETTLEMENT AGREEMENT, DATED Debtor, the creditors of Debtor whose names appear thereon, and all other persons or organizations who may agree to the terms thereof. The foregoing shall in no way be construed or deemed to discharge the rights and remedies that the undersigned now has or may hereafter have by virtue of the aforesaid AFFECTED OBLIGATIONS of Tom Corp. to the undersigned, and each and every right and remedy is hereby expressly reserved by the undersigned. The undersigned agrees to accept payment of its Affected Obligation as provided in Section 2.1(a) of the SETTLEMENT Agreement and in addition, the undersigned agrees to be bound by all the terms and conditions of the SETTLEMENT Agreement. Dated: Claim: $

4.4

(1) (2)

Restructuring Significant Amount of Debt Out of Court

Objective. Often businesses prefer to restructure out of court rather than file chapter 11. Frequently such restructurings involve not only a restructuring of debt because of an overleveraged balance sheet, but the elimination of unprofitable operations. Such was the case in the restructuring of Oneida. (a) Summary The financial restructuring for Oneida included the following: The deal was completed on August 9, 2004. The basic elements of the out-ofcourt comprehensive restructuring of $233.2 million in existing indebtedness are as follows:

r Conversion of $30 million of bank debt into approximately 29.8 million shares of common stock

r New $30 million revolving credit facility r Restructured the balance of the existing indebtedness into a Tranche A loan of $125 Million and a Tranche B loan of approximately $80 million

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(b) Press Release Oneida Ltd. and Lenders Consummate Anticipated Financial Restructuring ONEIDA, NY—August 9, 2004—Oneida Ltd. (OTC:ONEI) today announced that it has consummated an agreement with its principal lenders on a comprehensive restructuring of existing indebtedness of $233.2 million that includes a conversion of $30 million of the debt into approximately 29.8 million shares of common stock. The agreement also provides for a new $30 million revolving credit facility. Consummation of the transaction completes Oneida’s agreement in principle with its lenders that previously was announced on June 25, 2004. “This is a very positive long-term development for our company,” Oneida Chairman and Chief Executive Officer Peter J. Kallet said. “The financial restructuring provides Oneida with substantially improved financial flexibility and liquidity.” “Now that Oneida’s financial restructuring has been completed, the company can focus all of its efforts on strategically building its business for the future,” Mr. Kallet added. “Completion of the restructuring strengthens the company’s operations as it continues to improve its core business. We are very encouraged about the company’s overall prospects.” Oneida Ltd. is a leading source of flatware, dinnerware, crystal, glassware and metal serveware for both the consumer and foodservice industries worldwide. [Forward Looking Information Disclosure Statement Omitted]

(c) Comments in 10Q (July 05) On August 9, 2004 the Company completed the comprehensive restructuring of the existing indebtedness with its lenders, along with new covenants based upon current projections. The restructuring included the conversion of $30 million of principal amount of debt into an issuance of a total of 29.85 million shares of the common stock to the individual members of the lender group or their respective nominees. The common shares were issued in blocks proportionate to the amount of debt held by each lender. As of August 9, 2004 these shares of common stock represented approximately 62% of the outstanding shares of common stock of the Company. In addition to the debt to equity conversion, the Company received a new $30 million revolving credit facility from the lenders and restructured the balance of the existing indebtedness into a Tranche A loan of $125 Million and a Tranche B loan of approximately $80 million. All the restructured bank debt is secured by a first priority lien over substantially all of the Company’s and its domestic subsidiaries’ assets. The Tranche A loan will mature in three years and require amortization of principle based on available cash flow for the first two years and fixed amortization of $1,500 per quarter in the third year. The Tranche B loan will mature in 3 1/2 years with no required amortization. The debt and equity restructuring constituted a change in control of the Company. There are several employee benefit plans that have triggers if a change of control occurs. The appropriate plans were amended to allow the debt and equity transaction without

4.5

Recapitalization of Partners Interest with Purchase of New Equity

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triggering the change in control provision. In addition, the Shareholder Rights Plan was terminated. Along with the restructuring of the debt Oneida reduced its manufacturing activity as seen in the following excerpts: On August 28, 2004 the Company completed the sale of substantially all of the assets of its Encore Promotions Inc. subsidiary and has entered into a licensing agreement with the buyer. The proceeds from the sale were used to reduce debt, additionally the sale created an avenue to offer Oneida-branded produts under the licensing agreement to the supermarket industry.

As a result of the substantial manufacturing inefficiencies and negative manufacturing variances, it was determined at the end of the third quarter of fiscal year ending January 31, 2004 to close and sell the following factories: Buffalo China dinnerware factory and decorating facility in Buffalo NY; dinnerware factory in Juarez, Mexico; flatware factory in Toluca, Mexico; hollowware factory in Shanghai China; and hollowware factory in Vercelli, Italy. The Company continues to market the products primarily manufactured from these sites, using independent suppliers. 4.5 Recapitalization of Partners Interest with Purchase of New Equity Objectives. Often businesses prefer to restructure out of court rather than file chapter 11. Information about out-of-court restructuring is frequently not as publicly available as is the case with chapter 11 filings. Most of the information is from the summary information contained in the SEC filings for public companies. Star Gas:

r r r r

Summary Comment by Investment Banker Excerpts from 10K (2005) Excerpts from 10Q (March 31, 2006)

(a) Summary The recapitalization of Star Gas involved:

r Negotiated restructuring of $265 million in 10 1/4% senior notes: r Proposed $15 million in new equity plus a backstop commitment on a $35 million rights offering ($50 million in new capital) plus cash from operations to repurchase at least $60 million (and up to $73) million of 10 1/4% senior notes. r In addition, the senior note holders agreed to convert another $27 million of face value to equity. r A total potential reduction of $100 million in face value of the senior notes ($73 million plus the $27 million).

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r On 4/28/06, the deal was consummated and the following occurred: r Received an aggregate of $57.7 million in new equity financing r Repurchased $65.3 million in face amount of the senior notes r Converted $26.9 million in face amount of existing notes into 13.4 million common units at a conversion price of $2.00 per unit

r $7.6 million in face amount of existing senior notes remained outstanding

r Exchanged $165.2 million in principal amount of existing notes for a like amount of new notes that were issued under the new indenture (b) Comment by Investment Banker Star Gas Partners, LP is the largest home heating oil distributor and services provider in North America. Excessive leverage incurred during the Company’s swift expansion through acquisitions, along with volatile home heating oil prices, forced Star Gas to sell its propane operations and cease distributions to its limited partnership units in late 2004. Star Gas’ challenging liquidity situation was compounded by stridently activist unitholder complaints. Jefferies worked with the Company to evaluate various liquidity and restructuring alternatives, including recapitalizing through a new credit facility and potential capital infusion. Jefferies facilitated nuanced negotiations among multiple parties, including the bank lenders, unitholders, noteholders, management and the recapitalization equity sponsor. Ultimately, Star Gas, its noteholders, the bank lenders and a new sponsor, Kestrel Energy Partners, LLC, were able to reach an agreement to recapitalize the Company. The recapitalization was consummated out of court through a bank amendment, unitholder vote, rights offering and senior notes exchange offer, including an exchange into equity and new notes. Star Gas successfully avoided bankruptcy and the transaction closed in April 2006. (c) Excerpts for 10K (2005) Recapitalization On December 2, 2005 the board of directors of Star Gas LLC approved a strategic recapitalization of Star Gas Partners that, if approved by unitholders and completed, would result in a reduction in the outstanding amount of our 10 1/4% Senior Notes due 2013 (“Senior Notes”), of between approximately $87 million and $100 million. The recapitalization includes a commitment by Kestrel Energy Partners, LLC (or “Kestrel”) and its affiliates to purchase $15 million of new equity capital and provide a standby commitment in a $35 million rights offering to our common unitholders, at a price of $2.00 per common unit. We would utilize the $50 million in new equity financing, together with an additional $10 million to $23.1 million from operations, to repurchase at least $60 million in face amount of our Senior Notes and, at our option, up to approximately $73.1 million of Senior Notes. In addition, certain noteholders have agreed to convert approximately $26.9 million in face amount of such notes into newly issued

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common units at a conversion price of $2.00 per unit in connection with the closing of the recapitalization. We have entered into agreements with the holders of approximately 94% in principal amount of our Senior Notes which provide that: the noteholders commit to, and will, tender their Senior Notes at par (i) for a pro rata portion of $60 million or, at our option, up to approximately $73.1 million in cash, (ii) in exchange for approximately 13,434,000 new common units at a conversion price of $2.00 per unit (which new units would be acquired by exchanging approximately $26.9 million in face amount of Senior Notes) and (iii) in exchange for new notes representing the remaining face amount of the tendered notes. The principal terms of the new senior notes such as the term and interest rate are the same as the Senior Notes. The closing of the tender offer is conditioned upon the closing of the transactions under the Kestrel unit purchase agreement, which is discussed below. Upon closing the transaction we will incur a gain or loss on the exchange of Senior Notes for common units based on the difference between the $2.00 per unit conversion price and the fair value per unit represented by the per unit price in the open market on the conversion date. Subject to and until the transaction closing, the noteholders have agreed not to accelerate indebtedness due under the senior notes or initiate any litigation or proceeding with respect to the Senior Notes. The noteholders have further agreed to: waive any default under the indenture; not to tender the Senior Notes in the change of control offer which will be required to be made following the closing of the transactions under the unit purchase agreement with Kestrel; and to consent to certain amendments to the existing indenture. The agreement with the noteholders further provides for the termination of its provisions in the event that the Kestrel unit purchase agreement is no longer in effect. The understandings and agreements contemplated by these transactions will terminate if the transaction does not close prior to April 30, 2006. We believe the proposed recapitalization would substantially strengthen our balance sheet and thereby assist us in meeting our liquidity and capital requirements, which we believe would improve our future financial performance and as a result enhance unitholder value. In addition to enhancing unitholder value, we believe we will be able to operate more efficiently going forward with less long-term debt. As part of the recapitalization transaction, we have entered into a definitive unit purchase agreement with Kestrel and its affiliates, which provides for, among other things: the receipt by us of $50 million in new equity financing through the issuance to Kestrel’s affiliates of 7,500,000 common units at $2.00 per unit for an aggregate of $15 million and the issuance of an additional 17,500,000 common units in a rights offering to our common unitholders at an exercise price of $2.00 per unit for an aggregate of $35 million. The rights will be non-transferable, and an affiliate of Kestrel has agreed to buy any common units not subscribed for in the rights offering. Under the terms of the unit purchase agreement, Kestrel Heat, LLC, or Kestrel Heat, a wholly owned subsidiary of Kestrel, will become our new general partner and Star Gas LLC, our current general partner, will receive no consideration for its removal as general partner.

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In addition, the unit purchase agreement provides for the adoption of a second amended and restated agreement of limited partnership that will, among other matters:

r Provide for the mandatory conversion of each outstanding senior subordinated unit and junior subordinated unit into one common unit;

r Change the minimum quarterly distribution to the common units from $0.575 per quarter, or $2.30 per year, to $0.0675 per unit, or $0.27 per year, which shall commence accruing October 1, 2008 and, eliminate all previously accrued cumulative distribution arrearages which aggregated $92.5 million at November 30, 2005; r Suspend all distributions of available cash by us through the fiscal quarter ending September 30, 2008; r Reallocate the incentive distribution rights so that, commencing October 1, 2008, the new general partner units in the aggregate will be entitled to receive 10% of the available cash distributed once $.0675 per quarter, or $0.27 per year, has been distributed to common units and general partner units and 20% of the available cash distributed in excess of $0.1125 per quarter, or $.45 per year, provided there are no arrearages in minimum quarterly distributions at the time of such distribution (under our current partnership agreement if quarterly distributions of available cash exceed certain target levels, the senior subordinated units, junior subordinated units and general partner units would receive an increased percentage of distributions, resulting in their receiving a greater amount on a per unit basis than the common units). The recapitalization is subject to certain closing conditions including the approval of our unitholders, approval of the lenders under our revolving credit facility, and the successful completion of the tender offer for our Senior Notes. As a result of the challenging financial and operating conditions that we have experienced since fiscal 2004, we have not been able to generate sufficient available cash from operations to pay the minimum quarterly distribution of $0.575 per unit on our partnership securities. These conditions led to the suspension of distributions on our senior subordinated units, junior subordinated units and general partner units on July 29, 2004 and to the suspension of distributions on the common units on October 18, 2004. We believe that the proposed amendments to our partnership agreement will simplify our capital structure, provide internally generated funds for future investment and align the minimum quarterly distribution more closely with the levels of available cash from operations that we expect to generate in the future. Kestrel is a private equity investment firm formed by Yorktown Energy Partners VI, L.P., Paul A. Vermylen, Jr. and other investors. Yorktown Energy Partners VI, L.P. is a New York-based private equity investment partnership, which makes investments in companies engaged in the energy industry. Yorktown affiliates and Mr. Vermylen were investors in Meenan Oil Co. L.P. from 1983 to 2001, during which time Mr. Vermylen served as President of Meenan. Meenan was sold to us in 2001.

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(d) Excerpts for 10- (March 31, 2006) Effective as of April 28, 2006 the Partnership completed a recapitalization of the Partnership pursuant to the terms of the unit purchase agreement. In connection with the recapitalization:

r The Partnership received an aggregate of $57.7 million in new equity financing (i) through the sale of an aggregate of 6,750,000 common units to Kestrel Heat and M2 at a purchase price of $2.50 per unit and (ii) pursuant to the sale of 19,687,500 common units in a rights offering to common unitholders at a subscription price of $2.00 per common unit ($2.25 per unit in the case of 5,972,523 units purchased by M2 pursuant to a standby commitment). r The Partnership (i) repurchased $65.3 million in face amount of its existing notes, (ii) converted $26.9 million in face amount of existing notes into 13.4 million common units at a conversion price of $2.00 per unit and (iii) exchanged $165.2 million in principal amount of existing notes for a like amount of new notes that were issued under the new indenture. The terms of the new indenture are substantially the same as the terms of the existing indenture except that the new indenture permits restricted payments of $22 million and allows the Partnership to make acquisitions of up to $60 million without passing certain financial tests. In addition, the new indenture provides that proceeds of asset sales may not be invested in current assets for purposes of the “asset sale” covenant. The repurchase, conversion and exchange of the existing notes in connection with the recapitalization has resolved any claims of the participating noteholders resulting from the sale of the Partnership’s propane business in December 2004, including the Partnership’s use of such proceeds to purchase working capital inventory and the Partnership’s detemination that “excess proceeds” (as defined in the existing indenture) did not include any amounts invested in such inventory and the granting of liens or collateral to the lenders pursuant to the credit facility. r The Partnership also entered into the amended indenture for the $7.6 million in face amount of existing notes that remain outstanding that removed the following restrictive covenants from the existing indenture: r The limitation on restricted payments; r The limitation on dividends and other payment restrictions affecting restricted subsidiaries; r The limitation on indebtedness; r The limitation on transactions with affiliates; r The limitation on liens; r The limitation on the sale of assets; r The limitation on sale and leaseback transactions; r The limitation on other lines of business; and r The limitation on co-issuers.

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r The Partnership entered into the amended partnership agreement pursuant to which, among other things: r Star Gas withdrew as the general partner of the Partnership, and Kestrel Heat was appointed the general partner of the Partnership and received 325,729 general partner units in the Partnership; r Each outstanding senior subordinated unit and each junior subordinated unit was converted into one common unit, as a result of which the subordination period has ended; r The minimum quarterly distribution on the common units was reduced from $0.575 per unit per quarter, or $2.30 per year, to $0.0 per unit through September 30, 2008. Beginning October 1, 2008, minimum quarterly distributions will start accruing at a rate of $0.0675 per quarter ($0.27 on an annual basis). If the Partnership elects to commence making distributions of available cash before October 1, 2008, minimum quarterly distributions will start accruing at that earlier date; r All previously accrued cumulative distribution arrearages, which aggregated $111.0 million at February 14, 2006, were eliminated; r The target distribution levels for the incentive distribution rights were reduced so that, commencing with the quarter beginning October 1, 2008, or, if the Partnership elects to commence making distributions sooner, the quarter in which any distribution of available cash is made, the new general partner units in the aggregate will be entitled to receive 10% of the cash distributions in a quarter once each common unit and general partner unit has received $.0675 for that quarter, plus any arrearages on the common units from prior quarters, and 20% of the cash distributions in a quarter once each common unit and general partner unit has received $.1125 for that quarter, plus any arrearages on the common units from prior quarters; r The Partnership is not required to distribute available cash through the quarter ending September 30, 2008. Restriction on Use of NOLs The issuance of units in our recapitalization will likely result in an “ownership change” of our corporate subsidiary, Star/Petro, Inc. (“Star/Petro”) under the Internal Revenue Code of 1986, as amended (“Tax Code”). As a result of this ownership change, Star/Petro would be materially restricted in its ability to use its net operating loss carryforwards to reduce its future taxable income. As of the last calendar tax year ended December 31, 2005, Star/Petro had a federal net operating loss carryforward of approximately $166.4 million. The net operating loss carryforwards (prior to an “ownership change”) will begin to expire in 2025 and are generally available to reduce future taxable income that would otherwise be subject to federal income taxes. As a result of the ownership change, Star/Petro will be restricted annually in its ability to use its net operating loss carryforwards to reduce its federal taxable income. We believe that the restriction may entirely eliminate Star/Petro’s ability to use its net operating loss carryforwards. The restriction on Star/Petro’s ability to use net operating loss carryforwards to reduce its federal tax liability will reduce

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Court Order Approving Blue Bird’s Prepackaged Bankruptcy

the amount of cash Star/Petro has available to make distributions to us. Consequently, the restriction will reduce the amount of cash we have available to distribute to our unitholders. The following table shows the amount of units before and after the April 28, 2006 recapitalization described above. Before Recapitalization∗ Number Common Units Existing common units 32,165,528 Issued to Kestrel entities — Issued in rights offering (1) — Issued to senior noteholders — Issued to subordinated unitholders — Subtotal 32,165,528 Subordinated Units Senior subordinated units 3,391,982 Junior subordinated units 345,364 Subtotal 3,737,346 General Partner Units 325,729 Total 36,228,603

Percentage 88.8% — — — — 88.8%

After Recapitalization∗∗ Number

Percentage

32,165,528 6,750,000 19,687,500 13,433,962 3,737,346 75,774,336

42.3% 8.9% 25.9% 17.6% 4.9% 99.6%

9.4% — 0.9% — 10.3% — 0.9% 325,729 100% 76,100,065

— — — 0.4% 100%

∗

As of March 31,2006 As of April 28, 2006 (1) Includes 5,972,523 common units issued to Kestrel @ $2.25 per share, pursuant to its standby commitment. As part of the recapitalization a total of 12,722,523 common units were issued to Kestrel entities, representing approximately 16.7% of total units after the recapitalization.

∗∗

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Objective. §4.11 of Volume 1 describes the process of developing a prepackaged bankruptcy filing and briefly describes Blue Bird’s prepackaged bankruptcy and notes that Blue Bird was in bankruptcy for only 33 hours. Reproduced below is Bankruptcy Judge Zive’s findings of fact and conclusions of law in support of the order approving the disclosure statement and confirming the plan of reorganization. UNITED STATES BANKRUPTCY COURT DISTRICT OF NEVADA Case No. 06-50026-GWZ (Chapter 11) In re: BLUE BIRD BODY COMPANY, et al.,

FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF ORDER APPROVING DISCLOSURE STATEMENT AND CONFIRMING PLAN OF REORGANIZATION

Debtors. /

Date of Hearing: January 27, 2006 Time of Hearing: 4:00 p.m. (PST)

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On January 26, 2006 (the “Petition Date”), Blue Bird Body Company (“Blue Bird”) and certain of its affiliates, debtors and debtors-in-possession in the above-captioned cases (the “Debtors”), filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532, as amended (the “Bankruptcy Code”). The Debtors are proponents of the Joint Prepackaged Plan Of Reorganization Of Blue Bird Body Company And Certain Affiliates, dated January 24, 2006 (Docket No. 4). I. BACKGROUND The evidence adduced at the hearing of January 27, 2006, declarations, testimony, and written exhibits that were undisputed established the following factual context for these unusual bankruptcy cases and procedures. Since September 2005, following the Debtors’ conclusion that they were financing more bank debt than they could support, the Debtors, the Lenders (also referred to as the “Bank Group”), and their equity security holders have worked to restructure the Debtors’ balance sheet outside of Chapter 11. Since January 3, 2006, following the abandonment by Volvo (as defined in Section 1.49 of the Prepackaged Joint Plan of Reorganization) of its plans to purchase of the equity held by the Debtors’ lenders, the Debtors discussed with their Lenders and equity security holders all available restructuring alternatives in turn, which included a complete out-of-court restructuring, a sale, a traditional Chapter 11 case and a liquidation. The Debtors and the majority of their Lenders and equity security holders concluded that an out-of-court restructuring proved the most viable and sensible of the Debtors’ available restructuring alternatives. Under the out-of-court restructuring (the “Out-Of-Court Restructuring”) pursued by the Debtors, the Lenders were to acquire the Debtors’ equity interests from its largest shareholder, Volvo, and the other small equity holders, followed by the extension of additional financing to the Debtors by a subset of their existing Lenders. On January 18, 2006, the Debtors reached an understanding with all but one Lender (Newstart Factors, Inc. (“Newstart”)) on the terms of the Out-Of-Court Restructuring, although at all relevant times since late 2005, Newstart had the same opportunity to participate as, had access to the same information as, and in fact participated in substantially all of the restructuring discussions with, the other members of the Bank Group. In the time leading up to the decision to pursue the Out-Of-Court Restructuring and since such time, the Debtors and the Lenders conducted frequent telephonic conference calls at which Newstart actively participated by asking questions and by attempting to convince other Lenders to pursue a different strategy. On January 20, 2006, counsel for the Debtors, Mr. Jay Goffman of Skadden, Arps, Slate, Meagher & Flom LLP, had a telephone conversation with Mr. Jim Bennett, a principal of Newstart, at which time Mr. Goffman responded to Mr. Bennett’s inquiries regarding the prepackaged plan process and timing and invited Newstart to participate in the restructuring. The lack of unanimous consent by the Lenders compelled the Debtors to utilize the Chapter 11 process as a means to consummate the transaction contemplated by the Out-Of-Court Restructuring. On January 20, 2006, prior to the January 26, 2006 Petition Date,

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the Debtors provided advance notice first by telephone and then by electronic mail to all the Lenders under the Credit Agreement and the Joint Co-ordinators under the Credit Agreement of the Debtors’ intention to pursue a consensual prepackaged Chapter 11 plan, including the likely solicitation dates, filing dates, and confirmation timeline (a copy of the January 20, 2006 letter is Exhibit B to the Confirmation Motion). Prior to the Petition Date, on January 24, 2006, the Debtors provided additional advance notice by electronic mail of the commencement of these prepackaged Chapter 11 cases and the Debtors’ intention to seek confirmation of the Plan to the Lenders and to the equity holders (a copy of the notice provided to the Lenders is Exhibit C to the Confirmation Motion). The Disclosure Statement, attached to the January 24, 2006 notice, required the Lenders and equity holders to deliver any objections to the adequacy of the information contained in the Disclosure Statement and confirmation of the Plan by electronic mail or facsimile to the Debtors before January 26, 2006 at 5:00 p.m. Eastern Time. The January 24, 2006 notice informed the Lenders and equity holders of the confirmation hearing scheduled for Friday, January 27, 2006 at 4:00 p.m. Pacific Time. The Debtors sent specific letters to counsel for Newstart on January 24, 2006 and January 25, 2006, summarizing and responding to telephone conversations and correspondence with Newstart’s counsel, Mr. Andrew Rahl of Anderson Kill & Olick, P.C., regarding the Debtors’ prepackaged plan process and restructuring alternatives proposed by Newstart (copies of the January 24, 2006 and January 25, 2006 letters are Exhibits D and E to the Confirmation Motion). On January 24, 2006, at 9:36 p.m. Pacific Time, the Debtors commenced the solicitation of votes (the “Solicitation”) regarding the Plan from the Lenders to the credit agreement dated September 14, 1999 (as amended October 18, 2004 and May 12, 2005, (the “Credit Agreement”)). As part of the Solicitation, the Debtors transmitted copies of (i) the Plan, (ii) the disclosure statement relating to the Plan (Docket No. 3) (the “Disclosure Statement”), and (iii) a ballot (a “Ballot”) with which to vote to accept or reject the Plan (the Plan, Disclosure Statement, and Ballot, collectively, the “Solicitation Packages”) to the Lenders. The Debtors established January 26, 2006 at 10:00 a.m. (Eastern Time) as the deadline (the “Voting Deadline”) for Lenders to vote to accept or reject the Plan on account of their claims under the Credit Agreement (the “Bank Group Claims”). On January 25, 2006 at 1:43 p.m. (Pacific Time), Newstart returned a ballot (the “Newstart Ballot”) indicating its rejection of the Plan. By executing the Newstart Ballot (Exhibit E to the Confirmation Motion), Newstart certified that, among other things, it had access to the type of information it deemed necessary to evaluate whether to accept the Plan. Prior to the Voting Deadline, 92.56% in amount and 90.91% in number of those holders of Bank Group Claims voting on the Plan voted to accept the Plan. On the Petition Date, the Debtors filed the Declaration of Donlin, Recano & Company Inc. Certifying Voting On And Tabulation Of Ballots Accepting And Rejecting The Joint Prepackaged Plan Of Reorganization For Blue Bird Body Company And Certain Of Its Affiliates (Docket No. 5) (the “Tabulation Declaration”), which declaration sets forth the results of the Solicitation. On January 26, 2006, the Debtors filed the Memorandum Of Law In Support

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Of (A) Approval Of Solicitation Procedures And Adequacy Of Disclosure Statement And (B) Confirmation Of Joint Prepackaged Plan Of Reorganization For Blue Bird Body Company And Certain Of Its Affiliates (Docket No. 13) (the “Confirmation Brief”). On the Petition Date, the Debtors filed the Declaration of Wayne F. Hunnell in Support of Confirmation of Consensual Prepackaged Joint Plan of Reorganization of Blue Bird Body Company and Certain Affiliates (Docket No. 10), the Declaration Of Stephen Cooper In Support Of Consensual Joint Prepackaged Plan Of Reorganization Of Blue Bird Body Company And Certain Affiliates (Docket No. 11), and the Declaration of Neil Wright in Support of Consensual Prepackaged Joint Plan of Reorganization of Blue Bird Body Company and Certain Affiliates (Docket No. 12) (collectively, the “Confirmation Declarations”), and the Restructuring Agreement dated January 24, 2006 among the Debtors, the Lenders, and the equity holders of Peach County Holdings, Inc. (the “Restructuring Agreement”). Also, at noon Pacific Time on the Petition Date, I conducted an emergency hearing to consider Debtor’s request to conduct a confirmation hearing the next day. After hearing and considering argument from all counsel for the parties and other participants, the confirmation hearing was scheduled as requested. On the Petition Date, the Debtors filed the Motion for Order Confirming Debtors’ Consensual Plan of Reorganization, Approving Agreed Shortened Notice Thereof, Approving Prepetition Solicitation and Disclosure Statement in Support Thereof and Granting Related Relief (the “Confirmation Motion”). The hearing to consider approval of the solicitation procedures (the “Solicitation Procedures”), approval of the adequacy of the Disclosure Statement, and confirmation of the Plan was held before me on the January 27, 2006, at 4:00 p.m. (the “Confirmation Hearing”). Newstart Factors, Inc., a holder of a Class 1 Bank Group Claim under the Plan, filed its written objection to confirmation of the Plan on January 27, 2006 (Docket No. 30). I entered a separate order in accordance with Rule 9021 of the Federal Rules of Bankruptcy Procedure confirming the Plan on January 27, 2006 (the “Confirmation Order”), and directed that the Confirmation Order would be followed by these findings and conclusions of law (the “Findings and Conclusions”). Confirmation of the Plan was effective immediately upon entry of the Confirmation Order, and entry of these Findings and Conclusions does not alter in any way the effectiveness of the Confirmation Order and does not constitute a separate order for purposes of the appeal period, which commenced upon entry of the Confirmation Order. Based upon my review of the Disclosure Statement, the Plan, the Solicitation Packages, the Tabulation Declaration, the Confirmation Declarations, the Restructuring Agreement, and the Confirmation Brief; and upon all of the evidence proffered or adduced at, memoranda filed in connection with, and arguments of counsel made at, the Confirmation Hearing; and after due deliberation thereon; and good and sufficient cause appearing therefor; in addition to the oral findings of fact and conclusions of law I stated on the record at the time of the hearing, which are incorporated herein as though fully set forth pursuant to Fed. R. Bankr. P. 7052; I hereby found and determined in accordance with Fed. R. Bankr. P. 3020(b)(1), 7052, and 9014 in support of the Confirmation Order that:

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II. FINDINGS OF FACT AND CONCLUSIONS OF LAW A. Jurisdiction; Venue; Core Proceeding (28 U.S.C. §§ 157(b)(2) and 1334(a)). This Court has jurisdiction over the Debtors’ Chapter 11 cases under 28 U.S.C. §§ 157 and 1334. Venue is proper under 28 U.S.C. §§ 1408 and 1409. Confirmation of the Plan, approval of the Disclosure Statement, and approval of the Solicitation Procedures are core proceedings under 28 U.S.C. §§ 157(b)(2)(A), (L), and (N), over which the Court has exclusive jurisdiction. B. Judicial Notice. The Court takes judicial notice of the docket of these Chapter 11 cases maintained by the Clerk of the Court and/or its dulyappointed agent, including, without limitation, all pleadings and other documents filed, and all evidence and argument made, proffered, or adduced at the hearing held before the Court. C. Adequacy Of Disclosure Statement. The Disclosure Statement contains “adequate information,” as such term is defined in section 1125 of the Bankruptcy Code. D. Adequacy Of Solicitation. Votes for acceptance or rejection of the Plan were solicited from holders of Class 1 Bank Group Claims in good faith and in compliance with sections 1125 and 1126 of the Bankruptcy Code, Fed. R. Bankr. P. 3017 and 3018, and all other applicable provisions of the Bankruptcy Code under the Debtors’ exigent circumstances. All procedures used to distribute the Solicitation Packages to the appropriate holders of Claims entitled to vote on the Plan and to tabulate Ballots were fair and were conducted in accordance with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules of Bankruptcy Practice of the United States Bankruptcy Court for the District of Nevada (the “Local Rules”), and all other applicable rules, laws, and regulations. E. Transmittal And Mailing Of Materials; Notice. The transmittal and service of the Disclosure Statement, the Plan, and the Solicitation Packages was adequate and sufficient under the circumstances. Adequate and sufficient notice of the Confirmation Hearing and time to object to the adequacy of the Disclosure Statement and confirmation of the Plan was given under the Debtors’ exigent circumstances and no other or further notice is or shall be required. Moreover, for the reasons stated on the record as incorporated by Fed. R. Bankr. P. 7052 the Debtors’ filings to date are sufficient and the Court finds that cause exists to excuse the Debtors from any of the requirements of sections 341 and 521 of the Bankruptcy Code or any similar requirements. The expedited Chapter 11 procedures embodied in the Solicitation Procedures and the Confirmation Motion are appropriate under the circumstances and therefore in compliance with Local Rule 3016(d). F. Impaired Class That Has Voted To Accept The Plan. As set forth in the Plan, Class 1 Bank Group Claims are impaired; and, as set forth in the Tabulation Declaration, such holders of Bank Group Claims, as a class designated under the Plan, have voted to accept the Plan for all purposes pursuant to the requirements of sections 1124 and 1126 of the

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G.

H.

I. J.

Bankruptcy Code. Thus, at least one impaired Class of Claims has voted to accept the Plan. Burden Of Proof. The Debtors, as proponents of the Plan, have met their burden of proving the elements of sections 1129(a) and (b) of the Bankruptcy Code by a preponderance of the evidence. Classes Deemed To Have Accepted The Plan. Classes 2 (Other Secured Claims), 3 (Other Priority Claims), 4 (General Unsecured Claims), 5 (Intercompany Claims), and 6 (Interests) are not impaired under the Plan and are deemed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code. Such Classes shall be treated as unimpaired within the fullest meaning of section 1124 of the Code. The Court has not required the Debtors to provide notice of the Confirmation Hearing to holders of unimpaired claims or interests. Class Deemed to Have Rejected The Plan. No classes are deemed to have rejected the Plan. Plan Compliance With Bankruptcy Code (11 U.S.C. § 1129(a)(1)). The Plan complies with the applicable provisions of the Bankruptcy Code, thereby satisfying section 1129(a)(1) of the Bankruptcy Code. (1) Proper Classification (11 U.S.C. §§ 1122, 1123(a)(1)). In addition to Administrative Claims and Priority Tax Claims, which need not be classified, the Plan designates six Classes of Claims and Interests. The Claims and Interests placed in each Class are substantially similar to other Claims and Interests, as the case may be, in each such Class. Valid business, factual, and legal reasons exist for separately classifying the various Classes of Claims and Interests created under the Plan, and such Classes do not unfairly discriminate among holders of Claims and Interests. Thus, the Plan satisfies sections 1122 and 1123(a)(1) of the Bankruptcy Code. (2) Specify Unimpaired Classes (11 U.S.C. § 1123(a)(2)). Article III of the Plan specifies that Classes 2 through 6 are unimpaired under the Plan, thereby satisfying section 1123(a)(2) of the Bankruptcy Code. (3) Specify Treatment Of Impaired Classes (11 U.S.C. § 1123(a)(3)). Article III of the Plan designates Class 1 as impaired and specifies the treatment of Claims in this Class, thereby satisfying section 1123(a)(3) of the Bankruptcy Code. (4) No Discrimination (11 U.S.C. § 1123(a)(4)). The Plan provides for the same treatment by the Debtors for each Claim or Interest in each respective Class unless the holder of a particular Claim or Interest has agreed to a less favorable treatment of such Claim or Interest, thereby satisfying section 1123(a)(4) of the Bankruptcy Code. (5) Implementation Of Plan (11 U.S.C. § 1123(a)(5)). The Plan provides adequate and proper means for its implementation, thereby satisfying section 1123(a)(5) of the Bankruptcy Code. (6) Non-Voting Equity Securities (11 U.S.C. § 1123(a)(6)). Article IV.B of the Plan provides that the certificate of incorporation or other organization documents of each Reorganized Debtor will be amended

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P.

93

as of the Effective Date to the extent necessary to satisfy section 1123(a)(6) of the Bankruptcy Code. (7) Selection Of Officers And Directors (11 U.S.C. § 1123(a)(7)). At or prior to the Confirmation Hearing, the Debtors properly and adequately disclosed or otherwise identified all individuals proposed to serve on or after the Effective Date as an officer or director of each Reorganized Debtor, and the manner of selection and appointment of such officers and directors is consistent with the interests of Claim and Interest holders and with public policy and, accordingly, satisfies the requirements of section 1123(a)(7) of the Bankruptcy Code. (8) Additional Plan Provisions (11 U.S.C. § 1123(b)). The Plan’s provisions are appropriate and not inconsistent with the applicable provisions of the Bankruptcy Code. Releases. Pursuant to section 1123(b)(3) of the Bankruptcy Code and Fed. R. Bankr. P. 9019(a), the limited mutual releases, discharges, exculpations, and injunctions set forth in the Plan shall be, and hereby are, approved as fair, equitable, reasonable, and in the best interests of the Debtors, the Reorganized Debtors, and their Estates, creditors, and equity holders. Such releases neither affect any claims, causes of action, or choses in action, nor abridge any rights of any party that is not a party to the Restructuring Agreement, including without limitation, Newstart Factors, Inc. Such releases also do not affect any claims, causes of action, or choses in action, nor do they abridge any rights, of any party to the Restructuring Agreement against Newstart Factors, Inc. Compliance With Fed. R. Bankr. P. 3016. The Plan is dated and identifies the entities submitting it, thereby satisfying Fed. R. Bankr. P. 3016(a). The filing of the Disclosure Statement with the Court satisfies Fed. R. Bankr. P. 3016(b). Compliance With Fed. R. Bankr. P. 3017. The Debtors have given notice of the Confirmation Hearing as required by Fed. R. Bankr. P. 3017, as shortened pursuant to Fed. R. Bankr. P. 9006(c)(1) and Local Rule 3016. The Solicitation Packages were transmitted to the holders of Class 1 Bank Group Claims pursuant to Fed. R. Bankr. P. 3017(e), as shortened by this Court pursuant to Fed. R. Bankr. P. 9006(c)(1) and Local Rule 3016. Compliance With Fed. R. Bankr. P. 3018. The Solicitation of votes to accept or reject the Plan satisfies Fed. R. Bankr. P. 3018. The Plan was transmitted to all creditors entitled to vote on the Plan, sufficient time under the Debtors’ exigent circumstances was prescribed for such creditors to accept or reject the Plan, and the Solicitation Packages and Solicitation Procedures comply with section 1126 of the Bankruptcy Code, thereby satisfying the requirements of Fed. R. Bankr. P. 3018. Debtors’ Compliance With Bankruptcy Code (11 U.S.C. § 1129(a)(2)). The Debtors have complied with all provisions of the Bankruptcy Code, the Bankruptcy Rules, and the Local Rules. Plan Proposed In Good Faith (11 U.S.C. § 1129(a)(3)). The Debtors have proposed the Plan in good faith and not by any means

94


Q.

R.

S.

T.

U.

forbidden by law, thereby satisfying section 1129(a)(3) of the Bankruptcy Code. In determining that the Plan has been proposed in good faith, the Court has examined the totality of the circumstances of record surrounding the formulation of the Plan. The Debtors filed their Chapter 11 cases and proposed the Plan with legitimate and honest purposes including, among other things, (i) the reorganization of the Debtors’ businesses and (ii) the preservation of the going concern value of the Debtors’ businesses and maximization of value to creditors and interest holders. Payments For Services Or Costs And Expenses (11 U.S.C. § 1129(a)(4)). All payments made or to be made by the Debtors or by a person issuing securities or acquiring property under the Plan, for services or for costs and expenses in or in connection with the Chapter 11 cases, or in connection with the Plan and incident to the Chapter 11 cases, have been approved by, or are subject to the approval of, the Court as reasonable, thereby satisfying section 1129(a)(4) of the Bankruptcy Code. Directors, Officers, And Insiders (11 U.S.C. § 1129(a)(5)). The Debtors have complied with section 1129(a)(5) of the Bankruptcy Code. The identity of the individuals who will hold the director and officer positions with the Reorganized Debtors after confirmation of the Plan has been fully disclosed. Such individuals’ appointment to, or continuance in, such offices is consistent with the interests of holders of Claims against and Interests in the Debtors and with public policy. Additionally, the Debtors identified the identity and compensation of any insiders expected to be employed or retained by the Reorganized Debtors after the Effective Date. No Rate Changes (11 U.S.C. § 1129(a)(6)). The Debtors’ Plan does not provide for any rate change that requires regulatory approval. Section 1129(a)(6) of the Bankruptcy Code is thus not applicable. Best Interests Of Creditors (11 U.S.C. § 1129(a)(7)). The Plan satisfies section 1129(a)(7) of the Bankruptcy Code. The liquidation analysis attached as an exhibit to the Disclosure Statement and other evidence proffered or adduced at the Confirmation Hearing (a) are persuasive and credible, (b) have not been controverted by other evidence, and (c) establish that each holder of an impaired Claim or Interest either has accepted the Plan or will receive or retain under the Plan, on account of such Claim or Interest, property of a value, as of the Effective Date, that is not less than the amount that such holder would receive or retain if the Debtors were liquidated under Chapter 7 of the Bankruptcy Code on such date. Acceptance Or Rejection By Certain Classes (11 U.S.C. § 1129(a)(8)). Classes 2, 3, 4, 5, and 6 are Classes of unimpaired Claims and Interests that are conclusively presumed to have accepted the Plan under section 1126(f) of the Bankruptcy Code. Class 1 has voted to accept the Plan in accordance with sections 1126(c) and (d) of the Bankruptcy Code. As set forth in the Tabulation Declaration, 92.56% in amount and 90.91% in number of those holders of Class 1 Bank Group Claims voting on the Plan voted to accept the Plan. No other Classes of Claims or Interests were entitled to vote on the Plan. Section 1129(b) of the Bankruptcy Code

4.6


V.

W.

X.

Y.

Z.

AA.

BB.

95

is inapplicable in these Chapter 11 cases because all of the requirements of section 1129(a) of the Bankruptcy Code have been satisfied. Treatment Of Administrative And Priority Claims (11 U.S.C. § 1129(a)(9)). The treatment of Administrative Claims, Priority Tax Claims, and Other Priority Claims pursuant to Articles II and III of the Plan satisfies the requirements of sections 1129(a)(9)(A), (B), and (C) of the Bankruptcy Code. Acceptance By Impaired Class (11 U.S.C. § 1129(a)(10)). Class 1 is an Impaired Class of Claims that voted to accept the Plan and, to the Debtors’ knowledge, does not contain insiders whose votes have been counted. Therefore, the requirement of section 1129(a)(10) of the Bankruptcy Code that at least one Class of Claims against or Interests in the Debtors that is impaired under the Plan has accepted the Plan, determined without including any acceptance of the Plan by any insider, has been satisfied. Feasibility (11 U.S.C. § 1129(a)(11)). The projections set forth in the Disclosure Statement and other evidence proffered or adduced by the Debtors at the Confirmation Hearing or in support of confirmation of the Plan with respect to feasibility, including the Hunnell Declaration, (a) are persuasive and credible, (b) have not been controverted by other evidence, and (c) establish that confirmation of the Plan is not likely to be followed by the need for further financial reorganization of the Reorganized Debtors, thus satisfying the requirements of section 1129(a)(11) of the Bankruptcy Code. Payment Of Fees (11 U.S.C. § 1129(a)(12)). All fees payable under section 1930 of title 28, United States Code, as determined by the Court, have been paid or will be paid on the Effective Date pursuant to Article XII.B of the Plan, thus satisfying the requirements of section 1129(a)(12) of the Bankruptcy Code. Continuation Of Retiree Benefits (11 U.S.C. § 1129(a)(13)). All obligations under existing retiree benefit programs maintained for the benefit of the Debtors’ employees will continue to be honored by the Debtors. The Debtors, therefore are not rejecting any retiree benefits within the meaning of 11 U.S.C. § 1114 upon the Effective Date. Thus, the requirements of section 1129(a)(13) of the Bankruptcy Code are satisfied. Principal Purpose (11 U.S.C. § 1129(d)). The principal purpose of the Plan is neither the avoidance of taxes nor the avoidance of section 5 of the Securities Act of 1933, and no party has objected to the confirmation of the Plan on any such grounds. The Plan therefore satisfies the requirements of section 1129(d) of the Bankruptcy Code. Good Faith Solicitation (11 U.S.C. § 1125(e)). Based on the record before the Court in these Chapter 11 cases, the Debtors and their directors, officers, employees, equity holders, members, agents, advisors, accountants, financial advisors, consultants, attorneys, and other representatives have acted in good faith within the meaning of section 1125(e) of the Bankruptcy Code and in compliance with the applicable provisions of the Bankruptcy Code and Bankruptcy Rules in connection with all of their respective activities relating to the solicitation of acceptances of the Plan and their participation in the activities described in section

96

CC.

DD.

EE.

FF.


1125 of the Bankruptcy Code, and are entitled to the protections afforded by section 1125(e) of the Bankruptcy Code and the exculpation and injunctive provisions set forth in Article XI of the Plan. Satisfaction Of Confirmation Requirements. The Plan satisfies the requirements for confirmation set forth in section 1129 of the Bankruptcy Code. Retention Of Jurisdiction. The Court may properly retain jurisdiction over the matters set forth in Article X of the Plan and section 1142 of the Bankruptcy Code. Releases, Injunctions, Exculpation, And Limitation Of Liability. The Court has jurisdiction under sections 1334(a) and (b) of title 28 of the U.S. Code to approve the injunctions and related matters set forth in Article XI of the Plan. Waiver Of Stays Under Bankruptcy Rules. Under the circumstances, it is appropriate that the ten-day stay imposed by Fed. R. Bankr. P. 3020(e), 6004(h), and 6006(d) be waived.

5 Nature of Bankruptcy and Insolvency Proceedings

5.1

Voluntary Petition

Objectives. This example of the bankruptcy filing of Buffets Holdings Incorporated illustrates the type of information that might be contained in a voluntary chapter 11 petition. Included with the Form 1, Voluntary Petition was Exhibit A to the Petition (total assets, liabilities, and information about shared holders), schedules of names used in the past 8 years, affiliates, information and filing of list of creditors and equity holders, list of 40 largest creditors and amount of claims, and resolution by Board of Directors. While the Bankruptcy Code requires only the 20 largest creditors, Buffets included 40. UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re: BUFFETS HOLDINGS, INC., a Delaware corporation, et al.,1 Debtors.

x : : : : : : x

Chapter 11 Case No. 08-[

]-(

)

Joint Administration Pending

1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification

number, are: Buffets Holdings, Inc. (4018); Buffets, Inc. (2294); HomeTown Buffet, Inc. (3002); OCB Restaurant Company, LLC (7607); OCB Purchasing Co. (7610); Buffets Leasing Company, LLC (8138); Ryan’s Restaurant Group, Inc. (7895); Buffets Franchise Holdings, LLC (8749); Tahoe Joe’s, Inc. (7129); HomeTown Leasing Company, LLC (8142); OCB Leasing Company, LLC (8147); Big R Procurement Company, LLC (5198); Ryan’s Restaurant Leasing Company, LLC (7405); Fire Mountain Restaurants, LLC (8003); Ryan’s Restaurant Management Group, LLC (6739): Tahoe Joe’s Leasing Company, LLC (8145); Fire Mountain Leasing Company, LLC (7452); Fire Mountain Management Group, LLC (7299). The address for all of the Debtors is 1460 Buffet Way, Eagan, MN 55121.

97

98

Nature of Bankruptcy and Insolvency Proceedings

EXHIBIT “A” TO VOLUNTARY PETITION OF BUFFETS HOLDINGS, INC.2 1. If any of the Buffets Holdings, Inc.’s (“Buffets Holdings”) securities are registered under Section 12 of the Securities and Exchange Act of 1934, the SEC file number is 333-116897. 2. The following financial data (which is consolidated among all the Debtors and certain non-debtor affiliates) is the latest available unaudited information on the Debtors’ condition as of September 19, 2007.3 a. Total assets

$ 963,538,000

b. Total debts (including debts listed in 2.c., below)

$1,156,262,000

c. None of Debtors’ debt obligations are held by more than 500 record holders. d. As of July 30, 2007 the Buffets Holdings has 3,104,510 shares of common stock issued and outstanding. 3. The following persons directly or indirectly own, control, or hold, with power to vote, 5% or more of the voting securities of the Buffets Holdings:4 Buffets Holdings 5% Shareholders Shareholder Name Buffets Restaurants Holdings, Inc.

Number of Shares 3,104,510

Schedule 1 to Voluntary Petition The Debtor has used the following other names during the previous 8 years, which includes trade names the Debtor has registered with various states: Old Country Buffet Country Buffet HomeTown Buffet Ryan’s Ryan’s Family Steakhouse 2 The following financial data shall not constitute an admission of liability by the Debtors. The Debtors reserve all rights to assert that any debt or claim listed herein as liquidated or fixed is in fact a disputed claim or debt. The Debtors also reserve all rights to challenge the priority, nature, amount or status of a claim or debt. 3 Information contained herein is as reported on Buffets Holdings’ 10-Q filed on September 19, 2007. 4 The determination that there were no other persons known to the Debtors to beneficially own 5% or more of the Buffets Holdings voting securities was based on a review of all statements filed with the U.S. Securities and Exchange Commission with respect to Buffets Holdings pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended, since the beginning of the Buffets Holdings’ fiscal year.

5.1

Voluntary Petition

99

Fire Mountain Granny’s Tahoe Joe’s Tahoe Joe’s Famous Steakhouse Soup ‘N Salad Unlimited Roadhouse Grill Schedule 2 to Voluntary Petition Affiliated Entities On the date hereof, each of the affiliated entities listed below (including the debtor in this chapter 11 case) filed in this Court a petition for relief under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101–1532. Contemporaneously with the filings of these petitions, such entities filed a motion requesting joint administration of their chapter 11 cases. Buffets Holdings, Inc. Buffets, Inc. HomeTown Buffet, Inc. OCB Restaurant Company, LLC OCB Purchasing Co. Buffets Leasing Company, LLC Ryan’s Restaurant Group, Inc. Buffets Franchise Holdings, LLC Tahoe Joe’s, Inc. HomeTown Leasing Company, LLC OCB Leasing Company, LLC Big R Procurement Company, LLC Ryan’s Restaurant Leasing Company, LLC Fire Mountain Restaurants, LLC Ryan’s Restaurant Management Group, LLC Tahoe Joe’s Leasing Company, LLC Fire Mountain Leasing Company, LLC Fire Mountain Management Group, LLC

100


UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


x : : : : : : x


]-(

)


CERTIFICATION OF CONSOLIDATED LIST OF CREDITORS The consolidated list of creditors being filed in electronic format contemporaneously with the foregoing petition (the “Creditor List”) constitutes a full and complete list of the name and address of each creditor. This list is being filed pursuant to 11 U.S.C. § 521, Rules 1007 and 1008 of the Federal Rules of Bankruptcy Procedure, and Rule 1007-2 of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware. The above-captioned debtors (the “Debtors”), reserve the right to file an amended or supplemental list of creditors. The Creditor List is based upon the internal bookkeeping records of the Debtors and is accurate to the best of the undersigned’s knowledge, information and belief, subject to further review. I, R. Michael Andrews, Jr., Chief Executive Officer of Buffets Holdings, Inc., a Delaware corporation, and an entity named as a Debtor in these cases, declare under penalty of perjury that I have read the Creditor List and it is true and correct to the best of my knowledge, information and belief. Date: January

, 2008 R. Michael Andrews, Jr. Chief Executive Officer



5.1

101

Voluntary Petition

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


x : : : : : : x


]-(

)


LIST OF EQUITY INTEREST HOLDERS FOR BUFFETS HOLDINGS, INC. I, R. Michael Andrews, Jr., Chief Executive Officer of Buffets Holdings, Inc. a Delaware corporation, declare under penalty of perjury that I have read the List attached hereto as Exhibit “A” and that it is true and correct to the best of my knowledge, information and belief. Dated:

, 2008 Eagan, Minnesota

BUFFETS HOLDINGS, INC. a Delaware corporation

R. Michael Andrews, Jr. Chief Executive Officer Equity Holder

Address

Percentage Interest

Buffets Restaurants Holdings, Inc.

1460 Buffet Way, Eagan, MN 55121

100%


number, are: Buffets Holdings, Inc. (4018); Buffets, Inc. (2294); HomeTown Buffet, Inc. (3002); OCB Restaurant Company, LLC (7607); OCB Purchasing Co. (7610); Buffets Leasing Company, LLC (8138); Ryan’s Restaurant Group, Inc. (7895); Buffets Franchise Holdings, LLC (8749); Tahoe Joe’s, Inc. (7129); HomeTown Leasing Company, LLC (8142); OCB Leasing Company, LLC (8147); Big R Procurement Company, LLC (5198); Ryan’s Restaurant Leasing Company, LLC (7405); Fire Mountain Restaurants, LLC (8003); Ryan’s Restaurant Management Group, LLC (6739); Tahoe Joe’s Leasing Company, LLC (8145); Fire Mountain Leasing Company, LLC (7452); Fire Mountain Management Group, LLC (7299). The address for all of the Debtors is 1460 Buffet Way, Eagan, MN 55121.

102


IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE x : : BUFFETS HOLDINGS, INC., : : a Delaware corporation, et al.,1 : Debtors. : ——————————————————— x

Chapter 11

In re:

Case No. 08-[

]-(

)


CONSOLIDATED LIST OF CREDITORS HOLDING 40 LARGEST UNSECURED CLAIMS Buffets Holdings, Inc., a Delaware corporation, and certain of its direct and indirect affiliates and subsidiaries, the debtors and debtors in possession in the above captioned cases (collectively the “Debtors”), filed voluntary petitions in this Court for relief under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101, et seq. This list of creditors holding the 40 largest unsecured claims (the “Top 40 List”) has been prepared on a consolidated basis, from the Debtors’ books and records as of January 9, 2008. The Top 40 List was prepared in accordance with Rule 1007(d) of the Federal Rules of Bankruptcy Procedure for filing in the Debtors’ chapter 11 cases. The Top 40 List does not include: (1) persons who come within the definition of an “insider” set forth in 11 U.S.C. § 101(31); or (2) secured creditors, unless the value of the collateral is such that the unsecured deficiency places the creditor among the holders of the 40 largest unsecured claims. The information presented in the Top 40 List shall not constitute an admission by, nor is it binding on, the Debtors. The information presented herein, including, without limitation (a) the failure of the Debtors to list any claim as contingent, unliquidated, disputed or subject to a setoff or (b) the listing of any claim as unsecured, does not constitute an admission by the Debtors that the secured lenders listed hold any deficiency claims, nor does it constitute a waiver of the Debtors’ rights to contest the validity, priority, nature, characterization and/or amount of any claim.



103

U.S. Bank National Association Corporate Trust Services (indenture trustee as of the Petition Date)

1

HSBC Bank USA, N.A. Corporate Trust & Loan Agency (successor indenture trustee effective February 7, 2008)

Name of creditor

Rank Timothy Sandell Vice President U.S. Bank National Association Corporate Trust Services 60 Livingston Avenue St. Paul, MN 55 107-2292 Tel: 651-495-3959 Fax: 651-495-8100 [email protected] Sandra E. Horwitz 10 East 40th Street, 14th Floor New York, New York 10016 Tel: 212-525-1358 Fax: 212-525-1366 [email protected] Dennis J. Drebsky, Esq. Nixon Peabody LLP 437 Madison Avenue New York, New York 10022 Tel: 212-940-3091 Fax: 866-678-8786 [email protected]

Name, telephone number and complete mailing address, including zip code, of employee, agent, or department of creditor familiar with claim who may be contacted Notes

Nature of claim (trade debt, bank loan, government contract, etc.) Unliquidated

Indicate if claim is contingent, unliquidated, disputed or subject to setoff2

(continues)

$321,050,000

Amount of claim [if secured also state value of security]

104

Name of creditor

North Star Foodservice, Inc.

WB Doner and Company

Saladino’s Inc.

Van Eerden Distribution Co.

Rank

2

3

4

5

(Continued)

Bill Murray 9399 West Higgins Rd. Rosemont, IL 60018 Tel: 847-720-8080 Fax: 847-720-8099 [email protected] David DeMuth PO Box 67-28701 Detroit, MI 48267-0287 Tel: 248-354-9700 Fax: 248-827-8440 [email protected] Craig Saladino 3325 W. Figarden Dr. Fresno, CA 93711 Tel: 800-248-8089 Fax: 559-256-4600 [email protected] Dan Van Eerden 650 Iona Ave., SW P.O. Box 3110 Grand Rapids, MI 49501 Tel: 616-475-7402 Fax: 616-774-3973 [email protected]

Name, telephone number and complete mailing address, including zip code, of employee, agent, or department of creditor familiar with claim who may be contacted

Trade

Trade

Advertising

Trade

Nature of claim (trade debt, bank loan, government contract, etc.)

Not applicable

Not applicable

Not applicable

Not applicable


$2,017,204.68

$4,372,772.89

$4,727,724.95

$8,697,888.45


105

BiRite Foods

McDonald Wholesale Co.

Feesers Inc.

Upper Lake Foods Inc.

Shamrock Foods Co.

6

7

8

9

10

Steve Berulich 123 S Hill Dr. Brisbane, CA 94005-1203 [email protected] Jake VanderVeen 2350 W Broadway Eugene, OR 97402 Tel: 541-345-8421 x276 Fax: 541-284-1645 [email protected] Denny Layton 5561 Grayson Rd. Harrisburg, PA 17111 Tel: 717-564-4636 Fax: 717-558-7450 [email protected] Jim Bradshaw 801 Industry Ave. Cloquet, MN 55720 Tel: 218-879-7265 Fax: 218-879-1406 [email protected] Jeff Peitzmeier 5199 Ivy St. Commerce City, CO 80022 Tel: 800-289-3595 x8293 Fax: 303-288-5667 jeff [email protected] Not applicable

Not applicable

Trade

Not applicable

Not applicable

Not applicable

Trade

Trade

Trade

Trade

(continues)

$1,162,458.07

$1,261,656.03

$1,415,516.73

$1,570,265.73

$1,987,305.95

106

Name of creditor

Sunrise Produce

Piazza Produce

Haag Food Service Inc.

Daylight Foods Inc.

Rank

11

12

13

14

(Continued)

Paul Carone PO Box 227220 Commerce, CA 90022 Tel: 323-726-3838 Fax: 323-582-5222 [email protected] Pete Piazza PO Box 68931 5941 W 82nd Street Indianapolis, IN 46268-0931 Tel: 317-872-0101 Fax: 317-870-8784 [email protected] Mike Strieker 300 North Haag St. Breese, IL 62230-1758 Tel: 618-526-3133 Fax: 618-526-7596 [email protected] Chris Viahopouliotis Daylight Produce 2970 Daylight Way San Jose, CA 95111 Tel: 408-284-7300 x105 Fax: 408-284-7307 [email protected]


Trade

Trade

Trade

Trade


Not applicable

Not applicable

Not applicable

Not applicable


$717,433.92

$735,460.18

$845,140.03

$1,014,934.41


107

Sysco Food Service

Thurston Foods Inc.

Edward Don Company

Hartford Specialty/Specialty Risk Services, LLC

DiCarlo Distributors Inc.

15

16

17

18

19

Debbie Martin Sysco Corporation 20701 E Currier Rd Walnut, CA 91789 Tel: 909-595-9595 Fax: 909-594-0565 [email protected] Kevin Brown 30 Thurston Dr, PO Box 744 Wallingford, CT 06492 Tel: 800-98212227 Fax: 203-284-0712 [email protected] Gary Siegel 2500 S Harlem Ave. North Riverside, IL 60546 Tel: 708-883-8895 Fax: 708-883-8230 [email protected] Thomas R. Sullivan, Sr. V.P. Goodwin Square – 16th Floor 690 Asylum Ave. Hartford, CT 06103 Fax: 856-547-5712 Michael DiCarlo 630 North Ocean Avenue Holtsville, NY 11742 Tel: 631-758-6000 x131 Fax: 631-758-6096 [email protected] Not applicable

Unliquidated

Services

Trade

Not applicable

Not applicable

Not applicable

Trade

Trade

Trade

(continues)

$370,565.23

$408,221.74

$462,331.89

$605,911.28

$663,376.87

108

Name of creditor

RSI Construction Services

Brown FoodService, Inc.

Renzi Brothers Inc.

Yancey’s Food Service Supplier

Rank

20

21

22

23

(Continued)

999 Polaris Parkway Ste 111 Columbus, OH 43240 Tel: 614-885-9707 Fax: 614-880-0150 Wayne Brown 500 East Clayton Lane Louisa, KY 41230-0690 Tel: 606-638-1139 Fax: 606-638-1130 [email protected] David Renzi 948 Bradley St. PO Box 23 Watertown, NY 13601 Tel: 315-788-5610 x105 Fax: 315-788-9097 [email protected] Greg Yancey 5820 Piper Dr. Loveland, CO 80538 Tel: 970-613-4333 x306 Fax: 970-613-4334 [email protected]


Trade

Trade

Trade

Trade


Not applicable

Not applicable

Not applicable

Not applicable


$311,579.23

$326,857.29

$337,694.57

$339,081.60


109

V. Marchese Inc.

Bain & Company Inc.

Greenville County, South Carolina

EcoLab

Phoenix Wholesale Food Service

Impact Group

24

25

26

27

28

29

Jack Wertz 613 South 2nd Milwaukee, WI 53204 Tel: 800-538-8838 Fax: 414-289-0833 [email protected] PO Box 11321 Boston, MA 02211 Tel: 312-541-9500 Fax: 312-541-0089 PO Box 19114 Greenville, SC 29602-9114 Tel: 864-467-5673 Fax: 864-467-7358 Troy Dahl 655 Lone Oak Dr, Floor 2 Eagan, MN 55121 Tel: 651-204-2645 Fax: 651-204-2602 [email protected] David Collins PO Box 707 Forest Park, GA 30051-0707 Tel: 800-613-1898 Fax: 404-363-4562 [email protected] Paul Taunton 18760 Lake Drive East Chanhassen, MN 55317 Tel: 952-278-7822 Fax: 952-216-0259 [email protected] Trade

Trade

Trade

Taxes

Services

Trade

Not applicable

Not applicable

Not applicable

Unliquidated

Not applicable

Not applicable

(continues)

$228,856.04

$240,243.70

$253,136.70

$261,521.03

$279,072.00

$296,937.50

110

Name of creditor

GE Capital Solutions

Waynetown Associates

T & T Produce

Blue Cross Blue Shield SC

J Ambrogi Foods

Rank

30

31

32

33

34

(Continued)

Tom Bessinger 3 Capital Dr. Eden Prairie, MN 55344 Tel: 800-328-0244 Fax: 952-828-1023 2800 E. River Road Dayton, OH 45439-1538 Fax: 937-278-6334 Tony Buchanan PO Box 5756 Ft. Ogelthorpe, GA 30742 Tel: 706-806-1012 Fax: 706-866-9118 [email protected] I-20 East AT Apline Rd. Columbia, SC 29219 Tel: 1-800-288-2227 Fax: 803-870-8153 Jerry Ambrogi 101 Ryan Ave PO Box 86 Westville, NJ 08093 Tel: 856-845-0377 Fax: 609-845-0533 [email protected]


Trade

Services

Trade

Lease

Lease


Not applicable

Not applicable

Not applicable

Not applicable

Not applicable


$189,592.50

$205,898.75

$207,846.46

$208,403.18

$225,123.01


111

Service Management Group

OK Produce

Blue Cross Blue Shield Minnesota

Mento Produce

37

38

39

40

Randy Wilcox 1415 L’Orient St. St Paul, MN 55117 Tel: 651-487-8000 Fax: 651-487.1314 [email protected] Tom Sirna 7176 State Rte 88 Ravenna, OH 44266 Tel: 330-562-5221 Fax: 330-562-2995 [email protected] 210 W 19th Terrace, Ste 200 Kansas City, MO 64108 Tel: 800-764-0439 Fax: 816-448-4599 Gary Bettencourt 1762 G Street Fresno, CA 93779-2838 Tel: 559-445-8600 Fax: 559-455-8691 Julie Kacon 3535 Blue Cross Road St Paul, MN 55164 Tel: 1-888-878-0139 Fax: 651-662-2856 Frank Mento 946 Spence St. Syracuse, NY 13204 Tel: 315-422-9195 Fax: 315-476-3403 [email protected] Trade

Services

Trade

Trade

Trade

Trade

As noted above, the Debtors reserve their rights to dispute the claims on this schedule on any basis.

Sirna & Sons Mainline Produce

36

2

Bix Produce

35

Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

$138,340.41

$146,755.24

$157,519.77

$173,218.20

$183,988.53

$185,594.29

112




x : : : : : : x


]-(

)


DECLARATION CONCERNING THE DEBTORS’ CONSOLIDATED LIST OF CREDITORS HOLDING THE 40 LARGEST UNSECURED CLAIMS I, R. Michael Andrews, Jr., Chief Executive Officer of Buffets Holdings, Inc., a Delaware corporation, and an entity named as a debtor in these cases, declare under penalty of perjury under the laws of the United States of America that I have reviewed the foregoing Consolidated List of Creditors Holding the 40 Largest Unsecured Claims submitted herewith and that the information contained therein is true and correct to the best of my information and belief. Date: January 21, 2008 R. Michael Andrews, Jr. Chief Executive Officer RESOLUTIONS OF BOARD OF DIRECTORS OF BUFFETS HOLDINGS, INC. Upon motion duly made, seconded, and carried, the following resolutions were adopted by the affirmative vote of a majority of the directors present at the time of the vote, at a duly called meeting of the Board of Directors of Buffets Holdings, Inc. (the “Company” or the “Parent Corporation”), a Delaware corporation, in which a quorum was present, in each case, in accordance with the Articles of Incorporation and by-laws of the Company: WHEREAS, the Board of Directors has reviewed and considered the financial and operational condition of the Company and the Company’s business on the date hereof, including the historical performance of the Company, the assets 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification


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of the Company, the current and long-term liabilities of the Company, the market for the Company’s products and services, and restaurant industry and credit market conditions; and WHEREAS, the Board of Directors has received, reviewed and considered the recommendations of the senior management of the Company and the Company’s legal, financial and other advisors as to the relative risks and benefits of pursuing a bankruptcy proceeding under the provisions of Chapter 11 of Title 11 of the United States Code; NOW, THEREFORE, BE IT RESOLVED that, in the judgment of the Board of Directors, it is desirable and in the best interests of the Company, its creditors, stockholders and other interested parties, that a voluntary petition be filed by the Company under the provisions of Chapter 11 of Title 11 of the United States Code; and it is further RESOLVED that the Company shall be, and it hereby is, directed and authorized to execute and file on behalf of the Company all petitions, schedules, lists and other papers or documents, and to take any and all action which they deem reasonable, advisable, expedient, convenient, necessary or proper to obtain such relief; and it is further RESOLVED, that the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer of the Company (collectively, the “Designated Officers”), be and each of them, acting alone, hereby is, authorized, directed and empowered, on behalf of and in the name of the Company (i) to execute and verify the Petition as well as all other ancillary documents and to cause the Petition to be filed with the United States Bankruptcy Court for the District of Delaware and to make or cause to be made prior to the execution thereof any modifications to the Petition or ancillary documents, and (ii) to execute, verify and file or cause to be filed all petitions, schedules, lists, motions, applications and other papers or documents necessary or desirable in connection with the foregoing; and it is further RESOLVED that the law firm of Young Conaway Stargatt & Taylor, LLP (“Young Conaway”) be, and hereby is, authorized and empowered to represent the Company as its general bankruptcy counsel and to represent and assist the Company in carrying out its duties under Title 11 of the United States Code, and to take any and all actions to advance the Company’s rights, including the preparation of pleadings and filings in the Chapter 11 proceeding; and in connection therewith, the Designated Officers are hereby authorized and directed to execute appropriate retention agreements, pay appropriate retainers prior to and immediately upon the filing of the Chapter 11 case, and to cause to be filed an appropriate application for authority to retain the services of Young Conaway; and it is further RESOLVED, that the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”), be, and hereby is, authorized and empowered to represent the Company, as special corporate counsel in connection with securities law issues and related matters in connection with any case commenced by the Company under the Bankruptcy Code; and in connection therewith, the Designated Officers are hereby authorized and directed to execute appropriate retention agreements, pay appropriate retainers prior to and immediately upon the filing of the Chapter 11 case, and to cause to be filed an appropriate application for authority to retain the services of Paul Weiss; and it is further

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RESOLVED, that Kroll Zolfo Cooper LLC (“Kroll”) be, and hereby is, authorized and empowered to represent the Company as its restructuring advisor, with regard to the Chapter 11 proceeding and in connection therewith, the Designated Officers are hereby authorized and directed to execute appropriate retention agreements, pay appropriate retainers prior to and immediately upon the filing of the Chapter 11 case, and to cause to be filed an appropriate application for authority to retain the services of Kroll; and it is further RESOLVED, that Houlihan Lokey Howard & Zukin (“Houlihan”) be, and hereby is, authorized and empowered to represent the Company as its investment banker, with regard to the Chapter 11 proceeding; and in connection therewith, the Designated Officers are hereby authorized and directed to execute appropriate retention agreements, pay appropriate retainers prior to and immediately upon the filing of the Chapter 11 case, and to cause to be filed an appropriate application for authority to retain the services of Houlihan; and it is further RESOLVED, that Epiq Bankruptcy Solutions, LLC (“Epiq”) be, and hereby is, authorized and empowered to serve as the notice, claims, solicitation and balloting agent in connection with any case commenced by the Company under the Bankruptcy Code; and in connection therewith, the Designated Officers are hereby authorized and directed to execute appropriate retention agreements, pay appropriate retainers prior to and immediately upon the filing of the Chapter 11 case, and to cause to be filed an appropriate application for authority to retain the services of Epiq; and it is further RESOLVED that the Designated Officers be, and they hereby are, authorized and directed to employ any other individual and/or firm as professionals or consultants or financial advisors to the Company as are deemed necessary to represent and assist the Company in carrying out its duties under Title 11 of the United States Code, and in connection therewith, the Designated Officers are hereby authorized and directed to execute appropriate retention agreements, pay appropriate retainers prior to and immediately upon the filing of the Chapter 11 case, and to cause to be filed an appropriate application for authority to retain the services of such firms; and it is further RESOLVED, that the Parent Corporation be, and it hereby is, authorized to enter into a Secured Super-Priority Debtor In Possession Credit Agreement or one or more other agreements and any amendments thereto (the “DIP Credit Agreement”) by and among Buffets, Inc., a Minnesota corporation, (the “Borrower”), the Parent Corporation, each of the financial institutions from time to time a party thereto (the “Lenders”), and Credit Suisse, as administrative agent and collateral agent (in such capacity, the “Agent”), to provide for loans to be made to the Borrower in an aggregate principal amount of up to $385,000,000 (including up to $300,000,000 of “roll-over” loans) which shall bear such interest, require the payment of such fees and have such other terms and conditions and be in such form as are approved or deemed necessary, appropriate or desirable by the officer executing the same, the execution thereof by such officer to be conclusive evidence of such approval and determination; and it is further RESOLVED, that to induce the Lenders under the DIP Credit Agreement to make loans to the Borrower, a wholly owned subsidiary of the Parent Corporation, the Parent Corporation be, and it hereby is, authorized (i) to guarantee the payment of the loans made under the DIP Credit Agreement, and payment and performance of all other obligations and liabilities of the Parent

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Corporation and its subsidiaries arising under, out of, or in connection with, the DIP Credit Agreement (collectively, the “Obligations”), and (ii) in furtherance of the foregoing, to enter into such guarantee or other agreements as the Agent may require on such terms and conditions and in such form as are approved or deemed necessary, appropriate or desirable by the officer executing the same (the “Parent Guarantee”), the execution thereof by such officer to be conclusive evidence of such approval and determination; and it is further RESOLVED, that the Parent Corporation be, and it hereby is, authorized to secure the payment and performance of the Obligations by (i) pledging to the Agent, or granting to the Agent a lien or mortgage on or security interest in, all or any portion of the Parent Corporation’s assets, including all or any portion of the issued and outstanding capital stock of the Borrower now owned or hereafter acquired by the Parent Corporation, and (ii) entering into such security agreements, pledge agreements, intercreditor agreements, mortgages, control agreements, and other agreements as are necessary, appropriate or desirable to effectuate the intent of, or matters reasonably contemplated or implied by, this resolution in such form and having such terms and conditions as are approved or deemed necessary, appropriate or desirable by the officer executing the same (collectively, the “Security Agreements”), the execution thereof by such officer to be conclusive evidence of such approval or determination; and it is further RESOLVED, that any of the Designated Officers be, and each of them individually hereby is, authorized, in the name and on behalf of the Parent Corporation, to execute and deliver the DIP Credit Agreement, the Security Agreements, and the Parent Guarantee (collectively, the “Principal Agreements”), and any other agreements or amendments related thereto or required thereby containing such terms and conditions, setting forth such rights and obligations and otherwise addressing or dealing with such subjects or matters determined to be necessary, appropriate or desirable by the officer executing the same, the execution thereof by such officer to be conclusive evidence of such determination, and to do all such other acts or deeds as are or as are deemed by such officer to be necessary, appropriate or desirable to effectuate the intent of, or matters reasonably contemplated or implied by, this resolution and the foregoing resolutions; and it is further RESOLVED, that the Parent Corporation be, and it hereby is, authorized to perform fully its obligations under the Principal Agreement, and any such other agreements or amendments and to engage without limitation in such other transactions, arrangements or activities (collectively, the “Activities”) as are reasonably related or incident to or which will serve to facilitate or enhance for the benefit of the Parent Corporation and its subsidiaries the transactions contemplated by these resolutions, including without limitation any modification, extension or expansion (collectively, the “Changes”) of any of the Activities or of any other transactions, arrangements or activities resulting from any of the Changes and to enter into such other agreements or understandings as are necessary, appropriate or desirable to effectuate the intent of, or matters reasonably contemplated or implied by, this resolution and each of the foregoing resolutions; and it is further RESOLVED, that all actions previously taken by any director, officer, employee or agent of the Parent Corporation in connection with or related to the matters set forth in or reasonably contemplated or implied by the foregoing resolutions be, and each of them hereby is, adopted, ratified, confirmed and

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approved in all respects as the acts and deeds of the Parent Corporation; and it is further RESOLVED, that each and every officer of the Company be, and each of them acting alone is, hereby authorized, directed and empowered from time to time in the name and on behalf of the Company, to (a) take such further actions and execute and deliver such certificates, instruments, guaranties, notices and documents as may be required or as such officer may deem necessary, advisable or proper to carry out the intent and purpose of the foregoing resolutions, including the execution and delivery of any security agreements, pledges, financing statements and the like, and (b) perform the obligations of the Company under the Bankruptcy Code, with all such actions to be performed in such manner, and all such certificates, instruments, guaranties, notices and documents to be executed and delivered in such form, as the officer performing or executing the same shall approve, and the performance or execution thereof by such officer shall be conclusive evidence of the approval thereof by such officer and by the Company; and be it further RESOLVED, that all actions heretofore taken by any officer or director of the Company in connection with the foregoing resolutions be, and they hereby are, confirmed, ratified and approved in all respects. Dated: January 21, 2008 By: Name: H. Thomas Mitchell Title: Secretary BUFFETS HOLDINGS, INC. SECRETARIAL CERTIFICATE The undersigned, H, Thomas Mitchell, Secretary of Buffets Holdings, Inc. (the “Company”), a Delaware corporation, hereby certifies as follows: 1. I am the duly qualified and elected Secretary of the Company and, as such, am familiar with the facts herein certified, and I am duly authorized to certify the same on behalf of the Company. 2. Attached hereto is a true and complete copy of the Resolutions of the Board of Directors of the Company, duly adopted at a properly convened meeting of the Board of Directors on Jan. 21, 2008, by unanimous vote of the directors, in accordance with the by-laws of the Company. 3. Such resolutions have not been amended, altered, annulled, rescinded or revoked and are in full force and effect as of the date hereof. There exist no other subsequent resolutions of the Board of Directors of the Company relating to the matters set forth in the resolutions attached hereto. IN WITNESS WHEREOF, the undersigned has executed this certificate as of the 21 day of January, 2008. H. Thomas Mitchell Secretary

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Section 503(b)(9) Motion and Order to Pay Critical Vendor Claims

5.2 Section 503(b)(9) Motion and Order to Pay Critical Vendor Claims Objectives. Section 5.32 of Volume 1 contains a discussion of the issues related to critical vendors. The motion by Buffets illustrates how a request for the court to authorize the payment of critical vendors after the decision in K-Mart may be constructed. Following the motion is the order approving the payment of critical vendors. (a) Motion to Pay Critical Vendors Expenses IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


x : : : : : : x

Chapter 11 Case No. 08-10141 (

)


MOTION OF THE DEBTORS PURSUANT TO 11 U.S.C. §§ 105, 363 AND 506(b) FOR AN ORDER AUTHORIZING THE PAYMENT OF CERTAIN PREPETITION CLAIMS OF CERTAIN CRITICAL VENDORS AND FREIGHT CARRIERS Buffets Holdings, Inc. and its affiliated debtors and debtors-in-possession (collectively, the “Debtors,” and each individually, a “Debtor”), by and through their proposed undersigned counsel, move for entry of an order authorizing the payment of certain prepetition claims of critical vendors (“Critical Vendors”) and freight carriers (the “Freight Carriers”) pursuant to sections 105, 363 and 506(b) of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq (the “Bankruptcy Code”). In support of the Motion, the Debtors rely on the concurrently filed Declaration of A. Keith Wall in Support of Chapter 11 Petitions and First Day Motions (the “First Day Declaration”) and respectfully represent as follows: 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification


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JURISDICTION 1. This Court has jurisdiction to hear the Motion under 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The statutory predicates for the relief requested herein are sections 105, 363 and 506(b) of the Bankruptcy Code.

GENERAL BACKGROUND A. Introduction 2. Today (the “Petition Date”) each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 3. The Debtors continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or official committee of unsecured creditors has been appointed in these cases.

B. Overview of the Debtors’ Businesses 4. The Debtors comprise the nation’s largest steak-buffet restaurant chain and the second largest restaurant company in the family dining segment of the restaurant industry. The restaurants principally operate under the names Old R R R , Country Buffet , HomeTown Buffet (collectively the “BufCountry Buffet R R fets brand”), Ryan’s and Fire Mountain (collectively the “Ryan’s brand”). R The Debtors also own and operate eleven Tahoe Joe’s Famous Steakhouse restaurants (“Tahoe Joe’s”). 5. The Debtors were early innovators of the “scatter bar”—a buffet format believed to reduce the waiting time of customers’ access to food, thereby enhancing the dining experience and increasing table turns. All of the Debtors’ steak-buffet restaurants serve lunch and dinner seven days a week and the Buffets brand restaurants and most of the Ryan’s brand restaurants offer breakfast on Saturdays and Sundays. 6. As of January 14, 2008, the Debtors had 615 company-owned steak-buffet R restaurants and 16 franchised restaurants, 11 Tahoe Joe’s Famous Steakhouse locations collectively operating in 42 states. Approximately two-thirds of the Debtors’ restaurant facilities are freestanding units and one-third are located in strip shopping centers or malls. On average, each of the Buffets brand restaurants served approximately 6,700 customers per week in fiscal 2007, while each Ryan’s brand restaurant served approximately 5,300 customers per week in fiscal 2007. In the aggregate, the Debtors’ restaurants service approximately 3.8 million customers per week. 7. As of January 14, 2008, the Debtors employed over 36,000 employees. Except for approximately 585 corporate employees, nearly half of which work at the Debtors’ corporate headquarters in Eagan, Minnesota, the Debtors’ employees work at the Debtors’ restaurants.

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C. Corporate and Debt Structure 8. Buffets Holdings, Inc., a Delaware corporation, is a holding company that wholly owns Buffets, Inc., a Minnesota corporation, which is the Debtors’ principal operating entity and the primary obligor on the Debtors’ prepetition secured bank debt and unsecured bond debt. Buffets, Inc., in turn, is the direct parent of the Debtors HomeTown Buffet, Inc., OCB Restaurant Company, LLC, OCB Purchasing Co., Buffets Leasing Company, LLC, Ryan’s Restaurant Group, Inc. and Buffets Franchise Holdings, LLC (collectively, the “Direct Buffets Subsidiaries”), through which various restaurant functions are operated. Each of the other Debtors is indirectly owned by Buffets, Inc. through one of the Direct Buffets Subsidiaries or a subsidiary thereof. A chart showing the corporate organization of all of the Debtors is annexed to the First Day Declaration as Exhibit A. 9. Buffets, Inc. is a borrower under a secured credit facility with Credit Suisse, as a lender and administrative agent, and certain other lender-parties thereto dated November 1, 2006, as amended on March 13, 2007 and as further amended in early January 2008 by a Forbearance Agreement and Second Amendment to Credit Agreement (the “Forbearance Agreement”) (the credit agreement, as amended, shall hereinafter be referred to as the “Credit Facility”). 10. The Credit Facility is comprised of a term loan in the original principal amount of $530 million (the “Term Loan”), a primary revolving credit facility (the “Primary Revolver”) in the original principal amount of $40 million, and a secondary letter of credit facility in the amount of $70 million (the “Secondary Revolver”). As of January 15, 2008, the outstanding amounts due under the Term Loan, Primary Revolver and Secondary Revolver were approximately $524 million, $40 million and $70 million (comprised of approximately $16.3 million in borrowings and approximately $53.7 million in letter of credit obligations), respectively. The obligations of Buffets, Inc. under the Credit Facility are guaranteed by each of the other Debtors. 11. In addition to the Credit Facility, pursuant to an indenture dated as of November 1, 2006, Buffets, Inc. issued $300 million (original principal amount) of 12.5% senior unsecured notes (as amended from time-to-time, the “Senior Notes”) due November 1, 2014. Interest on the Senior Notes is due semiannually on January 1st and July 1st. As of the Petition Date, the Debtors had not made the interest payment under the Senior Notes due on January 2, 2008 in the amount of approximately $18.75 million. Payment of the Senior Notes is guaranteed by most, if not all, of the other Debtors. 12. In addition to the foregoing, the Debtors also have approximately $55 million in ordinary course trade debt that was unpaid as of the Petition Date. D. Events Leading to the Debtors’ Bankruptcy Filing. 13. A variety of external economic factors have led to a decline in the Debtors’ operating performance. The Debtors believe that the leading adverse factor has been a marked decline in discretionary spending among the Debtors’ core customers. This has resulted from higher gasoline and energy costs, increased debt service loads due to rate increases on adjustable rate mortgages, lower consumer confidence and the general economic downturn. Discretionary

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consumer spending has been further hampered by the disappearance of readily available credit. This has followed the collapse of the sub-prime mortgage market, stagnation of home valuations, and lower available home equity due to previous consumer refinancing efforts. Together, these factors have significantly depressed consumer spending in the family dining segment and negatively impacted the Debtors’ guest counts at their restaurants. Additionally, the Debtors’ performance has been impacted by increases in the minimum wage, food costs and energy costs. The decline in guest counts together with increased operating costs have negatively impacted the Debtors’ performance. These issues have significantly hampered the Debtors’ ability to service their non-trade-related debt and caused a current liquidity strain. 14. In recent months, the Debtors have diligently evaluated, in consultation with their professionals, a number of options to address the Debtors’ current financial issues. These efforts have included sharing information with and engaging in discussions with the Debtors’ secured lenders, bondholders and stockholders with the goal of consensually restructuring the Debtors’ balance sheet to bring it into line with the Debtors’ current debt servicing capabilities. In connection with those efforts, the Debtors entered into the Forbearance Agreement in an effort to allow sufficient time to negotiate a consensual restructuring with their creditor constituencies and to help ensure that the Debtors would have debtor-in-possession financing in place in the event a bankruptcy filing became necessary. Thereafter, the Debtors continued sharing information with and talking to the Prepetition Secured Lenders and certain holders of the Senior Notes. However, further deterioration in the Debtors’ liquidity necessitated the commencement of these cases before substantial progress could be made on a restructuring of the Debtors’ balance sheet. RELIEF REQUESTED 15. By this Motion, the Debtors seek entry of an order authorizing the Debtors, in their sole discretion, to pay certain prepetition claims of certain Critical Vendors (the “Critical Vendor Claims”) that are essential to the Debtors’ business operations, in an aggregate amount not to exceed $3.8 million (the “Critical Vendor Cap”). 2 16. Concurrently with the filing of this Motion, the Debtors are filing a motion seeking authority to pay claims of providers of goods received by the Debtors within 20 days of the Petition Date in accordance with 11 U.S.C. § 503(b)(9) (the “Twenty-Day Claims Motion”) as well as a motion seeking authority to pay the holders of claims under the Perishable Agricultural Commodities Act of 1930, as amended, 7 U.S.C. §§ 499(a), et seq. (the “PACA Motion”). It is expected that, if granted, a large portion of the claims held by the Critical Vendors will be paid pursuant to the Twenty-Day Claims Motion and a modest amount of the Critical Vendors’ Claims are covered under the PACA Motion. Because of this, the Critical Vendor Cap is net of any amounts planned to be paid to the Critical Vendors under the Twenty-Day Claims Motion and the PACA Motion. However, given the critical nature of the goods 2 The

Debtors reserve the right to seek to increase the Critical Vendor Cap if necessary, subject to this Court’s approval.

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provided by the Critical Vendors, it is imperative that the Debtors be authorized to pay the Critical Vendor Claims in their entirety to the extent not covered by the Twenty Day Claims Motion or the PACA Motion. Finally, to the extent the Twenty-Day Claims Motion and/or the PACA Motion are not granted in its entirety, the Debtors reserve the right to seek to modify the Critical Vendor Cap. 17. The Debtors also seek authority to pay, in the Debtors’ sole discretion, the Freight Claims (as defined below) and thereby discharge any Liens (as defined below) that are asserted against the Debtors’ property. A. Critical Vendor Claims 18. The Debtors believe that immediate payment of the claims of the approximately one dozen Critical Vendors is not only critical to the Debtors’ reorganization efforts, but immediately necessary in light of the industry in which the Debtors operate. The Critical Vendors generally consist of the parties that supply, either directly or as a distributor, food, beverages and goods related to the prepetition thereof for the Debtors’ restaurants. As of the Petition Date, the Debtors owned and operated in excess of 600 restaurants that service approximately 3.8 million customers per week countrywide. To operate these restaurants, the Debtors rely on deliveries of a variety of groceries, meats, beverages and items related to the preparation thereof two to three times per week that ultimately stock the Debtors’ scatter-bar buffets. If the delivery of these products is stopped or delayed for even one day, the Debtors could not operate their business. Without a full supply of food and beverages, the Debtors would be extremely disadvantaged in a highly competitive market segment and would suffer an immediate erosion in customer, creditor and employee trust and confidence which would be difficult, if not impossible, to restore. For these and the other reasons stated herein and in the First Day Declaration, the Debtors believe that the relief requested herein is necessary to avoid immediate and irreparable harm. See Fed.R.Bankr.P. 6003(b). 19. The Critical Vendors are the suppliers of vital food, beverages and related products that are absolutely critical to the Debtors’ ability to operate these restaurants day-to-day. The Debtors believe that the failure to pay the Critical Vendor Claims would, in the Debtors’ business judgment, result in the Critical Vendors refusing to provide goods to the Debtors post-petition which could have an immediately devastating effect on the Debtors’ ability to operate their restaurants. Moreover, the delay attendant to the Debtors changing from a Critical Vendor to another vendor of similar products (assuming one could be located) would very likely delay the Debtors’ ability to operate its business which would be devastating to the Debtors’ operations. 20. The Debtors and their advisors have critically examined whether the payment of Critical Vendor Claims is necessary, will ameliorate immediate and irreparable harm to the Debtors’ business operations and will ensure that the Debtors have access to adequate trade credit post-petition. Specifically, the Debtors have undertaken a thorough review of their accounts payable and their list of prepetition vendors to identify those vendors who are essential to the Debtors’ operations. The Debtors have further developed certain procedures (for which they seek this Court’s approval) that, when implemented, will ensure that the Debtors derive value for payments to Critical Vendors such that

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vendors receiving payment of Critical Vendor Claims will continue to supply trade credit necessary to the Debtors’ operations on a post-petition basis. 21. In determining an estimate of the Critical Vendor Claims the Debtors seek relief to potentially pay pursuant to this Motion, the Debtors consulted with the appropriate members of their management team to identify those vendors that are most essential to the Debtors’ operations, using the following criteria: (a) whether the vendor in question is a “sole-source” or “limited source” provider, (b) whether the Debtors receive advantageous pricing or other terms from a vendor such that replacing the vendor post-petition would result in significantly higher costs to the Debtors, and (c) the overall impact on the Debtors’ operations if the particular Critical Vendor ceased or delayed shipments 22. After evaluating the information received in response to these inquiries, the Debtors estimated the total payments that would be necessary to ensure the continued supply of critical goods to the Debtors and, further, considered the Debtors’ urgent need to continue to receive goods uninterrupted, their ability to find alternate sources and the likelihood that a vendor would extend trade terms post-petition despite the Debtors’ failure to pay such vendors prepetition outstanding trade debt. The Debtors also considered whether and how much a vendor might be paid under the Twenty Day Claims Motion and the PACA Motion, if those motions are granted. Based on the foregoing considerations, the Debtors were able to identify approximately 12 vendors—the Critical Vendors—whose cessation of deliveries could cripple a large number of the Debtors’ restaurants and, therefore, result in immediate and irreparable harm. 23. The Debtors propose to condition the payment of Critical Vendor Claims on the agreement of the individual Critical Vendor to continue supplying goods to the Debtors on terms that are consistent with the historical trade terms between the parties (the “Customary Trade Terms”). However, the Debtors reserve the right to negotiate different trade terms with any Critical Vendor, as a condition to payment of any Critical Vendor Claim, to the extent the Debtors determine that such trade terms are necessary to procure essential goods or are otherwise in the best interests of the Debtors’ estates. 24. The Debtors propose that a letter be sent to the Critical Vendors, along with a copy of the order granting this Motion, in substantially the form attached hereto as Exhibit A (the “Order”), including, without limitation, the following terms: (a) The amount of such Critical Vendor’s estimated prepetition claim, after accounting for any setoffs, other credits and discounts thereto, shall be as mutually determined in good faith by the Critical Vendor and the Debtors (but such amount shall be used only for purposes of the Order and shall not be deemed a claim allowed by the Court, and the rights of all parties in interest to object to such claim shall be fully preserved until further order of the Court); (b) The Critical Vendor’s agreement to be bound by the Customary Trade Terms (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, coupon reconciliation, normal

5.2

(c)

(d)

(e) (f) (g)


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product mix and availability and other applicable terms and programs), which were favorable to the Debtors and in effect between such Critical Vendor and the Debtors on a historical basis for the period within onehundred twenty (120) days of the Petition Date, or such other trade terms as mutually agreed to by the Debtors and such Critical Vendor; The Critical Vendor’s agreement to provide goods to the Debtors based upon Customary Trade Terms, and the Debtors’ agreement to pay the Critical Vendor in accordance with such terms; The Critical Vendor’s agreement not to file or otherwise assert against any of the Debtors, their estates or any of their respective assets or property (real or personal) any lien (a “Lien”) (regardless of the statute or other legal authority upon which such Lien is asserted) related in any way to any remaining prepetition amounts allegedly owed to the Critical Vendor by the Debtors arising from goods provided to the Debtors prior to the Petition Date, and that, to the extent that the Critical Vendor has previously obtained such a Lien, the Critical Vendor shall immediately take all necessary actions to release such Lien; The Critical Vendor’s acknowledgment that it has reviewed the terms and provisions of the Order and consents to be bound thereby; The Critical Vendor’s agreement that it will not separately assert or otherwise seek payment of any reclamation claims; and The Critical Vendor’s agreement that it has received payment of a prepetition claim but subsequently refuses to supply goods to the Debtors on Customary Trade Terms, any payments received by the Critical Vendor on account of its Critical Vendor Claim will be deemed to have been in payment of then outstanding post-petition obligations owed to such Critical Vendor, and that such Critical Vendor shall immediately repay to the Debtors any payments received on account of its Critical Vendor Claim to the extent that the aggregate amount of such payments exceed the post-petition obligations then outstanding, without the right of setoff or reclamation.

25. Such a letter, once agreed to and accepted by a Critical Vendor, shall be the agreement between the parties that governs their post-petition trade relationship (the “Trade Agreement”). The Debtors hereby seek authority to enter into Trade Agreements with the Critical Vendors if the Debtors determine, in their discretion, that such an agreement is necessary to their post-petition operations. In the event that the Debtors are unable to enter into a Trade Agreement with any Critical Vendor, however, the Debtors nevertheless seek authority to pay such vendor’s Critical Vendor Claim if the Debtors determine, in their sole discretion, that such payment is necessary to prevent irreparable harm to the Debtors’ business operations, such as the potential shutdown of one or more of the Debtors’ restaurants. 26. For those Critical Vendors who have agreed to provide goods to the Debtors on terms different from their Customary Trade Terms, the Debtors reserve the right to seek written acknowledgment of such terms on a case-bycase basis.

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27. If a Critical Vendor refuses to supply goods to the Debtors on Customary Trade Terms following payment of its Critical Vendor Claim, or fails to comply with any Trade Agreement it entered into with the Debtors, the Debtors hereby seek authority to, in their discretion and without further order of the Court, (i) declare that any Trade Agreement between the Debtors and such Critical Vendor is terminated (if applicable), and (ii) declare that any payments made to such Critical Vendor on account of its Critical Vendor Claim, whether pursuant to a Trade Agreement or otherwise, be deemed to have been in payment of thenoutstanding post-petition claims of such Critical Vendor without further order of the Court. 28. In the event the Debtors exercise either of the rights set forth in the preceding paragraph, the Debtors request that the Critical Vendor against which the Debtors exercise such rights be required to immediately return to the Debtors any payments made on account of its Critical Vendor Claim to the extent that such payments exceed the post-petition amounts then owed to such Critical Vendor, without giving effect to any rights of setoff or reclamation. In essence, the Debtors seek to return the parties to their respective positions immediately prior to entry of the Order in the event a Trade Agreement is terminated or a Critical Vendor refuses to supply goods to the Debtors on Customary Trade Terms following payment of its Critical Vendor Claim.

B. Freight Claims 29. In connection with the day-to-day operation of their business, the Debtors utilize certain Freight Carriers that are operated by third parties to transport goods or equipment that are necessary in the operation of their business. As a result, at any point in time, the Freight Carriers may be in possession of certain of the Debtors’ goods or equipment and may have claims for transportation and related services related thereto (collectively, the “Freight Claims”). 30. While the Debtors believe the Freight Claims are de minimis, it is nonetheless essential to the Debtors’ continued viability and the success of their business that they maintain the reliable and efficient flow of goods and equipment to their restaurants. Moreover, the Debtors believe that the Freight Carriers may argue that they are entitled to possessory or similar liens for the storage and/or transport of the goods or equipment in their possession as of the Petition Date and may refuse to deliver or release such goods or equipment before their claims have been satisfied and their liens discharged. Accordingly, it is imperative that the Debtors be authorized to pay the Freight Claims to (a) ensure that the essential services provided by the Freight Carriers are available to the Debtors without interruption, and (b) preserve to the fullest extent possible the Debtors’ relationships with their customers and, in turn, the value of the Debtors’ business for the benefit of their estates and their creditors. 31. The Debtors estimate that, as of the Petition Date, the aggregate amount of prepetition Freight Claims for which they seek authority to pay postpetition will not exceed $100,000.

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BASIS FOR RELIEF 32. The Court’s general equitable powers are codified in section 105(a) of the Bankruptcy Code. Section 105(a) empowers the Court to “issue any order, process, or judgment that is necessary to carry out the provisions of this title.” 11 U.S.C. § 105(a). A bankruptcy court’s use of its equitable powers to “authorize the payment of prepetition debt when such payment is needed to facilitate the rehabilitation of the debtor is not a novel concept.” In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984)). Under section 105(a), a court “can permit pre-plan payment of a prepetition obligation when essential to the continued operation of the debtor.” In re NVR L.P., 147 B.R. 126, 127 (Bankr. E.D. Va. 1992); see also In re Just for Feet, Inc., 242 B.R. 821, 826 (D. Del. 1999) (“To invoke the necessity of payment doctrine, a debtor must show that payment of the prepetition claims is critical to the debtor’s reorganization.”) (internal quotation omitted). 33. Section 363(b)(1) of the Bankruptcy Code authorizes the trustee to use property of the estate other than in the ordinary course of business after notice and a hearing. 11 U.S.C. § 363(b)(1). Pursuant to Fed.R.Bankr.P. 6003(b), authorization to utilize property of the estate, “including a motion to pay all or part of a claim that arose before the filing of the petition. . . [,]” may not be granted in the first twenty days of a bankruptcy case, except “to the extent that relief is necessary to avoid immediate and irreparable harm. . .” Fed.R.Bankr.P. 6003(b). 34. The “necessity of payment” rule further supports the relief requested in this Motion. See, e.g., In re Just for Feet, Inc., 242 B.R. at 826 (authorizing payment of prepetition claims of trade creditors that continue customary trade terms). The “necessity of payment” doctrine “recognizes the existence of the judicial power to authorize a debtor in a reorganization case to pay prepetition claims where such payment is essential to the continued operation of the debtor.” Ionosphere Clubs, 98 B.R. at 176; In re Chateaugay Corp., 80 B.R. 279 (S.D.N.Y. 1987). This rule is consistent with the paramount goal of chapter 11, i.e., “facilitating the continued operation and rehabilitation of the debtor. . . .” Ionosphere Clubs, 98 B.R. at 176. 35. The Debtors believe that obtaining immediate authorization to pay Critical Vendor Claims is vital to their continued viability. Specifically, the Debtors believe that any delay or interruption in supply of the goods provided by the Critical Vendors, however temporary it might be, would immediately jeopardize the Debtors’ continued ability to operate its business and generate revenues. Because the Debtors’ suppliers typically deliver the necessary produce, meats, other perishable food items, beverages and goods related to the preparation thereof two to three times per week, the supply of goods provided by the Critical Vendors supports the operations at any single restaurant for a matter of days, rather than weeks or months. Thus, even a one-day delay in food deliveries could severely disrupt hundreds of the Debtors’ restaurants. 36. In light of these considerations, granting the relief requested herein is compelling. Indeed, unless authorized to pay the Critical Vendor Claims, the Debtors’ business operations may likely be significantly threatened by immediate shut down which could immediately and irreparably jeopardize the Debtors’ restructuring efforts.

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37. The Debtors additionally believe that continuation of their favorable business relations with the Freight Carriers is important to the successful outcome of their chapter 11 cases and that the payment of certain prepetition claims is essential to assure the same. With respect to the Freight Carriers, in addition to the justifications set forth above, the Debtors believe that their failure to pay the Freight Claims may result in the assertion of possessory liens by the respective claimants under applicable state law with respect to any goods or equipment in their possession. Pursuant to section 362(b)(3) of the Bankruptcy Code, the act of perfecting such Liens, to the extent consistent with section 546(b) of the Bankruptcy Code,3 is expressly excluded from the automatic stay otherwise imposed by section 362(a) of the Bankruptcy Code. 38. Moreover, to protect their asserted Lien rights, the Freight Carriers may refuse to release goods or equipment in their possession unless and until their prepetition claims for services have been satisfied. Therefore, notwithstanding the automatic stay imposed by section 362 of the Bankruptcy Code, the Freight Carriers (a) may be entitled to assert and perfect Liens against the Debtors’ property, which would entitle them to payment ahead of other general unsecured creditors in any event; and (b) may hold the property subject to the asserted Liens pending payment, to the direct detriment of the Debtors and their estates. 39. Since the amount of any Freight Claims likely is less than the value of any property securing those claims, the Freight Carriers holding lien rights arguably are fully secured creditors. In general, pursuant to section 506 of the Bankruptcy Code, fully secured creditors are entitled to receive (a) payment in full of their prepetition claims pursuant to any confirmed plan(s) of reorganization in these chapter 11 cases, and (b) the postpetition interest accruing on such claims to the extent such claims are oversecured. Consequently, payment of the Freight Claims will: (a) give the Freight Carriers no more than that to which they otherwise would be entitled under a plan(s); and (b) save the Debtors the interest costs that otherwise may accrue on the Freight Claims during these chapter 11 cases. 40. The Debtors submit that nothing in this Motion is intended or should be construed: (a) as an admission as to the validity of any claim or Lien, including, but not limited to, any claim or Lien of a Freight Carrier against the Debtors or their estates; (b) as a waiver of the Debtors’ right to dispute any claim or Lien, including, but not limited to, any claim or Lien asserted by a Freight Carrier; (c) as approval or assumption of any agreement, contract or lease pursuant to section 365 of the Bankruptcy Code; or (d) to prejudice any of the Debtors’ rights to seek relief under any section of the Bankruptcy Code on account of any amounts owed or paid to any Freight Carrier. 41. For all of the foregoing reasons, the Debtors seek authority, pursuant to sections 105(a), 363 and 506(b) of the Bankruptcy Code, to (a) pay, in the Debtors’ sole discretion, the undisputed amounts owed by the Debtors on account of outstanding Critical Vendor Claims and Freight Claims, and (b) discharge any Liens asserted against the Debtors’ property. 3 Under

section 546(b) of the Bankruptcy Code, a debtor’s lien avoidance powers “are subject to any generally applicable law that . . . permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection. . . .” 11 U.S.C. § 546(b)(1)(A).

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NOTICE 42. Notice of this Motion has been provided to: (i) the Office of the United States Trustee; (ii) the Debtors’ forty (40) largest unsecured creditors on a consolidated basis; (iii) counsel to the administrative agent for the Debtors’ pre-petition secured lenders; (iv) counsel to the administrative agent for the Debtors’ proposed post-petition lenders; (v) counsel to the Indenture Trustee under the Senior Notes; and (vi) counsel to certain holders of the Senior Notes. In light of the nature of the relief requested herein, the Debtors submit that no other or further notice is necessary. WHEREFORE, each of the Debtors respectfully hereby moves this Court for entry of an order granting the relief requested in the Motion and such further relief as is just and proper. Dated: Wilmington, Delaware January 22, 2008 YOUNG CONAWAY STARGATT & TAYLOR, LLP

Pauline K. Morgan (No. 3650) Joel A. Waite (No. 2925) Joseph M. Barry (No 4221) Sean T. Greecher (No. 4484) The Brandywine Building 1000 West Street, 17th Floor Wilimington, Delaware 19801 Telephone: (302) 571-6600 Facsimile: (302) 571-1253 Proposed Counsel for the Debtors and Debtors in Possession

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(b) Order Authorizing Payment of Critical Vendors EXHIBIT A: PROPOSED ORDER IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


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Jointly Administered Ref. Docket No.

ORDER AUTHORIZING THE PAYMENT OF CERTAIN PREPETITION CLAIMS OF CERTAIN CRITICAL VENDORS AND FREIGHT CARRIERS Upon the Motion2 of the above-captioned debtors and debtors-in-possession for entry of an order authorizing the Debtors, in their discretion, to pay the prepetition claims of certain critical vendors and service providers; and upon consideration of the Motion and all pleadings related thereto, including the First Day Declaration; and the Court finding that (a) the Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, (b) this matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), and (c) notice of the Motion was due and proper under the circumstances; and it appearing that the relief requested in the Motion is in the best interests of the Debtors, their estates and creditors; and after due deliberation and good and sufficient cause appearing therefor, it is hereby: ORDERED, that the Motion is granted; and it is further ORDERED, that the Debtors are authorized, in their sole discretion and in the reasonable exercise of their business judgment, to pay certain prepetition claims of certain Critical Vendors (the “Critical Vendor Claims”) subject to the conditions set forth in this Order; and it is further ORDERED, that the Debtors’ payment of the Critical Vendor Claims shall not exceed $3.8 million (the “Critical Vendor Cap”) in the aggregate unless otherwise ordered by the Court; and it is further 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification

number, are: Buffets Holdings, Inc. (4018); Buffets, Inc. (2294); HomeTown Buffet, Inc. (3002); OCB Restaurant Company, LLC (7607); OCB Purchasing Co. (7610); Buffets Leasing Company, LLC (8138); Ryan’s Restaurant Group, Inc. (7895); Buffets Franchise Holdings, LLC (8749); Tahoe Joe’s, Inc. (7129); HomeTown Leasing Company, LLC (8142); OCB Leasing Company, LLC (8147); Big R Procurement Company, LLC (5198); Ryan’s Restaurant Leasing Company, LLC (7405); Fire Mountain Restaurants, LLC (8003); Ryan’s Restaurant Management Group, LLC (6739): Tahoe Joe’s Leasing Company, LLC (8145); Fire Mountain Leasing Company, LLC (7452); Fire Mountain Management Group, LLC (7299). The address for all of the Debtors is 1460 Buffet Way, Eagan, MN 55121. 2 Capitalized terms used but otherwise not defined herein shall have the meaning ascribed to such terms in the Motion.

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ORDERED, that the Debtors shall undertake all appropriate efforts to cause each Critical Vendor to enter into an agreement with the Debtors (the “Trade Agreement”), including, but not limited to, the following terms: (a) The amount of such Critical Vendor’s estimated prepetition claim, after accounting for any setoffs, other credits and discounts thereto, shall be as mutually determined in good faith by the Critical Vendor and the Debtors (but such amount shall be used only for purposes of the Order and shall not be deemed a claim allowed by the Court, and the rights of all parties in interest to object to such claim shall be fully preserved until further order of the Court); (b) The Critical Vendor’s agreement to be bound by the Customary Trade Terms (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, coupon reconciliation, normal product mix and availability and other applicable terms and programs), which were favorable to the Debtors and in effect between such Critical Vendor and the Debtors on a historical basis for the period within onehundred twenty (120) days of the Petition Date, or such other trade terms as mutually agreed to by the Debtors and such Critical Vendor; (c) The Critical Vendor’s agreement to provide goods to the Debtors based upon Customary Trade Terms, and the Debtors’ agreement to pay the Critical Vendor in accordance with such terms; (d) The Critical Vendor’s agreement not to file or otherwise assert against any of the Debtors, their estates or any of their respective assets or property (real or personal) any lien (a “Lien”) (regardless of the statute or other legal authority upon which such Lien is asserted) related in any way to any remaining prepetition amounts allegedly owed to the Critical Vendor by the Debtors arising from goods provided to the Debtors prior to the Petition Date, and that, to the extent that the Critical Vendor has previously obtained such a Lien, the Critical Vendor shall immediately take all necessary actions to release such Lien; (e) The Critical Vendor’s acknowledgment that it has reviewed the terms and provisions of the Order and consents to be bound thereby; (f) The Critical Vendor’s agreement that it will not separately assert or otherwise seek payment of any reclamation claims; and (g) The Critical Vendor’s agreement that it has received payment of a prepetition claim but subsequently refuses to supply goods to the Debtors on Customary Trade Terms, any payments received by the Critical Vendor on account of its Critical Vendor Claim will be deemed to have been in payment of then outstanding post-petition obligations owed to such Critical Vendor, and that such Critical Vendor shall immediately repay to the Debtors any payments received on account of its Critical Vendor Claim to the extent that the aggregate amount of such payments exceed the post-petition obligations then outstanding, without the right of setoff or reclamation. ORDERED, that the Debtors may, in their sole discretion, declare a Trade Agreement with an individual Critical Vendor to have terminated, together

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with the other benefits to the Critical Vendor as contained in this Order, on the date the Debtors deliver notice to the Critical Vendor that the Critical Vendor has not complied with the terms and provisions of the Trade Agreement or has failed to continue to provide Customary Trade Terms to the Debtors; and it is further ORDERED, that if a Trade Agreement is terminated as set forth above, or a Critical Vendor who has received payment of a prepetition claim later refuses to continue to supply goods to the Debtors on Customary Trade Terms during the pendency of these chapter 11 cases, the Debtors may, in their discretion, declare that provisional payments made to the Critical Vendor on account of prepetition Trade Claims be deemed to have been in payment of then outstanding post-petition amounts owed to such Critical Vendor without further order of the Court or action by any person or entity. A Critical Vendor shall then immediately repay to the Debtors any payments made to it on account of its Critical Vendor Claim to the extent that such payments exceed the postpetition amounts then owing to such Critical Vendor, without the right of setoff or reclamation, it being the express intention of this Court to return the parties to the status quo in effect as of the date of entry of this Order with respect to all prepetition claims if a Trade Agreement is terminated; and it is further ORDERED, that the execution of a Trade Agreement by the Debtors shall not be declared a waiver of any other cause of action, including avoidance actions, that may be held by the Debtors; and it is further ORDERED, that the Debtors are authorized, in the Debtors’ sole discretion, to pay Freight Claims in an amount not to exceed $100,000 absent for the order of the Court; and it is further ORDERED, that upon the Debtors’ payment of the Freight Claims, any Lien securing such Freight Claim shall be immediately released, void and of no further force and effect, without further action by the Debtors; and it is further ORDERED, that nothing in the Motion or this Order, or the Debtors’ payment of any claims pursuant to this Order, shall be deemed or construed: (a) as an admission as to the validity of any claim or Lien, including, but not limited to, any claim or Lien of a Freight Carrier against the Debtors or their estates; (b) as a waiver of the Debtors’ rights to dispute any claim or Lien, including, but not limited to, any claim or Lien asserted by a Freight Carrier; (c) as approval or assumption of any agreement, contract or lease pursuant to section 365 of the Bankruptcy Code; or (d) to prejudice any of the Debtors’ rights to seek relief under any section of the Bankruptcy Code on account of any amounts owed or paid to any Freight Carrier; and it is further ORDERED, that this Court shall retain jurisdiction with respect to all matters arising from or related to the implementation of this Order; and it is further ORDERED that notwithstanding any applicability of Federal Rule of Bankruptcy Procedure 6004(g), the terms and conditions of this Order shall be immediately effective and enforceable upon its entry. Dated: Wilmington, Delaware , 2008 UNITED STATES BANKRUPTCY JUDGE

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Section 503(b)(9) Motion and Order to Pay 503(b)(9) Expenses

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Objectives. Section 5.38 of Volume 1 describes the change in the Bankruptcy Code by the 2005 Act to provide an administrative expense claim for goods delivered with 20 days prior to filing. The motion by Buffets illustrates how a request for the court to authorize the payment of 503(b)(9) administrative expenses might be constructed. The order issued by the bankruptcy court follows. (a) Motion to Pay 503(b)(9) Expenses IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


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DEBTORS’ MOTION FOR ORDER PURSUANT TO SECTIONS 105(a), 503(b), AND 507(a) OF THE BANKRUPTCY CODE AUTHORIZING DEBTORS TO PAY CERTAIN PREPETITION CLAIMS OF SUPPLIERS AND VENDORS OF GOODS ENTITLED TO ADMINISTRATIVE PRIORITY The debtors and debtors in possession in the above-captioned cases (collectively, the “Debtors”) hereby move for entry of an order, pursuant to sections 105(a), 503(b), and 507(a) of title 11 of the United States Code (the “Bankruptcy Code”), authorizing Debtors to pay the prepetition claims of certain suppliers of goods entitled to administrative priority. In support of the Motion, the Debtors rely upon and incorporate by reference the Declaration of A. Keith Wall in Support of Chapter 11 Petitions and First Day Motions (“First Day Declaration”), which was filed with the Court concurrently herewith. In further support of the Motion, the Debtors, by and through their undersigned counsel, respectfully represent: 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are: Buffets Holdings, Inc. (4018); Buffets, Inc. (2294); HomeTown Buffet, Inc. (3002); OCB Restaurant Company, LLC (7607); OCB Purchasing Co. (7610); Buffets Leasing Company, LLC (8138); Ryan’s Restaurant Group, Inc. (7895); Buffets Franchise Holdings, LLC (8749); Tahoe Joe’s, Inc. (7129); HomeTown Leasing Company, LLC (8142); OCB Leasing Company, LLC (8147); Big R Procurement Company, LLC (5198); Ryan’s Restaurant Leasing Company, LLC (7405); Fire Mountain Restaurants, LLC (8003); Ryan’s Restaurant Management Group, LLC (6739): Tahoe Joe’s Leasing Company, LLC (8145); Fire Mountain Leasing Company, LLC (7452); Fire Mountain Management Group, LLC (7299). The address for all of the Debtors is 1460 Buffet Way, Eagan, MN 55121.

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JURISDICTION 1. This Court has jurisdiction to consider this Motion pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue of these cases and this Motion in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The statutory predicates for the relief requested herein are sections 105(a), 503(b), and 507(a) of the Bankruptcy Code. BACKGROUND A. Introduction 2. Today (the “Petition Date”) each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 3. The Debtors continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or official committee of unsecured creditors has been appointed in these cases. B. Overview of the Debtors’ Businesses 4. The Debtors comprise the nation’s largest steak-buffet restaurant chain and the second largest restaurant company in the family dining segment of the restaurant industry. The restaurants principally operate under the names Old R R R , Country Buffet , HomeTown Buffet (collectively the “BufCountry Buffet R R fets brand”), Ryan’s and Fire Mountain (collectively the “Ryan’s brand”). R The Debtors also own and operate eleven Tahoe Joe’s Famous Steakhouse restaurants (“Tahoe Joe’s”). 5. The Debtors were early innovators of the “scatter bar”—a buffet format believed to reduce the waiting time of customers’ access to food, thereby enhancing the dining experience and increasing table turns. All of the Debtors’ steak-buffet restaurants serve lunch and dinner seven days a week and the Buffets brand restaurants and most of the Ryan’s brand restaurants offer breakfast on Saturdays and Sundays. 6. As of January 14, 2008, the Debtors had 615 company-owned steak-buffet R restaurants and 16 franchised restaurants, 11 Tahoe Joe’s Famous Steakhouse locations collectively operating in 42 states. Approximately two-thirds of the Debtors’ restaurant facilities are freestanding units and one-third are located in strip shopping centers or malls. On average, each of the Buffets brand restaurants served approximately 6,700 customers per week in fiscal 2007, while each Ryan’s brand restaurant served approximately 5,300 customers per week in fiscal 2007. In the aggregate, the Debtors’ restaurants service approximately 3.8 million customers per week. 7. As of January 14, 2008, the Debtors employed over 36,000 employees. Except for approximately 585 corporate employees, nearly half of which work at the Debtors’ corporate headquarters in Eagan, Minnesota, the Debtors’ employees work at the Debtors’ restaurants. C. Corporate and Debt Structure 8. Buffets Holdings, Inc., a Delaware corporation, is a holding company that wholly owns Buffets, Inc., a Minnesota corporation, which is the Debtors’

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principal operating entity and the primary obligor on the Debtors’ prepetition secured bank debt and unsecured bond debt. Buffets, Inc., in turn, is the direct parent of the Debtors HomeTown Buffet, Inc., OCB Restaurant Company, LLC, OCB Purchasing Co., Buffets Leasing Company, LLC, Ryan’s Restaurant Group, Inc. and Buffets Franchise Holdings, LLC (collectively, the “Direct Buffets Subsidiaries”), through which various restaurant functions are operated. Each of the other Debtors is indirectly owned by Buffets, Inc. through one of the Direct Buffets Subsidiaries or a subsidiary thereof. A chart showing the corporate organization of all of the Debtors is annexed to the First Day Declaration as Exhibit A. 9. Buffets, Inc. is a borrower under a secured credit facility with Credit Suisse, as a lender and administrative agent, and certain other lender-parties thereto dated November 1, 2006, as amended on March 13, 2007 and as further amended in early January 2008 by a Forbearance Agreement and Second Amendment to Credit Agreement (the “Forbearance Agreement”) (the credit agreement, as amended, shall hereinafter be referred to as the “Credit Facility”). 10. The Credit Facility is comprised of a term loan in the original principal amount of $530 million (the “Term Loan”), a primary revolving credit facility (the “Primary Revolver”) in the original principal amount of $40 million, and a secondary letter of credit facility in the amount of $70 million (the “Secondary Revolver”). As of January 15, 2008, the outstanding amounts due under the Term Loan, Primary Revolver and Secondary Revolver were approximately $524 million, $40 million and $70 million (comprised of approximately $16.3 million in borrowings and approximately $53.7 million in letter of credit obligations), respectively. The obligations of Buffets, Inc. under the Credit Facility are guaranteed by each of the other Debtors. 11. In addition to the Credit Facility, pursuant to an indenture dated as of November 1, 2006, Buffets, Inc. issued $300 million (original principal amount) of 12.5% senior unsecured notes (as amended from time-to-time, the “Senior Notes”) due November 1, 2014. Interest on the Senior Notes is due semiannually on January 1st and July 1st. As of the Petition Date, the Debtors had not made the interest payment under the Senior Notes due on January 2, 2008 in the amount of approximately $18.75 million. Payment of the Senior Notes is guaranteed by most, if not all, of the other Debtors. 12. In addition to the foregoing, the Debtors also have approximately $55 million in ordinary course trade debt that was unpaid as of the Petition Date.

D. Events Leading to the Debtors’ Bankruptcy Filing 13. A variety of external economic factors have led to a decline in the Debtors’ operating performance. The Debtors believe that the leading adverse factor has been a marked decline in discretionary spending among the Debtors’ core customers. This has resulted from higher gasoline and energy costs, increased debt service loads due to rate increases on adjustable rate mortgages, lower consumer confidence and the general economic downturn. Discretionary consumer spending has been further hampered by the disappearance of readily available credit. This has followed the collapse of the sub-prime mortgage

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market, stagnation of home valuations, and lower available home equity due to previous consumer refinancing efforts. Together, these factors have significantly depressed consumer spending in the family dining segment and negatively impacted the Debtors’ guest counts at their restaurants. Additionally, the Debtors’ performance has been impacted by increases in the minimum wage, food costs and energy costs. The decline in guest counts together with increased operating costs have negatively impacted the Debtors’ performance. These issues have significantly hampered the Debtors’ ability to service their non-trade-related debt and caused a current liquidity strain. 14. In recent months, the Debtors have diligently evaluated, in consultation with their professionals, a number of options to address the Debtors’ current financial issues. These efforts have included sharing information with and engaging in discussions with the Debtors’ secured lenders, bondholders and stockholders with the goal of consensually restructuring the Debtors’ balance sheet to bring it into line with the Debtors’ current debt servicing capabilities. In connection with those efforts, the Debtors entered into the Forbearance Agreement in an effort to allow sufficient time to negotiate a consensual restructuring with their creditor constituencies and to help ensure that the Debtors would have debtor-in-possession financing in place in the event a bankruptcy filing became necessary. Thereafter, the Debtors continued sharing information with and talking to the Prepetition Secured Lenders and certain holders of the Senior Notes. However, further deterioration in the Debtors’ liquidity necessitated the commencement of these cases before substantial progress could be made on a restructuring of the Debtors’ balance sheet. RELIEF REQUESTED 15. By this Motion, and in order to obtain and ensure timely delivery from their suppliers and vendors of food, beverages and goods related to the preparation and service thereof (collectively, the “Goods”), and to help ensure the Debtors have access to post-petition trade credit from the suppliers of these vital Goods, the Debtors seek entry of an order authorizing payment in the ordinary course of prepetition claims of suppliers and vendors entitled to administrative priority under Bankruptcy Code sections 503(b)(9) and 507(a)(2) (such suppliers and vendors together, the “Priority Vendors”) for those undisputed obligations arising from Goods received by the Debtors from such Vendors in the ordinary course of business within 20 days before the Petition Date (such administrative expense claims, “Priority Vendor Claims”). 16. In the ordinary course of the Debtors’ business, numerous Priority Vendors provide the Debtors with Goods that will be essential to the sustained operations of the Debtors both in the short term and during the reorganization period. If the Priority Vendors are not paid in the ordinary course on account of their Priority Vendor Claims, such Priority Vendors are unlikely to provide the Debtors with post-petition trade credit and may refuse to continue providing the Debtors with Goods after the Petition Date. Because the Debtors are in the business of operating over 600 restaurants that rely on necessary deliveries from the Priority Vendors of food, beverages and goods related to the preparation and service thereof multiple times per week, any delay or disruption in the continuous flow of Goods to the Debtors could result in an

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immediate shut down of the Debtors’ restaurants. As of the Petition Date, the Debtors estimate that the Priority Vendor Claims total approximately $32.7 million. 17. Absent the relief requested in this Motion, the Debtors would face the very real possibility that Priority Vendors would cease delivery of Goods, causing a significant disruption to, if not cessation of, the Debtors’ business. An order of this Court confirming that all obligations of the Debtors arising from Goods delivered in the ordinary course of the Debtors’ business in the 20 days prior to the Petition Date may be paid by the Debtors in the ordinary course pursuant to Bankruptcy Code sections 503(b)(9) and 507(a)(2) will help ensure continuous delivery of Goods to the Debtors. Accordingly, the relief requested should be granted because it is critical to the Debtors’ continued operation and, consequently, is in the best interests of creditors and the estates. A. Proposed Terms and Conditions of Payment of Priority Vendor Claims 18. The Debtors hereby request authorization to pay the Priority Vendor Claims, as determined by the Debtors in their sole discretion, in order to continue receiving the Goods provided by the Priority Vendors. Subject to the terms set forth below, the Debtors propose to condition the payment of Priority Vendor Claims on the agreement of individual Priority Vendors to continue supplying Goods to the Debtors on the trade terms that such Priority Vendors provided Goods to the Debtors on a historical basis prior to the Petition Date (the “Customary Trade Terms”), or pursuant to such other favorable trade practices and programs that are agreed to by the Debtors. The Debtors reserve the right to negotiate new trade terms with any Priority Vendor as a condition to payment of any Priority Vendor Claim. 19. To ensure that the Priority Vendors continue to deal with the Debtors on the Customary Trade Terms, the Debtors propose that a letter agreement (a “Trade Agreement”)2 be sent to the Priority Vendors for execution, together with a copy of the Order granting this Motion. 20. The Debtors propose that each Trade Agreement include, without limitation the following terms: (a) The amount of such Priority Vendor’s estimated prepetition claim, after accounting for any setoffs, other credits and discounts thereto, shall be as mutually determined in good faith by the Priority Vendor and the Debtors (but such amount shall be used only for purposes of the Order and shall not be deemed a claim allowed by the Court, and the rights of all parties in interest to object to such claim shall be fully preserved until further order of the Court); (b) The Priority Vendor’s agreement to be bound by the Customary Trade Terms (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, coupon reconciliation, normal product mix and availability and other applicable terms and programs), 2 The

Debtors’ entry into a Trade Agreement shall not change the nature or priority of the underlying Priority Vendor Claims, and shall not constitute an assumption or rejection of any executory contract or prepetition or postpetition agreement between the Debtors and a Priority Vendor.

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(c)

(d)

(e) (f) (g)


which were favorable to the Debtors and in effect between such Priority Vendor and the Debtors on a historical basis during the period within one hundred twenty (120) days of the Petition Date, or such other trade terms as mutually agreed to by the Debtors and such Priority Vendor; The Priority Vendor’s agreement to provide goods and services to the Debtors based upon Customary Trade Terms, and the Debtors’ agreement to pay the Priority Vendor in accordance with such terms; The Priority Vendor’s agreement not to file or otherwise assert against any of the Debtors, their estates or any of their respective assets or property (real or personal) any lien (a “Lien”) (regardless of the statute or other legal authority upon which such Lien is asserted) related in any way to any remaining prepetition amounts allegedly owed to the Priority Vendor by the Debtors arising from goods or services provided to the Debtors prior to the Petition Date, and that, to the extent that the Priority Vendor has previously obtained such a Lien, the Priority Vendor shall immediately take all necessary actions to release such Lien; The Priority Vendor’s acknowledgment that it has reviewed the terms and provisions of the Order and consents to be bound thereby; The Priority Vendor’s agreement that it will not separately assert or otherwise seek payment of any reclamation claims; and The Priority Vendor’s agreement that it has received payment of a prepetition claim but subsequently refuses to supply goods to the Debtors on Customary Trade Terms, any payments received by the Priority Vendor on account of its Priority Vendor Claim will be deemed to have been in payment of then outstanding post-petition obligations owed to such Priority Vendor, and that such Priority Vendor shall immediately repay to the Debtors any payments received on account of its Priority Vendor Claim to the extent that the aggregate amount of such payments exceed the post-petition obligations then outstanding, without the right of setoff or reclamation.

21. By this Motion, the Debtors seek only the authority to enter into Trade Agreements when the Debtors determine, in their sole discretion, that payment of such Priority Vendor Claims in the ordinary course is necessary and that such agreements are advisable. The Debtors hereby seek authority to make payments in the ordinary course on account of Priority Vendor Claims, even in the absence of a Trade Agreement, if the Debtors determine, in their business judgment, that failure to pay the Priority Vendor Claims in the ordinary course is likely to result in irreparable harm to the Debtors’ business operations and that they are not reasonably likely to be able to achieve a Trade Agreement with the relevant Priority Vendor.3 22. In the event a Priority Vendor refuses to supply Goods to the Debtors on Customary Trade Terms (or such other terms as are agreed by the parties) following receipt of payment on its Priority Vendor Claim, or fails to comply 3 Nothing

in this Motion should be construed as a waiver by any of the Debtors of their rights to contest any claim of a Priority Vendor under applicable law.

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with any Trade Agreement entered into between such Priority Vendor and the Debtors, then the Debtors hereby seek authority, in their discretion and without further order of the Court, (a) to declare that any Trade Agreement between the Debtors and such Priority Vendor is terminated, (b) to declare that payments made to such Priority Vendor on account of its Priority Vendor Claims be deemed to have been in payment of then-outstanding (or subsequently accruing) postpetition claims of such Priority Vendor without further order of the Court or action by any person or entity, and (c) to recover any payment made to such Priority Vendor on account of its Priority Vendor Claims to the extent that such payments exceeded the postpetition claims of such Priority Vendor, without giving effect to any rights of setoff, claims, provision for payment of reclamation or trust fund claims, or other defense. In sum, in the event a Trade Agreement is terminated or a Priority Vendor refuses to supply Goods to the Debtors on Customary Trade Terms (or such other terms as have been agreed by the parties) following receipt of payment on its Priority Vendor Claim, the Debtors seek authority to return the parties to the positions they held immediately prior to the entry of the Order approving this Motion with respect to all prepetition claims. In addition, the Debtors reserve the right to seek damages or other appropriate remedies against any breaching Priority Vendor. 23. The Debtors further propose that any Trade Agreement terminated as a result of a Priority Vendor’s refusal to comply with the terms thereof may be reinstated if: (a) the underlying default under the Trade Agreement is fully cured by the Priority Vendor not later than five (5) business days following the Debtors’ notification to the Priority Vendor of such a default; or (b) the Debtors, in their discretion, reach a favorable alternative agreement with the Priority Vendor. BASIS FOR RELIEF

24. Under section 503(b)(9), a claim shall be accorded administrative expense priority where such claim is for the value of any goods received by the debtor within 20 days before the Petition Date if such goods were sold to the debtor in the ordinary course. See 11 U.S.C. § 503(b)(9). Furthermore, under section 507(a)(2), administrative expenses allowed under section 503(b) are granted priority status. See 11 U.S.C. § 507(a)(2). The prepetition vendor claims the Debtors seek to pay by this Motion are entitled to priority status under sections 503(b)(9) and 507(a)(2) of the Bankruptcy Code. The Debtors therefore must pay these claims in full to confirm a plan of reorganization. See 11 U.S.C. § 1129(a)(9)(A) (requiring payment in full of claims entitled to priority under section 507(a)(2)). Thus, granting the relief sought herein would only affect the timing, and not the amount or priority of the claims of Priority Vendors. Therefore, the payment of prepetition Priority Vendor Claims will not prejudice the unsecured creditors of Debtors.

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25. Although Priority Vendor Claims may not be required to be paid prior to confirmation of a Chapter 11 plan, nothing in the Bankruptcy Code prohibits the Debtors from paying such claims sooner if they choose to do so, or this Court from exercising its discretion to authorize the postpetition payment of such obligations prior to confirmation of a chapter 11 plan. See e.g., In re Global Home Products, LLC, 2006 Bankr. LEXIS 360 8 (Bankr. D. Del. December 21, 2006) (holding that timing of payment of section 503(b)(9) claim is within discretion of the Court). Since the enactment of section 503(b)(9), courts in this jurisdiction have exercised their discretion in favor of granting relief similar to the relief requested herein. See, e.g., In re Pliant Corp., Case No. 06-10001 (MFW) (Bankr. D. Del. Feb. 8, 2006); In re Werner Holding Co. (DE), Inc., Case No. 06-10578 (KJC) (Bankr. D. Del. June 13, 2006); In re Dura Automotive Sys., Inc., Case No. 06-11202 (KJC) (Bankr. D. Del. Oct. 31, 2006). Indeed, in granting a request for similar relief, at least one judge in this District observed that, “arguably the debtor could pay its 503(b)(9) claimants without court approval.” In re Dura Automotive Sys., Inc., Case No. 06-11202 (KJC) (Bankr. D. Del. Oct. 31) (approving payment of 503(b)(9) claims as first day relief). 26. As explained above, it is critical to the survival of the Debtors that they continue to receive the Goods from the Priority Vendors in the immediate future on an uninterrupted basis as well as throughout the reorganization process. The Debtors believe that without the relief requested herein, many Priority Vendors may cease delivering Goods to the Debtors, which could have devastating consequences for the Debtors. In addition, by reserving the right to require, as a condition to any payment to a Priority Vendor, that the Priority Vendor enter into a Trade Agreement by which it must agree to deal with the Debtors on Customary Trade Terms, the Debtors anticipate they will be able to enhance their liquidity during these chapter 11 cases to the benefit of their estates and creditors. 27. Accordingly, for all of the foregoing reasons, the Debtors submit that cause exists for granting the relief requested herein.

NOTICE 28. Notice of this Motion has been provided to: (i) the Office of the United States Trustee; (ii) the Debtors’ forty (40) largest unsecured creditors on a consolidated basis; (iii) counsel to the administrative agent for the Debtors’ pre-petition secured lenders; (iv) counsel to the administrative agent for the Debtors’ proposed post-petition lenders; (v) counsel to the Indenture Trustee under the Senior Notes; and (vi) counsel to certain holders of the Senior Notes. In light of the nature of the relief requested herein, the Debtors submit that no other or further notice is necessary.

CONCLUSION WHEREFORE, the Debtors respectfully request that the Court enter an order, substantially in the form annexed hereto as Exhibit A, granting the relief

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requested in the Motion and such other and further relief as may be just and proper. Dated: Wilmington, Delaware January 22, 2008 YOUNG CONAWAY STARGATT & TAYLOR, LLP

Pauline K. Morgan (No. 3650) Joel A. Waite (No. 2925) Joseph M. Barry (No. 4221) Sean T. Greecher (No. 4484) The Brandywine Building 1000 West Street, 17th Floor Wilmington, Delaware 19801 Telephone: (302) 571-6600 Facsimile: (302) 571-1253 Proposed Counsel for the Debtors and Debtors in Possession (b) Order Authorizing Payment of 503(b)(9) Claims EXHIBIT A: PROPOSED ORDER IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


x : : : : : : x


)

Joint Administration Pending Ref. Docket No.



140


ORDER PURSUANT TO BANKRUPTCY CODE SECTIONS 105(a), 503(b), AND 507(a) AUTHORIZING DEBTORS TO PAY CERTAIN PREPETITION CLAIMS OF SUPPLIERS AND VENDORS OF GOODS ENTITLED TO ADMINISTRATIVE PRIORITY Upon the motion (the “Motion”) of the debtors and debtors in possession in the above-captioned cases (collectively, the “Debtors”) for an order, pursuant to sections 105(a), 503(b), and 507(a) of title 11 of the United States Code (the “Bankruptcy Code”), authorizing Debtors to pay certain prepetition claims of suppliers of goods entitled to administrative priority; and upon the Declaration of A. Keith Wall in Support of Chapter 11 Petitions and First Day Motions; and due and sufficient notice of the Motion having been given; and it appearing that no other or further notice need be provided; and it appearing that the relief requested by this Motion is in the best interest of these estates, their creditors, and other parties in interest; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED, ADJUDGED, AND DECREED THAT: 1. The Motion is granted to the extent set forth herein. 2. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Motion. 3. The Debtors are authorized, but not directed, in their sole discretion, to pay in the ordinary course the Priority Vendor Claims in an amount not to exceed $35 million. 4. The Priority Vendors shall have administrative expense claims with priority under sections 503(b) and 507(a)(2) of the Bankruptcy Code for those undisputed obligations arising from shipments of Goods delivered, received and accepted by the Debtors in the ordinary course of business within the 20 days before the Petition Date. 5. The Debtors are authorized, but not directed, to pay, in the ordinary course, their undisputed obligations to Priority Vendors who have an administrative expense claim with priority under sections 503(b) and 507(a)(2) of the Bankruptcy Code for those undisputed obligations arising from shipments of Goods delivered, received and accepted by the Debtors in the ordinary course of business within the 20 days before the Petition Date in an amount not to exceed $35 million. 6. The Debtors are authorized, but not directed, to undertake appropriate efforts to cause Priority Vendors to enter into agreements with the Debtors (the “Trade Agreement”) as a condition of payment of each such Priority Vendor’s Priority Vendor Claims, including, but not limited to, the following terms: (a) The amount of such Priority Vendor’s estimated prepetition claim, after accounting for any setoffs, other credits and discounts thereto, shall be as mutually determined in good faith by the Priority Vendor and the Debtors (but such amount shall be used only for purposes of the Order and shall not be deemed a claim allowed by the Court, and the rights of all parties in interest to object to such claim shall be fully preserved until further order of the Court);

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(b) The Priority Vendor’s agreement to be bound by the Customary Trade Terms (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, coupon reconciliation, normal product mix and availability and other applicable terms and programs), which were favorable to the Debtors and in effect between such Priority Vendor and the Debtors on a historical basis during the period within one hundred twenty (120) days of the Petition Date, or such other trade terms as mutually agreed to by the Debtors and such Priority Vendor; (c) The Priority Vendor’s agreement to provide goods and services to the Debtors based upon Customary Trade Terms, and the Debtors’ agreement to pay the Priority Vendor in accordance with such terms; (d) The Priority Vendor’s agreement not to file or otherwise assert against any of the Debtors, their estates or any of their respective assets or property (real or personal) any lien (a “Lien”) (regardless of the statute or other legal authority upon which such Lien is asserted) related in any way to any remaining prepetition amounts allegedly owed to the Priority Vendor by the Debtors arising from goods or services provided to the Debtors prior to the Petition Date, and that, to the extent that the Priority Vendor has previously obtained such a Lien, the Priority Vendor shall immediately take all necessary actions to release such Lien; (e) The Priority Vendor’s acknowledgment that it has reviewed the terms and provisions of the Order and consents to be bound thereby; (f) The Priority Vendor’s agreement that it will not separately assert or otherwise seek payment of any reclamation claims; and (g) The Priority Vendor’s agreement that it has received payment of a prepetition claim but subsequently refuses to supply goods to the Debtors on Customary Trade Terms, any payments received by the Priority Vendor on account of its Priority Vendor Claim will be deemed to have been in payment of then outstanding post-petition obligations owed to such Priority Vendor, and that such Priority Vendor shall immediately repay to the Debtors any payments received on account of its Priority Vendor Claim to the extent that the aggregate amount of such payments exceed the post-petition obligations then outstanding, without the right of setoff or reclamation. 7. The Debtors are authorized, in their discretion, to make payments on account of a Priority Vendor Claim, subject to the other limits set forth herein, even in the absence of a Trade Agreement if the Debtors determine, in their business judgment, that failure to pay such Priority Vendor Claim is likely to result in irreparable harm to the Debtors’ business operations. 8. If a Priority Vendor refuses to supply Goods to the Debtors on Customary Trade Terms (or such other terms as are agreed by the parties) following receipt of payment on its Priority Vendor Claim (regardless of whether such Priority Vendor has entered into a Trade Agreement), or fails to comply with any Trade Agreement entered into between such Priority Vendor and the Debtors, then the Debtors may, in their discretion and without further order of the Court, (a) declare that any Trade Agreement between the Debtors and such Priority Vendor is terminated, (b) declare that payments made to such Priority

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Vendors on account of its Priority Vendor Claims shall be deemed to have been in payment of then-outstanding or subsequently accruing postpetition claims of such Priority Vendor without further order of the Court or action by any person or entity, and (c) recover any payment made to such Priority Vendor on account of its Priority Vendor Claims to the extent that such payments exceeded the postpetition claims of such Priority Vendor, without giving effect to any rights of setoff, claims, provision of payment of reclamation on trust fund claims or other defense. Under any such circumstances, such Priority Vendor shall immediately repay to the Debtors any payment made to it on account of its Priority Vendor Claims to the extent that such payments exceed the postpetition claims of such Priority Vendor then outstanding, without giving effect to any rights of setoff, claims, provision for payment of reclamation or trust fund claims, or other defense. Nothing herein shall constitute a waiver of the Debtors’ rights to seek damages or other appropriate remedies against any breaching Priority Vendor. 9. Notwithstanding the foregoing, the Debtors may, in their sole discretion, reinstate a Trade Agreement if: (a) the underlying default under the Trade Agreement is fully cured by the Priority Vendor not later than five business days following the Debtors’ notification to the Priority Vendor of such default had occurred; or (b) the Debtors, in their discretion, reach a favorable alternative agreement with the Priority Vendor. 10. Nothing herein shall be construed to limit, or in any way affect, the Debtors’ ability to dispute any Priority Vendor Claim. 11. Nothing contained in this order shall be deemed to constitute an assumption or rejection of any executory contract or prepetition or postpetition agreement between the Debtors and a Priority Vendor or to require the Debtors to make any of the payments authorized herein. 12. This Court shall retain jurisdiction with respect to all matters arising from or related to the implementation and/or interpretation of this Order. 13. Notwithstanding any applicability of Federal Rule of Bankruptcy Procedure 6004(g), the terms and conditions of this Order shall be immediately effective and enforceable upon its entry. Dated: Wilmington, Delaware , 2008 UNITED STATES BANKRUPTCY JUDGE

PART THREE

Accounting Services

6 Rehabilitation Proceedings under the Bankruptcy Code

6.1 Motion and Order Authorizing the KMIP Plan of Reorganization Metric Payment Objective. Section 6.4 of Volume 1 describes the extent to which the 2005 Act limited the use of Key Employments Retention Plans (KERPS) and the circumstances under which debtors have allowed Key Management Incentive Plans (KMIP). The motion and declarations from the Dura Automotive Systems case illustrate the method by which a KMIP may be constructed and accepted by the court. The documents consist of four major sections: 1 Motion and Order Authorizing the KMIP Plan of Reorganization Metric Payment 2 Declaration by Durc Savini as Investment Banker in Support of Motion for Entry of Order Authorizing Plan of Reorganization Metric Payment to Tier I KMIP Participants 3 Declaration by Anthony Flanagan, Financial Advisor for Debtor, in Support of Motion for Entry of an Order Authorizing the Plan of Reorganization Metric Payment to Tier I KMIP Participants 4 Statement of Official Committee of Unsecured Creditors in Support of Debtors’ Motion for Entry of Order Authorizing Plan of Reorganization Metric Payment to Tier I KMIP Participants

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Rehabilitation Proceedings under the Bankruptcy Code

(a) Motion and Order Authorizing the KMIP Plan of Reorganization Metric Payment IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) ) DURA AUTOMOTIVE SYSTEMS, INC., ) ) et al.,1 ) Debtors. ) ) In re

Chapter 11 Case No. 06-11202 (KJC) Jointly Administered Re: Docket No. 2020

ORDER AUTHORIZING THE KMIP PLAN OF REORGANIZATION METRIC PAYMENT Upon the motion (the “Motion”)2 of the Debtors for entry of an order authorizing the Plan of Reorganization Metric Payment; it appearing that the relief requested is in the best interest of the Debtors’ estates and justified by the facts and circumstances of these chapter 11 cases; it appearing that the Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334; it appearing that this proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2); it appearing that venue of this proceeding and the Motion in this District is proper pursuant to 28 U.S.C. §§ 1408 and 1409; notice of the Motion and the opportunity for a hearing on the Motion was appropriate under the particular circumstances and that no other or further notice need by given; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED, that the Motion is granted in its entirety; and it is further ORDERED, that the Plan of Reorganization Metric Payment is approved and authorized, and payments made in contemplation thereof constitute transfers and obligations within the meaning of section 503(c)(3) of the Bankruptcy Code; and it is further ORDERED, that the Plan of Reorganization Metric Payment is justified by the facts and circumstances of these chapter 11 cases; and it is further ORDERED, that the Debtors are authorized to make any such payments without further notice; and it is further ORDERED, that the Plan of Reorganization Metric Payment shall be treated as an administrative expense pursuant to section 503(b)(1)(A) of the Bankruptcy Code; and it is further 1 The

“Debtors” comprise the entities set forth in the order entered by the Court on October 31, 2006, jointly administering these cases pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). 2 Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Motion.

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Motion and Order Authorizing the KMIP Plan of Reorganization Metric Payment

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ORDERED, that the Debtors are authorized to take any and all actions that are contemplated by the Motion or necessary to effectuate this order; and it is further ORDERED, that notwithstanding the possible applicability of Fed.R.Bankr.P. 6004(g), 7062, 9014 or otherwise, the terms and conditions of this order shall be immediately effective and enforceable upon its entry; and it is further ORDERED, that this Court shall retain jurisdiction to hear and determine all matters arising from the implementation of this order.

Dated:

Nov 1

, 2007 Honorable Kevin J. Carey United States Bankruptcy Judge

(b) Declaration by Durc Savini as Investment Banker in Support of Motion for Entry of Order Authorizing Plan of Reorganization Metric Payment to Tier I KMIP Participants in Dura Automotive Systems IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) Chapter 11 ) DURA AUTOMOTIVE SYSTEMS, INC., ) Case No. 06-11202 (KJC) ) et al.,1 In re

Debtors.

) ) Jointly Administered

DECLARATION OF DURC A. SAVINI IN SUPPORT OF MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE PLAN OF REORGANIZATION METRIC PAYMENT TO THE TIER I KMIP PARTICIPANTS I, Durc A. Savini, make this declaration and state the following: 1. I am a Managing Director of Miller Buckfire & Co., LLC (“Miller Buckfire”), investment bankers to the Debtors in these proceedings. All facts set forth in this Declaration are based upon my personal knowledge, information supplied to me by the Debtors and other parties-in-interest, my review of relevant documents or my opinion based upon my knowledge of the Debtors. If I am called upon to testify, I can and will testify competently to the facts set forth herein. I am authorized by the Debtors to submit this Declaration in support of the Debtors’ Motion for Entry of an Order Authorizing the 1 The

“Debtors” comprise the entities set forth in the order entered by the Court on October 31, 2006, jointly administering these cases pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).

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Plan of Reorganization Metric Payment to the Tier I KMIP Participants (the “Motion”).2 I. The Plan of Reorganization Metric Payment 2. In mid April of 2007, the Debtors, the Creditors’ Committee and the Second Lien Group reached agreement over revised terms for the Debtors’ proposed key management incentive plan (the “Revised KMIP”). The Creditors’ Committee proposed that the Tier I KMIP metrics include a Plan of Reorganization Metric, which was designed to encourage the Tier I KMIP Participants to direct these Reorganization Cases quickly and efficiently to a successful outcome. With the filing of the Plan on August 22, 2007, the Debtors have commenced this last stage in the chapter 11 restructuring process. 3. The Debtors’ Plan is based on a number of building blocks: (a) execution of a substantial and wide-ranging operational restructuring program; (b) successful completion of customer negotiations; (c) obtaining a fully backstopped equity rights offering; and (d) the sale of non-core assets such as the Atwood division and several closed plants. All of these building blocks had to be in place, or at least far along, prior to the filing of any viable chapter 11 plan of reorganization. The Tier I KMIP Participants provided the direction, leadership and oversight necessary to ensure the timely achievement of these building blocks, which served as the foundation for the Plan the Debtors filed. II. The Strategic Sale of Non-Core Assets Has Provided the Debtors with an Additional Source of Liquidity to Re-Pay their Postpetition Financing and Fund Their Exit from Chapter 11 4. The Tier I KMIP Participants have continued to implement an aggressive asset divestiture program since presentation of the Business Plan. On August 27, 2007, after weeks of intensive negotiating and marketing efforts, the Debtors consummated the sale of their Atwood Mobile Products division for $160.2 million. As a necessary precondition to the Plan, the successful sale of the Atwood Mobile Products division allowed the Debtors to move forward with their chapter 11 financial reorganization. The Tier I KMIP Participants actively led and participated in the negotiations leading to this sale, including significant elements of the asset purchase agreement and the transition services agreement, and were instrumental in presenting an attractive product for sale. Without them, we could not have timely closed this deal. 5. In addition, the Tier I KMIP Participants continue to actively lead and participate in efforts to market the Debtors’ jacks business, hinges and latches business, certain assets of their non-debtor subsidiaries, and numerous other non-core assets identified in the Business Plan for strategic divestiture. They have, for example, taken the lead by organizing and leading numerous meetings and conference calls in an effort to maximize the value of these non-core assets and address concerns of key constituencies. In addition to the liquidity realized from the sale of their Atwood Mobile Products division, the strategic divestiture of identified non-core and non-performing assets should optimize the Debtors’ manufacturing footprint and allow the reorganized Debtors to maintain more efficient and streamlined operations. 2 Capitalized

Motion.

terms used, but not defined, herein shall have the meanings ascribed to them in the

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III. Securing the Commitment of the Backstop Party to Fully Backstop the Debtors’ Equity Rights Offering Was a Necessary Predicate to Filing the Plan 6. As described in their Motion for Entry of an Order Under Sections 363 and 503 of the Bankruptcy Code Authorizing the Debtors to (i) Enter into a Backstop Rights Purchase Agreement in Connection with a Contemplated Rights Offering, and (ii) Pay Certain Associated Fees [Docket No. 1430] and my declaration in support thereof [Docket No. 1487], I advised the Debtors that their best opportunity to reorganize required a substantial new money equity investment of up to $160 million to fund the Plan, provide additional liquidity and provide an appropriately conservative level of post-emergence financial leverage for the reorganized Debtors. I further advised the Debtors that such an equity raise should be obtained through a rights offering to senior noteholders and that the rights offering must be fully backstopped to reduce the risks associated with an undersubscription of the rights, as well as to facilitate the Debtors’ efforts to obtain exit financing commitments. 7. Following numerous weeks of negotiations with several interested parties, the Tier I KMIP Participants concluded, in consultation with my firm, that a rights offering, backstopped by Pacificor, LLC (the “Backstop Party”), would provide the Debtors with sufficient capital to fund their emergence from chapter 11 and appropriately capitalize the reorganized Debtors (particularly important for automotive suppliers because their customers often mandate certain financial requirements, including acceptable levels of debt). They further concluded, in consultation with my firm, that a fully backstopped rights offering would provide the necessary economic foundation upon which the Debtors could propose and confirm a chapter 11 plan of reorganization. 8. For its part, the Backstop Party agreed to provide its backstop purchase commitment based in large part on the performance improvement opportunities and related implementation plans detailed in the Company’s operational restructuring plan, which the Tier I KMIP Participants developed together with their advisors. 9. The Tier I KMIP Participants participated in the negotiation of, and reviewed and assessed, the backstop agreement term sheet in consultation with my firm, up to the filing of the Backstop Motion on July 12, 2007. Those negotiations led to the initial Backstop Agreement with the Backstop Party, on August 2, 2007, and, after negotiations with the Creditors’ Committee, the subsequent Amended Backstop Agreement on August 13, 2007, and the Amendment to the Amended Backstop Agreement filed on September 28, 2007. As a condition precedent to the effectiveness of the Plan, a fully backstopped equity rights offering provides the means by which the Debtors will successfully exit chapter 11. Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true and correct. Executed on October 11, 2007. Durc A. Savini

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(c) Declaration by Anthony Flanagan, Financial Advisor for Debtor, in Support of Motion for Entry of an Order Authorizing the Plan of Reorganization Metric Payment to Tier I KMIP Participants in Dura Automotive Systems IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) Chapter 11 ) DURA AUTOMOTIVE SYSTEMS, INC., ) Case No. 06-11202 (KJC) ) et al.,1 In re

Debtors.

) Jointly Administered )

DECLARATION OF ANTHONY C. FLANAGAN IN SUPPORT OF MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE PLAN OF REORGANIZATION METRIC PAYMENT TO THE TIER I KMIP PARTICIPANTS I, Anthony C. Flanagan, make this declaration and state the following: 1. I am a Managing Director of AlixPartners, LLP (“AlixPartners”), financial advisors to the Debtors in these proceedings. All facts set forth in this Declaration are based upon my personal knowledge, information supplied to me by the Debtors and other parties-in-interest, my review of relevant documents or my opinion based upon my knowledge of the Debtors. If I am called upon to testify, I can and will testify competently to the facts set forth herein. I am authorized by the Debtors to submit this Declaration. I. The Foundation of the Plan of Reorganization 2. The Debtors’ Plan is based on a number of building blocks: (a) execution of a substantial and wide-ranging operational restructuring program; (b) successful completion of customer negotiations; (c) obtaining a fully-backstopped equity rights offering; (d) the sale of the Atwood division; as well as (e) a planrelated comprehensive review of executory contracts and claims. All of these building blocks had to be in place, or at least far along, prior to the filing of any viable Chapter 11 plan of reorganization. The Tier I KMIP Participants provided the direction, leadership and oversight necessary to ensure the timely achievement of these building blocks, which served as the foundation for the Plan the Debtors filed. 1 The

“Debtors” comprise the entities set forth in the order entered by the Court on October 31, 2006, jointly administering these cases pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).

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A. Successful Execution of the Business Plan’s Operational Restructuring Initiatives 3. The Tier I KMIP Participants are the driving force behind the Company’s ongoing and continued execution of the Business Plan’s operational restructuring objectives. Critical to this success has been motivating and leading plant-level managers and employees to actively participate in the operational restructuring. The Debtors’ interim performance has met customer expectations, as evidenced by the customer agreements entered into by the Debtors since the presentation of the Business Plan. 4. Specifically, the Tier I KMIP Participants have continued to lead the implementation of the “Metals Move,” “Cables Move,” “Seats Consolidation,” and “Divisional and SG&A Consolidation” embodied in the Business Plan (as each of those operational restructuring initiatives is defined and described in my previous declaration in support of the Debtors’ Motion for Entry of an Order Authorizing the Business Plan Metric Payment to the Tier I KMIP Participants), including: r Completing the transfer of cable products from the Stratford, Ontario and Hannibal, Missouri facilities into the Matamoras, Mexico facility; r Continuing the consolidation of the Bracebridge, Ontario seats facility into the Gordonsville, Tennessee and Stockton, Illinois facilities. Closure of Bracebridge remains on schedule for November 2007; r Overseeing the completion of the construction of the Matamoras, Mexico building, which was completed in September 2007; r Continuing with the consolidation of the Metals business into the new facility in Matamoras, Mexico. In connection therewith, the Brownstown, Indiana facility is scheduled to be closed in December 2007 and wind down of the Jacksonville, Florida facility is underway; r Completing successful negotiations with the Debtors’ largest North American customers; and r Continuing planned downsizing of selling, general, and administrative costs in conjunction with the consolidation of facilities. 5. The cumulative impact of the Business Plan’s operational restructuring initiatives are critical to improving the Debtors’ projected EBITDA to approximately $150 million in 2011. 6. The Tier I KMIP Participants have worked assiduously, under significant time pressure, to effect interim operational restructuring changes and meet performance targets. I believe incentive payments are especially beneficial during a period of great change when management, charged with keeping their team focused and working under abnormally tight deadlines, is not assured of future employment. In my experience, a business’s senior management in a Chapter 11 case is operating in an inherently uncertain environment and is faced with the potential prospect of job loss regardless of the outcome of the restructuring. Such risks can destabilize the senior management team at the most critical stages of the process. In addition, the Tier I KMIP Participants have continued to lead the operational restructuring in the face of a period of continued instability in the automotive sector, as well as choppy conditions in the financial markets.

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B. Successful Customer Negotiations 7. The Business Plan was premised, in part, on successful customer negotiations with certain critical customers in North America. These negotiations focused on securing pricing adjustments on selected platforms and service parts, commitments with respect to certain price givebacks, and commitments not to re-source current business. Over the past several months the Debtors have successfully negotiated several long term agreements with key customers. The Tier I KMIP Participants played a critical role in making sure this was accomplished. These agreements have met the financial goals set forth in the Business Plan and provide the basis for the Company’s future health. II. Management Efforts in Plan-Related Claims and Executory Contract Analysis 8. In addition to vital operational restructuring efforts, the Tier I KMIP Participants, working with their advisors, monitored and were instrumental in organizing and supervising the Debtors’ efforts to timely complete the substantial work required to review significant filed proofs of claim and key executory contracts in anticipation of the Plan filing and subsequent confirmation process. Certain of the Tier I KMIP participants also conducted individual contract reviews of selected contracts to determine whether each contract should be assumed as is, renegotiated and assumed, or rejected. This comprehensive and detailed review will allow the Debtors to efficiently make decisions on hundreds of critical contracts within the contemplated plan-confirmation timeline. 9. The Debtors have made significant progress in resolving the more than 3,500 proofs of claim filed against their estates, and reviewing the hundreds of executory contracts they are party to. Specifically, the Debtors’ review reduced the amount of estimated allowed Other General Unsecured claims from over $170 million to approximately $75 million. The review has been painstaking. Thus far the Debtors have filed seven omnibus claims objections motions, and are well positioned to file all appropriate disclosures related to executory contracts during the confirmation process. Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true and correct. Executed on 10-11, 2007, Anthony C. Flanagan

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(d) Statement of Official Committee of Unsecured Creditors in Support of Debtors’ Motion for Entry of Order Authorizing Plan of Reorganization Metric Payment to Tier I KMIP Participants in Dura Automotive Systems IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) ) DURA AUTOMOTIVE SYSTEMS, INC., ) ) et al.,1 ) Debtors. ) ) ) In re

Chapter 11 Case No. 06-11202 (KJC) Jointly Administered Hearing Date: November 1, 2007

STATEMENT OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN SUPPORT OF THE DEBTORS’ MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE PLAN OF REORGANIZATION METRIC PAYMENT TO THE TIER I KMIP PARTICIPANTS The Official Committee of Unsecured Creditors (the “Committee”) of the above-captioned debtors-in-possession (the “Debtors”), by and through the undersigned counsel, submits this statement in support of the Debtors’ Motion to Authorize Certain Incentive Payments to Tier 1 KMIP Participants for their Work in Completing the Debtors’ Chapter 11 Plan of Reorganization (the “Motion”).2 The Committee respectfully states: 1. As more fully described in the attached Affidavit of Brent C. Williams, attached as Exhibit A (the “Williams Affidavit”), the Committee and the Debtors held numerous settlement discussions in an effort to resolve the Committee’s concerns regarding the Debtors’ Key Management Incentive Plan (the “KMIP”). 2. Prior to the April 25 Hearing on the Debtors’ Second Motion for Entry of an Order Authorizing Certain Interim Payments Pursuant to the Debtors’ 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C., Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 2 Those terms not otherwise defined herein shall have the meaning set forth in the Motion.

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KMIP, the Debtors and the Committee agreed, among other things, that 25% of the remaining bonus payments to be paid by the Debtors under the KMIP should be made upon the filing of the Debtors’ chapter 11 plan of reorganization (the “Chapter 11 Plan”), subject to this Court’s approval. 3. On August 22, 2007, the Debtors filed: (i) the Chapter 11 Plan [Docket No. 1702]; and (ii) the Disclosure Statement for the Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code [Docket No. 1703] (the “Disclosure Statement”). On October 2, 2007, the Committee filed a letter in support of the Debtor’s Chapter 11 Plan [Docket No. 1937] (the “Committee Support Letter”). On October 4, 2007, the Court entered an Order (A) Approving Disclosure Statement, (B) Fixing the Voting Record Date, (C) Scheduling Certain Hearing Dates and Deadlines in Connection with the Proposed Confirmation of the Debtors’ Plan of Reorganization, and (D) Approving the Solicitation Procedures and Form of Solicitation Package and Notices [Docket No. 1973], approving the adequacy of the Debtors’ Disclosure Statement and solicitation procedures. A confirmation hearing on the chapter 11 Plan is scheduled for November 26, 2007. 4. As stated in the Committee Support Letter, the Committee believes that the chapter 11 Plan provides unsecured creditors with the best possible recovery under the circumstances of these cases.

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STATEMENT 5. For the reasons stated above and set forth in the Williams Affidavit, the Committee supports the relief requested by the Debtors in the Motion. Dated: Wilmington, Delaware October 29, 2007 YOUNG CONAWAY STARGATT AND TAYLOR LLP /s/ Erin Edwards M. Blake Cleary (Del. No. 3614) Edmon L. Morton (Del. No. 3856) Erin Edwards (Del. No. 4392) The Brandywine Building 1000 West Street, 17th Floor Wilmington, DE 19801 Telephone: (302) 571-6600 Facsimile (302) 571-1253 -andKRAMER LEVIN NAFTALIS & FRANKEL LLP /s/ Douglas H. Mannal Douglas H. Mannal 1177 Avenue of the Americas New York, NY 10036 (212) 715-9100 Counsel for Official Committee of Unsecured Creditors of Dura Automotive Systems, Inc., et al.

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EXHIBIT A IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) ) DURA AUTOMOTIVE SYSTEMS, INC., ) ) et al.,1 ) Debtors. ) ) ) In re

Chapter 11 Case No. 06-11202 (KJC) Jointly Administered Hearing Date: November 1, 2007

AFFIDAVIT OF BRENT C. WILLIAMS IN SUPPORT OF DEBTORS’ MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE PLAN OF REORGANIZATION METRIC PAYMENT TO THE TIER I KMIP PARTICIPANTS STATE OF NEW YORK

) ) ss: COUNTY OF NEW YORK )

Brent C. Williams, being duly sworn, upon his oath, deposes and says:2 1. I am a Managing Director of Chanin Capital Partners (“Chanin”), financial advisor to the Official Committee of Unsecured Creditors (the “Committee”)3 in these proceedings. I submit this affidavit (the “Affidavit”) in support of the 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C., Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 2 Capitalized terms used, but not defined, herein shall have the meaning ascribed to them in the Motion. 3 The Committee is comprised of 9 members that hold an assortment of legal claims against the Debtors, including (i) two senior noteholders; (ii) the indenture trustees for (x) the senior notes, (y) the subordinated notes and (z) the convertible preferred notes; (iii) two trade creditors; (iv) the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW); and (v) and the Pension Benefit Guarantee Corporation.

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Debtors’ Motion to Authorize Certain Incentive Payments to Tier 1 KMIP Participants for their Work in Completing the Debtors’ Chapter 11 Plan of Reorganization (the “Motion”). All of the facts set forth in this Affidavit are based upon my personal knowledge, information supplied to me by the Debtors and other parties-in-interest, my review of relevant documents or my opinion based on my knowledge of the Debtors. If I am called upon to testify, I can and will testify competently to the facts set forth herein. I am authorized by the Committee to submit this Affidavit. 2. On or about February 1, 2007, the Debtors filed their Motion for Entry of an Order Authorizing the Key Management Incentive Plan (the “KMIP”) and Certain Payments Thereunder (the “First KMIP Motion”). Under the First KMIP Motion, the Debtors sought to make KMIP payments to approximately 55 members of the Debtors’ management for work allegedly performed during the 4th quarter of 2006. 3. The First KMIP Motion sought to pay bonuses to the Debtors’ management based on the achievement of certain operational initiatives, including the 510 Program and 50 Cubed Program. The Committee was concerned that the payment of bonuses to management based on these programs was not in the best interest of the estate, as it was unclear whether such programs would actually improve the Debtors’ operations. 4. In an effort to avoid costly and potentially distracting litigation regarding the KMIP prior to the presentation of a business plan, the Debtors and the Committee entered into an interim stipulation (the “Interim Stipulation”) that: (i) allowed the Debtors to make certain interim payments aggregating approximately $440,000 to the Debtors’ lower level managers (the “Tier II KMIP Participants”) for work allegedly performed during the 4th quarter of 2006; (ii) required the Debtors to obtain a further order of this Court before making any payments to the Debtors’ upper level managers (the “Tier I KMIP Participants”); and (iii) established an agreed upon discovery/litigation schedule to the extent the Debtors and the Committee could not resolve the Committee’s concerns regarding any future payment under the KMIP. 5. On March 20, 2007, the Debtors gave a presentation to the Committee that included a two (2) year business plan, and, subsequently, on or about April 5, 2007, the Debtors provided the Committee with a follow-up presentation, which included a revised 2007–2008 forecast summary (the “Forecast Summary”). 6. On or about March 22, 2007, the Debtors served the Committee with a draft version of their Second Motion for Entry of an Order Authorizing Certain Interim Payments Pursuant to the Debtors’ KMIP (the “Second KMIP Motion”), which the Debtors subsequently filed on April 5, 2007. The Second KMIP Motion sought to pay bonuses to both Tier I KMIP Participants and Tier II KMIP Participants. 7. As originally filed, the Second KMIP Motion sought to pay bonuses without conditioning the payment of such bonuses on the achievement of EBITDA targets related to the forecasts in the Forecast Summary or any bankruptcy process-related targets. 8. In an effort to resolve the Committee’s issues with the Second KMIP Motion, the Committee and the Debtors held numerous settlement discussions. In addition, because the filing of the Second KMIP Motion triggered the

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Interim Stipulation’s discovery, deposition and litigation timetable, the Committee served informal discovery requests on the Debtors and requested that the Debtors adjourn the Second KMIP Motion to allow negotiations to continue without the need for discovery or other litigation preparation. 9. The Debtors declined to adjourn the Second KMIP Motion and commenced document production. Accordingly, the Committee was compelled to prepare for litigation of the Second KMIP Motion, performing extensive document review and preparing for depositions. Only after depositions had commenced on April 11, and two Committee members, including the Committee chair, had flown to Detroit to negotiate personally with the Debtors’ chief executive officer and advisors, did the Debtors agree to condition future payments under the KMIP on the following agreed upon metrics (the “KMIP Settlement”): r 25% upon the delivery of a five (5) year business plan to the Committee (the “Business Plan Metric”); r 25% upon the filing of a chapter 11 plan of reorganization and disclosure statement (the “Chapter 11 Plan Metric”);4 and r 50% (the “Final Payment”) upon the earlier of (i) December 31, 2007 or (ii) the confirmation of a chapter 11 plan of reorganization, subject to the following: 1. If actual EBITDA (the “Actual EBITDA”)5 is less than 80% of the EBITDA forecast in the Forecast Summary (“2007 Forecast EBITDA”),6 Senior Participants will not receive the Final Payment. 2. If Actual EBITDA is greater than or equal to 80% and less than 85% of 2007 Forecast EBITDA, Senior Participants will receive the Final Payment, less $250k. 3. If Actual EBITDA is greater than or equal to 85% and less than 90% of 2007 Forecast EBITDA, Senior Participants will receive the Final Payment. 4. If Actual EBITDA is greater than or equal to 90% and less than 95% of 2007 Forecast EBITDA, Senior Participants will receive the Final Payment, plus an additional $250k. 5. If Actual EBITDA is greater than or equal to 95% and less than 100% of 2007 Forecast EBITDA, Senior Participants will receive the Final Payment, plus an additional $500k.

4 The

parties have agreed that such plan and disclosure statement will be filed in contemplation of confirmation. 5 Actual EBITDA refers to the amount of the Debtors’ actual EBITDA on a consolidated basis for the period beginning on April 1, 2007 and ending on the earlier of: (i) the end of the month immediately prior to the month in which a chapter 11 plan of reorganization is confirmed by the Bankruptcy Court or (ii) December 31, 2007. 6 2007 Forecast EBITDA refers to the amount of the Debtors’ forecast 2007 EBITDA (identified in the Forecast Summary) on a consolidated basis for the period beginning on April 1, 2007 and ending on the earlier of: (i) the end of the month immediately prior to the month in which a chapter 11 plan of reorganization is confirmed by the Bankruptcy Court or (ii) December 31, 2007. The Debtors have sent the Committee a breakdown of the monthly 2007 Forecast EBITDA in an email dated April 18.

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6. If Actual EBITDA is greater than or equal to 100% and less than 105% of 2007 Forecast EBITDA, Senior Participants will receive the Final Payment, plus an additional $750k. 10. The Debtors’ advisors and the Committee professionals actively negotiated over the course of a month in order to set appropriate parameters to the KMIP. The inclusion of the above metrics, including the Chapter 11 Plan Metric, was driven by the Committee and its professionals. The Committee insisted upon including the Chapter 11 Plan Metric in the above KMIP Settlement to incentivize management to file the Chapter 11 Plan as soon as possible, in order to set the stage for a timely exit from bankruptcy. 11. On May 31, the Debtors presented the Business Plan Presentation to the various members of the Committee. The Debtors thereafter filed a motion seeking approval of the Business Plan Metric Payment and on June 25, 2007, the Committee filed a statement in support of such motion. On June 29, 2007, the Court entered an order authorizing the Debtors to make the payments arising from that metric. 12. On August 22, 2007, the Debtors filed: (i) the Plan [Docket No. 1702] (the “Chapter 11 Plan”); and (ii) the Disclosure Statement for the Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code [Docket No. 1703] (the “Disclosure Statement”). On October 2, the Committee filed a letter in support of the Debtor’s Chapter 11 Plan (the “Committee Support Letter”). On October 4, 2007, the Court entered an Order (A) Approving Disclosure Statement, (B) Fixing the Voting Record Date, (C) Scheduling Certain Hearing Dates and Deadlines in Connection with the Proposed Confirmation of the Debtors’ Plan of Reorganization, and (D) Approving the Solicitation Procedures and Form of Solicitation Package and Notices [Docket No. 1973], approving the adequacy of the Debtors’ Disclosure Statement and solicitation procedures. A confirmation hearing on the Chapter 11 Plan is scheduled for November 26, 2007. 13. As stated in the Committee Support Letter, the Committee believes that the Chapter 11 Plan provides unsecured creditors with the best possible recovery under the circumstances of these cases. 14. For the foregoing reasons, the Tier I Participants have successfully met the agreed upon Chapter 11 Plan Metric and are entitled to receive the corresponding bonus payments.

Brent Williams Dated: October 29, 2007 Sworn to me this 29th day of October, 2007. Notary Public My commission expires ELIZABETH RAJU NOTARY PUBLIC, STATE OF NEW YORK Registration No. 01RA6046900 Qualified in New York County Commission Expires August 21, 2010

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6.2 Checklist for Determining the Merits of Substantive Consolidation Objective. Section 6.5(a) of Volume 1 of Bankruptcy and Insolvency Accounting contains a discussion of substantive consolidation of the related entities in chapter 11 cases. The checklist given here indicates the factors that need to be examined and considered before a decision can be made on whether to seek substantive consolidation of the cases. SUBSTANTIVE CONSOLIDATION Substantive consolidation is an equitable doctrine allowing creditors to treat separate corporate entities as one. Two factors are critical when considering the substantive consolidation of an estate: 1 Whether creditors dealt with the entities as a single economic unit, not relying on separate identities in extending credit; or 2 Whether the affairs of the debtors are so entangled that consolidation will benefit all creditors. The following checklist will help in analyzing the merits of substantive consolidation. It may be determined that the pursuit of a court approval for substantive consolidation may not be beneficial to the estate; however, the results of this analysis could still be helpful in plan formulation. Quantifying the issues 1 What are the asset values, third-party liabilities, and intercompany liabilities of each entity? 2 What is the future potential cash flow of each entity and for the consolidated entity? 3 Do the creditors of any single entity have disproportionately smaller recoveries than creditors of other entities? For example, this could occur when one entity books cost and another entity books the revenue (i.e., corporate holding company with officers and staff which manages operating subsidiaries). Plan issues 1 If creditors relied on a consolidated company, would all creditor groups be adversely affected if the cases were not consolidated? 2 Would duplicate claims have to be filed where it is unclear which legal entity incurred the liability? Lisa Poulin-Kloehr presented this Substantive Consolidation Checklist at the Association of Insolvency Accountants 1993 Annual Meeting. The checklist was developed through the collective experience of a number of professionals, on various cases, at KPMG Peat Marwick.

6.2

Checklist for Determining the Merits of Substantive Consolidation

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3 Will consolidation benefit the debtors and creditors at large? Can the continuing unified entity operate more profitably than the separate units, thus providing greater scheduled dividends to creditors? 4 Is consolidation critical to a plan of reorganization? 5 Can the distributions in a plan take into consideration the relative asset and liability levels of each entity without having the court rule on substantive consolidation? Representations 1 Did the debtors hold themselves out to their customers, suppliers, and bankers as a single entity? 2 Did the creditors have knowledge of interrelationships among the legal entities? 3 Did the debtors have the same or related business? 4 Did any debtors refer to their affiliates or subsidiaries as divisions as opposed to stand-alone operations? 5 Did each legal entity have its business address and phone number on its respective letterhead and business cards, etc.? 6 Was the common stock of the company traded on a consolidated basis? 7 Does the debtor own all or a majority of the stock of its affiliated or subsidiary debtors? 8 Do the debtors individually have adequate capitalization? 9 Were Dun & Bradstreet reports issued for the consolidated company or for individual debtors? 10 Did any of the debtors consistently contribute resources (earnings) to support any of the other debtors? Financing 1 2 3 4 5

Did lenders rely on consolidated financial statements? Were borrowings secured by the legal entity that owned the assets? Were borrowings guaranteed by other entities? Were there any cross-guarantees between the debtor and its affiliates? Were acquisitions funded from internal cash flow or outside financing? If third-party financing was used for acquisitions, who was the obligor on the debt?

Management 1 Were there common officers and directors for all the legal entities? Did any one set of officers have control over other officers and directors? 2 Was there management interdependence? 3 Were the services provided by any one debtor’s officers allocated to other entities on the same basis?

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Financial statements 1 Were financial statements prepared on a consolidated basis? 2 Were unconsolidated financial statements prepared, published, and relied on by third-party creditors or customers? 3 Were separate audits conducted for each legal entity? Recordkeeping 1 Were original books of record kept at one location or at the separate legal entity locations? 2 Were separate general ledgers kept by each legal entity? 3 Was the recordkeeping function performed by the same personnel for all of the legal entities? 4 Were assets transferred between legal entities with proper documentation? 5 Were assets transferred between legal entities for less than fair market value? 6 Was proper documentation attached as support for intercompany journal entries and other transactions? Cash management 1 Was cash for each entity treated as fungible and controlled by one debtor? 2 How was cash accounted for and transferred between legal entities? 3 Were intercompany borrowings evidenced by the execution of promissory notes? Was there any evidence of the time, place, or manner of repayment of intercompany borrowings? 4 Who paid (i.e., wrote the checks) for the operating expenses of each legal entity? 5 Were payroll and withholding taxes paid from a central account or from individual accounts maintained for each legal entity? 6 Were funds transferred between legal entities to meet debt obligations of other entities? 7 Was purchasing performed by any one legal entity for other related entities? Tax returns 1 Were tax returns filed on a consolidated basis? 2 Were there any documented tax arrangements between legal entities? 3 Were all federal, state, and local taxes paid by one entity on behalf of other legal entities?

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U.S. Trustee’s Opposition to Appointment of Interim CEO and Request

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6.3 U.S. Trustee’s Opposition to Appointment of Interim CEO and Request for Trustee Appointment Objective. Section 6.7 of Volume 1 discusses conditions where the court may appoint a trustee. This Estate Financial Inc. case example details a situation wherein the U.S. trustee objected to the appointment of an interim CEO and requested the appointment of a trustee. PETER C. ANDERSON United States Trustee Jennifer Braun Assistant United States Trustee Marjorie Lakin Erickson, SBN 94061 Trial Attorney OFFICE OF THE UNITED STATES TRUSTEE 128 East Carrillo Street Santa Barbara, CA 93105 (805) 957-4101; FAX (805) 957-4103 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA NORTHERN DIVISION In re

ESTATE FINANCIAL INC., Debtor.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Case No. ND 08-11457 RR Chapter 11 UNITED STATES TRUSTEE’S OPPOSITION TO DEBTOR’S MOTION FOR INTERIM ORDER APPROVING ASSUMPTION OF DISSOLUTION MANAGER EMPLOYMENT AGREEMENT AND APPROVING APPOINTMENT OF DISSOLUTION MANAGER AND REQUEST THAT THE COURT SUA SPONTE ORDER THE APPOINTMENT OF A CHAPTER 11 TRUSTEE Date: July 16, 2008 Time: 10:00 a.m. Place: Courtroom 201 1415 State Street Santa Barbara, CA 93101

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MEMORANDUM OF POINTS AND AUTHORITIES I. PRELIMINARY STATEMENT The motion of the debtor, Estate Financial, Inc. (“EFI”), to assume the appointment of as CEO of the debtor is a clear attempt to avoid the statutory scheme set up by the bankruptcy code when the principals of the debtor have engaged in misconduct. The moving papers cite virtually no authority that would allow the order they seek. The United States Trustee asserts that the only remedy provided for in the code for misconduct by management is the appointment of a Chapter 11 trustee. Prior to the filing of the case, a group of investors filed a state court action to appoint an receiver to take control of Estate Financial Mortgage Fund (“EFMF”), the managing member of which is EFI. Before the filing of the receivership complaint, the Department of Corporations had revoked EFMF’s permit to sell securities, based on its determination that EFMF failed to disclose certain facts to its investors, including that it was no longer making interest payments or that the percentage of its loans to affiliated companies contradicted representations made in its Offering Circular. Thus, the evidence supports a finding of cause to appoint a Chapter 11 trustee. The Bankruptcy Code provides no other provision to deal with mismanagement or misconduct. If there is cause, the court “shall order the appointment of a trustee.” 11 U.S.C. § 1104 (a). II. STATEMENT OF THE CASE A. Statutory Framework Ordinarily, when a debtor files a petition under chapter 11 of the Bankruptcy Code, the debtor becomes a “debtor in possession.” 11 U.S.C. § 1107 (a). The debtor in possession has virtually all of the rights, powers, and duties of a trustee, and accordingly serves as a fiduciary for the bankruptcy estate. Id.; see also Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 355 (1985) (“ [T] he willingness of courts to leave debtors in possession ‘is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee.’ ”) (quoting Wolf v. Weinstein, 372 U.S. 633, 651 (1963)). Under § 1104 (a) (1) of the Bankruptcy Code, the bankruptcy court “shall” order the appointment of a trustee upon a finding of “cause.” The Bankruptcy Code sets forth a non-exclusive list of examples of what can constitute cause, “including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor . . . .” Because the list of examples is introduced by the word “including,” the list is not limiting. 11 U.S.C. § 102 (3). The appointment of a chapter 11 trustee is the sole statutory remedy set out in the Bankruptcy Code by which a bankruptcy court may direct the appointment of a fiduciary to replace management of a debtor that is unable or unwilling to fulfill its fiduciary obligations to the estate.

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The Bankruptcy Code authorizes bankruptcy courts to issue any order necessary or appropriate to carry out the provisions of the Bankruptcy Code, 11 U.S.C. § 105 (a), but specifically prohibits bankruptcy courts from appointing receivers in bankruptcy cases. 11 U.S.C. § 105 (b). Nothing in the Bankruptcy Code or Rules authorizes a court to appoint a person to exercise the duties of a § 1104 (a) trustee, but not have the responsibilities of a trustee under the Code. B. Factual Background On May 28, 2008, the California Department of Corporations revoked EFMF’s permit to sell securities, because it had determined that EFMF had failed to disclose that it was no longer making interest payments in direct contradiction of the representations made in its Offering Circular; failed to disclose that the percentage of its loans to affiliated companies exceeded the amount set forth in representations made in its Offering Circular; failed to disclose that more than 5% of its loans were to affiliated companies of the Fund Manager in contradidtion to its Offering Circular; and failed to provide prospective investors with the subscription agreement, operating agreement and suitability questionnaire prior to accepting investment funds. A copy of the Order Revoking the Effectiveness of the Permit is attached to EMFM’s Request for Judicial Notice. On June 11, 2008, certain of the investors in EFMF filed a Complaint for Specific Performance, Accounting, Appointment of a Receiver, and Preliminary and Permanent Injunction in the San Luis Obispo Superior Court. This action was filed against EFI and the principals of EFI, Karen Guth and Joshua Yaguda, stating that the plaintiffs could not obtain an accounting from EFMF and seeking the appointment of a receiver. On June 16, 2008, EFI stipulated to a restraining order prohibiting the transfer of any of the EFMF’s assets and to the appointment of an independent evaluator to conduct an investigation into EFMF’s books and records. On June 25, several creditors filed an involuntary case against EFI under chapter 11, denominated ND 08-11457 RR. On or about June 30, EFI resigned as manager of EFMF and entered into an employment contract with David Gould, employing him as the “Dissolution Manager” for EFMF. On July 1, 2008, EFMF, filed a voluntary bankruptcy petition under chapas CEO. Apparently Guth ter 11. Also on July 1, 2008 EFI hired and Yaguda have resigned, but there is no evidence of any resignation in the record. On Friday, July 11, 2008, EFI filed a statement of consent to the . bankruptcy along with a motion to assume its contract with III. SUMMARY OF ARGUMENT Section 1104 (a) (1) of the Bankruptcy Code makes the appointment of a trustee mandatory if “cause” exists. 11 U.S.C. § 1104 (a) (1) (the court “shall” order the appointment of a trustee). In this case, the determination of the Department of Corporations to revoke EFMF’s ability to raise funds and the reasons recited in the order provide sufficient cause to appoint a trustee in EFI’s

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case. EFI as managing member of EFMF is responsible for its actions. Similarly, Guth and Yaguda, the principals of EFI are responsible for the actions of both EFI and EFMF. However, EFI is attempting to avoid this result by appointing a new CEO. The Bankruptcy Code and Rules nowhere recognize the concept of appointing a person to manage the affairs of a debtor when management has engaged in misconduct. To the contrary, the mandatory nature of a § 1104 (a) (1) appointment—that statute uses “shall”—underscores that bankruptcy courts must appoint a trustee when cause exists. Neither § 105 (a) nor § 1107 (a) empowers the bankruptcy court to refuse to order a trustee appointment in the face of cause. First, § 105 (a) does not permit a bankruptcy court to exercise its equitable powers to override other explicit mandates of other sections of the Bankruptcy Code such as § 1104 (a) (1). Second, the court’s power under § 105 (a) is specifically limited by § 105 (b), which expressly prohibits bankruptcy courts from appointing receivers. The CEO in this case is a receiver in all but name. Finally, the court’s authority to limit a debtor in possession’s powers under § 1107 (a) cannot fairly be read to authorize the court to appoint replacement management instead of ordering the appointment of a chapter 11 trustee. The clear weight of authority supports the appointment of § 1104 (a) trustees when cause exists and does not support recourse to the non-statutory alternative of a responsible person to appoint or replace the management of a debtor in possession. If management must be appointed or replaced, and if such appointment or replacement is not effectuated pursuant to state law, the proper remedy is the appointment of a chapter 11 trustee. IV. ARGUMENT A. The Appointment of a Trustee Is Mandatory When Cause Exists under § 1104 (a) (1) Section 1104 (a) of the Bankruptcy Code provides as follows: (a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee— (1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor. . . . 11 U.S.C. § 1104 (a) (1) (emphasis added). The use of the word “shall” in § 1104 (a) mandates the appointment of a trustee when “cause” exists. See Escoe v. Zerbst, 295 U.S. 490, 493 (“shall” is the language of command; its use in a statute indicates congressional intent that the statute be mandatory). “The willingness of Congress to leave a debtorin-possession is premised on an expectation that current management can be depended upon to carry out the fiduciary responsibilities of a trustee. And if the debtor-in-possession defaults in this respect, Section 1104 (a) (1) commands

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that the stewardship of the reorganization effort must be turned over to an independent trustee.” In re Marvel Entertainment Group, Inc., 140 F.3d 463, 474 (3rd Cir. 2000), quoting In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518, 526 (Bankr. E.D.N.Y. 1989). See also In re Oklahoma Refining Company, 838 F.2d 1133, 1136 (10th Cir. 1988).

B. The Debtor’s Misconduct as Set Forth in the Department of Corporations Revocation Order Provides Cause to Appoint a Trustee Although § 1104 (a) (1) of the Bankruptcy Code lists a number of examples of what can constitute cause for the appointment of a trustee, that list is not exhaustive. Section 1104 (a) (1)’s use of the word “including” to preface the list indicates that the list is not limiting. 11 U.S.C. § 102 (3) (rule of construction establishing that “including” is “not limiting”). See also In re Savino Oil & Heating Co., Inc., 99 B.R. 518 (Bankr. E.D.N.Y. 1989). The usual presumption in favor of allowing a debtor’s management to remain in the case vanishes completely when management has been found to have engaged in misconduct. See Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 355 (1985) (“[T] he willingness of courts to leave debtors in possession ‘is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee.’ “) (quoting Wolf v. Weinstein, 372 U.S. 633, 651 (1963)). In this case, the EFI’s pre-petition management hired a new CEO in the gap period and then consented to the bankruptcy. Rather than relying upon § 1104 (a) (1) by ordering the appointment of a trustee, EFI seeks to replace its state law officers and directors by appointing a new CEO who would be answerable only to the court. In a case similar to this case, the Bankruptcy Appellate Panel for the First Circuit concluded that, if a debtor’s duly authorized management must be displaced, the court’s only alternative is to order the appointment of a chapter 11 trustee. In In re Casco Bay Lines, Inc., 17 B.R. 946 (B.A.P. 1st Cir. 1982), the bankruptcy judge to whom the case was originally assigned barred the debtor’s principal stockholders, directors, and officers from any participation in or control of the debtor in possession. The court ordered that a former owner of the debtor’s business be hired as the debtor’s sole operating officer. Id. at 949. Upon the death of the former owner, the control of the debtor’s case was assumed by the debtor’s attorney. Id. The original bankruptcy judge was later appointed to the district court. The bankruptcy judge to whom the case was reassigned raised issues about the management of the debtor in possession, and convened a hearing to consider whether a chapter 11 trustee should be appointed. Relying upon the dearth of properly constituted corporate management, the bankruptcy court found that cause existed for the appointment of a trustee and ordered the appointment of a chapter 11 trustee. On appeal, the Bankruptcy Appellate Panel affirmed. The court found that the following undisputed facts mandated the trustee appointment: “(1) The principal officers had been barred from any participation in the management

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of the debtor; (2) new ‘management’ had been installed by the court; and (3) no trustee had been appointed.” Id. Affirming the bankruptcy court, the Bankruptcy Appellate Panel observed that in a chapter 11, there is either a debtor in possession or a trustee. Because the owners and officers of the debtor had been “ordered not in any way to have anything further to do with management of the company, that is the usual grounds for appointment of a Trustee, both under law and simple logic.” Id. at 951. The court further held that . . . a Chapter 11 reorganization contemplates only two possible scenarios for control of the debtor’s business operations: a debtor in possession, or a debtor out of possession. The latter situation contemplates and mandates the appointment of a trustee. . . . [E]ither the debtor must be in control, or the court will authorize the appointment of a trustee to take control of the debtor’s affairs. Furthermore, the phrase “in possession” not only means physical possession, but actual control over decisions regarding conduct of the business. In sum, the debtor, to be in possession, must have some form of control over its business destiny and be able to make the day to day business decisions required of its operation.

Id. The court observed that “the appointment of a trustee is the only statutorily authorized alternative to a debtor in possession. The bankruptcy court is specifically prohibited from appointing a receiver. 11 U.S.C. § 105 (b).” Id. at 952. The court concluded: Because a corporation is an inanimate legal entity, it acts only through its officers and agents. In this case, the court removed those agents from control and in effect replaced them with “new management”. The court had no authority under the Bankruptcy Code to do so. Once it removed the debtor’s agents from control, it had no alternative but to authorize those agents to be replaced with a trustee.

Id. Here, just as the bankruptcy court in Casco Bay Lines had removed that debtor’s managers from power and attempted to replace them with its designated representative, EFI’s management removed themselves before consenting to the bankruptcy and put in new management. The only difference is that it was done before filing. Worse, the “management structure” used in this case, is in derogation of California law. Under California law, “the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board [of directors].” California Corporations Code § 300 (a). Corporate officers, who are agents of the corporation, are “chosen by the board and serve at the pleasure of the board. . . .” California clearly does not serve at the pleasure of the Corporations Code 312 (b). board of directors, as all pre-petition officers and directors have resigned. answers only to the court; he is therefore not properly empowered under California corporate law to manage this debtor. There has been no approval of the replacement by a majority of the investors, as required by the Operating Agreement, paragraph 3:06 at page A-8, attached as Exhibit A to the Declaration of Joshua Yaguda.

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C. EFI Has Failed to Establish Legal Grounds for the Relief Sought EFI seeks to assume the contract of their new CEO. It cites no authority, but presumably it is relying on 11 U.S.C. § 365. Section 365 (c) (1) provides that a personal services contract, which this presumably is, can only be assumed with the consent of all the parties. Here as set forth above, replacement of management requires approval of a majority of investors, which has not occurred. Therefore, not all parties have properly consented.

D. Because Cause Exists, the Bankruptcy Court Is Required by § 1104 (a) to Order the Appointment of a Chapter 11 Trustee. Moving papers cite no case law to support the appointment of a new CEO, called Responsible Person in most of the cases. The great weight of authority rejects the notion that a bankruptcy court may appoint a responsible person in lieu of appointing a trustee. See, e.g., In re 1031 Tax Group, LLC, 2007 WL 2085384 at ∗ 3 fn. 4 (Bankr. S.D.N.Y., July 17, 2007) (“Sections 105 (a) and 1107 (a) may empower a bankruptcy court to prevent a debtor from removing a manager, officer or director, but they do not provide the Court with an independent power of appointment.”); (In re Adelphia Comm. Corp., 336 B.R. 610, 668 (Bankr. S.D.N.Y. 2006) (A request for the appointment of an “independent fiduciary” “that is in substance if not name a trustee, and represents a back-door means of circumventing the statutory requirements, and case law, applicable to the appointment of trustees under section 1104 . . . is not the type of relief that, in this Court’s view, it should exercise its discretion to grant.”); In re Suncruz Casinos, LLC, 298 B.R. 821, 832 (Bankr. S.D. Fla. 2003) (“[T]he Committee recommends that the Court appoint a “responsible Person” in lieu of a trustee, in the event the Court determines that Debtors’ management should be replaced. . . . The Bankruptcy Code expressly provides for appointment of a trustee when a debtor’s management is replaced. The Code does not contemplate appointment of a ‘responsible Person’ to perform the duties of a trustee.”); In re National Century Financial Enterprises, Inc., 292 B.R. 850 (Bankr. S.D. Ohio 2003) (Court rejected request to vest crisis manager with exclusive rights and powers of a debtor in possession); In re Freedlander, Inc., The Mortg. People, 86 B.R. 66, 68 (Bankr. E.D. Va. 1988) (adoption of “responsible person” rationale would enable every debtor to defeat a trustee motion by nominating its own successor; this result is not contemplated by the Bankruptcy Code); but cf. In re United Press Int’1, Inc., 60 B.R. 265 (Bankr. D.D.C. 1986). In light of this near unanimity of reported decisions, it is not surprising that Collier On Bankruptcy, perhaps the most frequently cited bankruptcy treatise, treats responsible person appointments with barely disguised disdain: It is really unnecessary to misinterpret the Code and look for ways to circumvent its provisions. In an appropriate case, section 1104 can be utilized to provide the proper persons to run the business and assist in the reorganization. When a court finds that management should be replaced, that should be sufficient cause under section 1104 (a) (1) to order the appointment of a trustee.

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7 Collier On Bankruptcy § 1104.03 [6] [a], at 1104-50 (15th Ed. Rev.) (footnotes omitted) (emphasis added). V. CONCLUSION For the foregoing reasons, the United States Trustee requests that this ’s contract and grant the United States court deny the motion to assume Trustee’s motion for the appointment of a chapter 11 trustee. In the event the court orders the appointment of a trustee, the United States is prepared to appoint a trustee as soon as possible. Dated: July 15, 2008

OFFICE OF THE UNITED STATES TRUSTEE

By: Marjorie Lakin Erickson Attorney for United States Trustee

6.4

Application for Order Approving Appointment of Trustee

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Objective. Section 6.7 of Volume 1 deals with the appointment or election of a trustee. An example of support demonstrating that a proposed trustee is qualified is given in the declaration of disinterestedness attached to the application for approval of trustee appointment in the Estate Financial, Inc., case. PETER C. ANDERSON UNITED STATES TRUSTEE Jennifer L. Braun, No. 130932 Assistant United States Trustee Marjorie L. Erickson, No. 94061 Trial Attorney OFFICE OF THE UNITED STATES TRUSTEE 128 East Carrillo Street Santa Barbara, California 93101 Telephone: (805) 957-4101; Facsimile: (805) 957-4103 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA NORTHERN DIVISION In re

ESTATE FINANCIAL, INC.,

Debtor.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Case No. ND 08-11457 RR Chapter 11 APPLICATION FOR ORDER APPROVING APPOINTMENT OF TRUSTEE AND ORDER THEREON

(No Hearing Required)

The United States Trustee hereby applies to the court pursuant to F.R.B.P. 2007 for an Order Approving the Appointment of Trustee and in support thereof, states: 1 The United States Trustee has appointed Thomas P. Jeremiassen as Trustee in the above-captioned case. 2 To the best of the United States Trustee’s knowledge, the Chapter 11 Trustee’s connections with the debtor, creditors, any other parties in

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interest, their respective attorney and accountants, the United States Trustee, and persons employed in the Office of the United States Trustee are limited to the connections set forth in the Chapter 11 trustee’s attached verified Statement of Disinterestedness. WHEREFORE, the United States Trustee requests that the Court enter an Order approving the Appointment of Thomas P. Jeremiassen as Trustee in the above-captioned case. Dated: July 25, 2008

Respectfully submitted, PETER C. ANDERSON United States Trustee By: Jennifer L. Braun Assistant United States Trustee ORDER

It is so ordered. Dated: July 25, 2008 Honorable Robin Riblet United States Bankruptcy Judge THOMAS P. JEREMIASSEN, CPA LECG, LLC 2049 Century Park East Suite 2300 Los Angeles, CA 90067 Telephone: (310) 556-0709 Facsimile: (310) 556-0766 Proposed Chapter 11 Trustee

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA NORTHERN DIVISION In re:

) ) ) ) ESTATE FINANCIAL, INC., ) ) ) ) Debtor. ) )

Case No.: ND 08-11457 RR Chapter 11 DECLARATION OF DISINTERESTEDNESS OF THOMAS P. JEREMIASSEN

[No Hearing Required]

I, Thomas P. Jeremiassen, the undersigned, declare as follows: 1 I am a director in the consulting firm of LECG, LLC (“LECG”), and I am duly licensed to practice as a Certified Public Accountant in the State of California.

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2 I have personal knowledge of the facts stated in this declaration, and if called as a witness, I could and would testify competently to these facts, except where matters are stated on information and belief, which I believe to be true. 3 I believe that I am eligible and competent to perform the duties of the Chapter 11 Trustee for the estate of Estate Financial, Inc. 4 I also believe that I am a disinterested person within the meaning of 11 U.S.C. §101 (14). I have not had previous contact with Estate Financial, Inc. I am a disinterested person within the meaning of 11 U.S.C. §101 (14) with regards to creditors. Furthermore, I have never provided services to any creditor or any other party in any dispute with Estate Financial, Inc. 5 Prior to the bankruptcy filing of Estate Financial, Inc., another director at LECG was approached by a creditor to discuss the possibility of the appointment of a receiver in connection with the State Court action, and also discussed the possibility of an involuntary bankruptcy filing against Estate Financial, Inc. Subsequent to the involuntary bankruptcy filing, this same creditor again approached the LECG director to discuss the possibility of serving as Chapter 11 Trustee. LECG was not engaged by the creditor, and no services were provided. 6 I further declare that: a I am not a creditor, an investor, or an insider of Estate Financial, Inc. b I am not, and was not, an investment banker for any outstanding security of Estate Financial, Inc. c I have not been, within three years before the date of filing of the petition, an investment banker for a security of Estate Financial, Inc., or an accountant for such an investment banker in connection with any offer, sale or issuance of a security of Estate Financial, Inc. d I am not and was not, within two years prior of the date of the filing of the petition, a director, officer, or employee of Estate Financial, Inc., or any investment banker of Estate Financial, Inc. e I do not have an interest materially adverse to the interest of this estate, or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, Estate Financial, Inc., or any investment banker of Estate Financial, Inc., or for any other reason. f My firm has conducted a search of its records and, to date, has discovered no associations with any interested parties or professionals connected to this case that would cause a conflict of interest in this matter. g I am not a relative or employee of the Office of the United States Trustee or a Bankruptcy Judge. I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed this 24th day of July 2008, at Los Angeles, California. By: THOMAS P. JEREMIASSEN

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DECLARATION OF SERVICE BY MAIL STATE OF CALIFORNIA COUNTY OF LOS ANGELES I am employed in the County of Los Angeles, state of California, in the Office of the United States Trustee under the supervision of a member of the bar of this Court at whose direction the service hereinafter described was made; I am over the age of 18 and not a party to the within action; and my business address is: 21051 Warner Center Lane, Suite 115, Woodland Hills, CA 91367. On July 25, 2008, I served the foregoing document described as: APPLICATION FOR ORDER APPROVING APPOINTMENT OF TRUSTEE AND ORDER THEREON, on the interested parties at their last known addresses by placing a true and correct copy thereof in a sealed envelope with sufficient postage thereon fully prepaid, in the United States Mail at Woodland Hills, California, addressed as follows: DEBTOR: Estate Financial, Inc. 806 9th Street, Suite 1A Paso Robles, CA 93446 DEBTOR’S ATTORNEY: William C. Beall Beall and Burkhardt 1114 State Street, Suite 200 Santa Barbara, CA 93101 OTHER INTERESTED PARTIES: Peter Susi Michaelson, Susi & Michaelson 7 West Figueroa Street, Second Floor Santa Barbara, CA 93101 Roger Frederickson Sinsheimer, Juhnke, Lebens & McIvor 1010 Peach Street San Luis Obispo, CA 93406 Shultheis 4455 Via Bendita Santa Barbara, CA 93110 PETITIONING CREDITORS: Steve Gardality 3542 Jasmine Crest Encinitas, CA 92024

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1994 Scott Revocable Trust, The 1994 James E Scott & Kathleen A Scott Revocable Trust 6528 Nancy Road Rancho Palos Verdes, CA 90275 ´ Kathleen Scott IRA 6528 Nancy Road Rancho Palos Verdes, CA 90275 Pippin LLC Attn: Jordana Cooper P.O. Box 702 Beverly Hills, CA 90213 San Dimas 18 LLC Attn: Jordana Cooper P.O. Box 702 Beverly Hills, CA 90213 OTHER INTERESTED PARTIES: David Gould 23801 Calabasas Road, Suite 2032 Calabasas, CA 91302 Bryan Cave LLP c/o K. M. Windler 120 Broadway, Suite 300 Santa Monica, CA 90401 Louise Kalshan 440 Kerwin Cambria, CA 93428 Lewis R. Landau 23564 Calabasas Road, Suite 104 Calabasas, CA 91302 Martin J. Brill 10250 Constellation Blvd., Suite 1700 Los Angeles, CA 90067 I declare under penalty of perjury that the foregoing is true and correct. Dated: July 25, 2008 Brian D. Fittipaldi Office of the U.S. Trustee In re: ESTATE FINANCIAL

CHAPTER 11 CASE NUMBER ND 08-11457-RR Debtor.

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NOTICE OF ENTRY OF JUDGMENT OR ORDER AND CERTIFICATE OF MAILING TO ALL PARTIES IN INTEREST ON THE ATTACHED SERVICE LIST: 1 You are hereby notified, pursuant to Local Bankruptcy Rule 90211(a)(1)(E), that a judgment or order entitled (Specify): APPLICATION FOR ORDER APPROVING APPOINTMENT OF TRUSTEE AND ORDER THEREON was entered on (specify date): 2 I hereby certify that I mailed a copy of this notice and a true copy of the order or judgment to the persons and entities on the attached service list on (specify date): Dated: JON D. CERETTO Clerk of the Bankruptcy Court By: Deputy Clerk NOTICE OF ENTRY SERVICE LIST FOR DEBTOR: Estate Financial, Inc. 806 9th Street, Suite 1A Paso Robles, CA 93446 DEBTOR’S ATTORNEY: William C. Beall Beall and Burkhardt 1114 State Street, Suite 200 Santa Barbara, CA 93101 OTHER INTERESTED PARTIES: Peter Susi Michaelson, Susi & Michaelson 7 West Figueroa Street, Second Floor Santa Barbara, CA 93101 Roger Frederickson Sinsheimer, Juhnke, Lebens & McIvor 1010 Peach Street San Luis Obispo, CA 93406 Shultheis 4455 Via Bendita Santa Barbara, CA 93110

6.4


PETITIONING CREDITORS: Steve Gardality 3542 Jasmine Crest Encinitas, CA 92024 1994 Scott Revocable Trust, The 1994 James E Scott & Kathleen A Scott Revocable Trust 6528 Nancy Road Rancho Palos Verdes, CA 90275 Kathleen Scott IRA 6528 Nancy Road Rancho Palos Verdes, CA 90275 Pippin LLC Attn: Jordana Cooper P.O. Box 702 Beverly Hills, CA 90213 San Dimas 18 LLC Attn: Jordana Cooper P.O. Box 702 Beverly Hills, CA 90213 OTHER INTERESTED PARTIES: David Gould 23801 Calabasas Road, Suite 2032 Calabasas, CA 91302 Bryan Cave LLP c/o K. M. Windler 120 Broadway, Suite 300 Santa Monica, CA 90401 Louise Kalshan 440 Kerwin Cambria, CA 93428 Lewis R. Landau 23564 Calabasas Road, Suite 104 Calabasas, CA 91302 Martin J. Brill 10250 Constellation Blvd., Suite 1700 Los Angeles, CA 90067

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6.5 Appointment of Examiner with Expanded Powers Objective. Section 6.8 of Volume 1 discusses the appointment of an examiner. The U.S. Bankruptcy Court’s order in the case of Tri-Valley Distributing, Cook Oil Company, and Snobird, Inc., illustrates the stipulation for the appointment of an examiner with expanded powers pursuant to 11 U.S.C. § 1104(c). (a) Stipulated Order for Appointment of Examiner with Expanded Powers IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF UTAH CENTRAL DIVISION In re: TRI-VALLEY DISTRIBUTING, INC., Debtor.

In re: COOK OIL COMPANY, Debtor. In re: SNOBIRD, INC., Debtor.

Bankruptcy No. 01-36562 GEC Chapter 11 (Substantively Consolidated) Bankruptcy No. 01-36563 GEC Chapter 11 Bankruptcy No. 01-36564 GEC Chapter 11 Honorable Glen E. Clark

STIPULATED ORDER FOR THE APPOINTMENT OF AN EXAMINER WITH EXPANDED POWERS PURSUANT TO 11 U.S.C. § 1104(c) The “Motion for the Appointment of a Trustee, or, in the Alternative, for the Appointment of an Examiner” (the “Motion”) filed by Wells Fargo Bank Northwest, N.A. (“Wells Fargo”) and Wells Fargo Equipment Finance, Inc. (“WFEFI”) came before the Court on February 18, 2003 upon the Court’s granting of the Motion of Wells Fargo and WFEFI for an Expedited Hearing, and Wells Fargo and WFEFI, along with Tri-Valley Distributing, Inc., Cook Oil Company, Snobird, Inc. (collectively, the “Debtors”), the Unsecured Creditors’ Committee (the “Committee”), and the United States Trustee having stipulated to the entry of the following Order (the “Stipulated Order”) in settlement of the Motion, and Wells Fargo and WFEFI having agreed to withdraw their Motion for the Appointment of a Trustee if the Stipulated Order is entered by the Court and to rely solely on their alternative Motion for the Appointment of an Examiner with “expanded powers”, NOW THEREFORE, the Court, having considered the Motion, the evidence proffered or adduced, the proffered settlement of the Motion set forth in this Stipulated Order, the objections filed, if any, the arguments of counsel, and the entire record made in connection with this Motion and in the above-named cases, and good cause, adequate notice and opportunity to be heard under the circumstances having been given;

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IT IS HEREBY FOUND THAT: A. The Court has jurisdiction over the Motion pursuant to 28 U.S.C. § 157 and 1334, and this matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(A). Venue of these cases and the Motion in this district is proper under 28 U.S.C. §§ 1408 and 1409. B. The statutory predicates for the relief sought in the Motion are Sections 105(a), 1104(c) and 1106(b) of the Bankruptcy Code and Rule 2007.1 of the Federal Rules of Bankruptcy Procedure. C. Proper, timely, adequate and sufficient notice of the Motion and the hearing have been provided under the circumstances in accordance with Sections 1104(c) and 1106(b) of the Bankruptcy Code and Rules 2002, 2007.1 and 9014 of the Federal Rules of Bankruptcy Procedure, and no further notice of the Motion, the hearing, or of the entry of this Stipulated Order is required. D. A reasonable opportunity to object or to be heard with respect to the Motion and the relief requested therein has been afforded to all interested persons and entities, including, without limitation, (i) the Debtors; (ii) the Committee; (iii) the United States Trustee; and (iv) all other creditors, parties in interest and entities that had filed requests for notices pursuant to Rule 2002 of the Federal Rules of Bankruptcy Procedure. E. Wells Fargo, WFEFI, the Debtors, the Committee, the United States Trustee have all consented to the entry of this Stipulated Order and have specifically consented to the terms of this Stipulated Order. F. Good and sufficient cause exists for the entry of this Stipulated Order and for the appointment of an examiner with expanded powers under Section 1104(c) of the Bankruptcy Code, including incompetence and gross mismanagement of the affairs of the Debtors and the existence of conflicts of interest that affect and impair the Debtors’ ability to fulfill their fiduciary duties to creditors and to instill confidence in creditors. G. The appointment of an examiner with expanded powers as set forth in this Stipulated Order is in the interests of creditors, equity security holders and other interests of the estate. The Court has the authority to appoint an examiner with expanded powers pursuant to Sections 105(a), 1104(c), and 1106(b) of the Bankruptcy Code and Rule 2007.1 of the Federal Rules of Bankruptcy Procedure. H. Good and sufficient cause exists for the Court to order the examiner with expanded powers to perform all of the duties set forth in this Stipulated Order pursuant to Section 1106(b) of the Bankruptcy Code and to order the Debtors not to perform or interfere with the duties assigned to the examiner. NOW THEREFORE, IT IS HEREBY ORDERED: 1. The Motion of Wells Fargo and WFEFI to appoint an examiner with “expanded powers” under Section 1104(c), upon the terms set forth in this Stipulated Order, shall be, and it hereby is, granted. 2. All objections, if any, to the Motion or to the relief requested therein that have not been withdrawn, waived, or settled, and all reservations of rights included therein, are hereby overruled on the merits. 3. The United States Trustee shall consider the joint recommendation of Wells Fargo, WFEFI, the Debtors, the Committee and shall file an application for the appointment of an examiner with expanded powers under Section

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1104(d) of the Bankruptcy Code and Rule 2007.1(c) of the Federal Rules of Bankruptcy Procedure on or before February 20, 2003. 4. Pursuant to Section 1106(b) of the Code, the examiner is ordered and authorized to perform the following duties, and the debtors-in-possession are hereby ordered not to perform these duties after the date of this Stipulated Order, not to interfere with the performance of these duties by the examiner, and to cooperate in all respects with the examiner in the performance of his duties: a. Those duties set forth in Section 1106(a)(1), (3), (4), and (7), including, without limitation, (i) the duty to investigate, report on, and pursue any causes of action the estates may have against Speedy Turtle Petroleum, Inc. (“Speedy Turtle”) or Theodore L. Hansen or their affiliates or against any other current or former officers, directors or controlling shareholders of the Debtors, (ii) to review the January 8, 2002 Report and the January 29, 2002 Report and any additional Reports issued by Mark Hashimoto in these cases (collectively the “Hashimoto Reports”) to verify their accuracy, to conduct such follow-up investigation as is necessary to confirm the initial findings of Mr. Hashimoto in the Hashimoto Reports and to determine whether any additional acts of commingling of bank accounts or other improper interference by Speedy Turtle, or any current or former officers, directors, or controlling shareholders of Speedy Turtle, in the Debtors’ operations has occurred, (iii) the duty to investigate, report on and pursue any causes of action the estates may have against Seven C Enterprises, Inc. or Speedy Turtle, or against any current or former officers, directors or controlling shareholders of the Debtor, Speedy Turtle, or Seven C Enterprises, Inc., (iv) the duty to investigate, report and pursue the issue of whether Seven C Enterprises, Inc., Speedy Turtle, or any other entity affiliated with the Debtors should be substantively consolidated into this consolidated bankruptcy case; and (v) to conduct an ongoing investigation of the Debtors’ operations, including, but not necessarily limited to, ensuring compliance with the Auditing Procedures outlined in the Sixteenth Order Authorizing Debtor’s Use of Cash Collateral and Fixing Manner of Giving Notice of Continued Hearing that was entered in these consolidated cases on January 29, 2003, to verify the integrity of Debtors’ bank accounts, to confirm that all transactions between the Debtors, Seven C Enterprises, and Speedy Turtle or any other entity affiliated with Seven C Enterprises or Speedy Turtle or their current or former officers, directors or controlling shareholders are conducted at arms length and in accordance with normal and customary business terms, and to verify that Seven C Enterprises and Speedy Turtle or any other entity affiliated with Seven C Enterprises and Speedy Turtle or their current or former officers, directors or controlling shareholders are taking no actions that may adversely affect the Debtors and the examiner’s control over their business operations. b. The duties and authority to operate the Debtors’ business as set forth in Section 1108 of the Bankruptcy Code, including, without limitation, and to the exclusion of any power or authority that officers, directors, and boards of directors of the Debtors may have had to perform these duties prior to the entry of this Stipulated Order, (i) all rights to make all operational decisions related to the Debtors’ business operations, (ii) all rights to fire and hire employees, including officers of the Debtors, and to set the terms of employment by the Debtors of any such employees, (iii) all rights to hire and fire the Debtors’ professionals and, except in those areas not included or specifically excluded

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by this Stipulated Order, to give the Debtors’ professionals instructions on what actions to take in these cases; (iv) all rights to exercise the powers and rights of a debtor-in-possession or trustee over all property of the estate, defined in Section 541 of the Bankruptcy Code, and under Sections 362, 363, 364, 365, 366, and 554 of the Bankruptcy Code; and (v) all rights to exercise powers and make decisions normally vested in the boards of directors of the Debtors. c. The power and right to waive the attorney-client privilege of the Debtors, in accordance with the rights afforded a trustee under Commodity Futures Trading Comm’n v. Weintraub, et al., 471 U.S. 343 (1985). d. The power and rights of a debtor to convert a case under Section 1112(a) of the Bankruptcy Code; e. The right to be heard on all matters arising in the above-named cases under Section 1109(b) of the Bankruptcy Code; f. The duty and power to control all financial affairs of the Debtors, including control over all bank accounts of the Debtors, all cash disbursements by the Debtors, and compliance by the Debtors with Sections 345 and 363(c)(2) of the Bankruptcy Code; g. The right to have input in the pending Disclosure Statement and Plan of Reorganization filed by the Debtors and to make all decisions for the Debtors relating to any amendments to such Plan and to the Debtors’ position on the invocation of Section 1129(b) of the Bankruptcy Code; h. The right to pursue all causes of action of the Debtors, except for those causes of actions arising under the Bankruptcy Code under Sections 544, 545, 547, 548, and 553, which shall specifically be retained by the Debtors; and i. The power and right to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of any of the property of the Debtors, and to perform any other act, including the satisfaction or any lien, that is necessary to consummate such transfer as authorized by the Court. 5. The rights and duties of the examiner with expanded powers as set forth herein may be altered by and are subject to the terms of a confirmed plan of reorganization. 6. While the examiner with expanded powers is ordered and authorized to perform the foregoing duties to the exclusion of the debtors-in-possession, nothing in this Stipulated Order is intended to, nor does it affect the right of the Committee or any other creditors or parties in interest to pursue causes of action, including, without limitation, causes of action against Speedy Turtle Petroleum, Inc., Theodore L. Hansen, Seven C Enterprises, Inc. or any of each of their current or former affiliates, officers, directors, or controlling shareholders, or against any current or former officers, directors or controlling shareholders of the Debtors. 7. In carrying out his or her duties under this order, the examiner shall be subject to the same fiduciary duty that would be imposed on a debtorin-possession or a Chapter 11 trustee appointed under Section 1104(a). 8. The examiner is authorized to hire such professionals under Section 327 of the Bankruptcy Code as the examiner deems necessary and appropriate to carry out his duties under this Stipulated Order, including, without limitation, to hire an industry consultant to assist in the management and operation of the business operations of the Debtors. The examiner is also authorized to consult with and to reasonably rely on the advice of professionals which have previously been retained under Section 327 of the Bankruptcy Code by the

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Debtors or the Committee (as requested by the examiner) in these cases with respect to his or her duties and responsibilities and the performance of those duties and responsibilities under this Stipulated Order. 9. The Committee appointed in the above-named cases under Section 1102 shall continue in existence after the entry of this Stipulated Order and shall continue to perform all duties and to exercise all powers set forth in Section 1103 of the Bankruptcy Code and to retain the professionals previously employed by them pursuant to Sections 327 and 330 of the Bankruptcy Code. 10. The Court retains the right to amend or clarify this Stipulated Order for cause on the request of a party in interest and after notice and a hearing. DATED this 18 day of February, 2003. BY THE COURT: The Honorable Glen E. Clark CHIEF UNITED STATES BANKRUPTCY JUDGE STIPULATED TO AS TO FORM AND CONTENT: Annette W. Jarvis Douglas M. Monson RAY, QUINNEY & NEBEKER Counsel for Wells Fargo Bank Northwest, N.A. and Wells Fargo Equipment Finance, Inc. Duane H. Gillman MCDOWELL & GILLMAN, P.C. Counsel for Tri-Valley Distributing, Inc., Cook Oil Company, and Snobird, Inc. Lauri A. Cayton Assistant United States Trustee [Signature Page for Stipulated Order For The Appointment Of An Examiner With Expanded Powers Pursuant To 11 U.S.C. § 1104(c)] STIPULATED TO AS TO FORM AND CONTENT: Weston L. Harris PARSONS DAVIES KINGHORN & PETERS Counsel for the Official Committee of Unsecured Creditors 694315.03/rqn [Signature Page for Stipulated Order For The Appointment Of An Examiner With Expanded Powers Pursuant To 11 U.S.C. § 1104(c)]

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CERTIFICATE OF MAILING I hereby certify that on the 20th day of February, 2003, I mailed a true and accurate copy of the foregoing ORDER to the following by depositing the same in the United States mail, postage prepaid, addressed as follows: (∗∗∗ hand delivered to runner 2/19/03 NP) ANNETTE W JARVIS RAY QUINNEY & NEBEKER PO BOX 45385 SALT LAKE CITY UT 84145-0385 DUANE H GILLMAN MCDOWELL & GILLMAN TWELFTH FLOOR 50 WEST BROADWAY SALT LAKE CITY UT 84101 LAURIE A CAYTON ASSISTANT UNITED STATES TRUSTEE (via facsimile transmission 2-18-03 mp) WESTON L HARRIS PARSONS DAVIES KINGHORN & PETERS 185 SOUTH STATE STREET SUITE 700 SALT LAKE CITY UT 84111 WILLIAM C. STILLGEBAUER Clerk of Court By Deputy Clerk (b) Order for Appointment of Examiner with Expanded Powers HABBO G. FOKKENA, United States Trustee LAURIE A. CAYTON, Assistant U.S. Trustee (#4557) Boston Building, Suite 100 #9 Exchange Place Salt Lake City, Utah 84111-2709 Telephone: (801)524-5734 Fax Number: (801)524-5628 appt/tv

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF UTAH CENTRAL DIVISION In re: TRI-VALLEY DISTRIBUTING, INC., Debtor.

Bankruptcy No. 01-36562 GEC Chapter 11 (Substantively Consolidated)

In re: COOK OIL COMPANY, Debtor.

Bankruptcy No. 01-36563 GEC Chapter 11

In re: SNOWBIRD, INC., Debtor.

Bankruptcy No. 01-36564 GEC Chapter 11 Honorable Glen E. Clark

APPOINTMENT OF CHAPTER 11 EXAMINER WITH EXPANDED POWERS Pursuant to 11 U.S.C. § 1104, the Court entered an Order for the appointment of an examiner with expanded powers in the above-entitled case on the 18th day of February, 2003. The United States Trustee hereby appoints D. Ray Strong as the Chapter 11 Examiner with Expanded Powers in this case. The Examiner with Expanded Powers shall file a bond in the amount of $3,500,000 in favor of the United States conditioned on the faithful performance of his official duties, shall cause a copy of said bond together with all subsequent riders and renewals to be delivered to the United States Trustee and shall adjust the bond so that at all times the bond shall equal or exceed the total amount of liquid assets of this bankruptcy estate. The Examiner with Expanded Powers shall deposit estate funds only in federally insured depositories and shall cause depositories to deliver a summary of each bankruptcy estate account to the United States Trustee on a monthly basis. The Examiner with Expanded Powers shall promptly pay all quarterly fees owed to the United States Trustee and all fees owed to the Clerk of Court when due and shall timely file all monthly financial reports in compliance with Local Rule of Bankruptcy Procedure, Rule 2081-1(a). If the Examiner with Expanded Powers has reasonable grounds for believing that any violation of the bankruptcy laws or other laws have been committed, the Examiner with Expanded Powers shall submit a report in compliance with 18 U.S.C. § 3057 with a copy of said report submitted to the Office of the United States Trustee. The Examiner with Expanded Powers shall prepare a report for the Court at a time and in a manner as directed by the Court. DATED this 19 day of February, 2003. Respectfully submitted, HABBO G. FOKKENA United States Trustee By: LAURIE A. CAYTON Assistant U.S. Trustee

6.6

Appointment of Examiner or Mediator in Plan Negotiations

6.6

185


Objective. In In re Public Service Company of New Hampshire, after exclusivity had been terminated and it appeared that multiple plans would be filed, the court appointed an examiner to foster plan negotiations. Section 5.15 of Volume 1 of Bankruptcy and Insolvency Accounting describes how a mediator might be appointed to help resolve conflicts. Given here are samples of some of the documents that might be used to facilitate the appointment of an examiner or mediator to help resolve conflicts. The documents are designated as: (a) Motion to Appoint an Examiner (b) Modification of Motion to Allow Appointment of Either an Examiner or a Mediator (c) Order Authorizing Appointment of a Mediator (a) Motion to Appoint an Examiner Peter D. Wolfson VARET MARCUS & FINK P.C. 53 Wall Street New York, New York 10005 (212) 858-5300 Attorneys for Barre & Company Incorporated IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION In re: ZALE CORPORATION, et al., Debtors.

CASE NO. 392-30001-SAF-11 (JOINTLY ADMINISTERED UNDER Case No. 392-30001-SAF-11)

BARRE & COMPANY INCORPORATED’S MOTION FOR APPOINTMENT OF AN EXAMINER PURSUANT TO SECTIONS 1104(b)(1) AND 1104(b)(2) TO MEDIATE IN PLAN NEGOTIATIONS Barre & Company Incorporated (“Barre”), by its counsel, Varet Marcus & Fink P.C., hereby files its Motion for Appointment Of An Examiner Pursuant to Sections 1104(b)(1) and 1104(b)(2) To Mediate in Plan Negotiations (the “Motion”), and in support thereof, respectfully states as follows: Preliminary Statement Negotiations relating to the Consolidated Plan option of the September 10, 1992 First Amended Plan proposed by the Debtors and Zale Committee, as it

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will be further amended and supported by the Gordon Committee, are at an impasse. At this point, the distance between the positions asserted by the ZCC Committee, on the one hand, and the Zale and Gordon Committees and the Bank Group, on the other, with respect to the allocation to ZCC creditors to settle ZCC’s claims against the other Debtors and third parties are too far to bridge on a consensual basis. Barre believes that an examiner appointed by the Court for a limited period as a neutral third party to mediate among the creditor groups is the fastest and fairest means of breaking the deadlock, thereby ensuring that all creditor constituencies, employees and other interested parties will benefit from an expeditious consolidated reorganization that will avoid protracted litigation both before and after confirmation, and which will avoid the threat such litigation places on exit financing. In particular, Barre believes that an Examiner should analyze the now fairly well documented positions of the parties, meet with them both privately and jointly, and “suggest” what he or she believes is a more reasonable range of recoveries and a compromise thereof. Although reasonable people may differ, the spread between the bid and the ask of approximately $62 million (upon information and belief, the offer to the ZCC Committee in the Consolidated Plan is about $108 million, and the ZCC Committee believes it is entitled to about $170 million) is so great that it cannot possibly be a realistic range. The Examiner’s analysis and suggestions may provide the reality shock that one or more parties need to narrow the gap and begin negotiating a more realistic starting point so that a settlement could be achieved. The Examiner should also file a brief report with the Court that would be useful at the confirmation hearing(s). Barre recommends that the Examiner be someone familiar with bankruptcy issues and who has experience in dispute resolution. By way of illustration, former Federal District Court Judge Abraham Sofaer, who took on a similar role in the bankruptcy proceedings of Myerson & Kuhn and has now been appointed as Trustee in the Braniff III proceedings, would be a good choice. A. Jurisdiction 1. Pursuant to 28 U.S.C. Sections 1334 and 157 and the Standing Order of Reference of the United States for the Northern District of Texas, Dallas Division, the Court has jurisdiction to hear this Motion. Pursuant to 28 U.S.C. Sections 157(b)(2)(A) and (O), this Motion is a core proceeding. B. Factual background 2. On January 1, 1992, involuntary petitions under Chapter 11 of the Bankruptcy Code were filed against Zale Corporation (“Zale”) and Zale Credit Corporation (“ZCC”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Court”). On January 23, 1992, Zale and ZCC each filed a Notice of Consent to the Entry of Order For Relief Under Chapter 11 of the Bankruptcy Code. On the same date, fifteen affiliates, including Gordon Jewelry Corporation (“Gordon”), filed voluntary petitions to reorganize under Chapter 11 of the Bankruptcy Code. The cases have been consolidated for procedural purposes only and are being jointly administered pursuant to an Order of the Court.

6.6


187

3. Five official committees (collectively the “Committees”) were appointed in these cases to represent the interests of the unsecured creditors of Zale, ZCC, Gordon and trade creditors of Zale and Gordon. For more than eight months since the filings, the Committees and their professionals have examined and analyzed the claims of each creditor group against each of the Debtors and third parties. On the termination of exclusivity for the ZCC and Gordon Debtors, these Committees filed plans and disclosure statements setting out their respective positions regarding these claims. Although certain compromises have been reached, there is no agreement between the ZCC Committee and the other Committees that would allow all the Debtors to reorganize through a single consensual plan. The deadlock is holding up recoveries to creditors while the estates are being consumed by huge administrative expenses. C. Relief requested 4. Barre believes that the only way to end the impasse is for the Court to appoint an Examiner as a neutral third party to mediate and report. The Examiner should be given access to the data and analysis developed by the Debtors and each of the Committees so that he or she can quickly understand their respective positions. The Court has the authority to appoint an Examiner for that purpose. 5. Section 1104(b)(2) mandates the appointment of an examiner on request of a party in interest to conduct such investigation of the Debtor as is appropriate when unsecured debts other than debts for goods, services or taxes exceed $5,000,000. Based on the Debtors’ schedules, this alone would be sufficient grounds for appointment for an examiner in these cases that would conduct his own investigation of the historical transactions and make recommendations with respect to formulation of a plan.7 6. Section 1104(b)(1) is designed to enable a court to appoint an examiner in cases such as these, where negotiations have reached an impasse, to mediate and aid in breaking the deadlock. In re Public Service Company of New Hampshire, 99 B.R. 177 (Bankr. D.N.H., 1989). See also In re UNR Industries, Inc. 72 B.R. 789 (Bankr. N.D. I11. 1987). In Public Service, after exclusivity had been terminated and it appeared that multiple plans would be filed, the court sua sponte appointed an examiner to foster plan negotiations. The court there gave the parties a sixty-day negotiation period to achieve a consensual plan if possible and charged the examiner to take advantage of the data and analyses developed by the parties in interest in the course of the case, mediate the efforts of the parties and give the court a report at the end of the period. To keep administrative expenses of an examiner under control, the examiner was not authorized to employ financial advisors, analysts or other technical professionals. 7. Barre believes that the appointment of an examiner in these cases on similar terms is necessary to break the deadlock and move the parties toward a truly consolidated consensual plan. 7 Section 1106(b) of the Bankruptcy Code, by reference to Section 1106(a)(3), authorizes an examiner

to “investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan.” (emphases added)

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CONCLUSION WHEREFORE Barre requests that this Court appoint an examiner pursuant to Section 1104 of the Bankruptcy Code for an initial period of thirty days to mediate the efforts of the parties in interest in formulating a consensual consolidated plan, make recommendations with respect to such a plan and report to the Court at the end of such period. Dated: September 30, 1992 New York, New York Respectfully submitted, VARET MARCUS & FINK P.C. By: Peter D. Wolfson 53 Wall Street New York, New York 10005 (212) 858-5300 Attorneys for Barre & Company Incorporated (b) Modification of Motion to Allow Appointment of Either an Examiner or a Mediator Peter D. Wolfson VARET MARCUS & FINK P.C. 53 Wall Street New York, New York 10005 (212) 858-5300 Attorneys for Barre & Company Incorporated IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION In re: ZALE CORPORATION, et al., Debtors.

CASE NO. 392-30001-SAF-11 (JOINTLY ADMINISTERED UNDER Case No. 392-30001-SAF-11)

SUPPLEMENT TO THE MOTION OF BARRE & COMPANY INCORPORATED FOR APPOINTMENT OF AN EXAMINER PURSUANT TO SECTIONS 1104(b)(1) AND 1104(b)(2) TO MEDIATE IN PLAN NEGOTIATIONS Barre & Company Incorporated (“Barre”), by its counsel, Varet Marcus & Fink P.C., hereby files this Supplement (the “Supplement”) to its Motion For Appointment Of An Examiner Pursuant to Sections 1104(b)(1) and 1104(b)(2) To Mediate in Plan Negotiations (the “Examiner Motion”), and in support thereof, respectfully states as follows:

6.6


189

1. Barre submits this Supplement to raise with the Court the possibility of appointing a mediator, pursuant to 11 U.S.C. § 105, as a further alternative designed to provide a neutral third party to mediate among the various parties to these cases. Barre continues to believe that such mediation, whether supervised by an examiner—as originally requested by Barre in the Examiner Motion—or by a court-appointed mediator, is the fastest and fairest means of breaking the current deadlock of negotiations towards developing a consensual plan of reorganization for all of the debtors in these cases. 2. The authority to appoint a mediator appears to fall well within the broad authority conferred upon bankruptcy courts by 11 U.S.C. § 105(a) to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” While the authority granted to bankruptcy courts by § 105(a) is not unlimited, see e.g. In re Pirsig Farms, Inc., 46 B.R. 237 (D.C. Minn. 1985) (bankruptcy court not authorized to take actions under its general grant of authority which contravene specific provisions of the Bankruptcy Code), the bankruptcy court is a court of equity which “can do what needs to be done as long as there is not an abuse of [its equitable] power.” In re An Unknown Group of Cases Seeking To Be Filed, 79 B.R. 651, 652 (Bkrtcy. E.D. Va. 1987) (citing Katchen v. Landy, 382 U.S. 323 (1966)). Because no specific provision of the Bankruptcy Code prohibits the appointment of a mediator, and because such action by a bankruptcy court under appropriate circumstances will fulfill the most basic mandate of chapter 11, accelerating the progress of a chapter 11 case to the benefit of all parties concerned, § 105(a) should be read to allow the appointment of a mediator. 3. Sound precedent exists for the use of court-appointed mediators in bankruptcy cases to resolve disputes among parties which would otherwise require costly and time-consuming litigation resulting in additional costs to the estate and decreased distributions to creditors. 4. In In re Eagle-Picher Industries, Inc. et al., an asbestos-related chapter 11 case currently pending in bankruptcy court in the Southern District of Ohio, the court has recently appointed a mediator, pursuant to 11 U.S.C. § 105, to assist the parties in arriving at a consensual plan of reorganization for the debtors. Like the instant cases, the various parties in Eagle-Picher had vastly divergent views as to the proper allocation of value which a plan of reorganization would need to provide each of them in order to be fair and equitable. In seeking to move the parties closer to a consensual plan of reorganization at the least cost to the estate and at the greatest possible speed, Judge Burton Perlman ordered the appointment of a mediator with that specific charge. A copy of Judge Perlman’s order (the “EPI Mediator Order”) appointing the mediator is attached as Exhibit 1. 5. As a review of the EPI Mediator Order demonstrates, Judge Perlman gave the mediator a specific charge, but left him with broad authority to establish whatever procedures and rules he thought would best advance the goals of the mediation. Judge Perlman also vested the mediator with certain limited authority to direct the parties to produce documents or additional information to the mediator upon his request. To assist the mediator in analyzing the positions and arguments of the parties, the EPI Mediator Order also provided that the mediator could engage his own independent experts. Thus, Judge Perlman structured the EPI Mediator Order in such a way that the mediation

190


could proceed without the need for frequent, costly and time-consuming intervention by the bankruptcy court. 6. In In re Apex Oil Company, et al., 101 B.R. 92 (Bankr. E.D. Mo. 1989) the bankruptcy court granted a motion to appoint an examiner, pursuant to 11 U.S.C. § 1104 and 1106, and simultaneously directed the examiner to act as a neutral third party mediator to help resolve the reorganization cases. In describing the examiner’s role as mediator, the bankruptcy court noted that: The Examiner was further directed to take any necessary and appropriate action to assist the Court and the parties in bringing these bankruptcy proceedings to a just, prompt and economic disposition. As a “facilitator”, the Examiner was specifically prohibited from advocating or aligning himself with a position on any given matter. Rather, the Examiner’s role is limited to that of investigator and mediator.

101 B.R. at 93. 7. Adopting the court’s rationale in Apex, this Court could grant the Examiner Motion by appointing an examiner, pursuant to 11 U.S.C. §§ 1104 and 1106, and directing the examiner to act as a neutral mediator, whose charge is limited both as to duration and scope. Alternatively, the Court could follow the example set by Judge Perlman in the Eagle-Picher case and appoint a mediator under the general powers conferred by 11 U.S.C. § 105. 8. Whether the Court chooses to appoint an examiner or a mediator, Barre continues to believe, as more fully set out in the Examiner Motion, that all parties to these cases will benefit from the efforts of a neutral, court-appointed third party to break the deadlock and move the parties toward a truly consolidated consensual plan. WHEREFORE Barre requests that this Court appoint either (i) an examiner pursuant to 11 U.S.C. § 1104, or (ii) a mediator pursuant to 11 U.S.C. § 105, for a sixty day period to mediate the efforts of the parties in interest in formulating a consensual plan, make recommendations with respect to such a plan and report to the Court at the end of the period. Dated: October 2, 1992 New York, New York Respectfully submitted, VARET MARCUS & FINK P.C. By: Peter D. Wolfson 53 Wall Street New York, New York 10005 (212) 858-5300 Attorneys for Barre & Company Incorporated

6.6


191

(c) Order Authorizing Appointment of a Mediator IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: ZALE CORPORATION, et al., CASE NO. 392-30001-SAF-11 (JOINTLY ADMINISTERED UNDER DEBTORS. CASE NO. 392-30001-SAF-11)

ORDER APPOINTING ABRAHAM D. SOFAER AS MEDIATOR Upon the motion of Barre & Company Incorporated (“Barre”) for an order authorizing the appointment of an examiner to mediate in plan negotiations (the “Motion”) and the supplement to the motion in which Barre requested appointment of either an examiner or a mediator, pursuant to § 105 of the Bankruptcy Code (the “Supplement”) (collectively, the “Application”), and adequate notice of the application having been given under the circumstances, and good cause appearing for the relief requested, the court finds and orders as follows: 1. The court finds that the appointment of a mediator in these consolidated cases is appropriate pursuant to 11 U.S.C. § 105 and Bankruptcy Rule 7016 as made applicable to this proceeding by Bankruptcy Rule 9014 to carry out the provisions of the Bankruptcy Code. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (L) and (O). 2. The court designates Abraham D. Sofaer, Esq. as the mediator. 3. The following provisions shall govern the mediation in these cases, subject to further order of this court: a. The purpose of the mediation is to assist the creditor constituencies herein in their efforts to negotiate a consensual consolidated Chapter 11 plan of reorganization covering all of the debtors, and approved by the debtors, each official committee, the Ad Hoc Trade Committee, the Bank Group and NationsBank Texas and its affiliates (the “NationsBank entities”), and Barre. b. No earlier than November 3, 1992, and unless such a consensual consolidated Chapter 11 plan of reorganization has been filed prior thereto, the debtors, each official committee, the Ad Hoc Trade Committee, the Bank Group, the NationsBank entities and Barre will submit to mediation, and, following November 3, 1992, will promptly deliver to the mediator such material and information as the mediator may reasonably request in order to familiarize himself with the disputes. Prior to November 3, the mediator may commence his review and analysis of the publicly filed information and positions relating to the disputes, and may confer with the parties on a voluntary basis. Submissions may be made in writing or orally as reasonably determined by the mediator. The mediator may request any party to provide clarification and additional information. c. All parties are directed to cooperate with the mediator. The mediator will decide when to hold joint and/or separate meetings with the parties and shall fix the time, place and agenda of each such meeting after consulting with

192


the parties in order to attempt to schedule meetings at mutually convenient times and places. The mediator shall determine such other procedural rules as necessary to facilitate the mediation process. d. No party may seek to introduce, for any purpose, evidence of a statement made or of conduct occurring during the mediation, whether to the mediator or to other parties, or of any report of the mediator’s views shared with the parties, at any trial or hearing that may later be held in this or any court, which involves any of the parties to these reorganization cases. The mediator may not be called to testify as a witness, consultant or expert in any pending or future action relating to the subject matter of the mediation, including those between persons not parties to the mediation. Communications, oral or in writing, between a party and the mediator shall not constitute a waiver of any privilege that would otherwise exist with respect to the material communicated. Written communications marked “confidential” submitted by a party to the mediator shall not be shared by the mediator with any other party without the written consent of the party who provided such written communication. Mediation discussion shall be kept confidential by the parties unless all the parties agree to release a public statement or the court directs otherwise. e. Forty-five (45) days after the entry of this order, the mediator will furnish a report to the court stating only whether a consensual plan of reorganization has or has not been agreed upon by all parties. If so, the report shall set out the agreed-upon terms of the plan. If not, the report shall state whether the mediation is at an impasse and should be discontinued or whether the mediator believes that mediation should continue and for how long. The report shall be limited to the foregoing, and shall not include anything concerning the substance of the parties’ positions, discussions or negotiations. The court will determine whether the mediation should continue. f. The mediator may communicate to the court about the mediation process, but not about the parties’ positions, discussions or negotiations. The mediator may give his views to the parties orally or in writing, but such views shall be kept confidential pursuant to subparagraph (d) above and shall have no legal weight in these proceedings. 4. The mediator’s fees and expenses shall be paid as an administrative expense of the estate upon appropriate application therefore. Subject to court review under 11 U.S.C. § 330, the mediator shall be compensated at his usual hourly rates for actual and reasonable time and reimbursed for his reasonable out of pocket expenses, provided however that the total fees for the mediator shall not exceed $150,000 during the forty-five (45) day period following the entry of this order. Signed this 4th day of November, 1992. Steven A. Felsenthal United States Bankruptcy Judge

6.7

6.7

193

Cash Collateral Order


Objective. Section 6.13 of Volume 1 describes the nature and content of cash collateral agreements. Following is an example of a cash collateral order allowing the debtor to use cash collateral. UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA In re TGC TGC Holding Corp. Debtors.

Case Nos. X4-21156 and X4-21157 (Chapter 11) (Jointly Administered)

SECOND AGREED ORDER AUTHORIZING INTERIM AND LIMITED USE OF CASH COLLATERAL WHEREAS: A. On March 18, 20XX (the “Petition Date”), TGC Holding Corp. (“Holding”) and its wholly owned subsidiary TGC filed voluntary petitions for relief under Chapter 11 of title 11, United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Central District of California (the “Court”); B. Each of the Debtors continues to operate its business and manage its properties as a debtor-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code; C. Prior to the Petition Date, West Coast Bank (the “Bank”) extended credit to Colt’s pursuant to that certain Credit Agreement, dated as of March 22, 20XX, as amended (the “Credit Agreement”) and certain promissory notes issued in connection therewith; D. On the Petition Date, TGC was and is indebted to the Bank in respect of extensions of credit made pursuant to the Credit Agreement as follows: (i) a term loan in the aggregate principal amount of $12,000,000; (ii) revolving credit loans in the aggregate principal amount of $35,452,500; (iii) letters of credit outstanding in the aggregate face amount of $2,500,600; and (iv) accrued and unpaid interest, fees and expenses in the aggregate amount of $1,203,500, which continue to accrue (collectively, the “Bank Debt”); E. By Order of this Court, dated March 19, 20XX, which Order was entered on consent of the Bank (the “Agreed Order”), TGC’s was authorized to use up to $2,500,000 in proceeds of TGC’s Receivables and Cash Collateral (both as hereinafter defined). Of that amount, approximately $400,000 remains unused as of March 26, 20XX (the “Unused Amount”). Pursuant to the terms of Paragraph 6 of the Agreed Order, the Agreed Order expires and terminates on March 27, 20XX. F. The Bank asserts, pursuant to the Credit Agreement and the documents described on Exhibit A (omitted) that the Bank has a valid and properly perfected first priority lien and security interest on and in substantially all of

194


the Debtors’ property, including, without limitation, Receivables, Inventory, Equipment, Accounts, Contracts, General Intangibles, and Leasehold Buildings and Leasehold Lands (each as defined in the Loan Documents) and all proceeds thereof (collectively, the “Collateral”); G. An immediate need exists for TGC to obtain the use of funds in order to assure the continued operation of its business. Without such funds, TGC will be unable to pay its payroll, payroll expenses, and other immediate and necessary expenses of operating its business. Consequently, there would be no reasonable prospect that TGC will be able to reorganize successfully in these proceedings; H. TGC has been unable to obtain sufficient credit to pay its payroll, payroll expenses, and other immediate and necessary costs of operating its business, other than pursuant to Section 363 of the Bankruptcy Code; I. The Bank is willing to consent to TGC continued use of the Collateral, including cash collateral as defined in Section 363(a) of the Bankruptcy Code (“Cash Collateral”), on an interim basis, but only upon the terms and conditions set forth herein and to the extent of and for immediate and necessary expenses, including payroll and payroll expenses; IT IS, THEREFORE, STIPULATED AND AGREED, by and between the Bank and the Debtors as follows: 1. This Stipulation shall have no force or effect unless and until it is so ordered by the Court. 2. The Bank hereby consents to TGC use of the Collateral, including proceeds of TGC Receivables and Cash Collateral, in the amounts and for the disbursements set forth in Schedule A annexed hereto, which amounts shall not exceed $4,000,000 in the aggregate (representing the Unused Amount plus $3,600,000). TGC is and shall be authorized to use the Collateral exclusively for the disbursements, and to the extent, set forth in Exhibit B, provided however, that payment of interest with respect to the Bank Debt shall be without prejudice to the right of the Official Committee of Unsecured Creditors appointed in TGC Case or any other party in interest to apply to the Bankruptcy Court to have such payments reclassified as payments of principal in the event the Bankruptcy Court subsequently determines that the Bank is undersecured. 3. As adequate protection and security for and as an inducement to the Bank to permit the use of its Collateral, TGC hereby grants to the Bank (i) a security interest (subject only to the Bank’s security interests and any validly perfected pre-petition liens existing as of the Petition Date) in and lien upon all of its right, title and interest in and to all of its property, whether real or personal, tangible or intangible, now existing or owned or hereafter arising or acquired including without limitation: (a) all inventory acquired by TGC subsequent to the Petition Date and (b) all accounts created or billed by TGC subsequent to the Petition Date, senior to any other security interest or lien; (ii) a continuing security interest in and lien upon the Collateral and the proceeds thereof, whether now existing or owned and hereinafter arising or acquired, pursuant to Section 552(b) of the Bankruptcy Code; all such liens subject only to subordination to the extent necessary to provide for the payment of unpaid post-petition wages, if any, that accrue during the term of this Order; and (iii) an administrative claim with priority over all other administrative claims in the Cases, including all claims of the kind specified under Sections 503(b) and

6.7

195


507(b) of the Bankruptcy Code, but not to affect (i) the amounts, if any, allowed by subsequent order of this court, under Section 326(a) of the Bankruptcy Code, and (ii) the unpaid amount of post-petition wages, if any, that accrue during the term of this Order and (iii) fees allowed by orders of this Court under sections 330 or 331 of the Bankruptcy Code for professional services which accrue from the Petition Date through the earlier of the expiration and termination of this Order and the occurrence of an Event (as hereinafter defined) in an amount not to exceed $500,000 in the aggregate. All security interests, liens and claims granted to the Bank pursuant to this paragraph 3 shall be to the extent of one dollar for every dollar of Collateral utilized or to be utilized by TGC pursuant to paragraph 2 of this Stipulation. No other lien or claim having a priority superior to or pari passu with that of the Bank may be granted. 4. The Bank shall not be required to file financing statements or record any lien in any jurisdiction or take any other action in order to validate and perfect the security interests and liens granted to it pursuant to this Stipulation. 5. Notwithstanding anything to the contrary contained herein, TGC shall immediately cease the use of Collateral, including Cash Collateral, upon the occurrence of any of the following events (the “Events”): (i) either of the Cases shall be dismissed or converted to a Chapter 7 case or (ii) an order shall be entered reversing, rescinding, amending, supplementing, staying, vacating, or otherwise modifying the terms of this Stipulation, provided, however, upon the occurrence of either of the Events, each of TGC and the Bank reserves its respective rights with respect to use of Cash Collateral. 6. This Stipulation shall expire and terminate on the earlier of (i) April 9, 19XX and (ii) the closing with respect to a final debtor-in-possession credit facility approved by the Court, which facility shall be acceptable to the Bank in its sole discretion. 7. If so requested by the Bank, the Debtors shall execute such instruments and documents and do any and all things necessary to effectuate the terms and provisions of this Stipulation including, but not limited to, the execution of security agreements, mortgages and financing statements, and all such financing statements or similar instruments shall be deemed to have been filed or recorded as of the time and on the date this Stipulation is so ordered by the Court. 8. The Debtors shall provide the Bank with such reports and information as may reasonably be requested by the Bank. The Bank shall have the right, during ordinary business hours, to inspect and copy the Debtors’ books and records and audit the Debtors’ assets. Dated: Signed [Counsel for Debtor and Counsel for Bank]

196

Disbursements Payroll and payroll taxes Inventory and manufacturing supplies purchases Insurance Rent Employee reimbursements Miscellaneous Interest Total Disbursements 50 400

350

Holdover

5 8 0 583

319 5 75 0 937

248

322

0

211 327

3/31

3/30

8 0 708

5

322

373

4/01

8 0 335

5

322

0

4/02

8 0 525

5

323

189

4/03

8 0 256

5

243

0

4/06

Schedule A TGC MANUFACTURING COMPANY, INC. SCHEDULE OF DISBURSEMENTS FOR THE PERIOD 3/30/20XX–4/07/20XX (0000s)

8 52 256

5

191

0

4/07

123 102 4,000

248 319 35

2,400

773

Total

6.8

Use of Cash Collateral and Debtor-in-Possession Financing for Tower Automotive

197

6.8 Use of Cash Collateral and Debtor-in-Possession Financing for Tower Automotive Objective. Sections 6.13 and 6.14 of Volume 1 describe the nature and content of the debtors’ motion requesting and order authorizing the use of cash collateral and debtor-in-financing. Below is the interim order authorizing the use of cash collateral and debtor-in-possession financing for Tower Automotive. If the existing lender provides additional financing postpetition, it is common to see the cash collateral and debtor-in-possession financing in the same order. James H.M. Sprayregen, P.C. (JS-7757) KIRKLAND & ELLIS LLP Citigroup Center 153 East 53rd Street New York, New York 10022-4611 (212) 446-4800 and Anup Sathy (AS-4915) Jason D. Horwitz (JH-4496) Ryan B. Bennett (RB-5236) KIRKLAND & ELLIS LLP 200 East Randolph Drive Chicago, Illinois 60601 (312) 861-2000 Proposed Counsel for the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re TOWER AUTOMOTIVE, INC., et al., Debtors.

) ) ) ) ) ) ) )

Chapter 11 Case No. Jointly Administered

EMERGENCY MOTION FOR INTERIM AND FINAL ORDERS (I) AUTHORIZING DEBTORS TO (A) OBTAIN POST-PETITION SECURED FINANCING PURSUANT TO 11 U.S.C. §§ 105, 361, 362, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) AND 364(e) AND (B) UTILIZE CASH COLLATERAL PURSUANT TO 11 U.S.C. § 363; (II) GRANTING ADEQUATE PROTECTION TO PRE-PETITION SECURED PARTIES PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364; AND (III) SCHEDULING FINAL HEARING PURSUANT TO FED. R. BANKR. P. 4001(b) AND (c) Tower Automotive, Inc. and certain of its direct and indirect subsidiaries, as debtors and debtors-in-possession (collectively, the “Debtors”), file this

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motion (the “Motion”) seeking entry of an interim order, substantially in the form attached hereto as Exhibit A (the “Interim DIP Order”), and a final order, substantially in the form of the Interim DIP Order with the requisite conforming changes (the “Final DIP Order” and together with the Interim DIP Order, the “DIP Orders”), (i) authorizing the Debtors to (a) obtain post-petition financing pursuant to 11 U.S.C. §§ 105, 361, 362, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e) and (b) utilize cash collateral pursuant to 11 U.S.C. § 363; (ii) granting adequate protection to pre-petition secured parties pursuant to 11 U.S.C. §§ 361, 362, 363 and 364; and (iii) scheduling a final hearing pursuant to Fed. R. Bankr. P. 4001(b) and (c). In support of this Motion, the Debtors state as follows:1 Jurisdiction 1. This Court has jurisdiction over this Motion under 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue of this proceeding and this Motion is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. 2. The statutory bases for the relief sought herein are sections 105, 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e) of title 11 of the United States Code (the “Bankruptcy Code”) and Rule 4001 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). Background 3. On the date hereof (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”). Simultaneously with the filing of their petitions and this Motion, the Debtors requested an order for joint administration of their Chapter 11 Cases pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure. As more fully described in the First Day Affidavit, the Debtors and their nondebtor affiliates are leading global designers and producers of structural components and assemblies used by every major automotive original equipment manufacturer, including Ford, DaimlerChrysler, Renault/Nissan, Volkswagen Group, General Motors, Toyota, Honda, BMW, Fiat, Hyundai/Kia, Mazda and Isuzu. The Debtors supply products for many of the most popular car, light truck and sport utility models, including the Ford Taurus, Focus, Explorer, Ranger and F-Series pickups, Chevrolet Silverado and GMC Sierra pickups, Dodge Ram pickup, Toyota Camry and Honda Accord and Civic. 4. In 2004, the Debtors’ revenues were over $3.1 billion. Based on these revenues, the Debtors believe they are the largest independent global supplier of structural components and assemblies to the automotive market. Tower Automotive, Inc., the Debtors’ top-tier holding company, has total assets of approximately $787,948,000, and total liabilities of approximately $1,306,949,000. None of the Debtors’ operating foreign subsidiaries are part of these Chapter 11 Cases. 1 The facts and circumstances supporting this Motion are set forth in the Affidavit of James Mallak,

Chief Financial Officer and Treasurer of Tower Automotive, Inc., in Support of First Day Motions (the “First Day Affidavit”), filed contemporaneously herewith.

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5. The Debtors have commenced these Chapter 11 Cases in order to facilitate a balance sheet restructuring. By de-leveraging their balance sheet and addressing operational issues as necessary, the Debtors expect to use these Chapter 11 Cases to return to profitability and to put themselves in a position to grow for the future. Relief Requested 6. By this Motion, pursuant to sections 105, 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e) of the Bankruptcy Code and Bankruptcy Rule 4001, the Debtors seek, among other things: (a) authorization to obtain secured postpetition financing (the “DIP Financing”), pursuant to sections 364(c) and 364(d) of the Bankruptcy Code, up to the aggregate principal amount of $725 million comprised of a $300 million revolving credit facility (the “DIP Revolving Facility”) and a $425 million term loan (the “Term Loan” and together with the DIP Revolving Facility, the “DIP Loans”); (b) authorization to execute and enter into the DIP Credit Agreement (as defined below) and related documents (collectively, the “DIP Documents”) and to perform such other and further acts as may be required in connection with the DIP Documents; (c) authorization to execute and enter into the Silver Point Back-Stop Commitment Letter (as defined below); (d) the granting of adequate protection to the lenders under or in connection with (i) that certain Credit Agreement, dated as of May 24, 2004 (as amended, supplemented or otherwise modified, the “Pre-Petition Credit Agreement”), among R.J. Tower Corporation (the “Borrower”), Silver Point Capital Fund LP, as successor agent to Morgan Stanley Senior Funding, Inc. (the “Pre-Petition Agent”), the lenders party thereto and the letter of credit issuing bank(s) named therein (collectively, the “Pre-Petition Secured Lenders”); (ii) that certain First Lien Pledge and Security Agreement, dated as of May 24, 2004, between Borrower and Standard Federal Bank on behalf of certain Pre-Petition Secured Lenders (the “First Lien Lenders”) (as amended, supplemented or otherwise modified, the “First Lien Pre-Petition Security Agreement”); and (iii) that certain Second Lien Pledge and Security Agreement, dated as of May 24, 2004, between Borrower and Standard Federal Bank on behalf of certain Pre-Petition Secured Lenders (the “Second Lien Lenders”) (as amended, supplemented or otherwise modified, the “Second Lien Pre-Petition Security Agreement” and, collectively with the First Lien Pre-Petition Security Agreement, the Pre-Petition Credit Agreement, and the mortgages and all other documentation executed in connection therewith (including, for the avoidance of doubt, any rate protection agreement or hedge agreements as set forth in the Pre-Petition Credit Agreement), the “Existing Agreements”), whose liens and security interests are being primed by the DIP Financing; (e) authorization for the Debtors to use cash collateral (as such term is defined in the Bankruptcy Code) in which the Pre-Petition Secured Lenders have an interest, and the granting of adequate protection to the Pre-Petition Secured Lenders with respect to, inter alia, such use of their cash collateral and all use and diminution in the value of the Pre-Petition Collateral (as defined in the Interim DIP Order);

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(f) the granting of superpriority claims to the DIP Lenders (as defined below) payable from, and having recourse to, all pre-petition and post-petition property of the Debtors’ estates and all proceeds thereof (including any proceeds of avoidance actions), subject to the Carve-Out (as defined below); (g) pursuant to Bankruptcy Rule 4001, that an interim hearing (the “Interim Hearing”) on the Motion be held before this Court to consider entry of the Interim DIP Order authorizing the Borrower, on an interim basis, to forthwith (i) execute the DIP Documents in connection with the DIP Revolving Facility and borrow or obtain letters of credit from the DIP Lenders under the DIP Documents up to an aggregate principal or face amount not to exceed $125,000,000 under the DIP Revolving Facility for working capital and other general corporate purposes of the Debtors (subject to any limitations of borrowings under the DIP Documents), (ii) authorizing the Debtors’ use of cash collateral of the Pre-Petition Secured Lenders, (iii) granting the Pre-Petition Secured Lenders the adequate protection described herein, and (iv) authorizing the Debtors to execute and enter into the Silver Point Back-Stop Commitment Letter; and (h) that this Court schedule a final hearing (the “Final Hearing”) to be held within 30 days of the entry of the Interim DIP Order to consider entry of the Final DIP Order authorizing the balance of the borrowings and letter of credit issuances under the DIP Documents on a final basis, as set forth in this Motion and the DIP Documents filed with this Court; including without limitation, authorizing the Debtors to (i) waive the right to charge, pursuant to section 506 of the Bankruptcy Code, any costs of administration of these Chapter 11 Cases (except as permitted by the Carve-Out) against any Pre-Petition Collateral and Collateral (as defined in the Interim DIP Order); (ii) borrow or obtain letters of credit from the DIP Lenders under the DIP Documents up to (A) an aggregate principal or face amount not to exceed $300 million (inclusive of amounts authorized pursuant to the Interim DIP Order) under the DIP Revolving Facility for working capital and other general corporate purposes of the Debtors; and (B) an aggregate principal amount not to exceed $425 million under the Term Loan to refinance the First Lien Pre-Petition Secured Debt (as defined in the Interim DIP Order) outstanding as of the Petition Date. Basis for Emergency Relief 7. This Motion is brought on an emergency basis in light of the immediate and irreparable harm that would be suffered by the Debtors’ bankruptcy estates if the Debtors were to be denied the financing needed to sustain on-going business operations. The Debtors do not have sufficiently reliable liquidity sources available to ensure continued operations, absent approval of the DIP Financing. The Debtors have an immediate need to obtain the DIP Financing and use Cash Collateral in order to permit, among other things, the orderly continuation of the operation of their businesses, to maintain business relationships with vendors, suppliers and customers, to make payroll, to make capital expenditures and to satisfy other working capital and operational needs. 8. The access of the Debtors to sufficient working capital and liquidity through the use of Cash Collateral, incurrence of new indebtedness for borrowed money and other financial accommodations is vital to the preservation and maintenance of the going concern values of the Debtors and to a successful reorganization of the Debtors. In the absence of suitable debtor-in-possession

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financing, the Debtors could be compelled to curtail or even terminate their business operations—to the material detriment of creditors, employees and other parties in interest—if there were even the slightest cash flow problem. Thus, the Debtors need to ensure that such working capital is available now. Indeed, the Debtors anticipate utilizing the DIP Financing almost immediately for certain requirements. Furthermore, it is important for the Debtors to be able to demonstrate to their customers, suppliers and vendors that they have sufficient capital to ensure ongoing operations. Summary of the Principal Terms of the DIP Credit Agreement 9. Prior to the Petition Date, the Debtors contacted five potential lenders, including JPMorgan Chase Bank, N.A. (“JPMCB”), with respect to postpetition financing, and received proposals from four of these lenders. The Debtors determined that the proposal of JPMCB was, under the circumstances, the most favorable and addressed the Debtors’ working capital and liquidity needs, while being acceptable to the Debtors’ Pre-Petition Secured Lenders. The proposal of JPMCB provides the Debtors with funding needed to operate and maintain their businesses and to pay necessary expenses during the pendency of their Chapter 11 Cases. Accordingly, in their sound business judgment, the Debtors ultimately decided to accept the proposal of JPMCB for postpetition financing. 10. The Debtors and JPMCB engaged in good faith and extensive arm’s length negotiations that culminated in an agreement by the DIP Lenders to provide the Debtors up to $725 million of secured postpetition financing, on the terms and subject to the conditions set forth in that certain Revolving Credit, Term Loan and Guaranty Agreement, substantially in the form attached hereto as Exhibit B (the “DIP Credit Agreement”),2 by and among the Borrower, Tower Automotive, Inc. and the domestic subsidiaries of the Borrower party to the DIP Credit Agreement, as guarantors (collectively, the “Guarantors”), JPMCB, as administrative agent (in such capacity, the “DIP Agent”), and the lender parties thereto from time to time (together with JPMCB, the “DIP Lenders”). 11. The significant terms of the DIP Credit Agreement are as follows:3 (a) Borrower: R.J. Tower Corporation (b) Guarantors: Tower Automotive, Inc. and the domestic subsidiaries of the Borrower party to the DIP Credit Agreement. (c) Agent and Banks: A syndicate of financial institutions, including JPMorgan Chase Bank, N.A., as administrative agent, to be arranged by J.P. Morgan Securities Inc. (“JPMorgan”), as sole lead arranger and sole bookrunner. (d) Commitment: Up to $725 million comprised as follows: (i) Tranche A shall be a revolving commitment of up to $300 million, of which a portion not in excess of $100 million shall be available for the issuance of letters of credit, and (ii) Tranche B shall be a term loan commitment of up to $425 million. (e) Purpose: The Commitment shall be available for (i) in the case of DIP Loans under Tranche A, working capital and other general corporate purposes of the Borrower and the Guarantors and (ii) in the case of DIP Loans under Tranche 2 Unless

otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the DIP Credit Agreement. 3 This summary is qualified in its entirety by reference to the provisions of the DIP Credit Agreement.

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B, the refinancing in full of the loans outstanding as of the Petition Date under the First Lien Facility (as defined in the Pre-Petition Credit Agreement). (f) Term: Borrowings shall be repaid in full, and the Commitment shall terminate, at the earliest of (i) the date that is 24 months after the Petition Date, (ii) 45 days after the entry of the Interim DIP Order if the Final DIP Order has not been entered prior to the expiration of such 45-day period, (iii) the substantial consummation of a plan of reorganization that is confirmed pursuant to an order entered by the Court or any other court having jurisdiction over the Chapter 11 Cases and (iv) the acceleration of the loans and the termination of the Commitment in accordance with the DIP Credit Agreement (the earliest such date, the “Termination Date”). Upon occurrence of the Termination Date, the DIP Loans and other obligations shall be repaid in full first, to the DIP Revolving Facility and second, to the Term Loan. (g) Closing Date: No later than 10 days after the entry of the Interim DIP Order. (h) Priority and Liens: All direct borrowings and reimbursement obligations under Letters of Credit and other obligations under the DIP Financing (and all guaranties of the foregoing by the Guarantors), shall at all times, subject to the Carve-Out: (i) pursuant to section 364(c)(1) of the Bankruptcy Code, be entitled to joint and several superpriority claim status in the Chapter 11 Cases; (ii) pursuant to section 364(c)(2) of the Bankruptcy Code, be secured by a perfected first priority lien on all property of the Borrower and the Guarantors’ respective estates in the Chapter 11 Cases that is not subject to valid, perfected and non-avoidable liens, including without limitation, as of the Petition Date, all present and future accounts receivable (other than receivables theretofore sold to the Receivables Subsidiary (as defined in the Pre-Petition Credit Agreement) pursuant to the Permitted Receivable Purchase Facility (as defined in the Pre-Petition Credit Agreement) as of the Petition Date) and inventory of the Borrower and the Guarantors, and on all cash maintained in the Letter of Credit Account, excluding (x) avoidance actions (it being understood that, notwithstanding such exclusion of avoidance actions, the proceeds of such actions (including, without limitation, assets as to which liens are avoided) shall be subject to such liens under section 364(c)(2) of the Bankruptcy Code and available to repay the DIP Loans and all other obligations under the DIP Financing) and (y) joint venture interests and related assets as to which (I) liens thereon are not permitted to be granted or (II) as a result of the granting of such lien, the value of such interests and related assets would be materially adversely compromised (it being understood that, notwithstanding such exclusion of such interests and assets, the proceeds of such interests and assets shall be subject to such liens under section 364(c)(2) of the Bankruptcy Code and available to repay the DIP Loans). (iii) pursuant to section 364(c)(3) of the Bankruptcy Code, be secured by a perfected junior lien on all property of the Borrower and the Guarantors’ respective estates in the Chapter 11 Cases, that is subject to valid, perfected and non-avoidable liens in existence on the Petition Date or to valid liens in existence on the Petition Date that are perfected subsequent to the Petition Date as permitted by section 546(b) of the Bankruptcy Code (other than property that is subject to the existing liens that secure obligations under the Pre-Petition

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Credit Agreement referred to in clause (iv) hereof, which liens shall be primed by the liens to be granted to the DIP Agent as described in such clause); and (iv) pursuant to section 364(d)(1) of the Bankruptcy Code, be secured by a perfected first priority, senior priming lien on all of the property of the Borrower and the Guarantors’ respective estates in the Chapter 11 Cases (including, without limitation, inventory, accounts receivable, general intangibles, chattel paper, owned real estate, real property leaseholds, fixtures and machinery and equipment, deposit accounts, patents, copyrights, trademarks, tradenames, rights under license agreements, and other intellectual property and capital stock of subsidiaries) that is subject to the existing liens that secure the obligations of the Borrower and the Guarantors under or in connection with the Pre-Petition Credit Agreement (including, without limitation, the liens in favor of the First Lien Lenders until the refinancing of the First Lien Facility) and any liens that are junior to such existing liens, all of which existing liens (the “Primed Liens”) shall be primed by and made subject and subordinate to the perfected first priority senior liens to be granted to the DIP Agent, which senior priming liens in favor of the DIP Agent shall also prime any liens granted after the Petition Date to provide adequate protection in respect of any of the Primed Liens but shall not prime liens, if any, to which the Primed Liens are subject on the Petition Date (it being understood that, as a condition precedent to the transactions contemplated hereby, the DIP Agent shall be satisfied, in its sole judgment, that the priming contemplated hereby shall be with the consent or non-objection of a preponderance of the Pre-Petition Secured Lenders); provided, however, that the Borrower shall not be required to pledge in excess of 65% of the capital stock of its direct foreign subsidiaries or any of the capital stock or interests of indirect foreign subsidiaries (if adverse tax consequences would result to the Borrower) or joint venture interests (if such pledge would result in the value of such joint venture interests being materially adversely compromised). (i) Carve-Out for Fees and Expenses of Retained Professionals: The superpriority claims and postpetition liens shall be subject to (i) in the event of the occurrence and during the continuance of an Event of Default, or an event that would constitute an Event of Default with the giving of notice or lapse of time or both, the payment of allowed and unpaid professional fees and disbursements incurred by the Borrower, the Guarantors and any statutory committees appointed in the Chapter 11 Cases in an aggregate amount not in excess of $7,000,000 (plus all unpaid professional fees and disbursements incurred prior to the occurrence of an Event of Default or an event that would constitute an Event of Default with the giving of notice or lapse of time or both to the extent allowed by the Court at any time), (y) the payment of fees pursuant to 28 U.S.C. § 1930 and (z) in the event of conversion of the Chapter 11 Cases, up to $50,000 to pay fees and expenses incurred by a trustee and his professionals ((x), (y) and (z) together, the “Carve-Out”). Notwithstanding the foregoing, so long as an Event of Default or an event which with the giving of notice or lapse of time or both would constitute an Event of Default shall not have occurred and be continuing, the Borrower and the Guarantors shall be permitted to pay compensation and reimbursement of expenses allowed and payable under 11 U.S.C. §§ 330 and 331, as the same may be due and payable, and the same shall not reduce the Carve-Out.

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(j) Conditions to Priming and Use of Cash Collateral: The parties (the “Primed Parties”) whose liens are primed as described in clause (iv) of “Priority and Liens” above, and the cash proceeds of whose prepetition collateral shall be authorized for use by the Borrower and the Guarantors as described under “Use of Cash Collateral” below, may receive as adequate protection for such priming and use (in the case of the Existing First Lien Lenders, until such time as the Term Loan has been advanced), all of which adequate protection must be satisfactory to the DIP Agent, including the following: (i) the payment of current interest and letter of credit fees, (ii) a superpriority claim as contemplated by section 507(b) of the Bankruptcy Code immediately junior to the claims under section 364(c)(1) of the Bankruptcy Code held by the DIP Agent and the DIP Lenders, (iii) a lien on the assets of the Borrower and the Guarantors to be encumbered in favor of the DIP Agent, which adequate protection lien shall have a priority immediately junior to the priming and other liens to be granted in favor of the DIP Agent, and (iv) the payment of the reasonable fees and expenses incurred by the Pre-Petition Agent under the Pre-Petition Credit Agreement and the continuation of the payment on a current basis of the administration fees that are provided for thereunder. So long as there are any borrowings or Letters of Credit outstanding, or the Commitment is in effect, the Primed Parties shall not be permitted to take any action in the Court or otherwise related to the enforcement of such adequate protection liens or the liens granted pursuant to the Pre-Petition Credit Agreement and shall not seek to terminate or modify the use of Cash Collateral, obtain additional (or different) adequate protection than that set forth in the DIP Orders or seek to litigate or relitigate the priming of the Pre-Petition Secured Lenders’ liens and the grant of the superpriority claims of the DIP Lenders unless (x) the maturity of the DIP Loans shall be extended or (y) the principal amount of the DIP Loans shall be increased beyond $725 million; provided, however, that the PrePetition Secured Lenders shall otherwise have the rights as creditors to take positions with respect to any motions or applications in the Court. (k) Use of Cash Collateral: The Commitment shall not be available for use by the Borrower unless the Court shall have authorized the use by the Borrower and the Guarantors of proceeds of prepetition collateral that constitutes “cash collateral” (within the meaning of the Bankruptcy Code) in respect of the liens granted pursuant to the Pre-Petition Credit Agreement. The Commitment shall not be available for direct borrowings unless the Borrower shall at that time have the use of such cash collateral for the purposes that are described under “Purpose” above. (l) Commitment Fee: 1/2 of 1% per annum on the unused amount of the Commitment (with the issuance of Letters of Credit being treated as usage of the Commitment) payable monthly in arrears during the term of the DIP Financing. (m) Nature of Fees: Non-refundable under all circumstances. (n) Letter of Credit Fees: 2.75% per annum on the outstanding face amount of each Letter of Credit plus customary fees for fronting, issuance, amendments and processing, payable quarterly in arrears to the Issuing Lender for its own account. (o) Interest Rate: JPMCB’s Alternate Base Rate (“ABR”) plus (i) 1.75% in the case of Tranche A Loans and (ii) 2.75% in the case of Tranche B Loans or,

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at the Borrower’s option, LIBOR plus (x) 2.75% in the case of Tranche A Loans and (y) 3.75% in the case of Tranche B Loans for interest periods of 1, 3, 6 or 9 months; interest shall be payable monthly in arrears, on the Termination Date and thereafter on demand. (p) Default Interest: Upon the occurrence and during the continuance of any default in the payment of principal, interest or other amounts due under the DIP Credit Agreement (including, without limitation, in respect of Letters of Credit), interest shall be payable on demand at 2% above the then applicable rate. (q) Tranche A Borrowing Base: From and after the entry of the Final DIP Order, the sum of the aggregate outstanding amount of direct Tranche A borrowings plus undrawn amount of outstanding Tranche A Letters of Credit issued for the account of the Borrower (including unreimbursed draws) shall at no time exceed the amount by which the Borrowing Base (plus $25,000,000 for each of the periods of July 15 through August 15 and December 15 through January 15) exceeds $7,000,000. The Borrowing Base (which will include (i) all accounts receivable (but not including the receivables heretofore sold to the Receivables Subsidiary pursuant to the Permitted Receivables Purchase Facility and, until the Permitted Receivables Purchase Facility has been paid in full, receivables payable by the obligors on the receivables heretofore sold to the Receivables Subsidiary), (ii) inventory and (iii) $200,000,000 on account of machinery and equipment, in each case meeting certain eligibility standards determined by the DIP Agent in its reasonable discretion and subject to reserves from time to time established by the DIP Agent, provided, that the amount of the Borrowing Base that is represented by machinery and equipment shall at no time exceed seventy-five (75%) of the aggregate amount of the Borrowing Base as a whole) shall be defined in a manner reasonably satisfactory to the DIP Agent. Borrowing Base eligibility standards may be fixed and revised from time to time by the DIP Agent, in its reasonable discretion, and in the DIP Agent’s reasonable exclusive judgment. (r) Minimum Revolver Borrowing: $1,000,000 for direct borrowing of ABR Loans and $5,000,000 for direct borrowing of LIBOR Loans; the DIP Agent must receive one business day’s notice (received by the DIP Agent by 12:00 noon, New York City time) for ABR Loans and three business days’ notice (received by the DIP Agent by 1:00 p.m., New York City time) for LIBOR Loans, provided that same day borrowings of ABR Loans will be available if notice is received by the DIP Agent no later than 12:00 p.m., New York City time, on such day. (s) Conditions of Initial Extension of Credit: The obligation to provide the initial extension of credit shall be subject to the satisfaction or waiver of the following conditions: (i) Not later than 15 days following the Petition Date, entry of the Interim DIP Order on an application or motion by the Borrower that is reasonably satisfactory in form and substance to the DIP Agent, which Interim DIP Order shall have been entered with the consent or non-objection of a preponderance of the Pre-Petition Secured Lenders and on such prior notice to such parties (including, without limitation, the Primed Parties) as may be reasonably satisfactory to the DIP Agent, approving the transactions contemplated in the DIP Credit Agreement and granting the superpriority claim status and senior priming and other liens referred to in the DIP Credit Agreement, which Interim

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DIP Order (w) shall authorize extensions of credit in respect of Tranche A in amounts not in excess of $125,000,000 and may authorize the refinancing of the loans outstanding under the First Lien Facility, (x) shall authorize the use of cash collateral under the Pre-Petition Credit Agreement and provide for adequate protection in favor of the Primed Parties as set forth under “Conditions to Priming and Use of Cash Collateral” above, (y) shall approve the payment by the Borrower of all of the fees provided for in the Fee Letter (as more fully described infra) and (z) shall not have been vacated, reversed, modified, amended or stayed; (ii) All of the “first day orders” entered at the time of the Petition Date shall be reasonably satisfactory in form and substance to the DIP Agent; (iii) Receipt of closing documents (including security documents granting the liens in favor of the DIP Agent) reasonably satisfactory in form and substance to the DIP Agent; (iv) Legal opinion of counsel to the Borrower and the Guarantors in form reasonably satisfactory to the DIP Agent; (v) Receipt of UCC searches (including tax liens and judgments) conducted in the jurisdictions in which the Borrower and the Guarantors conduct business, reasonably satisfactory to the DIP Agent (dated as of a date reasonably satisfactory to the DIP Agent), reflecting the absence of liens and encumbrances on the assets of the Borrower and the Guarantors except as may be satisfactory to the DIP Agent; (vi) The Borrower and the Guarantors shall have granted the DIP Agent access to and the right to inspect all reports, audits and other internal information of the Borrower and the Guarantors relating to environmental matters and any third party verification of certain matters relating to compliance with environmental laws and regulations requested by the DIP Agent, and the DIP Agent shall be reasonably satisfied that the Borrower and the Guarantors are in compliance in all material respects with all applicable environmental laws and regulations and be satisfied with the costs of maintaining such compliance; (vii) There shall have been paid to the DIP Agent all fees owed to the DIP Agent, the DIP Lenders and JPMorgan as set forth in the Fee Letter entered into among the Borrower, JPMCB and JPMorgan (the “Fee Letter”) and otherwise as referenced herein; (viii) All corporate and judicial proceedings and all instruments and agreements in connection with the transactions among the Borrower, the Guarantors, the DIP Agent and the DIP Lenders contemplated by the DIP Credit Agreement shall be reasonably satisfactory in form and substance to the DIP Agent and the DIP Agent shall have received all information and copies of all documents or papers reasonably requested by the DIP Agent; (ix) The DIP Agent shall have received such information (financial or otherwise) as may be reasonably requested by the DIP Agent, including, without limitation, the business plan of the Domestic Entities and the Parent and its consolidated subsidiaries (together, the “Global Entities”) (which plan shall (i) be for the period through the Maturity Date and (ii) be reasonably satisfactory in form and substance to the DIP Agent), and shall discuss such business plan with the Borrower’s management and shall be satisfied with the nature and substance of such discussions; and

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(x) Such other conditions as are reasonably satisfactory to the DIP Agent as set forth in the DIP Credit Agreement. (t) Conditions of Each Extension of Credit: The obligation to provide each extension of credit (including the initial extension of credit) shall be subject to the satisfaction (or waiver) of the following conditions: (i) If as a result of such extension of credit usage of the Commitment would exceed in the aggregate the amount authorized by the Interim DIP Order, and in any event no later than 45 days after the entry of the Interim DIP Order, the Court shall have entered the Final DIP Order in substantially the form of the Interim DIP Order, with only such modifications as are reasonably satisfactory in form and substance to the DIP Agent (which Final DIP Order shall approve the refinancing of the loans by the First Lien Lenders outstanding as of the Petition Date if not approved by the Interim DIP Order); (ii) The Interim DIP Order or the Final DIP Order, as the case may be, shall be in full force and effect, and shall not have been vacated, reversed, modified, amended or stayed, or modified or amended in a manner that the requisite lenders reasonably determine to be adverse to their interests; (iii) No Event of Default and no condition which would constitute an Event of Default with the giving of notice or lapse of time or both shall exist; (iv) Representations and warranties shall be true and correct in all material respects at the date of each extension of credit except to the extent such representations and warranties relate to an earlier date; (v) Receipt of a notice of borrowing from the Borrower; (vi) From and after entry by the Court of the Final DIP Order, receipt by the DIP Agent of a certificate evidencing calculations under the Borrowing Base (a “Borrowing Base Certificate”) dated no more than 7 days prior to the extension of credit, which Borrowing Base Certificate shall include supporting schedules as required by the DIP Agent; (vii) The Borrower shall have paid the balance of all fees then payable as referenced in the Fee Letter and herein; and (viii) Such other conditions as are reasonably satisfactory to the DIP Agent as set forth in the DIP Credit Agreement. (u) Events of Default: The DIP Credit Agreement contains customary events of default, as set forth in the DIP Credit Agreement, including, without limitation, failure to make payments on interest and fees when due where such default shall continue for more than two business days; failure to pay principal when due; noncompliance with negative covenants; noncompliance with other covenants for more than ten days; failure to deliver a certified Borrowing Base Certificate when due if unremitted for more than three business days; representations and warranties proving materially incorrect when made; dismissal of these chapter 11 Cases or conversion to chapter 7; appointment of a chapter 11 trustee, responsible officer or examiner with expanded powers (plus the passage of 30 days); payments on account of prepetition indebtedness, other than those approved by this Court or as set forth in the DIP Credit Agreement; granting of relief from the automatic stay to permit foreclosure on any material assets of the Debtors; Change of Control; material provisions of the DIP Credit Agreement ceasing to be valid and binding on the Debtors; entry of an order reversing, amending, supplementing, staying for a period in excess of ten days, vacating, or otherwise modifying in a manner that is material and adverse to the

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Interim DIP Order or the Final DIP Order; any judgment or order (not covered by insurance) in excess of $10,000,000 as to any postpetition obligation that is not stayed, vacated or discharged or any judgment with respect to a postpetition event which causes or would reasonably be expected to cause a material adverse change or material adverse effect on the ability of the Debtors to perform their obligations under the DIP Credit Agreement; certain ERISA-related defaults; and other customary defaults. 12. Under the Fee Letter, the Debtors have agreed to pay certain fees to JPMCB, including an arrangement and underwriting fee equal to 1.5% of the Commitment (or $10,875,000), of which amount $2,718,750 has already been paid, a portion of which will be payable upon the entry of the Interim DIP Order and the remainder to be payable upon the entry of the Final DIP Order (less a credit of $250,000 on account of a fee previously paid to JPMCB). In addition, the Debtors have agreed to pay (i) letter of credit fronting fees of 0.25% per annum on the face amount of each letter of credit, (ii) an annual collateral monitoring fee of $150,000, and (iii) an annual administrative fee of $200,000. Furthermore, the Fee Letter provides that JPMCB and JPMorgan, at any time prior to the conclusion of the Final Hearing, shall be entitled, after consultation with the Debtors, to change the structure, terms or pricing of the DIP Financing if the syndication has not been completed and if JPMCB and JPMorgan reasonably determine that such changes are advisable in order to ensure a successful syndication of the DIP Financing; provided, however, that (i) the interest rate may not be increased by more than (a) 0.50% per annum with respect to the DIP Revolving Facility and (b) 0.75% per annum with respect to the Term Loan; (ii) the DIP Revolving Facility shall not be less than $300 million; (iii) no additional types of covenants shall be added; and (iv) the Borrowing Base shall not be modified such that availability under the DIP Revolving Facility is less than approximately $300 million. Extraordinary Provisions 13. This Court’s Guidelines for Financial Requests adopted by General Order No. M-274, dated as of September 9, 2002, require the Debtors to highlight any Extraordinary Provisions4 included in the DIP Credit Agreement. 14. The only Extraordinary Provisions included in the DIP Loan Agreement are as follows: (a) the Debtors seek authority at the Final Hearing to waive the right to charge, pursuant to section 506 of the Bankruptcy Code, any costs of administration of these Chapter 11 Cases (except as permitted by the Carve-Out) against any Pre-Petition Collateral and Collateral; and (b) the Debtors seek authority at the Final Hearing to borrow or obtain letters of credit from the DIP Lenders under the Term Loan up to an aggregate principal amount not to exceed $425 million to refinance in full all of the loans outstanding as of the Petition Date under the First Lien Facility (as defined in the Pre-Petition Credit Agreement).

4 This

term shall have the meaning ascribed to it in General Order No. M274 of the United States Bankruptcy Court for the Southern District of New York.

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15. These Extraordinary Provisions are typically found in debtor-inpossession financing agreements, and JPMCB would not have agreed to provide financing to the Debtors absent such provisions. Adequate Protection 16. Pursuant to section 363(c)(2) of the Bankruptcy Code, a debtor-inpossession may not use cash collateral without the consent of the secured party or court approval. 11 U.S.C. § 363(c)(2). Section 363(e) of the Bankruptcy Code provides that upon request of an entity that has an interest in property to be used by a debtor, the court shall prohibit or condition such use as is necessary to provide adequate protection of such interest. 11 U.S.C. § 363(e). Section 364(d) of the Bankruptcy Code provides that a debtor may obtain credit secured by a senior or equal lien if an existing secured creditor’s interest in the collateral security is adequately protected. 11 U.S.C. § 364(d)(1). 17. What constitutes adequate protection must be decided on a case-by-case basis. See In re Mosello, 195 B.R. 277, 289 (Bankr. S.D.N.Y. 1996); In re Realty Southwest Assocs., 140 B.R. 360 (Bankr. S.D.N.Y. 1992); In re Beker Indus. Corp., 58 B.R. 725 (Bankr. S.D.N.Y. 1986). See also In re O’Connor, 808 F.2d 1393, 1396 (10th Cir. 1987); In re Martin, 761 F.2d 472 (8th Cir. 1985). The focus of the requirement is to protect a secured creditor from diminution in the value of its interest in the particular collateral during the period of use. See In re 495 Central Park Avenue Corp., 136 B.R. 626, 631 (Bankr. S.D.N.Y. 1992); In re Beker Indus. Corp., 58 B.R. at 736; In re Hubbard Power & Light, 202 B.R. 680 (Bankr. E.D.N.Y. 1996). 18. As noted above, the liens securing the DIP Financing will prime the liens in the senior debt collateral granted to secure payment under the PrePetition Credit Agreement to the Pre-Petition Secured Lenders. Additionally, the Debtors by this Motion request authority to use all cash collateral existing on or after the Petition Date that may be subject to liens in favor of the Pre-Petition Secured Lenders (the “Cash Collateral”). The Debtors have an emergency need for the immediate use of the Cash Collateral pending a final hearing on this Motion. The Debtors require use of the Cash Collateral to, among other things, pay present operating expenses, including payroll, and to pay vendors on a going-forward basis to ensure a continued supply of materials essential to the Debtors’ continued viability. In addition, it is an explicit condition of the DIP Financing that the Court grant the Debtors use of the Cash Collateral. 19. As adequate protection to protect the Pre-Petition Secured Lenders from diminution, if any, in the value of their interest in their collateral, the Debtors’ propose the following: (a) Adequate Protection Liens: The Pre-Petition Agent (for itself and in the respective order of priority for the benefit of (i) first, the First Lien Lenders and (ii) second, the Second Lien Lenders) shall be granted a replacement security interest in and lien upon all the Collateral, subject and subordinate only to (x) the security interest and liens granted to the DIP Agent for the benefit of the DIP Lenders and any liens on the Collateral to which such liens so granted to the DIP Agent are junior and (y) the Carve-Out. (b) Section 507(b) Claim: The Pre-Petition Agent, First Lien Lenders and the Second Lien Lenders shall be granted, subject to the payment of the

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Carve-Out, and subject to the respective order of priority between the First Lien Lenders and the Second Lien Lenders, a superpriority claim as provided for in section 507(b) of the Bankruptcy Code, immediately junior to the claims under section 364(c)(1) of the Bankruptcy Code held by the DIP Agent and the DIP Lenders; provided, however, that the Pre-Petition Agent and the Pre-Petition Secured lenders shall not receive any payments, property or other amounts in respect of the superpriority claims under section 507(b) of the Bankruptcy Code granted under the DIP Orders or under the Existing Agreements unless and until the obligations under the DIP Financing have been indefeasibly paid in cash in full and the Commitments under the DIP Credit Agreement have been terminated. (c) Interest fees and Expenses: The Pre-Petition Agent shall receive from the Debtors (i) immediate cash payment of all accrued and unpaid interest on the Pre-Petition Debt and letter of credit fees at the non-default rates provided for in the Existing Agreements, and all other accrued and unpaid fees and disbursements (including, but not limited to, fees owed to the Pre-Petition Agent) owing to the Pre-Petition Agent under the Existing Agreements and incurred prior to the Petition Date, (ii) current cash payments of all fees and expenses payable to the Pre-Petition Agent under the Existing Agreements, including, but not limited to, the reasonable fees and disbursements of counsel and other consultants for the Pre-Petition Agent and (iii) current monthly payment of all accrued but unpaid interest on the Pre-Petition Debt at a rate (x) set forth in the Existing Agreements with respect to the First Lien PrePetition Secured Debt and (y) of LIBOR plus 9.50% with respect to the Second Lien Pre-Petition Secured Debt, and letter of credit and other fees at the nondefault contract rate applicable on the Petition Date (including LIBOR pricing options) under the Existing Agreements, provided that, without prejudice to the rights of any other party to contest such assertion, the Pre-Petition Secured Lenders reserve their rights to assert claims for the payment of additional interest calculated at any other applicable rate of interest (including, without limitation, default rates), or on any other basis, provided for in the Existing Agreements. (d) Refinance of the First Lien Facility: The DIP Credit Agreement provides that the Term Loan shall be used to refinance in full all of the loans outstanding as of the Petition Date under the First Lien Facility after the entry of the Final DIP Order. Therefore, diminution, if any, of the First Lien Lenders’ collateral would be limited, as the use of cash collateral and the priming of liens with respect to the First Lien Lenders shall be for a short period of time pending the entry of the Final DIP Order. (e) Silver Point Back-Stop Commitment Letter: The Debtors seek authority at the Interim Hearing to enter into the commitment letter, dated February 2, 2005 (the “Silver Point Back-Stop Commitment Letter”), by and among R.J. Tower Corporation, Tower Automotive, Inc. and Silver Point Finance, LLC (“Silver Point”), substantially in the form attached hereto as Exhibit C, with respect to the priming of the Second Lien Lenders. Pursuant to the terms of the Silver Point Back-Stop Commitment Letter, should any Second Lien Lender wish to assign its Second Lien Deposits or Second Lien Loans (as such terms are defined in the Pre-Petition Credit Agreement) and discontinue as a Second Lien Lender under the Pre-Petition Credit Agreement, Silver Point agrees

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to take by assignment such Second Lien Lender’s (such Second Lien Lender hereinafter referred to as a “Discontinuing Lender”) Second Lien Deposits or Second Lien loans, together with all of the Discontinuing Lender’s right, title and interest as a Second Lien Lender under the Pre-Petition Credit Agreement, for the purchase price equal to the full amount of, and accrued Participation Fees (as defined in the Pre-Petition Credit Agreement) on, such Second Lien Deposits or the outstanding principal amount of, and interest on, such Second Lien Loans. As consideration for Silver Point’s commitment to take by assignment and Silver Point’s structuring advice in relation to the Second Lien Facility, the Debtors agree to pay to Silver Point a fee equal to $5.425 million upon entry of the Interim DIP Order. 20. Accordingly, the Debtors believe that the protections to be provided to the Pre-Petition Secured Lenders, as described above, are sufficient to protect any diminution in the value of their interest during the period their collateral is used by the Debtors, and are fair and reasonable. Applicable Authority 21. As described above, it is vital to the success of the Debtors’ reorganization efforts that they immediately be authorized to use cash collateral and to obtain access to sufficient postpetition financing. The preservation of estate assets and the Debtors’ ability to reorganize successfully depend heavily upon the expeditious approval of the DIP Financing and the related actions requested herein. 22. Section 364 of the Bankruptcy Code distinguishes among (i) obtaining unsecured credit in the ordinary course of business, (ii) obtaining unsecured credit outside the ordinary course of business, and (iii) obtaining credit with specialized priority or on a secured basis. If a debtor-in-possession cannot obtain postpetition credit on an unsecured basis, pursuant to section 364(c) of the Bankruptcy Code, then the court may authorize such debtor to obtain credit or incur debt that is entitled to superpriority administrative expense status, secured by a senior lien on unencumbered property, a junior lien on encumbered property, or a combination of the foregoing. In addition, pursuant to section 364(d) of the Bankruptcy Code, a court may authorize a debtor to obtain postpetition credit secured by a senior or equal lien on encumbered property (i.e., a “priming” lien) when a debtor is unable to obtain credit elsewhere and the interests of existing lienholders are adequately protected. 23. Fed. R. Bankr. P. 4001(c) governs the procedures for obtaining authorization to obtain postpetition financing and provides, in relevant part: The court may commence a final hearing on a motion for authority to obtain credit no earlier than 15 days after service of the motion. If the motion so requests, the court may conduct a hearing before such 15 day period expires, but the court may authorize the obtaining of credit only to the extent necessary to avoid immediate and irreparable harm to the estate pending a final hearing.

Fed. R. Bankr. P. 4001(c). 24. Accordingly, the Court is authorized to grant the relief requested herein.

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A. The DIP Financing Should Be Approved Approval for Incurrence of Secured Superpriority Debt Under Sections 364(c) and 364(d) of the Bankruptcy Code 25. The statutory requirement for obtaining postpetition credit under section 364(c) of the Bankruptcy Code is a finding, made after notice and a hearing, that the debtors-in-possession are “unable to obtain unsecured credit allowable under section 503(b)(1) of [the Bankruptcy Code] as an administrative expense.”5 See In re Garland Corp., 6 B.R. 456, 461 (1st Cir. BAP 1980) (secured credit under section 364(c)(2) is authorized, after notice and a hearing, upon showing that unsecured credit cannot be obtained); In re Crouse Group, Inc., 71 B.R. 544, 549 (Bankr. E.D. Pa.), modified on other grounds, 75 B.R. 553 (Bankr. E.D. Pa. 1987) (debtor seeking unsecured credit under section 364(c) of the Bankruptcy Code must prove that it was unable to obtain unsecured credit pursuant to section 364(b) of the Bankruptcy Code); In re Ames Dept. Stores, Inc., 115 B.R. 34, 37-39 (Bankr. S.D.N.Y. 1990) (debtor must show that it has made a reasonable effort to seek other sources of financing under sections 364(a) and (b) of the Bankruptcy Code). 26. In addition, section 364(d)(1) of the Bankruptcy Code, which governs the incurrence of postpetition debt secured by senior or “priming” liens, provides that the Court may, after notice and a hearing: authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if—

(A) the trustee is unable to obtain credit otherwise; and (B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. 11 U.S.C. § 364(d)(1). 27. As set forth in the First Day Affidavit, and as the evidence at the Final Hearing will demonstrate, the Debtors could not have obtained a postpetition financing facility on the terms and of the type and magnitude required in these Chapter 11 Cases on an unsecured basis; or, indeed, without offering terms largely similar to those of the DIP Financing. 28. To show that the credit required is not obtainable on an unsecured basis, a debtor need only demonstrate “by a good faith effort that credit was not available” without the protections afforded to potential lenders by sections 364(c) or 364(d) of the Bankruptcy Code. Bray v. Shenandoah Federal Savings & Loan Assn. (In re Snowshoe Co.), 789 F.2d 1085, 1088 (4th Cir. 1986). Thus, 5 Section

364(c) of the Bankruptcy Code provides that: If the trustee [or debtor-in-possession] is unable to obtain unsecured credit allowable under § 503(b)(1) of this title as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt— (1) with priority over any and all administrative expenses of the kind specified in § 503(b) or 507(b) of this title; (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien.

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“[t]he statute imposes no duty to seek credit from every possible lender before concluding that such credit is unavailable.” Id.; see also Ames, 115 B.R. at 40 (holding that debtor made a reasonable effort to secure financing when it selected the least onerous financing option from the remaining two lenders). Moreover, where few lenders are likely to be able and willing to extend the necessary credit to a debtor, “it would be unrealistic and unnecessary to require [the debtor] to conduct an exhaustive search for financing.” In re Sky Valley, Inc., 100 B.R. 107, 113 (Bankr. N.D. Ga. 1988), aff’d sub nom, Anchor Savings Bank FSB v. Sky Valley, Inc., 99 B.R. 117, 120 n. 4 (N.D. Ga. 1989). 29. Initially, it must be observed that the universe of lenders who could commit to meet the Debtors’ postpetition financing requirements was quite limited for two reasons. First, the DIP Financing is quite large and, accordingly, required both significant underwriting capacity and sophisticated syndication capabilities. Second, because any postpetition financing facility would likely require priming of the Pre-Petition Secured Lenders, the Debtors required that the DIP Agent have the ability to work with and gain the cooperation of the Pre-Petition Secured Lenders. 30. Prior to the Petition Date, the Debtors approached JPMCB and several other financial institutions about providing postpetition financing. However, none of the institutions approached by the Debtors was willing to make a postpetition loan on an unsecured basis. Therefore, after carefully evaluating the foregoing requirements, the Debtors determined that their efforts to arrange postpetition financing should be focused upon JPMCB, the syndication agent for the Pre-Petition Secured Lenders. 31. The Debtors’ efforts to seek necessary postpetition financing from other sophisticated lending institutions satisfy the statutory requirements of section 364(c) of the Bankruptcy Code. See, e.g., Ames, 115 B.R. at 40 (approving section 364(c) financing facility and holding that the debtor made reasonable efforts to obtain less onerous terms where it approached four lending institutions, was rejected by two, and selected the least onerous financing option from the remaining two lenders); In re 495 Cent. Park Ave. Corp., 136 B.R. 626, 630 (Bankr. S.D.N.Y. 1992) (debtor “must make an effort to obtain credit without priming a senior lien”); In re Reading Tube Indus., 72 B.R. 329, 332 (Bankr E.D. Pa. 1987) (requiring demonstration that less onerous financing was unavailable); In re Phoenix Steel Corp., 39 B.R. 218, 222 and n.9 (D. Del. 1984) (same). 32. The Debtors further submit that the foregoing reasons demonstrate that the first prong of section 364(d)(1) of the Bankruptcy Code—the non-availability of credit except on the terms offered by JPMCB—is satisfied in these Chapter 11 Cases. Moreover, as discussed infra, the Debtors believe that the protections to be provided to the Pre-Petition Secured Lenders—namely, the payment of fees and expenses, the provision of replacement liens and superpriority claims, the purpose of the Term Loan to refinance in full all of the loans outstanding as of the Petition Date under the First Lien Facility, and the entry into the Silver Point Back-Stop Commitment Letter—are sufficient to protect the Pre-Petition Secured Lenders from diminution in the value of their interest during the period their collateral is used by the Debtors, and are fair and reasonable.

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The DIP Facility is Necessary to Preserve Assets of the Debtors’ Estates 33. It is essential that the Debtors immediately instill their employees, vendors, service providers and customers with confidence in the Debtors’ ability to transition their business smoothly to the chapter 11 process, operate normally in that environment, and ultimately to reorganize in a successful and expedient manner. The DIP Financing is necessary to continue, among other things, the orderly operation of the Debtors’ business, the maintenance of continued relationships with the Debtors’ vendors and service providers, and also to satisfy actual or procedurally necessary working requirements for the Debtors’ businesses. 34. The initial success of these Chapter 11 Cases and the stabilization of the Debtors’ operations at the outset thereof depend on the confidence of the Debtors’ employees, vendors, service providers and customers, which in turn depends upon the Debtors’ ability to minimize the disruption to their business of the bankruptcy filing. If the relief sought in this Motion is delayed or denied, the necessary parties’ confidence may be shattered, consequently damaging the Debtors’ ability to reorganize, perhaps beyond repair. In contrast, once the DIP Financing is approved and implemented, the Debtors’ ability to continue functioning normally will be reasonably assured. The Debtors thus submit that their need for approval of the DIP Financing is immediate. The Terms of the DIP Financing are Fair, Reasonable and Appropriate 35. The terms and conditions of the DIP Financing are fair and reasonable, and were negotiated by the parties in good faith and at arms’ length. In the reasonable exercise of the Debtors’ business judgment, the DIP Financing is the best financing option available under the Debtors’ present circumstances. The purpose of the DIP Financing is to enable the Debtors to continue normal business operations during the pendency of these Chapter 11 Cases. Further, the DIP Financing does not directly or indirectly deprive the Debtors’ estates or other parties-in-interest of possible rights and powers by restricting the services for which professionals may be paid in these cases. See Ames, 115 B.R. at 38 (observing that courts insist on carve-outs for professionals representing parties-in-interest because “absent such protection, the collective rights and expectation of all parties-in-interest are sorely prejudiced”). 36. The proposed DIP Financing provides, generally, that the security interests and administrative expense claims granted to the DIP Lenders as security for the obligations under the DIP Credit Agreement are subject to the CarveOut, as described above. The Carve-Out encompasses (a) professional fees and expenses in an amount up to $7 million during an Event of Default and (b) payment of fees and expenses to the clerk of the Court and to the United States Trustee. The DIP Financing also provides for payment of fees and expenses of professionals without any cap so long as no Event of Default has occurred and is continuing. In Ames Dept. Stores, the bankruptcy court found that such “carve-outs” for professional fees are not only reasonable but necessary to ensure that official committees and debtors’ estates are adequately assisted by counsel. See Ames, 115 B.R. at 40. 37. Likewise, the various fees and charges required by the DIP Lenders under the DIP Financing are reasonable and appropriate under the circumstances. See First Day Affidavit. Indeed, courts routinely authorize similar lender incentives

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beyond the explicit liens and rights specified in section 364 of the Bankruptcy Code. See In re Defender Drug Stores, Inc., 145 B.R. 312, 316 (9th Cir. BAP 1992) (approving financing facility pursuant to section 364 of the Bankruptcy Code that included a lender “enhancement fee”). 38. The fairness and reasonableness of the terms of the DIP Financing will further be demonstrated at the Final Hearing. Application of the Business Judgment Standard 39. As described above, after appropriate investigation and analysis, the Debtors’ management has concluded that the DIP Financing is the best alternative available under the circumstances of these Chapter 11 Cases. Bankruptcy courts routinely defer to a debtor’s business judgment on most business decisions, including the decision to borrow money, unless such decision is arbitrary and capricious. See In re Trans World Airlines, Inc., 163 B.R. 964, 974 (Bankr. D. Del. 1994) (noting that an interim loan, receivables facility and asset-based facility were approved because the “reflect[ed] sound and prudent business judgment. . .[were] reasonable under the circumstances and in the best interest of [the debtor] and its creditors”); cf. Group of Institutional Investors v. Chicago, Mil., St. P. & Pac. Ry., 318 U.S. 523, 550 (1943) (holding that decisions regarding assumption or rejection of leases are left to business judgment of the debtor); In re Simasko Prods. Co., 47 B.R. 444, 449 (D. Colo. 1985) (“[b]usiness judgments should be left to the board room and not to this Court”). Indeed, “more exacting scrutiny [of the debtor’s business decisions] would slow the administration of the Debtors’ estate and increase its cost, interfere with the Bankruptcy Code’s provision for private control of administration of the estate, and threaten the court’s ability to control a case impartially.” Richmond Leasing Co. v. Capital Bank, N.A., 762 F. 2d 1303, 1311 (5th Cir. 1985). 40. The Debtors have exercised sound business judgment in determining that a postpetition credit facility is appropriate and have satisfied the legal prerequisites to incur debt on the terms and conditions set forth in the DIP Credit Agreement. The terms of the DIP Credit Agreement are fair, reasonable, and in the best interests of the Debtors and their estates. Accordingly, the Debtors should be granted authority to enter into the DIP Credit Agreement and to obtain funds from the DIP Lenders on the secured and administrative “superpriority” basis described above, pursuant to sections 364(c) and 364(d) of the Bankruptcy Code. B. Interim Approval Should Be Granted 41. The Debtors request that the Court conduct an expedited preliminary hearing on the Motion and authorize the Debtors from and after the entry of the Interim DIP Order until the Final Hearing to obtain credit under the DIP Credit Agreement in the amount of not more than $125 million, which shall be used to, among other things, provide working capital for the Debtors and to pay interest, fees and expenses in accordance with the Interim DIP Order and the DIP Credit Agreement. This will ensure that the Debtors maintain ongoing operations and avoid immediate and irreparable harm and prejudice to their estates and all parties in interest pending the Final Hearing. 42. Absent this Court’s approval of the interim relief sought in this Motion, the Debtors face a substantial risk of severe disruption to their business

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operations and irreparable damage to their relationships with their vendors and service providers. Simply put, the relief sought herein is necessary for the Debtors to continue meeting their financial obligations to their employees, vendors, and service providers, among others. 43. Fed. R. Bankr. P. 4001(c) permits a court to approve a debtor’s request for financing during the 15-day period following the filing of a motion requesting authorization to obtain postpetition financing “only to the extent necessary to avoid immediate and irreparable harm to the estate pending a final hearing.” Fed. R. Bankr. P. 4001(c)(2). In examining requests under this Bankruptcy Rule, courts apply the same business judgment standard as is applicable to other business decisions. See, e.g., Ames, 115 B.R. at 38. After the 15-day period, the request for financing is not limited to those amounts necessary to prevent the destruction of the debtor’s business, and the debtor is entitled to borrow those amounts that it believes are prudent to the operation of its business. Id. at 36. The Debtors submit that, for the reasons set forth herein, the immediate obtaining of credit up to the $125 million amount and the use of cash collateral on an interim basis as requested in this Motion is necessary to avert immediate and irreparable harm to the Debtors’ business. C. Request for Final Hearing 44. Pursuant to Bankruptcy Rules 4001(b)(2) and 4001(c)(2), the Debtors respectfully request that the Court set a date for the Final Hearing that is no later than thirty (30) days following the entry of the Interim DIP Order. 45. The Debtors respectfully request that they be authorized to serve a copy of the signed Interim DIP Order, which fixes the time and date for the filing of objections, if any, by first class mail upon (a) counsel to any official committee of unsecured creditors appointed in these Chapter 11 Cases, (b) the United States Trustee for the Southern District of New York, (c) counsel to the PrePetition Agent for the Debtors’ Pre-Petition Secured Lenders; (d) counsel to the Debtors’ postpetition secured lenders; (e) the Debtors’ top thirty (30) unsecured creditors; and (f) all parties who have filed requests for notice under Bankruptcy Rule 2002. The Debtors request that the Court consider such notice of the Final Hearing to be sufficient notice under Bankruptcy Rule 4001. Memorandum of Law 46. This Motion includes citations to the applicable authorities and a discussion of their application to this Motion. Accordingly, the Debtors respectfully submit that such citations and discussion satisfy the requirement that the Debtors submit a separate memorandum of law in support of this Motion pursuant to Rule 9013-1(b) of the Local Bankruptcy Rules for the Southern District of New York. Notice 47. Notice of this Motion has been given to (a) the United States Trustee; (b) counsel to the Agent to the Debtors’ prepetition secured lenders; (c) counsel to the Debtors’ postpetition secured lenders; and (d) the Debtors’ top thirty (30) unsecured creditors. In light of the nature of the relief requested, the Debtors submit that no further notice is required.

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No Prior Request 48. No prior application for the relief requested herein has been made to this or any other Court. WHEREFORE, the Debtors respectfully request the entry of an order, substantially in the form attached hereto as Exhibit A, granting the relief requested herein and granting such other and further relief as is just and proper. New York, New York Respectfully submitted, Dated: February 2, 2005 KIRKLAND & ELLIS LLP /s/ James H.M. Sprayregen

James H.M. Sprayregen, P.C. (JS-7757) Citigroup Center 153 East 53rd Street New York, New York 10022 (212) 446-4800 and KIRKLAND & ELLIS LLP Anup Sathy (AS-4915) Jason D. Horwitz (JH-4496) Ryan B. Bennett (RB-5236) 200 East Randolph Drive Chicago, Illinois 60601 (312) 861-2000 Proposed Counsel for the Debtors and Debtors in Possession

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Priming of Prepetition, First Lien

Objective. Section 6.14 of Volume 1 contains a discussion of the process of priming prepetition liens. In the following example, both the secured lender and the court approved the granting of a first lien on selected properties even though a prepetition first lien already existed. The excerpt here is from a motion for authority to obtain debtor-in-possession financing. 13. New borrowing facilities are unavailable to the Debtors without the Debtors’ granting to Foothill a superpriority administrative claim and security for such obligations through the granting of: (a) a first priority lien and security interest in all of the Collateral (as defined in the Financing Agreement) except the Excluded Collateral (as defined in the Financing Agreement) and a junior lien and security interest in the Excluded Collateral, all in accordance with the Financing Agreement and the Intercreditor Agreement, the proposed Order, and pursuant to Bankruptcy Code Sections 364(c) and (d), effective upon satisfaction of the obligations of the senior lienholder, and removal of its lien. In very general terms: the “Collateral” includes all personal property of the Debtors. Foothill will be granted a security interest in all “Collateral.” “Excluded Collateral” very generally refers to machinery and equipment and certain specified refund claims of the Debtors. The term “Collateral” encompasses Excluded Collateral. Under the proposed Order and the exhibits thereto, the Debtors’ primary existing secured creditor, Central Trust Company (“Central”), will retain its first-priority security interest only with respect to the Excluded Collateral. Foothill will be granted a priming, first-priority security interest in Collateral other than Excluded Collateral, ahead of Central, and a junior lien and security interest in the Excluded Collateral. Additionally, Central will retain a lien and security interest in all Collateral other than the Excluded Collateral that is junior only to the priming lien of Foothill and the liens and security interests described in Paragraph 16 of the proposed Order. The proposed Order does not purport to grant new interests, or affect existing interests, in the Debtors’ real property.

6.10 Bankruptcy Court Guidelines/Orders for Motions Relating to Financing Agreements Objective. Section 6.14 of Volume 1 describes financing during the chapter 11 case. District courts have issued orders or guidelines of facts that should be considered in preparing motions related to financing agreements. Reproduced below are general orders/guidelines from the following districts: Delaware, Central District of California, and the Southern District of New York. 1. District of Delaware Rule 4001-2 Cash Collateral and Financing Orders. (a) Motions. Except as provided herein and elsewhere in these Local Rules, all cash collateral and financing requests under 11 U.S.C. § 363 and 364 shall be heard by motion filed under Fed. R. Bankr. P. 2002, 4001 and 9014 (“Financing Motions”).

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Bankruptcy Court Guidelines/Orders for Motions Relating to Financing Agreements

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(i) Provisions to be Highlighted. All Financing Motions must (a) recite whether the proposed form of order and/or underlying cash collateral stipulation or loan agreement contains any provision of the type indicated below, (b) identify the location of any such provision in the proposed form of order, cash collateral stipulation and/or loan agreement and (c) justify the inclusion of such provision: (A) Provisions that grant cross-collateralization protection (other than replacement liens or other adequate protection) to the prepetition secured creditors (i.e., clauses that secure prepetition debt by postpetition assets in which the secured creditor would not otherwise have a security interest by virtue of its prepetition security agreement or applicable law); (B) Provisions or findings of fact that bind the estate or other parties in interest with respect to the validity, perfection or amount of the secured creditor’s prepetition lien or the waiver of claims against the secured creditor without first giving parties in interest at least seventy-five (75) days from the entry of the order and the creditors’ committee, if formed, at least sixty (60) days from the date of its formation to investigate such matters; (C) Provisions that seek to waive, without notice, whatever rights the estate may have under 11 U.S.C. § 506(c); (D) Provisions that immediately grant to the prepetition secured creditor liens on the debtor’s claims and causes of action arising under 11 U.S.C. §§ 544, 545, 547, 548 and 549; (E) Provisions that deem prepetition secured debt to be postpetition debt or that use postpetition loans from a prepetition secured creditor to pay part or all of that secured creditor’s prepetition debt, other than as provided in 11 U.S.C. § 552(b); (F) Provisions that provide disparate treatment for the professionals retained by a creditors’ committee from those professionals retained by the debtor with respect to a professional fee carveout; and (G) Provisions that prime any secured lien without the consent of that lienor. (ii) All Financing Motions shall also provide a summary of the essential terms of the proposed use of cash collateral and/or financing (e.g., the maximum borrowing available on a final basis, the interim borrowing limit, borrowing conditions, interest rate, maturity, events of default, use of funds limitations and protections afforded under 11 U.S.C. §§ 363 and 364). (b) Interim Relief. When Financing Motions are filed with the Court on or shortly after the petition date, the Court may grant interim relief pending review by interested parties of the proposed Debtor-in-Possession financing arrangements. Such interim relief shall be only what is necessary to avoid immediate and irreparable harm to the estate pending a final hearing. In the absence of extraordinary circumstances, the Court shall not approve interim financing orders that include any of the provisions previously identified in Local Rule 4001-2(a)(i)(A)-(F).

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(c) Final Orders. A final order shall be entered only after notice and a hearing under Fed. R. Bankr P. 4001 and Local Rule 2002-1(b). Ordinarily, the final hearing shall be held at least ten (10) days following the organizational meeting of the creditors’ committee contemplated by 11 U.S.C. § 1102. 2. Central District of California LBR 4001-2. CASH COLLATERAL AND FINANCING ORDERS (a) General. The requirements of LBR 9013-1 through LBR 9013-4 apply to a motion to obtain credit or to approve the use of cash collateral, debtor in possession financing, and/or cash management under 11 U.S.C. §§ 363 or 364 (collectively, “Financing Motion”), except as provided by this rule. (b) Provisions to Be Identified. To the extent not otherwise required by FRBP 4001(b)(1)(B) and (c)(1)(B), a Financing Motion must identify whether the proposed form of order and/or underlying cash collateral stipulation or loan agreement contains any provision that: (1) Grants cross-collateralization protection (other than replacement liens or other adequate protection) to the prepetition secured creditors (i.e., clauses that secure prepetition debt by postpetition assets in which the secured creditor would not otherwise have a security interest by virtue of its prepetition security agreement or applicable law); (2) Binds the estate or all parties in interest with respect to the validity, perfection, or amount of the secured creditor’s prepetition lien or debt or the waiver of claims against the secured creditor; (3) Waives or limits the estate’s rights under 11 U.S.C. § 506(c); (4) Grants to the prepetition secured creditor liens on the debtor’s claims and causes of action arising under 11 U.S.C. §§ 544, 545, 547, 548, or 549; (5) Deems prepetition secured debt to be postpetition debt or that uses postpetition loans from a prepetition secured creditor to pay part or all of that secured creditor’s prepetition debt, other than as provided in 11 U.S.C. § 552(b); (6) Provides disparate treatment for the professionals retained by a creditors’ committee from that provided for the professionals retained by the debtor with respect to a professional fee carve out; or (7) Primes any secured lien. If an order is sought to prime a lien, the Financing Motion must: (A) Identify the location of any such provision in the proposed form of order, cash collateral stipulation, and/or loan agreement; and (B) Contain specific justification for the priming of the lien. (c) Summary of Essential Terms. The Financing Motion must include a summary of the essential terms of the proposed credit, use of cash collateral, or debtor in possession financing (e.g., the interim borrowing limit, the maximum borrowing available on a final basis, borrowing conditions, interest rate, maturity dates, events of default, use of funds limitations, and protections afforded under 11 U.S.C. §§ 363 and 364).

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(d) Use of Form for Cash Collateral and/or Debtor in Possession Financing Stipulations. Each Financing Motion requesting approval of a stipulation for credit, use of cash collateral, or debtor in possession financing must be accompanied by court-approved form F 4001-2, Statement Pursuant to Local Bankruptcy Rule 4001-2, or a statement consistent with courtapproved form F 4001-2. (e) Interim Relief. The court may grant interim relief to prevent immediate and irreparable harm to the estate pending a final hearing. In the absence of extraordinary circumstances, the court will not approve an interim order that includes any of the provisions described in subsection (b)(1)-(7) of this rule. (f) Final Orders. A final order will be entered only after notice and a hearing pursuant to FRBP 4001(b). Ordinarily, the final hearing will be held at least 10 days after the appointment of the creditors’ committee contemplated by 11 U.S.C. § 1102. 3. Southern District of New York Rule 4001-2 REQUESTS FOR USE OF CASH COLLATERAL OR TO OBTAIN CREDIT—Amended [August 4, 2008] (a) Contents of Motion. The following provisions, to the extent applicable, are added to the enumerated lists of material provisions set forth in Bankruptcy Rule 4001(b)(1)(B), (c)(1)(B), and (d)(1)(B): 1. the amount of cash collateral the party seeks permission to use or the amount of credit the party seeks to obtain, including any committed amount or the existence of a borrowing base formula and the estimated availability under the formula; 2. material conditions to closing and borrowing, including budget provisions; 3. pricing and economic terms, including letter of credit fees, commitment fees, any other fees, and the treatment of costs and expenses of the lender, any agent for the lender, and their respective professionals; 4. any effect on existing liens of the granting of collateral or adequate protection provided to the lender and any priority or superpriority provisions; 5. any carve-outs from liens or superpriorities; 6. any cross-collateralization provision that elevates prepetition debt to administrative expense (or higher) status or that secures prepetition debt with liens on postpetition assets (which liens the creditor would not otherwise have by virtue of the prepetition security agreement or applicable law); 7. any roll-up provision which applies the proceeds of postpetition financing to pay, in whole or in part, prepetition debt or which otherwise has the effect of converting prepetition debt to postpetition debt; 8. any provision that would limit the Court’s power or discretion in a material way, or would interfere with the exercise of the fiduciary duties, or restrict the rights and powers, of the trustee, debtor in possession, or a committee appointed under § 1102 or § 1114 of the Bankruptcy Code, or any other fiduciary of the estate, in connection with the operation, financing, use or sale of the business or property of the estate, but excluding any agreement

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to repay postpetition financing in connection with a plan or to waive any right to incur liens that prime or are pari passu with liens granted under § 364; 9. any limitation on the lender’s obligation to fund certain activities of the trustee, debtor in possession, or a committee appointed under § 1102 or § 1114 of the Bankruptcy Code; 10. termination or default provisions, including events of default, any effect of termination or default on the automatic stay or the lender’s ability to enforce remedies, any cross-default provision, and any terms that provide that the use of cash collateral or the availability of credit will cease on (i) the filing of a challenge to the lender’s prepetition lien or the lender’s prepetition claim based on the lender’s prepetition conduct; (ii) entry of an order granting relief from the automatic stay other than an order granting relief from the stay with respect to material assets; (iii) the grant of a change of venue with respect to the case or any adversary proceeding; (iv) management changes or the departure, from the debtor, of any identified employees; (v) the expiration of a specified time for filing a plan; or (vi) the making of a motion by a party in interest seeking any relief (as distinct from an order granting such relief); 11. any change-of-control provisions; 12. any provision establishing a deadline for, or otherwise requiring, the sale of property of the estate; 13. any provision that affects the debtor’s right or ability to repay the financing in full during the course of the chapter 11 reorganization case; 14. in jointly administered cases, terms that govern the joint liability of debtors including any provision described in subdivision (e) of this rule; and 15. any provision for the funding of non-debtor affiliates with cash collateral or proceeds of the loan, as applicable, and the approximate amount of such funding. (b) Disclosure of Efforts to Obtain Financing and Good Faith. A motion for authority to obtain credit shall describe in general terms the efforts of the trustee or debtor in possession to obtain financing, the basis on which the debtor determined that the proposed financing is on the best terms available, and material facts bearing on the issue of whether the extension of credit is being extended in good faith. (c) Inadequacy of Notice After Event of Default. 1. If the proposed order contains a provision that modifies or terminates the automatic stay or permits the lender to enforce remedies after an event of default, either the proposed order shall require at least five business days’ notice to the trustee or debtor in possession, the United States Trustee and each committee appointed under § 1102 or § 1114 of the Bankruptcy Code (or the 20 largest creditors if no committee has been appointed under § 1102 of the Bankruptcy Code), before the modification or termination of the automatic stay or the enforcement of the lender’s remedies, or the motion shall explain why such notice provision is not contained in the proposed order. 2. If the proposed order contains a provision that terminates the use of cash collateral, either the proposed order shall require at least three business days’ notice before the use of cash collateral ceases (provided that the use of cash collateral conforms to any budget in effect) or the motion shall explain why such notice provision is not contained in the proposed order.

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(d) Carve-Outs. Any provision in a motion or proposed order relating to a carve-out from liens or superpriorities shall disclose when a carve-out takes effect, whether it remains unaltered after payment of interim fees made before an event of default, and any effect of the carve-out on any borrowing base or borrowing availability under the postpetition loan. If a provision relating to a carve-out provides disparate treatment for the professionals retained by a committee appointed under § 1102 or § 1114 of the Bankruptcy Code, when compared with the treatment for professionals retained by the trustee or debtor in possession, or if the carve-out does not include fees payable to either the Bankruptcy Court or the United States Trustee, reasonable expenses of committee members (excluding fees and expenses of professionals employed by such committee members individually), and reasonable post-conversion fees and expenses of a chapter 7 trustee, or if a carve-out does not include the costs of investigating whether any claims or causes of action against the lender exist, there shall be disclosure thereof under subdivision (a) of this Local Rule and the motion shall contain a detailed explanation of the reasons therefor. (e) Joint Obligations. In jointly-administered cases, if one or more debtors will be liable for the repayment of indebtedness for funds advanced to or for the benefit of another debtor, the motion and the proposed order shall describe, with specificity, any provisions of the agreement or proposed order that would affect the nature and priority, if any, of any interdebtor claims that would result if a debtor were to repay debt incurred by or for the benefit of another debtor. (f) Investigation Period Relating to Waivers and Concessions as to Prepetition Debt. If a motion seeks entry of an order in which the debtor stipulates, acknowledges or otherwise admits to the validity, enforceability, priority, or amount of a claim that arose before the commencement of the case, or of any lien securing the claim, either the proposed order shall include a provision that permits a committee appointed under § 1102 of the Bankruptcy Code and other parties in interest to undertake an investigation of the facts relating thereto, and proceedings relating to such determination, or the motion shall explain why the proposed order does not contain such a provision. The minimum time period for such committee or other party in interest to commence, or to file a motion to obtain authority to commence, any related proceedings as representative of the estate shall ordinarily be 60 days from the date of entry of the final order authorizing the use of cash collateral or the obtaining of credit, or such longer period as the Court orders for cause shown prior to the expiration of such period. (g) Content of Interim Orders. A motion that seeks entry of an emergency or interim order before a final hearing under Bankruptcy Rule 4001(b)(2) or (c)(2) shall describe the amount and purpose of funds sought to be used or borrowed on an emergency or interim basis and shall set forth facts to support a finding that immediate or irreparable harm will be caused to the estate if immediate relief is not granted before the final hearing. (h) Adequacy of Budget. If the debtor in possession or trustee will be subject to a budget under a proposed cash collateral or financing order or agreement, the motion filed under Bankruptcy Rule 4001(b), (c), or (d) shall include a statement by the trustee or debtor in possession as to whether it has reason to believe that the budget will be adequate, considering all available assets, to

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pay all administrative expenses due or accruing during the period covered by the financing or the budget. (i) Notice. Notice of a preliminary or final hearing shall be given to the persons required by Bankruptcy Rules 4001(b)(3) and 4001(c)(3), as the case may be, the United States Trustee, and any other persons whose interests may be directly affected by the outcome of the motion or any provision of the proposed order. (j) Presence at Hearing. Unless the court directs otherwise, 1. counsel for each proposed lender, or for an agent representing such lender, shall be present at all preliminary and final hearings on the authority to obtain credit from such lender, and counsel for each entity, or for an agent of such entity, with an interest in cash collateral to be used with the entity’s consent shall be present at all preliminary and final hearings on the authority to use such cash collateral; and 2. a business representative of the trustee or debtor in possession, the proposed lender or an agent representing such lender, and any party objecting to the motion for authority to obtain credit, each with appropriate authority, must be present at, or reasonably available by telephone for, all preliminary and final hearings for the purpose of making necessary decisions with respect to the proposed financing. (k) Provisions of the Proposed Order. 1. Findings of Fact. A. A proposed order approving the use of cash collateral under § 363(c) of the Bankruptcy Code, or granting authority to obtain credit under § 364 of the Bankruptcy Code, shall limit the recitation of findings to essential facts, including the facts required under § 364 of the Bankruptcy Code regarding efforts to obtain financing on a less onerous basis and (where required) facts sufficient to support a finding of good faith under § 364(e) of the Bankruptcy Code, and shall not include any findings extraneous to the use of cash collateral or to the financing. B. A proposed emergency or interim order shall include a finding that immediate and irreparable loss or damage will be caused to the estate if immediate financing is not obtained and should state with respect to notice only that the hearing was held pursuant to Bankruptcy Rule 4001(b)(2) or (c)(2), that notice was given to certain parties in the manner described, and that the notice was, in the debtor’s belief, the best available under the circumstances. C. A proposed final order may include factual findings as to notice and the adequacy thereof. D. To the extent that a proposed order incorporates by reference to, or refers to a specific section of, a prepetition or postpetition loan agreement or other document, the proposed order shall also include a statement of such section’s import. 2. Mandatory Provisions. The proposed order shall contain all applicable provisions included in the enumerated lists of material provisions set forth in Bankruptcy Rule 4001(b)(1)(B), (c)(1)(B), and (d)(1)(B), as supplemented by subsection (a) of this Local Rule. 3. Cross-Collateralization and Rollups. A proposed order approving crosscollateralization or a rollup shall include language that reserves the right of the Court to unwind, after notice and hearing, the postpetition protection

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provided to the prepetition lender or the paydown of the prepetition debt, whichever is applicable, in the event that there is a timely and successful challenge to the validity, enforceability, extent, perfection, or priority of the prepetition lender’s claims or liens, or a determination that the prepetition debt was undersecured as of the petition date, and the cross-collateralization or rollup unduly advantaged the lender. 4. Waivers, Consents or Amendments with Respect to the Loan Agreement. A proposed order may permit the parties to enter into waivers or consents with respect to the loan agreement or amendments thereof without the need for further court approval provided that (i) the agreement as so modified is not materially different from that approved, (ii) notice of all amendments is filed with the Court, and (iii) notice of all amendments (other than those that are ministerial or technical and do not adversely affect the debtor) are provided in advance to counsel for any committee appointed under § 1102 or § 1114 of the Bankruptcy Code, all parties requesting notice, and the United States Trustee. 5. Conclusions of Law. A proposed interim order may provide that the debtor is authorized to enter into the loan or other agreement, but it shall not state that the Court has examined and approved the loan or other agreement. 6. Order to Control. The proposed order shall state that to the extent that a loan or other agreement differs from the order, the order shall control. 7. Statutory Provisions Affected. The proposed order shall specify those provisions of the Bankruptcy Code, Bankruptcy Rules and Local Rules relied upon as authority for granting relief, and shall identify those sections that are, to the extent permitted by law, being limited or abridged. 8. Conclusions of Law Regarding Notice. A proposed final order may contain conclusions of law with respect to the adequacy of notice under § 364 of the Bankruptcy Code and Rule 4001. Comment This rule was amended in its entirety in 2008 to conform to the 2007 amendments to Bankruptcy Rule 4001 and to replace the procedures for requests for the use of cash collateral or to obtain credit that were governed by former General Order M-274. Thus, this rule should be read in conjunction with Bankruptcy Rule 4001 as the requirements contained in this rule are meant to supplement, but not duplicate, Bankruptcy Rule 4001. This rule is not intended to fundamentally change practice under former General Order M-274, except as expressly provided. As provided in former General Order M-274, a single motion may be filed seeking entry of an interim order and a final order, which orders would be normally entered at the conclusion of the preliminary hearing and the final hearing, respectively, as those terms are used in Bankruptcy Rules 4001(b)(2) and (c)(2). In addition, where circumstances warrant, the debtor may seek emergency relief for financing limited to the amount necessary to avoid immediate and irreparable harm to the estate pending the preliminary hearing, but in the usual case, only a preliminary and a final hearing will be required. Notwithstanding the provisions of subsection (i), emergency and interim relief may be entered after the best notice available under the circumstances; however, emergency and interim relief will ordinarily not be considered unless the United States Trustee and the Court have had a reasonable opportunity to

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review the motion, the financing agreement, and the proposed interim order, and the Court normally will not approve provisions that directly affect the interests of landlords, taxing and environmental authorities and other thirdparties without notice to them. As suggested in former General Order M-274, prospective debtors may provide substantially complete drafts of the motion, interim order, and related financing documents to the United States Trustee in advance of a filing, on a confidential basis. Debtors are encouraged to provide drafts of financing requests, including proposed orders, to the United States Trustee as early as possible in advance of filing to provide that office with the opportunity to comment. The hearing on a final order for use of cash collateral under § 363(c) of the Bankruptcy Code, or for authority to obtain credit under § 364 of the Bankruptcy Code will ordinarily not commence until there has been a reasonable opportunity for the formation of a creditors committee under § 1102 of the Bankruptcy Code and either the creditors committee’s appointment of counsel or reasonable opportunity to do so. Reasonable allocations in a carve-out provision may be proposed among (i) expenses of professionals retained by committees appointed in the case, (ii) expenses of professionals retained by the debtor, (iii) fees payable to either the Bankruptcy Court or the United States Trustee, (iv) the reasonable expenses of committee members, and (v) reasonable post-conversion fees and expenses of a chapter 7 trustee, and the lender may refuse to include in a carve-out the costs of litigation or other assertions of claims against it. As provided in former General Order M-274, non-essential facts regarding prepetition dealings and agreements may be included in an order approving the use of cash collateral or granting authority to obtain credit under a heading entitled “stipulations between the debtor and the lender” or “background.” As provided in former General Order M-274, an interim order will not ordinarily bind the Court with respect to the provisions of the final order provided that (i) the lender will be afforded all the benefits and protections of the interim order, including a lender’s § 364(e) and § 363(m) protection with respect to funds advanced during the interim period, and (ii) the interim order will not bind the lender to advance funds pursuant to a final order that contains provisions contrary to or inconsistent with the interim order.

6.11

Debtor-in-Possession Financing Agreement: No. 1

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Objective. The debtor-in-possession (DIP) financing agreement represented here is for a two-year period and illustrates the conditions and terms that are common for DIP financing. The agreement contains two major sections: (a) Motion for Order Authorizing Debtor-in-Possession Financing (b) Excerpts from General Loan and Security Agreement Section 5.14 of Volume 1 describes the nature of postpetition financing. (a) Motion for Order Authorizing Debtor-in-Possession Financing KENNETH N. KLEE—State Bar No. 63372, ROBERT A. GREENFIELD—State Bar No. 39648, BENJAMIN L. FRANKEL—State Bar No. 125341, and KENNETH J. SHAFFER—State Bar No. 153729, Members of STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION 3699 Wilshire Boulevard, Suite 900 Los Angeles, California 90010 Telephone: (213) 251-5100 Attorneys for Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA In re

Case No. LA 92Chapter 11

STANDARD BRANDS PAINT COMPANY, a Delaware corporation, Debtor. In re


STANDARD BRANDS PAINT CO., a California corporation, Debtor. In re STANDARD BRANDS REALTY CO., INC., a California corporation,

Debtor.

Case No. LA 92Chapter 11 MOTION PURSUANT TO 11 U.S.C. § 364(c) AND FED. R. BANKR. P. 4001(c) FOR ORDER AUTHORIZING DEBTORS IN POSSESSION TO OBTAIN POSTPETITION FINANCING FROM FOOTHILL CAPITAL CORPORATION;

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CAPTION CONTINUED ON NEXT PAGE

MEMORANDUM OF POINTS AND AUTHORITIES; DECLARATION OF STUART D. BUCHALTER DATE: February : TIME: CTRM:

In re

, 1992 .m.


ZYNOLYTE PRODUCTS COMPANY, a California corporation, Debtor. In re


MAJOR PAINT COMPANY, a California corporation, Debtor.

TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Standard Brands Paint Company, a Delaware corporation (“Standard Brands”), and its direct and indirect subsidiaries Standard Brands Paint Co., a California corporation (“Paint”); Standard Brands Realty Co., Inc., a California corporation (“Realty”); Zynolyte Products Company, a California corporation (“Zynolyte”); and Major Paint Company, a California corporation (“Major”), the debtors in possession in the above-captioned cases (collectively, “Debtors”), hereby move, pursuant to 11 U.S.C. § 364(c) and Fed. R. Bankr. P. 4001(c), for an order authorizing the Debtors to enter into a postpetition financing agreement with Foothill Capital Corporation (“Foothill”), on the terms described herein, whereby the Debtors will be entitled to borrow up to $17 million for general working capital purposes, and whereby Foothill will be granted a superpriority administrative claim and a first priority lien and security interest in substantially all of each Debtor’s personal property, including without limitations, accounts receivable and inventory, rolling stock, and in one parcel of improved real property of the Debtors to secure repayment of the amounts borrowed. The Motion is based on the Notice of Motion; the Motion, supporting Memorandum of Points and Authorities and Declaration of Stuart D. Buchalter served concurrently herewith; such evidence as may be presented prior to or at the hearing on the Motion; the record in the Debtors’ cases; and such other and further matters of which the Court may take judicial notice. In support of the Motion, the Debtors respectfully represent as follows: 1. Standard Brands, which is a Delaware holding company, was formed in 1939, with headquarters in Torrance, California. The common stock of Standard Brands is publicly traded on the New York Stock Exchange and is widely held by approximately 10,000 equity security holders. Paint and Zynolyte are direct subsidiaries of Standard Brands; Realty and Major are direct subsidiaries of Paint. 2. The Debtors filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code on February 11, 1992 and are operating their

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businesses as debtors in possession pursuant to Bankruptcy Code sections 1107 and 1108. 3. Standard Brands and its direct and indirect subsidiaries (collectively, the “Company”) are primarily engaged in the manufacture, wholesaling and retailing of paint and home decorating products. As owner and operator of 135 retail paint stores in 108 cities throughout California, Arizona, Texas, New Mexico, Nevada, Utah, Oregon, and Washington, the Company is the leading retailer of paint and related products in the West. In addition the Company owns and operates a chain of 10 art material and supply stores in Southern and Northern California. It also manufactures paint and specialty paint products for sale in its own stores and for wholesale distribution through Major and Zynolyte. 4. In addition to Paint, Realty, Zynolyte, and Major, Standard Brands has four other direct and indirect subsidiaries which are not presently the subject of cases under title 11: The Art Store, a California corporation; SBP Leasing Company, a Nevada corporation; SBP Transportation Company, Inc., a California corporation; and Promark West, a Nevada corporation. The Art Store has limited real estate holdings and, as a consequence, is a co-obligor of the Company’s $119 million to a syndicate of insurance companies. The assets, liabilities, and business activities of the other three nonfiling entities are negligible. 5. The Company, through Paint, owns 117 of its 135 retail paint stores. The Company, through Paint, leases its remaining 18 stores. The Company, through Paint, also owns approximately 1 million square feet of manufacturing, warehousing and office space situated on over forty acres of land. The Company believes that the current market value of the owned real property exceeds its current book value. Thirty-two properties are leased to third parties, producing annual rental revenue in excess of $1 million. 6. The Company employs approximately 2,100 persons, three-quarters of whom are engaged in the Company’s retail operations and the balance in office, warehousing and manufacturing positions, representing a gross annual payroll in excess of $45 million. Approximately 50% of the Company’s California employees are represented by the United Food and Commercial Workers Union, which last year ratified a five-year collective bargaining agreement with the Company. 7. As a strategic matter, the Company’s operations are substantially integrated. For example, the Company has vertically integrated its manufacturing and retailing operations. The Company manages the cash flow from its 145 retail outlets through a unified cash management system designed to provide efficient cash controls and accurate and timely financial reporting. By means of this system, the Company closely monitors and records intercompany transactions. The integration also affords Company-wide economies. Thus, for example, all personnel are employed by Paint. The strategic linkage in operations dictates that any financing be made available to the Debtors on a joint basis. 8. The Company’s management conservatively estimates that the following assets have a current value as stated: Real Property Inventory Accounts Rolling Stock Total

$200,000,000 70,000,000 7,500,000 2,500,000 $280,000,000

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9. The Company has three categories of secured and unsecured debt. Transamerica Occidental Life Insurance Company is the servicing and collateral agent for a loan in the outstanding principal amount of $119 million from a syndicate of insurance companies. These lenders were granted liens on substantially all of the Company’s real property. Standard Brands owes Security Pacific National Bank approximately $26 million, secured by pledges of stock of certain of Standard Brands’ subsidiaries. Finally, approximately $19 million is owed to the Company’s 2,500 trade vendors and other unsecured creditors. 10. The Company’s inventory, accounts receivable, rolling stock, and certain parcels of its real property currently are unencumbered. 11. The Company’s net sales for fiscal 1991 were approximately $250 million. This reflected a substantial diminution from the Company’s sales for 1990, which were approximately $290 million, and for 1989, which were approximately $314 million. This downturn in sales is attributable to the adverse economic conditions in California, consumer spending resistance, increased competition, and inventory shortages in the retail stores resulting from credit restraints. Although the Company undertook an aggressive cost-cutting program in reaction to reduced sales, it lost money in 1990 and 1991. 12. The sheer size and nature of the Company’s business makes the availability of working capital critical to its continued operation. The sales levels of each of the Company’s stores depend upon the continued flow of merchandise through that store. Such flow, in turn, depends upon the Company having a stable source of funding so that vendors will deliver merchandise to the Company on normal credit terms. This extension of normal business credit, in turn, depends on the confidence of vendors that they will be paid when their invoices come due. 13. The Company’s peak selling season runs from late spring to the end of summer. During the period between April 1 and September 1, the Company generates 65% of its gross annual sales. It goes without saying that the key to profitability during this peak selling season is the maintenance of maximum inventory levels tailored to meet customer demand. The prescription for success is fully stocked shelves in the Company’s retail stores; the prescription for disaster is inventory shortages. 14. At a time when the Company most needs liquidity, it is faced with its most acute cash crisis. Increasingly over the past months, suppliers have been restricting their extension of credit to the Company. In the past thirty days, a majority of the Company’s suppliers have demanded C.O.D. or even cash-before-delivery terms. The unwillingness of vendors to extend unsecured credit, combined with the fact that the Company’s only current source of cash is generated from operations, has made it nearly impossible for the Company to acquire the necessary levels of raw material and inventory. 15. As a consequence of the Company’s previously deteriorating financial performance and the recent cash squeeze by its vendors, the Company’s inventory levels have diminished to a level that is at least twenty percent (20%) below normal. In dollar and cents terms, this amounts to a $15 million shortfall in store inventory. 16. The Company has recognized that its viability hinges on re-stocking its shelves for the upcoming sales season. In order for inventory levels to be restored by April 1, production must be in the pipeline by March 1, and

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orders must be placed by mid-February. In order for the Company to meet this timetable and its sales objective, it needs an immediate infusion of cash. 17. In order to secure funds to purchase raw materials and inventory and make capital improvements that would enhance profitability, the Company has negotiated with a number of parties over the past months for an infusion of cash (by way of equity or debt). To date, these negotiations have proven unsuccessful. 18. As a result of the shrinkage in unsecured trade credit, the Company was unable to obtain unsecured credit, either on a pre- or on a postpetition basis, in an amount comparable to that being offered by the financing which is the subject of this Motion. 19. Faced with an inability to raise the needed capital outside of a bankruptcy case and diminishing trade credit, the Debtors commenced negotiations to obtain financing in the context of a chapter 11 case. In the recent past, the Company has been in communication with numerous third parties, including CIT, BT (Bankers Trust) Commercial, Sterling National Bank, First of Chicago, Foothill and the Company’s current lenders, in an effort to obtain debtor in possession financing. The Company was unable to obtain debtor in possession financing on an unsecured basis under section 364(a) or (b) of the Bankruptcy Code. Foothill provided the best overall financing package, taking into consideration the borrowing base, interest rate, and commitment fee. With respect to the borrowing base, Foothill was the only lender willing to advance funds ($6 million) based upon the Company’s real property in Carson, California and one of only two potential lenders willing to provide $17 million of financing. No other lenders were willing to advance in excess of $15 million. Further, even prior to the signing of a commitment letter, Foothill was prepared to move, and in fact, has moved expeditiously to obtain loan approval and document the borrowing. The Proposed Financing 20. In order to increase the confidence of its vendors that the Company will be able to accept delivery and pay for the purchase of goods when it orders, the Company seeks approval of its debtor in possession financing agreement with Foothill. 21. Based on the discussions the Company had with the interested parties, information provided by the Company, and the due diligence of the parties, Debtor and Foothill Capital Corporation (“Foothill”) have agreed to the terms of a financing arrangement (the “Financing”). The terms of the Financing are set forth fully in the General Loan and Security Agreement (“Agreement”) which is annexed as an exhibit to the accompanying Declaration of Stuart D. Buchalter, and are summarized below. Essential Terms of the Financing 22. Purpose: Foothill will advance funds for the Company’s general working capital purposes, such purposes to include the making of capital expenditures as permitted in the loan documents, the payment of interim awards for compensation and reimbursement of professional expenses in the bankruptcy cases, the payment of adequate protection payments and postpetition interest as

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required by order of the Bankruptcy Court and to repay approximately $2 million of indebtedness relating to the certain real property. 23. Formula and Line Cap: Foothill will advance to the Company up to 70% of eligible accounts receivable; up to 25% of eligible inventory; $600,000 against the value of the Rolling Stock owned by Paint; and $6 million against the value of the Carson, California real estate ($2 million on an interim basis pending a final hearing on the financing and an additional $4 million after the final hearing); to a maximum borrowing of $17 million under the line of credit. 24. Letter of Credit Sub-Facility: Foothill will provide an aggregate of $5 million of letters of credit and guarantees of letters of credit to be reserved against availability under the borrowing formula on a 1:1 basis. 25. Interest Rate: The nondefault interest rate will be 2 percentage points over the “Reference (prime) Rate.” The default interest rate will be 4 percentage points over the Reference Rate. 26. Pees: The Financing provides for a one time commitment fee of $200,000, a fee of one-half of one percent per annum on the average daily unused portion of the unused facility, a $5,000 monthly servicing fee, and a fee of two and one-half percent per annum on issued Letters of Credit or Lender Guarantees. 27. Term and Prepayment: The loan will mature at the earliest of (i) 2 years from the Closing Date of the financing; (ii) the effective date of any Debtor’s plan of reorganization; and (iii) conversion of any Debtor’s case. There is a prepayment penalty of 3% in the event that the Foothill Financing is refinanced during the chapter 11 cases prior to maturity. 28. Collateral: Obligations to Foothill will be treated as a superpriority administrative expense and will be secured by a first priority security interest in substantially all of each Debtor’s personal property, including without limitation cash, accounts receivable and inventory, and by a second priority lien on real property in Carson, California, junior only to the lien of City National Bank (“CNB”) which will become a first priority lien when the obligation of CNB is satisfied from proceeds of the Foothill Financing upon final approval of the financing. 29. Guarantees: All of the Debtors other than Standard Brands will be jointly and severally liable for the obligations under the Financing. In addition, all of the Debtors’ obligations to Foothill will be guaranteed by the parent, Standard Brands. 30. Closing: The Financing requires that the First Order of the Bankruptcy Court approving the Financing be entered on or before February 19, 1992 and that the closing occur on or before February 28, 1992. 31. Other Terms: The Financing also sets forth other provisions, including the covenants to be provided by the Companies, conditions precedent to the extension of credit by Foothill, and the requirement of Bankruptcy Court approval. 32. The rates, fees and terms of the Financing are fair and reasonable. They were the subject of intense arm’s-length negotiations between the Company and Foothill and are the same as, if not better than, that which would be offered by other lenders with whom the Company has discussed a lending arrangement.

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Request For Relief 33. The need for approval of the Financing is clear and compelling. As a matter of business judgment, the Company believes that the entry into the Financing with Foothill is in the best interests of the estates and its creditors. First and foremost, the Financing will enable the Company to obtain adequate raw material and finished goods inventory to meet customer demand during what is traditionally the Company’s busiest sales season. The Financing will instill confidence in the Company’s vendors, other creditors, employees, and customers. 34. As described in detail in the projections annexed to the Buchalter Declaration, the financing to be provided by Foothill will fund necessary and ordinary operating expenses critical to preserving ongoing operations and thus the Debtors opportunity to reorganize. The financing will be used to fund such normal operating expenses as payroll, purchase of raw materials, capital expenditures, and administrative expenses, including interim fees. As a result of the Company’s continued operations, the Company projects that its cash, accounts receivable and inventory balances will increase during the projection period by an aggregate amount substantially approximating the anticipated borrowings. 35. Further, it is essential for the Company to obtain the Financing as soon as possible. Any delay in obtaining the Financing results in a corresponding delay in the Company’s ability to use it to obtain desperately needed additional inventory during its busiest season. 36. The Company requests that the Court grant the Motion and authorize the Company to enter into the Financing Agreement and make such borrowings as are necessary to avoid immediate and irreparable harm to the Company pending a final hearing. As set forth in the Buchalter Declaration and the accompanying cash flow projections, the Company will require $10 million in credit to maintain operations through the week ending March 1, 1992. The Company also requests that the Court set a hearing fifteen days from the date of its initial hearing, or as soon as possible thereafter, to consider and give final approval to the Motion. WHEREFORE, the Debtors request that the Court enter an order authorizing them to enter into the Financing Agreement with Foothill, authorizing Debtors to borrow up to $10 million from Foothill so as to avoid immediate and irreparable harm to the Company pending a final hearing, granting to Foothill a superpriority administrative expense and first priority liens on the collateral described in the Financing to secure repayment of the amounts borrowed, setting a final hearing in approximately fifteen days, and granting Debtors such other and further relief as the Court deems appropriate. DATED: February

, 1992 BENJAMIN L. FRANKEL, a Member of STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION Attorneys for Debtors and Debtors in Possession

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(b) Excerpts from General Loan and Security Agreement 2. LOAN AND TERMS OF PAYMENT 2.1 Revolving Advances. Subject to the terms and conditions of this Agreement, Foothill agrees to make revolving advances to Borrower in an amount not to exceed the Borrowing Base. For purposes of this Agreement, “Borrowing Base” shall mean the sum of: (a) Accounts: seventy percent (70%) of the amount of Eligible Accounts; plus (b) Inventory: twenty-five percent (25%) of the amount of Eligible Inventory, less the amount of reserves established by Foothill for obsolescence or shrinkage; plus (c) Rolling Stock: Six Hundred Thousand Dollars ($600,000), such amount to be reduced, from time to time, on a proportionate basis, by the value of Rolling Stock that has been sold or otherwise disposed of and that is not concurrently replaced with a replacement item of Rolling Stock of the same or greater value and as to which Foothill has been granted a first priority perfected security interest; plus (d) Real Property: $2,000,000 up to the date on which the Order has been entered pursuant to a final hearing; $6,000,000 from and after the date on which the Order (inclusive of provisions permitting the repayment of the indebtedness of Realty Co. to City National Bank) has been entered pursuant to a final hearing. In each case, such amount to be reduced by an amount, if any, to be determined in Foothill’s judgment, equal to the estimated cost of abatement and remediation of the asbestos present at the Real Property. Foothill shall have no obligation to make advances hereunder to the extent they would cause the outstanding balance of revolving advances under this Section 2.1 plus the aggregate undrawn amount of L/Cs and L/C Guarantees to exceed Seventeen Million Dollars ($17,000,000) (the “Maximum Amount”). Amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement so long as no Event of Default has occurred and is continuing. The proceeds of the advances made under this Section 2.1 shall be used, consistent with the Order, by Borrower for its general working capital purposes, such purposes to include the making of capital expenditures to the extent permitted by the terms hereof, the payment of not more frequently than monthly 100% interim awards, free and clear of Foothill’s liens or security interests, for services rendered or costs incurred by Borrower’s, Guarantor’s, or committee professionals in the ordinary course of the proceedings, the payment of adequate protection payments and postpetition interest payments to the extent made pursuant to an appropriate order of the Bankruptcy Judge before whom the cases of the Debtors are pending. From and after the date on which the Order (inclusive of provisions permitting the repayment of the indebtedness of Realty Co. to City National Bank) has been entered pursuant to a final hearing, Realty Co. may use the proceeds of the advances made under this Section 2.1, consistent with the Order, to repay an existing indebtedness of approximately $2,000,000 that is secured by the Real Property.

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2.2 Letters of Credit and Letter of Credit Guarantees. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to issue commercial or standby letters of credit for the account of Borrower (each, an “L/C”) or to issue guarantees of payment with respect to L/Cs (each, an “L/C Guaranty”) in an aggregate face amount not to exceed the lesser of: (i) the Borrowing Base less the amount of revolving advances outstanding pursuant to Section 2.1, and (ii) Five Million Dollars ($5,000,000). It being expressly understood and agreed that Foothill shall have no obligation to arrange the issuance by other financial institutions of the L/Cs that are to be the subject of L/C Guarantees. Each such L/C shall have an expiry date no later than sixty (60) days prior to the date on which this Agreement is scheduled to terminate under Section 3.4 (i) hereof and all such L/Cs and L/C Guarantees shall be, in form and substance, acceptable to Foothill in its sole discretion. Foothill shall have no obligation to cause the issuance of L/Cs or L/C Guarantees to the extent that the face amount of all outstanding L/Cs and L/C Guarantees, plus the amount of revolving advances outstanding pursuant to Section 2.1, would exceed the Maximum Amount. The L/Cs and the L/C Guarantees issued under this Section 2.2 shall be used, consistent with the Order, by Borrower for its general working capital purposes or to support its obligations with respect to worker’s compensation premiums or other similar obligations. Foothill may make loans and advances to or for Borrower’s loan account in connection with the L/Cs, which advances shall be deemed advances pursuant to Section 2.1 hereof and shall bear interest on the terms and conditions provided in Section 2.4 hereof. (b) Borrower hereby agrees to indemnify, save, and hold Foothill harmless from any loss, cost, expense, or liability, including payments made by Foothill, expenses, and reasonable attorneys’ fees incurred by Foothill arising out of or in connection with any L/Cs or L/C Guarantees. Borrower agrees to be bound by the issuing bank’s regulations and interpretations of any L/Cs guarantied by Foothill and opened to or for Borrower’s account or by Foothill’s interpretations of any L/C issued by Foothill to or for Borrower’s account, though this interpretation may be different from Borrower’s own, and it is understood and agreed that Foothill shall not be liable for any error, negligence, or mistakes, whether of omission or commission, in following Borrower’s instructions or those contained in the L/Cs or of any modifications, amendments, or supplements thereto. Borrower understands that the L/C Guarantees may require Foothill to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Foothill harmless with respect to any costs or liabilities incurred by Foothill under any L/C Guaranty arising out of Foothill’s indemnification of any such issuing bank. (c) Borrower hereby authorizes and directs any bank which issues an L/C guarantied by Foothill to deliver to Foothill all instruments, documents, and other writings and property received by the issuing bank pursuant to the L/C, and to accept and rely upon Foothill’s instructions and agreements with respect to all matters arising in connection with the L/C and the application therefor. Borrower may or may not be the “Account Party” on such L/Cs. (d) Any and all service charges, commissions, fees, and costs incurred by Foothill relating to the L/Cs guarantied by Foothill shall be considered

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Foothill Expenses for purposes of this Agreement and shall be immediately reimbursable by Borrower to Foothill. On the first Business Day of each month, Borrower will pay Foothill a fee equal to two and one-half percent (2.5%) per annum times the average Daily Balance of the undrawn L/Cs and L/C Guaranties that were outstanding during the immediately preceding calendar month. Service charges, commissions, fees, and costs may be charged to Borrower’s loan account at the time the service is rendered or the cost is incurred. (e) Immediately upon the termination of this Agreement, Borrower agrees to either: (i) provide cash collateral to Foothill in an amount equal to the maximum amount of Foothill’s obligations under L/Cs plus the maximum amount of Foothill’s obligations to any issuing bank under outstanding L/C Guarantees, or (ii) cause to be delivered to Foothill releases of all of Foothill’s obligations under its outstanding L/Cs and L/C Guarantees. At Foothill’s discretion, any proceeds of Collateral held by Foothill may be applied to the cash collateral required by this Section 2.2(e). 2.3 Joint Borrower Provisions. (a) Borrower agrees to establish and maintain a single designated deposit account for all of the Debtors and for the purpose of receiving the proceeds of the advances to be made by Foothill hereunder. Any advance made by Foothill hereunder shall be made jointly to the Debtors and shall be charged to each of the Debtors, jointly and severally. Any payments received by Foothill hereunder likewise shall be credited to each of the Debtors. (b) Foothill is authorized to make advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Officer of Borrower or, without instructions, if in Foothill’s discretion such advances are necessary to meet Obligations. Unless otherwise instructed by one or more of the Debtors, Foothill will credit the amount of advances made to Borrower under Section 2.1 to Borrower’s designated deposit account. It is expressly agreed and understood by each Debtor that Foothill shall have no responsibility to inquire into the apportionment, allocation, or disposition of any advances made to the Debtors. All advances are to be made for the collective account of Borrower. (c) For the purpose of implementing the joint borrower provisions of the Loan Documents, each Debtor hereby irrevocably appoints each other Debtor as its agent and attorney-in-fact for all purposes of the Loan Documents, including the making of requests for advances, L/Cs, or L/C Guaranties, the execution and delivery of certificates and the receiving and allocating of disbursements from Foothill. (d) It is understood and agreed that the handling of the revolving credit facility on a joint borrowing basis as set forth in this Agreement is solely as an accommodation to the Debtors and at their request, and that Foothill shall incur no liability to the Debtors as a result thereof. To induce Foothill to do so, and in consideration thereof, each of the Debtors hereby agrees to indemnify Foothill and hold Foothill harmless from and against any and all liabilities, expenses, losses, damages or claims or damage or injury asserted against Foothill by the Debtors or by any other Person arising from or incurred by reason of Foothill’s handling of the financing arrangement of the Debtors as herein provided, reliance by Foothill on any requests or instructions from any Debtor, or any other action taken by Foothill hereunder.

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(e) Each Debtor represents and warrants to Foothill that the request for joint handling of the advances and other financial accommodations to be made by Foothill hereunder was made because the Debtors are engaged in an integrated operation that requires financing on a basis permitting the availability of credit from time to time to each of the Debtors. Each of the Debtors expects to derive benefit, directly or indirectly, from such availability because the successful operation of the Debtors is dependent on the continued successful performance of the functions of the integrated group. (f) Each of the Debtors represents and warrants to Foothill that (i) such Debtor has established adequate means of obtaining from each of the other Debtors on a continuing basis financial and other information pertaining to the business, operations, and condition (financial and otherwise) of each of the other Debtors, and their property, and (ii) such Debtor now is and hereafter will be completely familiar with the business, operations and condition (financial and otherwise) of each of the other Debtors, and their property. Each of the Debtors hereby waives and relinquishes any duty on the part of Foothill to disclose to such Debtor any matter, fact or thing relating to the business, operations or condition (financial or otherwise) of any of the other Debtors, or the property of any of the other Debtors, whether now or hereafter known by Foothill during the term of this Agreement. 2.4 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 of this Agreement is greater than the dollar or percentage limitations set forth in Sections 2.1 or 2.2 hereof (an “Overadvance”) Borrower shall immediately pay to Foothill, in cash, the amount of such excess. 2.5 Interest Rates, Payments, and Calculations. (a) Interest Rate. Except as specified to the contrary in any Loan Document, the Obligations shall bear interest, on the average Daily Balance, at a rate equal to two (2.0) percentage points above the Reference Rate. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to four (4.0) percentage points above the Reference Rate. (c) Payments. Interest hereunder shall be due and payable on the first Business Day of each calendar month during the term hereof. Foothill shall, at its option, charge such interest and all Foothill Expenses to Borrower’s loan account, which amounts shall thereafter accrue interest at the rate then applicable hereunder. Foothill agrees to provide Borrower with notice of any Foothill Expenses that are charged to Borrower’s loan account. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. The Reference Rate as of this date is six and onehalf percent (6.5%) per annum. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased by an amount equal to the Reference Rate change. For each month the rate of interest charged hereunder shall be based upon the average Reference Rate in effect during such month. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.

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2.6 Crediting Payments. The receipt of any wire transfer of funds, check, or other item of payment by Foothill shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Foothill or unless and until such check or other item of payment is honored when presented for payment. Should such check or item of payment not be honored when presented for payment, then, Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Foothill after 11:00 a.m. Los Angeles time shall be deemed to have been received by Foothill as of the opening of business on the immediately following Business Day. 2.7 Statements of Obligations. Foothill shall render statements to Borrower of the Obligations, including all statements of principal, interest, fees, and Foothill Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Foothill unless, within thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to Foothill by registered or certified mail at its address specified hereinabove, written objection thereto describing the error or errors, if any, contained in any such statements. 2.8 Fees. Borrower shall pay to Foothill the following fees: (a) Commitment Fee. A one time commitment fee of $200,000 which is due and payable by Borrower to Foothill in connection with this Agreement as follows: (i) $100,000 was earned, due and payable, and was paid by Borrower to Foothill on the date on which Foothill delivered a commitment letter regarding the financing contemplated hereby; and (ii) on the earlier of the Closing Date or the date on which Borrower (or any of the Debtors or Guarantor) incurs debtorin-possession financing from a third person in lieu of that provided herein, the $100,000 balance is due and payable. (b) Unused Line Fee. On the first Business Day of each calendar month during the term of this Agreement, a fee in an amount equal to one-half of one percent (0.5%) per annum times the Average Unused Portion of the Maximum Amount; (c) Financial Examination and Appraisal Fees. From and after the occurrence and during the continuance of an Event of Default, Foothill’s customary fee of Five Hundred Dollars ($500) per day per examiner, plus out-of-pocket expenses for each financial analysis and examination of Borrower performed by Foothill or its agents, and Foothill’s customary appraisal fee of Seven Hundred Fifty Dollars ($750) per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by Foothill; and (d) Servicing Fee. On the first Business Day of each calendar month during the term of this Agreement, and thereafter so long as any Obligations are outstanding, a servicing fee in an amount equal to Five Thousand Dollars ($5,000) per month. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the Obligations, and unless Foothill shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Accounting System. Borrower at all times hereafter shall maintain a standard and modern system of accounting in accordance with GAAP with

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ledger and account cards or computer tapes, discs, printouts, and records pertaining to the Collateral which contain information as from time to time be requested by Foothill. Borrower shall also keep proper books of Accounts showing all sales, claims, and allowances on its Inventory. 6.2 Collateral Reports. Borrower shall, deliver to Foothill, no later than the tenth (10th) day of each month during the term of this Agreement, a detailed aging, by total, of the Accounts, a reconciliation statement, and a summary aging, by vendor, of all accounts payable and any book overdraft. Original sales invoices evidencing daily sales shall be mailed by Borrower to each account debtor with a copy to Foothill, and, at Foothill’s direction following the occurrence of an Event of Default, the invoices shall indicate on their face that the Account has been assigned to Foothill and that all payments are to be made directly to Foothill. Borrower shall deliver to Foothill, as Foothill may from time to time require, collection reports, sales journals, invoices, original delivery receipts, customer’s purchase orders, shipping instructions, bills of lading and other documentation respecting shipment arrangements. Absent such a request by Foothill, copies of all such documentation shall be held by Borrower as custodian for Foothill. 6.3 Assignments of Accounts. Borrower shall provide Foothill with schedules describing all Accounts and shall execute and deliver to Foothill assignments of all Accounts. Borrower’s failure to execute and deliver such schedules or assignments shall not affect or limit Foothill’s security interest or other rights in and to the Accounts. 6.4 Financial Statements, Reports, Certificates. (a) Borrower agrees to deliver to Foothill: (i) as soon as available, but in any event within thirty (30) days after the end of each month during each of Borrower’s fiscal years, a company prepared balance sheet, income statement, and cash flow statement covering Guarantor’s and its subsidiaries’ operations during such period; and (ii) as soon as available, but in any event within ninety (90) days after the end of each of Guarantor’s fiscal years, financial statements of Guarantor and its subsidiaries for each such fiscal year, audited by independent certified public accountants acceptable to Foothill and certified, without any qualifications (other than those that are necessitated by the filing of Chapter 11 by Borrower), by such accountants to have been prepared in accordance with GAAP, consistently applied, together with a certificate of such accountants addressed to Foothill stating that such accountants do not have knowledge of the existence of any event or condition constituting an Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and cash flow statement, and such accountants’ letter to management. Borrower shall and shall have caused Guarantor to have issued written instructions to its independent certified public accountants, authorizing them to communicate with Foothill and to release to Foothill whatever financial information concerning Borrower or Guarantor that Foothill may request. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present each Debtor separately, and on a consolidated basis. (b) Together with the above, Borrower shall also deliver to Foothill Borrower’s Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower with the Securities and Exchange Commission, if any, as soon as the same are filed, and

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any other report reasonably requested by Foothill relating to the Collateral and financial condition of Borrower. (c) Each month Borrower shall deliver to Foothill a certificate signed by its chief financial officer to the effect that: (i) all reports, statements, or computer prepared information of any kind or nature delivered or caused to be delivered to Foothill hereunder have been prepared in accordance with GAAP consistently applied and fully and fairly present the financial condition of Borrower; (ii) Borrower is in timely compliance with all representations, warranties, and covenants hereunder; and (iii) on the date of delivery of such certificate to Foothill there does not exist any condition or event which constitutes an Event of Default. (d) Borrower hereby irrevocably authorizes and directs, and shall cause Guarantor to authorize and direct, all auditors, accountants, or other third parties to deliver to Foothill, at Borrower’s expense, copies of Borrower’s or Guarantor’s financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Foothill any information they may have regarding Borrower’s or Guarantor’s business affairs and financial conditions. (e) As soon as practicable, Borrower agrees to deliver to Foothill copies of the interim reports of Borrower and Guarantor provided to the U.S. Trustee. 6.5 Tax Returns, Receipts. To the extent not required to be provided by Section 6.6, Borrower agrees to deliver to Foothill copies of Borrower’s future federal income tax returns, and any amendments thereto, within thirty (30) days of the filing thereof with the Internal Revenue Service. 6.6 Guarantor Reports. Borrower agrees to cause Guarantor to deliver its annual financial statements and copies of all federal income tax returns as soon as the same are available and in any event no later than thirty (30) days after the same are required to be filed by law. 6.7 Designation of Inventory. Borrower shall now and from time to time hereafter, but not less frequently than monthly, execute and deliver to Foothill a designation of Inventory specifying Borrower’s cost and the wholesale market value of Borrower’s raw materials, work in process, and finished goods, and further specifying such other information as Foothill may reasonably request. 6.8 Returns. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If at any time prior to the occurrence of an Event of Default, any account debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such account debtor. Borrower shall promptly notify Foothill of all returns and recoveries and of all disputes and claims. 6.9 Title to Rolling Stock. Borrower shall promptly deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Rolling Stock. 6.10 Maintenance of Rolling Stock. Borrower shall keep and maintain the Rolling Stock in good operating condition and repair, and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved.

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6.11 Taxes. Except as otherwise provided by a confirmed plan of reorganization, and to the extent permitted or required under the Bankruptcy Code, all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property will be paid in full, before delinquency or before the expiration of any extension period. Except as otherwise provided by a confirmed plan of reorganization, and to the extent permitted or required under the Bankruptcy Code, Borrower shall make due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Foothill, on demand, appropriate certificates attesting to the payment or deposit thereof. To the extent permitted or required under the Bankruptcy Code, Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Foothill with proof satisfactory to Foothill indicating that Borrower has made such payments or deposits. 6.12 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses. To the extent that it has historically maintained such insurances, Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower’s ownership and use of the Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as satisfactory to Foothill. All such policies of insurance (except those of public liability and property damage) shall contain a 438BFU lender’s loss payable endorsement, or an equivalent endorsement in a form satisfactory to Foothill, showing Foothill as sole loss payee thereof (solely as to items of Collateral), and shall contain a waiver of warranties, and shall specify that the insurer must give at least ten (10) days notice to Foothill before cancelling its policy for any reason. Borrower shall deliver to Foothill certified copies of such policies of insurance and evidence of the payments of all premiums therefor. Except to the extent set forth in the Deed of Trust, all proceeds payable under any such policy shall be payable to Foothill to be applied on account of the Obligations. 6.13 Foothill Expenses. Borrower shall immediately and without demand reimburse Foothill for all sums expended by Foothill which constitute Foothill Expenses and Borrower hereby authorizes and approves all advances and payments by Foothill for items constituting Foothill Expenses. 6.14 Financial Covenants. Borrower shall cause Guarantor to maintain: (a) Current Ratio. A ratio of Consolidated Current Assets divided by Consolidated Current Liabilities, of at least eight-tenths to one (0.8:1.0) measured on a quarterly basis; (b) Consolidated Tangible Net Worth. Consolidated Tangible Net Worth of not less than , such amount to be increased by

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$1,000,000 per quarter commencing with the first fiscal quarter ending after the date of this Agreement; and (c) Working Capital. Working Capital of not less than , measured on a quarterly basis. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the Obligations, Borrower will not do any of the following without Foothill’s prior written consent: 7.1 Extraordinary Transactions and Disposal of Assets. Enter into any transaction not in the ordinary and usual course of Borrower’s business, including the sale, lease, or other disposition of, moving, relocation, or transfer, whether by sale or otherwise, of any of Borrower’s assets (other than sales of Inventory in the ordinary and usual course of Borrower’s business as presently conducted and other than sales of real (other than the Real Property) or personal property that does not constitute Collateral for not less than the fair market value therefor), the incurrence of any debts outside the ordinary and usual course of Borrower’s business except for renewals or extensions of existing debts and except as permitted by Section 7.7 hereof, or the making of any advance or loan except in the ordinary course of business as presently conducted. 7.2 Change Name. Change Borrower’s name, business structure, or identity, or add any new fictitious name. 7.3 Merge, Acquire. Acquire, merge, or consolidate with or into any other business organization. 7.4 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third party except by endorsement or instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Foothill. 7.5 Restructure. Make any material change in Borrower’s financial structure or in any of its business operations, or change the date of its fiscal year. 7.6 Prepayments. Except as contemplated in Section 2.1, except for the prepayment of indebtedness to the extent of the net proceeds received by Borrower from the sale or other disposition of assets that secure such indebtedness, and except as may be agreed to in writing by Foothill, prepay any existing indebtedness owing to any third party. 7.7 Capital Expenditures. Make any plant or fixed capital expenditure, or any commitment therefor, or purchase or lease any real or personal property or replacement equipment subject to a purchase money security interest, trust deed or lease, in excess of Three Hundred Thousand Dollars ($300,000) for any individual transaction or where the aggregate amount of such transactions, in any fiscal year, is in excess of Six Hundred Thousand Dollars ($600,000). In addition to the foregoing limitations, Borrower shall be entitled to make any plant or fixed capital expenditure, or any commitment therefor, or purchase or lease any real or personal property or replacement equipment subject to a purchase money security interest, trust deed or lease to the extent of the net proceeds received by Borrower from the sale or other disposition of assets that do not comprise a portion of the Collateral or the Real Property. 7.8 Consignments. Consign any Inventory, sell any Inventory on bill and hold or other unusual terms of sale.

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7.9 Distributions. Make any distribution or declare or pay any dividends (in cash or in stock) on, or purchase, acquire, redeem, or retire any of Borrower’s capital stock, of any class, whether now or hereafter outstanding. 7.10 Accounting Methods. Modify or change its method of accounting or enter into, modify, or terminate any agreement presently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower’s accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or Borrower’s financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agrees that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 7.11 Investments. Directly or indirectly make or own any beneficial interest in (including stock, partnership interest, or other securities of), or make any loan, advance, or capital contribution to, any corporation, association, person, or entity. 7.12 Transactions with Affiliates. Borrower will not directly or indirectly enter into or permit to exist any material transaction with any person or entity controlling, controlled by, or under common control (whether by contract, ownership of voting securities, or otherwise) with Borrower except for transactions which are in the ordinary course of Borrower’s business, upon fair and reasonable terms and which are fully disclosed to Foothill and no less favorable to Borrower than would be obtained in arm’s length transaction with a nonaffiliated person or entity.

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Disclosure Statement

Objective. Section 6.26 of Volume 1 describes the nature of the disclosure statement. The sample statement below consists of selected provisions from the disclosure statement filed by Dura Automotive. In order to provide an outline of all the items included in the disclosure statement, the Table of Contents from Dura Automotive’s statement precedes the selected excerpts. TABLE OF CONTENTS SUMMARY I. BACKGROUND A OVERVIEW OF THE COMPANY’S BUSINESSES B SUMMARY OF PREPETITION INDEBTEDNESS II. EVENTS LEADING TO THE CHAPTER 11 CASES A DETERIORATING CONDITIONS IN AUTOMOTIVE SECTOR B THE DEBTORS’ DETERIORATING FINANCIAL CONDITION C THE COMPANY’S PREPETITION OPERATIONAL RESTRUCTURING EFFORTS D IMPACT OF LIQUIDITY CONSTRAINTS III. THE CHAPTER 11 CASES A OVERVIEW OF CHAPTER 11 B ADMINISTRATION OF THE CHAPTER 11 CASES C CLAIMS ADMINISTRATION D CANADIAN PROCEEDINGS E THE DEBTORS’ OPERATIONAL RESTRUCTURING INITIATIVES F THE ORIGINAL CHAPTER 11 JOINT PLAN OF REORGANIZATION G THE REVISED CHAPTER 11 JOINT PLAN OF REORGANIZATION IV. SUMMARY OF THE REVISED CHAPTER 11 JOINT PLAN OF REORGANIZATION A THE PURPOSE OF THE REVISED PLAN B LIMITED SUBSTANTIVE CONSOLIDATION V. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE REVISED PLAN A TREATMENT OF UNCLASSIFIED CLAIMS B SUMMARY OF CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND EQUITY INTERESTS C CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND EQUITY INTERESTS D SUBORDINATION E SPECIAL PROVISION GOVERNING UNIMPAIRED CLAIMS F NON-CONSENSUAL CONFIRMATION

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VI. SUMMARY OF EXIT FINANCING TO BE ISSUED IN CONNECTION WITH THE REVISED PLAN VII. MEANS FOR IMPLEMENTATION OF THE REVISED PLAN A CONTINUED CORPORATE EXISTENCE AND VESTING OF ASSETS IN THE REORGANIZED DEBTORS, AND MERGERS B TREATMENT OF INTERCOMPANY CLAIMS C CANCELLATION OF SENIOR NOTES, SUBORDINATED NOTES, CONVERTIBLE SUBORDINATED DEBENTURES, AND EQUITY INTERESTS D SENIOR NOTES INDENTURE TRUSTEE FEES E SUBORDINATED NOTES INDENTURES TRUSTEE FEES F CONVERTIBLE SUBORDINATED INDENTURE TRUSTEE FEES G ISSUANCE OF NEW SECURITIES H CREATION OF RETAINED PROFESSIONAL ESCROW ACCOUNT I CORPORATE GOVERNANCE, DIRECTORS AND OFFICERS, AND CORPORATE ACTION J NEW MONEY SECOND LIEN LOAN, ALTERNATIVE TRANSACTIONS, AND EXIT FINANCING VIII. TREATMENT OF EXECUTORY CONTRACTS, UNEXPIRED LEASES, AND DEFINED BENEFIT PENSION PLANS A ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES B CLAIMS BASED ON REJECTION OF EXECUTORY CONTRACTS OR UNEXPIRED LEASES C CURE OF DEFAULTS FOR EXECUTORY CONTRACTS AND UNEXPIRED LEASES ASSUMED PURSUANT TO THE REVISED PLAN D INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES E ASSUMPTION OF D&O INSURANCE POLICIES; TAIL COVERAGE F COMPENSATION AND BENEFIT PROGRAMS; CHANGE OF CONTROL AGREEMENTS G PENSION PLANS H COLLECTIVE BARGAINING AGREEMENTS I WORKERS’ COMPENSATION PROGRAMS IX. PROVISIONS GOVERNING DISTRIBUTIONS A DISTRIBUTIONS FOR CLAIMS ALLOWED AS OF THE EFFECTIVE DATE B PRO RATA DISTRIBUTIONS C DELIVERY OF DISTRIBUTIONS D TIMING OF DISTRIBUTIONS E MINIMUM DISTRIBUTION F SETOFFS

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X. PROCEDURES FOR RESOLVING DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS OR EQUITY INTERESTS A RESOLUTION OF DISPUTED CLAIMS B CLAIMS ALLOWANCE C ALLOWED CLAIMS XI. CONDITIONS PRECEDENT TO EFFECTIVE DATE OF THE REVISED PLAN A CONDITIONS PRECEDENT TO EFFECTIVE DATE OF THE REVISED PLAN B WAIVER OF CONDITIONS C NON-OCCURRENCE OF CONDITIONS XII. RELEASE, INJUNCTIVE AND RELATED PROVISIONS A COMPROMISE AND SETTLEMENT B RELEASES C EXCULPATION D PRESERVATION OF RIGHTS OF ACTION E DISCHARGE OF CLAIMS AND TERMINATION OF EQUITY INTERESTS F INJUNCTION XIII. RETENTION OF JURISDCTION XIV. MISCELLANEOUS PROVISIONS A DISSOLUTION OF CREDITORS’ COMMITTEE B POST-CONFIRMATION, PRE-EFFECTIVE DATE PROFESSIONALS’ FEES AND FINAL FEE APPLICATIONS C PAYMENT OF STATUTORY FEES D MODIFICATION OF REVISED PLAN E REVOCATION OF REVISED PLAN F SUCCESSORS AND ASSIGNS G GOVERNING LAW H RESERVATION OF RIGHTS I SECTION 1146 EXEMPTION J SECTION 1125(E) GOOD FAITH COMPLIANCE K FURTHER ASSURANCES L FILING OF ADDITIONAL DOCUMENTS M NO STAY OF CONFIRMATION ORDER N AID AND RECOGNITION XV. VALUATION ANALYSIS AND FINANCIAL PROJECTIONS A VALUATION OF THE REORGANIZED DEBTORS B FINANCIAL PROJECTIONS XVI. SOLICITATION AND VOTING PROCEDURES A SOLICITATION PACKAGE B VOTING INSTRUCTIONS AND GENERAL TABULATION PROCEDURES XVII. CONFIRMATION PROCEDURES A CONFIRMATION GENERALLY B THE CONFIRMATION HEARING C STATUTORY REQUIREMENTS FOR CONFIRMATION OF THE REVISED PLAN

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XVIII.

XIX.

XX.

XXI.

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D IDENTITY OF PERSONS TO CONTACT FOR MORE INFORMATION CERTAIN RISK FACTORS AFFECTING THE DEBTORS A CERTAIN BANKRUPTCY LAW CONSIDERATIONS B FINANCIAL INFORMATION; DISCLAIMER C FACTORS AFFECTING THE VALUE OF THE SECURITIES TO BE ISSUED UNDER THE REVISED PLAN D RISK FACTORS ASSOCIATED WITH THE DEBTORS’ BUSINESSES E FACTORS AFFECTING THE REORGANIZED DEBTORS ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE REVISED PLAN A LIQUIDATION UNDER CHAPTER 7 B ALTERNATIVE PLAN OF REORGANIZATION CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES A CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS AND THE REORGANIZED DEBTORS B CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE HOLDERS OF CLASS 1, CLASS 2, CLASS 3 AND CLASS 5 CLAIMS C ACCRUED INTEREST D MARKET DISCOUNT CONCLUSION AND RECOMMENDATION

SUMMARY Dura Automotive Systems, Inc., Dura Operating Corporation, and 40 of their direct and indirect wholly-owned United States and Canadian subsidiaries (each a “Debtor,” and collectively, the “Debtors”),1 as debtors and debtors-inpossession, submit this Disclosure Statement to holders of Claims and Equity Interests in connection with: (a) the solicitation of votes to accept or reject the Revised Plan; and (b) the Confirmation Hearing. The purpose of this Disclosure Statement is to provide to holders of Claims and Equity Interests adequate

1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems, Inc., Dura Automotive Systems of Indiana, Inc., Dura Brake Systems, L.L.C., Dura British Columbia ULC (formerly Dura Ontario, Inc.), Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Operating Canada LP. Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc.

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information to make an informed judgment about the Revised Plan, which is annexed hereto as Exhibit A.

All capitalized terms used in this Disclosure Statement but not otherwise defined herein shall have the meaning ascribed to them in Article I of the Revised Plan unless otherwise noted.

The following summary is qualified in its entirely by the more detailed information and financial statements contained elsewhere in this Disclosure Statement. The Debtors are a leading independent designer and manufacturer of driver control systems, seating control systems, glass systems, engineered assemblies, structural door modules, and exterior trim systems for the global automotive industry. The Debtors sell their products directly to virtually every major North American, Asian and European automotive original equipment manufacturer as well as to other automotive parts suppliers. The Debtors manufacture products for many of the most popular car, light truck, sport utility and multiactivity-vehicle models in North America and Europe. The Debtors are also a leading supplier of door and window systems, engineered components and gas appliances to the recreational and specialty vehicle industries. On October 30, 2006 (the “Petition Date”), the Debtors filed voluntary petitions for relief commencing cases (the “Chapter 11 Cases”) under chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330, as amended, (the “Bankruptcy Code”), in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). Contemporaneously therewith, the Debtors filed a motion to jointly administer the Chapter 11 Cases for procedural purposes only. The Debtors’ remaining 45 direct and indirect wholly-owned Latin American, Asian and European subsidiaries at the time of the Petition Date did not seek chapter 11 protection, and each of those non-filing entities is continuing normal business operations. The Debtors also have interests in four directly and indirectly partially owned joint ventures, with ownership ranging from 50% to 90%, none of which is included in the Debtors’ Chapter 11 Cases. Attached hereto as Exhibit B is the Debtors’ corporate organization chart as of the Petition Date. The Debtors continue to operate their businesses and manage their properties as debtors-in-possession during the pendency of the Chapter 11 Cases. The Debtors’ customers continue to receive services from the Debtors, and the Debtors’ vendors continue to be paid according to applicable payment terms. On November 8 and 9, 2006, and December 7, 2006, the United States Trustee for the District of Delaware appointed an official committee of unsecured creditors (the “Creditors’ Committee”), pursuant to section 1102 of the Bankruptcy Code. On August 22, 2007, the Debtors filed a proposed plan of reorganization (as amended and modified, the “Original Plan”) [Docket No. 1702] and corresponding disclosure statement (as amended and modified, the “Original Disclosure Statement”) [Docket No. 1703]. The Debtors subsequently engaged in weeks of

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negotiations with their various creditor constituencies regarding the terms of the Original Plan and Original Disclosure Statement. Those negotiations culminated in a global resolution of various issues among the Debtors, the Creditors’ Committee, and the Senior Notes Indenture Trustee, all of which was predicated on confirmation of the Original Plan, as modified. On September 28, 2007, the Debtors filed a modified Original Plan and a modified Original Disclosure Statement incorporating this global resolution as well as certain other changes and revisions. On October 3, 2007, the Debtors filed a second modified Original Disclosure Statement incorporating further agreed upon resolutions. On October 4, 2007, the Bankruptcy Court entered an order approving the Original Disclosure Statement, as modified, approved the Debtors’ proposed solicitation procedures, and set November 26, 2007, as the hearing date on confirmation of the Original Plan. Despite the Debtors’ progress in negotiating and soliciting a largely consensual chapter 11 plan that was accepted by overwhelming majorities in every voting class, it became clear that the Debtors’ plan to exit chapter 11 prior to year-end 2007 would not come to fruition. Even though the Debtors had progressed to the very cusp of confirming the Original Plan, the Debtors were unable to proceed to confirmation with the Original Plan in light of the abnormally challenging credit market conditions and consequently were unable to obtain sufficient exit financing on acceptable terms. This unwelcome development, however, stands in marked contrast to the progress achieved by the Debtors from an operational restructuring and business turnaround perspective. Indeed, despite their inability to confirm the Original Plan, the Debtors have been executing a robust operational restructuring and business turnaround over the past eighteen months that, when completed, will position them well for the future. Moreover, the Debtors continue to be quality and technology leaders in both North America and Europe in their markets. It is in this context that the Debtors have evaluated their options and worked diligently with their key creditor constituencies to formulate the Revised Plan. This Disclosure Statement summarizes the Revised Plan’s content and provides information relating to the Revised Plan and the process that the Bankruptcy Court follows in determining whether or not to confirm the Revised Plan, This Disclosure Statement also discusses the events leading to the Debtors filing their Chapter 11 Cases, describes the main events that have occurred in the Debtors’ Chapter 11 Cases and, finally, summarizes and analyzes the Revised Plan. The Disclosure Statement also describes certain potential federal income tax consequences of holders of Claims and Equity Interests, voting procedures and the confirmation process. The Purpose of the Revised Plan The Revised Plan contemplates, generally, the following restructuring transactions:

r Conversion of all Second Lien Facility Claims into Convertible Preferred Stock (the “Second Lien Distribution”) with the following terms:

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r Liquidation preference as of the Effective Date equal to the Second Lien Allowed Claim amount;

r 20% annual dividend which shall accrue and increase the liquidation preference of such shares;

r Beginning on the third anniversary of the Effective Date, holders may

r

r

r

r

elect to convert their shares into their pro rata share of 92.5% of the New Common Stock, and thereafter, into New Common Stock based on a percentage reflecting any accrued dividends earned since the third anniversary through the conversion date, if the Convertible Preferred Stock were to be converted at its full amount including any accrued dividends and with no prior redemptions. Such percentage will be proportionately reduced to reflect the actual amounts of the unredeemed Convertible Preferred Stock outstanding, including any accrued dividends as of the conversion date; Beginning on the fourth anniversary of the Effective Date, the holders of New Common Stock may call for the conversion of all outstanding Convertible Preferred Stock; provided, however, that, either (i) the Convertible Preferred Stock must be trading at a level equal to or exceeding 115% of the liquidation preference of the Convertible Preferred Stock on the date on which the conversion is called, or (ii) the number of shares of New Common Stock into which the Convertible Preferred Stock is then convertible, in the aggregate, is trading at a similar valuation; Beginning on the tenth anniversary of the Effective Date, to the extent that the Convertible Preferred Stock remains outstanding, holders representing more than a majority of the Convertible Preferred Stock shall have the right to appoint a majority of the New Board’s directors; At any time prior to the third anniversary of the Effective Date, New Dura may ratably redeem up to 100% of the Convertible Preferred Stock plus accrued dividends then outstanding: provided, however, that on the date of any such redemption, holders may elect to convert a proportion of their Convertible Preferred Stock shares into New Common Stock shares, which proportion shall be 0% on the Effective Date, 7% on the first anniversary thereof, 14% on the second anniversary thereof and 21% on the third anniversary thereof, respectively, if the Convertible Preferred Stock were to be redeemed in full on those dates; provided, further, however, that proportion of Convertible Preferred Stock that may be so converted shall be adjusted as a function of the amount of Convertible Preferred Stock redeemed, the redemption date and any prior redemptions; and The Special Transactions Committee may effectuate a redemption of Convertible Preferred Stock at any time prior to the third anniversary of the Effective Date, provided that the post-transaction cost of funds meets certain customary parameters for refinancing indebtedness typically found in an indenture; provided, however, a majority of the entire Board of Directors must approve any redemption using funds from debt senior to the Convertible Preferred Stock if the size of the proposed redemption is less than $112.5 million.

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r Converting Senior Notes Claims into approximately 95% of the New Common Stock (the “Senior Notes Distribution”);

r Converting the U.S. Other General Unsecured Claims into approximately r

r r r

r

r

5% of the New Common Stock (the “U.S. General Unsecured Equity Distribution”); The Canadian General Unsecured Claims shall receive, in full and final satisfaction of such Claim, Cash to be distributed pro rata to holders of Allowed Canadian General Unsecured Claims pursuant to the Revised Plan equal to the higher of (a) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Canadian Information Officer’s report dated March 31, 2008; or (b) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Liquidation Analysis; Payment in full in Cash of all DIP Facility Claims, Administrative Claims, and certain Priority Claims; Discharge of all other Claims, including Claims arising from the Subordinated Notes and the Convertible Subordinated Debentures, without recovery, and cancellation of all Equity Interests in the Debtors; Corporate Governance: The settlement contemplates the Second Lien Group, Creditors’ Committee, and the Commitment Parties choosing six independent board members as provided in the Revised Plan Supplement, provided that those members are reasonably acceptable to all other major constituencies (as provided in the Revised Plan Supplement), including the Debtors. Additionally, the CEO of New Dura will be a member of the New Dura Board; Special Transactions Committee: The settlement contemplates a special subcommittee of the New Dura Board that is responsible, subject to certain limitations for determining when, if ever, to redeem the Convertible Preferred Stock, and to effectuate such redemption (the “Special Transactions Committee”), The Special Transactions Committee shall comprise the two board members appointed by the Creditors’ Committee (the “New Common Members”); A new capital infusion of $80 million in exchange for a second lien debt facility having a $100 million face amount (the “New Money Second Lien Loan”).

The Debtors believe that the Revised Plan maximizes the Debtors’ value. Further, the Debtors believe that any alternative to confirmation of the Revised Plan, such as liquidation or attempts by another party-in-interest to file a plan of reorganization, would result in significant delays, litigation and additional costs, and ultimately would lower the recoveries for holders of Allowed Claims. The Revised Plan will result in a capital structure that can be supported by the Reorganized Debtors’ business operations. To this end, the Revised Plan will eliminate the Company’s prepetition debt of approximately $1.3 billion, and replace it with, in addition to the New Money Second Lien Loan, an Exit Credit Facility with a First Lien term loan of approximately $150 million, and a revolving credit facility of approximately $110 million (including a letter

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of credit sub-facility of up to $25 million), which is expected to be largely unutilized at exit. The New Money Second Lien Loan will have a face value of approximately $100 million. The Debtors believe that the Revised Plan is in the best interests of their creditors. If the Revised Plan were not to be confirmed, the Debtors believe that they would be forced either to file an alternate plan of reorganization or to liquidate under chapter 11 or chapter 7 of the Bankruptcy Code. If either such event were to occur, the Debtors believe that their creditors would realize a much less favorable distribution of value, or, in certain cases, none at all, for their Claims. Why You Are Receiving This Document The Bankruptcy Code requires a disclosure statement to contain “adequate information” concerning the Revised Plan. In other words, a disclosure statement must contain sufficient information to enable parties who are affected by the Revised Plan to vote either to accept or reject the Revised Plan or to object to the Revised Plan, as the case may be. All creditors should carefully review both the Disclosure Statement and the Revised Plan before voting to accept or reject the Revised Plan. Indeed, creditors should not rely solely on the Disclosure Statement, but should read the Revised Plan as well.

Please note that any terms not specifically defined in this Disclosure Statement shall have the meaning ascribed to them in the Revised Plan and any conflict between the Disclosure Statement and the Revised Plan shall be governed by the Revised Plan.

Limited Substantive Consolidation The Revised Plan is premised upon “substantively consolidating” the U.S. Debtors on the terms set forth in Article IV.A of the Revised Plan, and as more fully described in Article IV.B of this Disclosure Statement, for the limited purposes of confirming and consummating the Revised Plan, including but not limited to, voting, confirmation and distribution. The Bankruptcy Court may order substantive consolidation in the exercise of its general equitable discretionary powers under section 105(a) of the Bankruptcy Code to ensure the equitable treatment of creditors. The effect of substantive consolidation will be the pooling of the assets and liabilities of the consolidated U.S. Debtors and the satisfaction of creditor Claims from the resulting common pool of funds. Each and every Claim filed or to be filed in the Chapter 11 Cases against any U.S. Debtor shall be considered filed against the consolidated U.S. Debtors and shall be considered one Claim against and obligation of the consolidated U.S. Debtors. All guaranties by any of the U.S. Debtors of the obligations of any U.S. Debtor arising prior to the Effective Date shall be deemed eliminated under

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the Revised Plan so that any Claim against any U.S. Debtor and any guaranty thereof executed by any other U.S. Debtor and any joint and several liability of any of the U.S. Debtors shall be deemed to be one obligation of the deemed consolidated U.S. Debtors. The Revised Plan does not substantively consolidate the Canadian Operating Debtor with any other Debtor (U.S. or Canadian). The Revised Plan separately classifies Claims against the Canadian Operating Debtor as Class 5B Canadian General Unsecured Claims with recoveries in Cash to be distributed pro rata to holders of Allowed Canadian General Unsecured Claims pursuant to the Revised Plan equal to the higher of (a) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Canadian Information Officer’s report dated March 31, 2008, and annexed hereto as Exhibit G; or (b) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Liquidation Analysis, annexed hereto as Exhibit I. Each of the Other Canadian Debtors will also be treated as individual nonconsolidated Debtors, however, no claims have been filed against the Other Canadian Debtors. The contemplated substantive consolidation will not affect any liens or other security interests held by prepetition secured Claim holders. If the Bankruptcy Court authorizes the Debtors to substantively consolidate less than all of the Estates: (a) the Revised Plan would be treated as a separate plan of reorganization for each Debtor not substantively consolidated; and (b) the Debtors would not be required to re-solicit votes with respect to the Revised Plan. Summary of Treatment of Claims and Equity Interests The Revised Plan classifies Claims against and Equity Interests in the Debtors. Certain unclassified Claims, including Administrative Claims, DIP Facility Claims and Priority Tax Claims, will receive full payment in cash either on the distribution date, or as promptly thereafter as each such Claims are liquidated, or in installments over time as permitted by the Bankruptcy Code or as agreed with the holders of such Claims. All other Claims and all Equity Interests are classified into Classes and will receive the distributions and recoveries (if any) as described in the Revised Plan.

THE DEBTORS HAVE DETERMINED, AS SUMMARIZED ON THE FOLLOWING CHART, THAT CONFIRMING AND CONSUMMATING THE REVISED PLAN WILL PROVIDE EACH CREDITOR WITH A RECOVERY THAT IS NOT LESS THAN IT WOULD RECEIVE PURSUANT TO A LIQUIDATION OF THE DEBTORS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE.

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Class 2 – Second Lien Facility Claims

Administrative Claims Priority Tax Claims Other Priority Claims Class 1 – Other Secured Claims

DIP Facility Claims

Class/Type of Claim or Interest

$228.15 million

$0.8 million

$0

$5.2 million

Amount outstanding as of the Effective Date, including outstanding letters of credit $28.5 million

Projected Claims/Equity Interests3

Summary of Expected Recoveries2

Paid in full in cash, unless another treatment is specified by agreement. Paid in full in cash in accordance with section 1129(a)(9)(C) of the Bankruptey Code. Paid in full in cash or in another manner that leaves such Claim unimpaired. Each holder of an Allowed Other Secured Claim will receive either: (i) the collateral securing such Claim; (ii) the cash equivalent of such collateral; (iii) the treatment that leaves such Claim reinstated or unimpaired. Each holder of an Allowed Second Lien Facility Claim shall receive in full and final satisfaction of such Claim, its pro rata share of the Second Lien Distribution.

Paid in full in cash.

Plan Treatment of Class

100%

100%

100%

100%

100%

100%

Projected Recovery Under the Revised Plan4

100%

100%

100%

100%

100%

100%

Projected Recovery Under the Original Plan

100%

100%

50%

50%

95%

100%

Projected Recovery Under Chapter 7

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$57.4 million

Class 5 – Other General Unsecured Claims

Class 6 – Convertible Subordinated Debentures Claims

$560.7 million

Class 4 – Subordinated Notes Claims

$58.3 million

$2.1 million

$418.7 million

Class 3 – Senior Notes Claims6

Each holder of an Allowed Senior Notes Claim shall receive, in full and final satisfaction of such Claim, its pro rata share of the Senior Notes Distribution. Holders of Subordinated Notes Claims shall neither receive nor retain any property under the Revised Plan pursuant to contractual subordination provisions contained in the Subordinated Notes Indenture. Class 5A – U.S. Other General Unsecured Claims Each holder of an Allowed U.S. General Unsecured Claim shall receive, in full and final satisfaction of such Claim, its pro rata share of the U.S. Unsecured Creditor Equity Distribution. Class 5B – Canadian General Unsecured Claims Each holder of an Allowed Canadian General Unsecured Claim shall receive, in full and final satisfaction of such Claim, Cash in its pro rata share of the Canadian Creditor Distribution. If an Allowed Claim is filed against both the Canadian Operating Debtor and a U.S. Debtor the holder of such Allowed Claim shall be entitled, in the alternative, to its pro rata share of either: (a) the Canadian Creditor Distribution; or (b) the U.S. Unsecured Creditor Equity Distribution, whichever is higher. Holders of Convertible Subordinated Debentures Claims shall neither receive nor retain any property under the Revised Plan pursuant to subordination provisions. 0%

22%

12.5%7

0%

22%

0%

55%

8%

0%

19%

0%

8.6%

1.9%

0%

4.7%

256

N/A

STBD

8

Projected Claims/Equity Interests3

Holders of Interests shall neither receive nor retain any property under the Revised Plan.

Holders of Section 510 Subordinated Claims shall neither receive nor retain any property under the Revised Plan.

Plan Treatment of Class

0%

0%

Projected Recovery Under the Revised Plan4

0%

0%

Projected Recovery Under the Original Plan

0%

0%

Projected Recovery Under Chapter 7

All recovery estimates other than the DIP Facility Claims are approximate, and may vary as a result of, among other things, the Debtors’ ongoing claims adjudication process. 3 In the table above, the amounts in the column entitled “Projected Claims/Equity Interests” (except for DIP Facility Claims and Administrative Claims that accrued but were not paid) estimate amounts outstanding on the Petition Date, based on the Debtors’ Schedules and Statements of Financial Affairs, filed on January 16, 2007, or amounts reflected on filed proofs of claim, as the case may be. 4 Projected recoveries for each creditor class are the midpoints in the potential range of recoveries for each such class. 5 The prepayment penalty, if incurred, would have been approximately $4.5 million or 2.0% of accrued principal. Pursuant to the Initial Final DIP Order, the Debtors have been paying the Stated Rate, a lower interest rate than the Base Rate, in Cash, throughout the Chapter 11 Cases as adequate protection. As part of the global settlement with respect to the Revised Plan as discussed herein, the Debtors agreed to allow the difference between the Stated Rate and the Base Rate accrued over the course of the Chapter 11 Cases to be included in the Second Lien Facility Claims that are converted into Convertible Preferred Stock. The Debtors estimate that as of May 2008, the accrued, but unpaid interest on the Allowed Second Lien Facility Claims will be approximately $3.1 million. Thus, the approximate value of the Second Lien Facility Claims as of that date is $228.1 million. The Allowed Second Lien Facility Claims will include any outstanding and unpaid interest at the Base Rate that has accrued through and including the Effective Date. 6 But for the subordination provisions in the Subordinated Notes Indentures and Convertible Subordinated Indenture: (i) the projected recovery for holders of Senior Notes Claims, Subordinated Notes Claims and Convertible Subordinated Debentures Claims would be approximately 8%. Due to the aforementioned subordinated provisions, the total recovery under the Revised Plan for holders of Senior Notes Claims is calculated as follows:

2

Class 7 – Section 510 Subordinated Claims Class 8 – Equity Interests

Class/Type of Claim or Interest

(Continued)

257

$79 million (19% of $418.7 million)

$418.7 million

After including applicable subordinated recoveries

No subordination Subordinated to Senior Notes Subordinated to Senior Notes

Note

The Original Canadian Liquidation Analysis, annexed as Exhibit K to the Original Disclosure Statement, estimated that the creditors of the Canadian Operating Debtor entity would receive between a minimum 9% recovery to a maximum recovery of 12% in the “best case scenario” liquidation, as compared with a 22% recovery under the Original Plan. Accordingly, 10.5% is the median projected liquidation recovery set forth in the Canadian Information Officer’s Report dated October 3, 2007. The Canadian Information Officer filed a Revised Canadian Liquidation Analysis as part of the Canadian Information Officer’s Report, dated March 31, 2008, updating liquidating analysis for the Canadian Operating Debtor. The Revised Canadian Liquidation, Analysis projects a 12.5% median recovery which is a higher recovery rate than the 10.5% recovery projected in the October 3, 2007, analysis. The Canadian Creditor Distribution means Cash to be distributed pro rata to holders of Allowed Canadian General Unsecured Claims pursuant to the Revised Plan equal to the higher of (a) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Canadian Information Officer’s report dated March 31, 2008; or (b) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Liquidation Analysis. 8 The Debtors reserve the right to subordinate punitive damages and other Claims pursuant to section 510 of the Bankruptcy Code.

7

$32 million (8% of $418.7 million) $43 million (8% of $560.7 million) $4 million (8% of $58.3 million)

$418.7 million S560.7 million $58.3 million

Senior Notes Claims Subordinated Notes Claims Convertible Subordinated Debentures Claims Total Recovery for Holders of Senior Notes Claims

Projected Recovery

Projected Claims

Source

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Entities Entitled to Vote on the Revised Plan Under the provisions of the Bankruptcy Code, not all parties-in-interest are entitled to vote on a chapter 11 plan. Holders of Claims or Equity Interests not impaired by the Revised Plan are deemed to accept the Revised Plan under the Bankruptcy Code and, therefore, are not entitled to vote on the Revised Plan. Holders of Claims or Equity Interests impaired by the Revised Plan and receiving no distribution under the Revised Plan are not entitled to vote because they are deemed to reject the Revised Plan. The Classes of Claims and Equity Interests classify Claims and Equity Interests for all purposes, including voting, Confirmation and distribution pursuant to the Revised Plan and sections 1122 and 1123(a)(1) of the Bankruptcy Code. The Revised Plan deems a Claim or an Equity Interest to be classified in a particular Class only to the extent that the Claim or the Equity Interest qualifies within the description of that Class and will be deemed classified in a different Class to the extent that any remainder of the Claim or Equity Interest qualifies within the description of a different Class. Summary of Status and Voting Rights

Class

Claim/Interest

Class 1 Class 2 Class 3 Class 4 Class 5 Class 6

Other Secured Claims Second Lien Facility Claims Senior Notes Claims Subordinated Notes Claims Other General Unsecured Claims Convertible Subordinated Debentures Claims Section 510 Subordinated Claims Equity Interests

Class 7 Class 8

Treatment of Claim/Interest

Voting Rights

Unimpaired Impaired Impaired Impaired Impaired Impaired

Deemed to Accept Entitled to Vote Entitled to Vote Deemed to Reject Entitled to Vote Deemed to Reject

Impaired Impaired

Deemed to Reject Deemed to Reject

The following sets forth the classes that are entitled to vote on the Revised Plan and the classes that are not entitled to vote on the Revised Plan:

r The Debtors are NOT seeking votes from the holders of Other Secured Claims in Class I because Class I, and the Claims of any holders in Class I, are unimpaired under the Revised Plan. Pursuant to section 1126(f) of the Bankruptcy Code, Class I is conclusively presumed to have accepted the Revised Plan. r The Debtors are NOT seeking votes from the holders of Subordinated Notes Claims in Class 4, Convertible Subordinated Debentures Claims in Class 6, Section 510 Subordinated Claims in Class 7, or Equity Interests in Class 8 because those classes are impaired under the Revised Plan, and the holders of Claims and Equity Interests in those classes shall neither receive nor retain any property under the Revised Plan on account of such Claims or Equity Interests. Pursuant to section 1126(g) of the Bankruptcy Code, each of those classes is deemed to have rejected the Revised Plan.

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r The Debtors ARE soliciting votes to accept or reject the Revised Plan from those holders of Second Lien Facility Claims in Class 2, Senior Notes Claims in Class 3 and Other General Unsecured Claims in Classes 5A and 5B because Claims in those classes are impaired under the Revised Plan and the holders of those Claims will receive distributions under the Revised Plan. As such, the holders of Classes 2, 3, 5A and 5B have the right to vote to accept or reject the Revised Plan. For a detailed description of the classes of Claims and Equity Interests, as well as their respective treatment under the Revised Plan, see Article V of this Disclosure Statement. The Classes entitled to vote will have accepted the Revised Plan if (1) the holders of at least two-thirds in dollar amount of the Allowed Claims actually voting in each such Class, as applicable, have voted to accept the Revised Plan and (2) the holders of more than one-half in number of the Allowed Claims actually voting in each such Class, as applicable, have voted to accept the Revised Plan. Assuming that the requisite acceptances are obtained, the debtors intend to seek Confirmation of the Revised Plan at the Confirmation Hearing scheduled to commence on May 13, 2008, at 10:00 a.m. (prevailing Eastern Time), before the Bankruptcy Court. THE DEBTORS WILL SEEK CONFIRMATION OF THE REVISED PLAN UNDER SECTION 1129(B) OF THE BANKRUPTCY CODE WITH RESPECT TO ANY IMPAIRED CLASSES PRESUMED TO REJECT THE REVISED PLAN, AND THE DEBTORS RESERVE THE RIGHT TO DO SO WITH RESPECT TO ANY OTHER REJECTING CLASS OR TO MODIFY THE REVISED PLAN. Article XVI herein specifies the deadlines, solicitation procedures, and instructions for voting to accept or reject the Revised Plan and the applicable standards for tabulating Ballots. The Bankruptcy Court has established May 7, 2008, at 5:00 p.m. (prevailing Pacific Time), as the voting deadline (the “Voting Deadline”) for delivering Ballots and Master Ballots with respect to the Revised Plan. Kurtzman Carson Consultants LLC (“KCC”), the Debtors’ claims and solicitation agent, will facilitate the solicitation process. Financial Balloting Group (“FBG”) will assist KCC as special voting agent for solicitation of votes of, and communication with, holders of Claims and Equity Interests arising from publicly traded securities. The Confirmation Hearing Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of the Revised Plan. Section 1128(b) of the Bankruptcy Code provides that any party-in-interest may object to confirmation of the Revised Plan. The Bankruptcy Court has scheduled the Confirmation Hearing for May 13, 2008, to take place at 10:00 a.m. (prevailing Eastern Time), before the Honorable Kevin J. Carey, United States Bankruptcy Judge, in the United States Bankruptcy Court for the District of Delaware, located at Marine Midland

260


Building, 824 North Market Street, 5th Floor, Wilmington, Delaware 19801. The Confirmation Hearing may be adjourned from time to time without further notice except for an announcement of the adjourned date made at the Confirmation Hearing or any adjournment thereof. Objections to confirmation of the Revised Plan must be filed and served on the Debtors, and certain other parties, by no later than May 2, 2008, at 4:00 p.m. (prevailing Eastern Time), in accordance with the Scheduling and Disclosure Statement Order that accompanies this Disclosure Statement. THE BANKRUPTCY COURT MAY NOT CONSIDER OBJECTIONS TO CONFIRMATION OF THE REVISED PLAN IF ANY SUCH OBJECTIONS HAVE NOT BEEN TIMELY SERVED AND FILED IN COMPLIANCE WITH THE SCHEDULING AND DISCLOSURE STATEMENT ORDER.

THE BANKRUPTCY COURT DOES NOT INTEND TO CONSIDER ANY OBJECTIONS TO THE ORIGINAL PLAN UNLESS THEY ARE RE-FILED AGAINST THE REVISED PLAN. The Confirmation Hearing Notice will contain, among other things, the Revised Plan Objection Deadline, the Voting Deadline, and Confirmation Hearing Date. The Debtors will publish the Confirmation Notice in the following publications in order to provide notification to those persons who may not receive notice by mail: The New York Times (National Edition), The Wall Street Journal (National Edition), The Detroit Free Press, The Automotive News (National Edition), The Globe and Mail, and The National Post. I. BACKGROUND A. OVERVIEW OF THE COMPANY’S BUSINESSES 1. Corporate Structure. Dura Automotive Systems, Inc. is a publicly held Delaware corporation that functions as a parent holding company for its forty-one debtor affiliates and its non-debtor affiliates and subsidiaries operating outside the United States and Canada (collectively, the “Company”). A key element of the Company’s growth strategy has been to enhance its ability to provide complete systems to its original equipment manufacturer (“OEM”) customers. The Debtors consist of Dura Automotive Systems, Inc., the parent holding company, Dura Operating Corporation, the operating arm and a direct and sole subsidiary of Dura Automotive Systems, Inc., and 40 of their direct and indirect wholly-owned United States and Canadian subsidiaries. The Company’s remaining 45 direct and indirect wholly-owned Latin American, Asian and European subsidiaries (the “Non-Debtor Affiliates”) did not seek chapter 11 protection, and each of those non-filing entities is continuing normal business operations. The Company’s joint ventures are also not included in the Debtors’ Chapter 11 Cases.

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2. Description of Debtors’ Businesses and Customers. The Debtors are leading independent designers and manufacturers of driver control systems, seating control systems, glass systems, engineered assemblies, structural door modules, and exterior trim systems for the global automotive industry. Although a portion of their products are sold directly to OEMs as finished components, most of the Debtors’ products are used to produce “systems” or “subsystems,” which are groups of component parts located throughout the vehicle operating together to provide a specific vehicle function. Nearly 100% of the Debtors’ products are sole-sourced. The Debtors commonly supply these sole-sourced parts for the life of an OEM model which usually ranges from three to seven years. The Debtors sell their products to almost every major North American, European and Asian OEM and many large tier one automotive suppliers (the “Tier 1 Customers”). Based on 2007 sales, on a consolidated basis, the Company’s largest customers by revenue are Ford Motor Company (“Ford”), General Motors Corporation (“CM”), Volkswagen, Chrysler LLC (“Chrysler”), BMW, Renault-Nissan and PSA Peugeot and Citroen (“PSA”). In North America, the Company supplies products to the “Big Three” North American OEM Customers (Ford, GM and Chrysler). In Europe, the Company supplies products primarily to Volkswagen, GM, Ford, Chrysler, BMW, PSA, and Renault-Nissan. While GM and Ford make up 36% of consolidated revenues, 50% of Ford sales are in Europe under luxury brands such as Jaguar, Land Rover and Volvo. Furthermore, 33% of European sales to GM are under Opel and Holden. 5. The Debtors’ Business Strategy. Over the past fifteen years, the automotive components supply industries have consolidated and globalized as OEMs have reduced their supplier base. In order to lower costs and improve quality, OEMs are awarding sole-source contracts to full-service suppliers who have the capability and ability to design and manufacture their products on a global basis. The OEMs’ criteria for supplier selection include cost, quality, delivery, customer service, and global full-service design, engineering and program management capabilities. In response to these trends, the Debtors developed wider product, manufacturing and technical capabilities. The Debtors broadened their geographic coverage and strengthened their ability to design and manufacture products on a global basis. The Debtors continue to build their competitive advantage by investing in new product and manufacturing process technologies to strengthen and differentiate their product portfolio. In addition, the Debtors are continuously implementing strategic initiatives designed to improve quality while reducing manufacturing costs. As part of their post-petition business plan and operational restructuring efforts, the Debtors announced that they intended to exit certain unprofitable business lines, including, but not limited to, their jacks business, all more fully described in Article III.E.2 of this Disclosure Statement. The Debtors are also focused on bolstering their profitable core businesses and continuing to seek complementary partnerships and investments that provide a competitive advantage for those core businesses. The Debtors’ advanced design capabilities, ability to supply complete systems and integrated modules, combined with their global production capabilities have enabled the Debtors to maintain their strong operating momentum

262


through the chapter 11 process. Furthermore, the Company’s global market position and design capabilities have resulted in a number of new business wins for the Debtors during these Chapter 11 Cases.

II. EVENTS LEADING TO THE CHAPTER 11 CASES A. DETERIORATING CONDITIONS IN AUTOMOTIVE SECTOR The North American OEM market share and their overall production levels for both cars and light trucks has declined significantly in recent years. As recently as 1999, GM, Chrysler, and Ford enjoyed a collective 62% U.S. market share. However, demand for light trucks and sport utility vehicles decreased over the 12–18 months leading up to these Chapter 11 Cases as a result of record high U.S. gasoline prices during this period, product fatigue among consumers, and shifting consumer tastes. In mid-2006, the Big Three’s collective U.S. market share had fallen to approximately 53.6%. Industry experts also point to a number of other factors as having caused the current decline, including uncompetitive product offerings, and cost disadvantages resulting from legacy pensions, health care costs and unwieldy unionized labor collective bargaining agreements. GM, Chrysler, and Ford’s respective loss of market share and decreased sales volumes during the past several years have impacted the automotive supply chain. As a result, these three North American OEMs have decreased their volume of orders from their Tier 1 suppliers while continuing to pursue aggressive price-down strategies. All of these factors have caused revenues and profit margins of the automotive suppliers industry to shrink significantly.

B. THE DEBTORS’ DETERIORATING FINANCIAL CONDITION Prior to the Petition Date, the Debtors’ principal source of liquidity was cash flow generated from operations, cash on hand and borrowings under their Senior Secured Credit Facilities. In the months leading up to the Petition Date, a series of developments reduced the Debtors’ revenue, profitability and cash flow. These developments severely constrained the Debtors’ liquidity, thereby jeopardizing the Debtors’ near-term ability to meet their obligations as they became due. These liquidity constraints also threatened the Debtors’ ability to continue to pursue necessary growth and development initiatives.

III. THE CHAPTER 11 CASES A. OVERVIEW OF CHAPTER 11 Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. In addition to permitting debtor rehabilitation, chapter 11 promotes equality of treatment for similarly situated creditors and similarly situated equity interest holders, subject to the priority of distributions prescribed by the

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Bankruptcy Code’s “absolute priority” rule which governs distribution priorities, and governs how chapter 11 plans treat different classes of dissimilarly situated creditors and equity interest holders. Commencement of a chapter 11 case creates an estate that comprises all of the legal and equitable interests of the debtor as of the bankruptcy commencement date. The Bankruptcy Code provides that the debtor may continue to operate its business and remain in possession of its property as a “debtor-inpossession.” Consummating a plan of reorganization is the principal objective of a chapter 11 reorganization case. The bankruptcy court’s confirmation of a plan of reorganization binds the debtor, any issuer of securities under the plan of reorganization, any person acquiring property under the plan of reorganization, any creditor or equity interest holder of a debtor, and any other person or entity as may be ordered by the bankruptcy court in accordance with the applicable provisions of the Bankruptcy Code. Subject to certain limited exceptions, the order issued by the bankruptcy court confirming a plan of reorganization discharges a debtor from any debt that arose prior to the confirmation of the plan of reorganization and provides for the treatment of such debt in accordance with the terms of the confirmed plan of reorganization. Prior to soliciting acceptances of a proposed plan of reorganization, section 1125 of the Bankruptcy Code requires a debtor to prepare a disclosure statement containing information of a kind, and in sufficient detail, to enable a hypothetical reasonable investor to make an informed judgment regarding acceptance of the plan of reorganization. This Disclosure Statement is being submitted in accordance with the requirements of section 1125 of the Bankruptcy Code. The following is a general summary of the Chapter 11 Cases, including, without limitation, the administration of the Chapter 11 Cases, the stabilization of the Debtors’ operations following the chapter 11 filings, the Debtors’ restructuring initiatives since the chapter 11 filings, and the Debtors’ business plan, which culminated in the Debtors’ chapter 11 plans of reorganization. B. ADMINISTRATION OF THE CHAPTER 11 CASES On the Petition Date, the Debtors sought and obtained certain relief from the Bankruptcy Court to ensure that their operations continued with the least possible disruption, including but not limited to, the relief set forth below. 1. Customary “First Day” Orders As in many large chapter 11 cases, the Debtors filed a variety of customary motions on the Petition Date which were designed to facilitate their smooth transition into bankruptcy.

r The Joint Administration Order On October 31, 2006, the Bankruptcy Court entered a final order allowing the joint administration of these Chapter 11 Cases solely for procedural purposes to reduce the financial and other resources spent on administering the Chapter 11 Cases.

264


r The Employee Wages Order The Debtors believe that their employees are a valuable asset and that any delay in paying prepetition or postpetition compensation or benefits to their employees would have destroyed the Debtors’ relationship with their employees and irreparably harmed employee morale at a time when the dedication, confidence and cooperation of the Debtors’ employees is most critical. On October 31, 2006, the Bankruptcy Court entered an interim order granting the Debtors authority to pay prepetition compensation and benefits owed to employees (including, but not limited to, vacation pay, health insurance, and other benefits) in the ordinary course of the Debtors’ businesses. On November 20, 2006, the Bankruptcy Court entered a final order granting the requested relief, but “capped” payments made under this order at $1,150,000 on account of prepetition severance payments and obligations.

r The Utilities Order The Bankruptcy Court entered an interim order on October 31, 2006, prohibiting the Debtors’ utility providers from discontinuing, altering or refusing service and proposed a two week deposit, calculated by month averages over the past year, as adequate assurance of future performance. The interim order also set a final hearing on the matter for November 20, 2006. The Debtors received three formal objections from utility providers arguing that a two week deposit was insufficient adequate assurance of future performance. Two of those objections were resolved prior to the final hearing and the Bankruptcy Court entered a final order granting the relief requested on November 20, 2006, but carved out the last remaining utility provider, Northern Indiana Trading Company, with a standing objection. This third objection was resolved by a stipulation, filed on November 22, 2006, and approved by the Bankruptcy Court on November 27, 2006.

r The Cash Management Order On October 31, 2006, the Bankruptcy Court entered an interim order authorizing the Debtors to continue using their established cash management system, bank accounts, investment practices and intercompany transactions in the ordinary course of business, in lieu of closing existing accounts and establishing an entirely new postpetition cash management system, to avoid disruption. The interim order also set a final hearing on this matter for November 20, 2006. The Bankruptcy Court entered a final order on November 20, 2006, and on an interim basis until December 21, 2006, allowed Debtors to invest and deposit funds in their investment account in accordance with their prepetition practices, notwithstanding that this practice may not strictly comply with the requirements of section 345 of the Bankruptcy Code.

r The Insurance Order On October 31, 2006, the Bankruptcy Court entered an interim order authorizing the Debtors to pay any prepetition premiums or costs related to insurance policies then in effect or to their existing premium financing agreement as are necessary to avoid cancellation, default, alteration, assignment, attachment,

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lapse or any form of impairment to the coverage, benefits or proceeds provided under such policies and to maintain the policies in current force and effect. This order permits the Debtors to continue taking advantage of prepetition policies which mostly likely have lower premiums than new, equivalent policies. On November 20, 2006, the Bankruptcy Court entered a final order granting the relief requested, and authorized the Debtors in their sole discretion to renew their existing premium financing agreement or to enter into new premium financing agreements in the ordinary course of business.

r The Sales and Use Tax Order On October 31, 2006, the Bankruptcy Court entered an order authorizing the Debtors to remit and pay certain taxes and government charges up to an aggregate cap of $350,000.

r The Customer Programs Order On October 31, 2006, the Bankruptcy Court entered an interim order authorizing the Debtors to continue certain customer programs, including programs related to product returns, warranties, indemnification, customer-owned tools, replacement parts and price adjustments. On November 20, 2006, the Bankruptcy Court entered a final order, which set an aggregate cap of $5,000,000 for payment of prepetition Claims owed on account of customer programs and a provision requiring the Debtors to notify the Creditors’ Committee of any payments on account of prepetition warranty obligations or customer rebates exceeding $50,000.

r The Equity Trading Order On the Petition Date, the Debtors filed a motion requesting entry of an order limiting the ability of substantial shareholders and shareholders holding a fifty percent or greater interest in the Debtors to transfer their equity interests or assert claims of worthlessness, to protect the Debtors’ valuable net operating losses and tax benefits. The Bankruptcy Court entered an interim order granting the relief requested on October 31, 2006, and entered a final order on November 20, 2006.

r The Interim Compensation Order On the Petition Date, the Debtors filed a motion to establish procedures whereby certain retained professionals performing services directly related to the Chapter 11 Cases may receive a percentage of fees billed and expenses incurred for services performed upon proper application to the Bankruptcy Court. On November 20, 2006, the Bankruptcy Court entered an order establishing procedures for the interim compensation and reimbursement of professionals during these Chapter 11 Cases. On December 22, 2006, the Bankruptcy Court entered an order appointing a fee auditor and establishing procedures related to compensation of these professionals.

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r The Ordinary Course Professionals Order On the Petition Date, the Debtors filed a motion requesting authority to employ and pay the reasonable fees and expenses of professionals utilized in the ordinary course of business to advise and assist the Debtors in the operation of their businesses and to defend the Debtors in matters arising in the ordinary course of business. On November 20, 2006, the Bankruptcy Court entered an order granting the relief requested and establishing compensation procedures for professionals utilized in the ordinary course of business. 12. Exclusivity Under the Bankruptcy Code, the Debtors have the exclusive right to file and solicit acceptance of a plan or plans of reorganization for an initial period of 120 days from the date on which they debtor filed for voluntary relief. If the Debtors file a plan within this exclusive period, then the Debtors have the exclusive right for 180 days from the filing date to solicit acceptances to its plan. During these exclusive periods, no other party in interest may file a competing plan of reorganization, however, a court may extend these periods upon request of a party in interest and “for cause.” Without further order of the Bankruptcy Court, the Debtors’ initial exclusive filing period would have expired on February 27, 2007, and the Debtors’ exclusive solicitation period would have expired on April 30, 2007. The Bankruptcy Court, however, extended the Debtors’ exclusive periods beyond those provided in the Bankruptcy Code twice previously, by orders entered on March 19, 2007, and May 30, 2007. As a result of such extensions, and the Debtors having filed the Original Plan on August 22, 2007, the exclusive periods were presently slated to expire on November 30, 2007. The Debtors are presently seeking authority to extend the exclusive filing period through and including April 30, 2008, and extend the exclusive solicitation period through and including June 30, 2008, the full extent permitted by section 1121 of the Bankruptcy Code. D. CANADIAN PROCEEDINGS 1. Commencement of the Chapter 11 Cases as a “Foreign Proceeding” Simultaneously with the filing of the Chapter 11 Cases, the Debtors filed for creditor protection under the Companies’ Creditors Arrangement Act, as amended, (the “CCAA”) in the Ontario Superior Court of Justice (the “Canadian Court”). On November 1, 2006, the Canadian Court issued an order granting the Debtors a stay of proceedings in Canada, recognizing the Chapter 11 Cases as a “foreign proceeding,” as defined by subsection 18.6(1) of the CCAA, to give full effect of the Bankruptcy Court’s orders in all provinces and territories of Canada, and appointing RSM Richter Inc. as the independent third party information officer to the Canadian Court (the “Canadian Information Officer”).25 A copy of this order is attached hereto as Exhibit F. The Canadian Information Officer reports directly to the Canadian Court, provides updates on material activities in the Chapter 11 Cases, and delivers a report at least once every three months, outlining the status of the Chapter 11 Cases. Copies of the eleven reports filed to date by the Canadian Information Officer with the Canadian Court, which provide further detail on the Canadian

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Debtors’ operations and the CCAA proceeding are available on the Debtors’ website: http://dura.kccllc.net and on the Canadian Information Officer’s website: www.rsmrichter.com. By order dated January 15, 2008, the Canadian Court extended the stay of proceedings in Canada until June 30, 2008. F. THE ORIGINAL CHAPTER 11 JOINT PLAN OF REORGANIZATION 1. The 2007 Business Plan The Debtors and their advisors recognized that developing a realistic, solid and executable business plan was a necessary foundation for them developing a chapter 11 plan of reorganization. Thus, early in these Chapter 11 Cases, the Debtors and their advisors initiated a thorough, bottom-up review of the Company’s businesses in North America, Europe and its “rest-of-world” operations in light of rapidly evolving business conditions in the automotive sector to develop a five-year business plan. Key to developing the Debtors’ business plan was turning the 50-Cubed Plan’s operational initiatives into a substantial cash-flow improving reality. In connection with the Company’s operational restructuring, the Company identified additional cost-elimination initiatives in their preliminary 2007–08 operating forecast, including but not limited to new plant closures, proposed divestitures and further consolidation strategies. In early March of 2007, the Debtors presented this 2007–08 operating forecast based upon their efforts to date to the Creditors’ Committee and Second Lien Group. In late March of 2007, the Debtors completed their bottom-up 2007–08 operating forecast, paving the way for their five-year business plan. The Debtors completed their comprehensive five-year business plan in late May of 2007 (the “2007 Business Plan”). This 2007 Business Plan was designed to serve as the platform for a plan of reorganization and thus, as the roadmap for the Debtors’ emergence from chapter 11 and return to profitability. On May 31, 2007, the Debtors presented the 2007 Business Plan to the Creditors’ Committee and Second Lien Group. The development and negotiations of the terms of the Original Plan initiated shortly thereafter. A summary of key points in the 2007 Business Plan, include: (i) consolidation of manufacturing facilities to low-cost countries, which includes closing ten manufacturing locations; (ii) completion of a profitability analysis to determine what, if any, of the Debtors’ businesses should be exited, and which customer programs need to be renegotiated or terminated; (iii) centralization of purchasing; (iv) reductions in corporate overhead costs; (v) reductions in manufacturing defect rates; and (vi) reductions in indirect labor costs. These operational restructuring initiatives are more fully discussed in Article III.E above. VI. SUMMARY OF EXIT FINANCING TO BE ISSUED IN CONNECTION WITH THE REVISED PLAN On or prior to the Effective Date, the Reorganized Debtors will enter into definitive documentation with respect to an Exit Credit Facility comprised of a first lien term loan of approximately S150 million and a revolving credit facility

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of approximately S110 million (including a letter of credit sub-facility of up to S25 million) which is expected to be largely unutilized at exit. Additionally, the Debtors will enter into a New Money Second Lien Loan with certain existing creditors that will provide a second lien secured term loan with a new capital infusion of S80 million and a face amount of S100 million. Although the Debtors believe that they will be able to obtain such exit financing on terms reasonably acceptable to them, there can be no assurance that they will ultimately be able to do so. Therefore, there can be no guarantee that the required Exit Credit Facility amount will have been obtained prior to the commencement of the Confirmation Hearing (obtaining a committed financing is a condition precedent to Confirmation). See Article XVIII (“CERTAIN RISK FACTORS AFFECTING THE DEBTORS”.) VIII. TREATMENT OF EXECUTORY CONTRACTS, UNEXPIRED LEASES, AND DEFINED BENEFIT PENSION PLANS A. ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES Any executory contracts and unexpired leases that are listed in the Revised Plan Supplement as executory contracts or unexpired leases to be assumed, or are to be assumed pursuant to the terms hereof, shall be deemed assumed by the Debtors as of immediately prior to the Effective Date, and the entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of any such assumptions pursuant to sections 365(a) and 1123 of the Bankruptcy Code. Any executory contracts and unexpired leases that have not expired by their own terms on or prior to the Effective Date, which the Debtors have not assumed or rejected during the pendency of the Chapter 11 Cases, which are not listed in the Revised Plan Supplement as executory contracts or unexpired leases to be assumed, which are not to be assumed pursuant to the terms hereof, and that are not the subject of a motion pending as of the Effective Date to assume the same, shall be deemed rejected by the Debtors as of immediately prior to the Petition Date, and the entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of any such rejections pursuant to sections 365(a) and 1123 of the Bankruptcy Code. B. CLAIMS BASED ON REJECTION OF EXECUTORY CONTRACTS OR UNEXPIRED LEASES All proofs of claim arising from the rejection of executory contracts or unexpired leases must be filed within thirty (30) days after the earlier of: (1) the date of entry of an order of the Bankruptcy Court approving any such rejection; and (2) the Effective Date. Any Claims arising from the rejection of an executory contract or unexpired lease for which proofs of claim are not timely filed within that time period will be forever barred from assertion against the Debtors, Reorganized Debtors, Estates, their successors and assigns, and their assets and properties, unless otherwise ordered by the Bankruptcy Court or as otherwise provided herein. All such Claims shall, as of the Effective Date, be

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subject to the discharge and permanent injunction set forth in Article IX.E and Article IX.F of the Revised Plan. C. CURE OF DEFAULTS FOR EXECUTORY CONTRACTS AND UNEXPIRED LEASES ASSUMED PURSUANT TO THE REVISED PLAN Any monetary amounts by which any executory contract and unexpired lease to be assumed pursuant to the Revised Plan or otherwise is in default shall be satisfied, pursuant to section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in Cash on or as soon as practicable after the Effective Date or on such other terms as the parties to each such executory contract or unexpired lease may otherwise agree. In the event of a dispute regarding the amount of a cure payment, “adequate assurance of future performance” (within the meaning of section 365 of the Bankruptcy Code), or any other matter pertaining to assumption: (1) the Debtors or Reorganized Debtors, as the case may be, retain the right to reject the applicable executory contract or unexpired lease at any time prior to the resolution of the dispute; and (2) cure payments shall only be made following the entry of a Final Order resolving the dispute. G. PENSION PLANS 1. The Pension Benefit Guaranty Corporation (the “PBGC”) asserts that each of the Debtors is either a sponsor or a controlled group member of a sponsor of the following pension plans (excluding any pension plan listed below that has been assumed by a successor to a portion of the business of the Reorganized Debtors on or prior to the Effective Date) (“Pension Plans”) covered by Title IV of ERISA: Pension Plan

EIN-PN

Dura Master Pension Plan Dura Automotive Systems, Inc. Mancelona Union-Represented Employees’ Pension Plan Atwood Mobile Products, Inc. Supplementary Retirement Plan Dura Retirement Plan For La Grange Bargaining Employees

382961431/001 382961431/004 364334203/005 364334203/024

Notwithstanding anything to the contrary herein, in the Revised Plan, or in the Revised Plan Supplement, the Reorganized Debtors will continue to sponsor or maintain the Pension Plans subsequent to the Effective Date, subject to the right to terminate one or more of the Pension Plans in a standard termination under 29 U.S.C. § 1341(b), and will make the contributions required by law. The PBGC has the authority to initiate termination proceedings, subject to certain statutory criteria, regarding the Pension Plans; if the Pension Plans were to terminate prior to the date of Plan confirmation, certain Claims,

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including Claims that may be entitled to priority under various Bankruptcy Code provisions, would arise. Notwithstanding anything to the contrary herein, in the Revised Plan, or in the Revised Plan Supplement, in the event that the Pension Plans do not terminate prior to the Confirmation Date, all Claims of, or with respect to, the Pension Plans (including without limitation the contingent Claims of PBGC for unfunded benefit liabilities pursuant to 29 U.S.C. § 1362(b), the contingent Claims of PBGC pursuant to 29 U.S.C. § 1306(a)(7) for termination premiums, and the Claims of PBGC pursuant to 29 U.S.C. § 1362(c) for unpaid contributions owing to the Pension Plans) shall become obligations of the Reorganized Debtors and each member of any controlled group, and shall be unaffected by the confirmation of the Revised Plan, and such Claims shall not be discharged, released, exculpated, enjoined or otherwise affected by these proceedings. Notwithstanding anything to the contrary herein, in the Revised Plan, or in the Revised Plan Supplement, including, without limitation, Article XI of this Disclosure Statement and Article IX of the Revised Plan, there shall be no discharge, exculpation or release in favor of any Reorganized Debtors, controlled group members or other persons or entities or their property with respect to any fiduciary Claims under the Employee Retirement Income Security Act of 1974 (as amended), any Claims with respect to the Pension Plans, or any Claims asserted by the PBGC, and there shall be no injunction against the assertion of any such Claims. In the event of termination of one or more of the Pension Plans subsequent to the Confirmation Date, the Reorganized Debtors, and each member of any controlled group, may be liable to PBGC for various Claims including without limitation any unfunded benefit liabilities under 29 U.S.C. § 1362(b), any unpaid contributions under 29 U.S.C. § 1362(c), and any premiums owed under 29 U.S.C. § 1306(a)(7). 2. The Revised Plan Supplement will contain a non-exclusive list of Compensation and Benefits Programs to be assumed pursuant to Article V.F. of the Revised Plan. H. COLLECTIVE BARGAINING AGREEMENTS Notwithstanding Article V.A of the Revised Plan, all unexpired collective bargaining agreements shall be treated as executory contracts under the Revised Plan and deemed assumed on the Effective Date pursuant to the provisions of sections 365 and 1123 of the Bankruptcy Code, except for collective bargaining agreements: (1) specifically assumed and assigned pursuant to an order of the Bankruptcy Court; (2) as of the entry of the Confirmation Order, are the subject of pending assumption or rejection procedures or a motion to assume or reject; or (3) as of the entry of the Confirmation Order, are the subject of pending settlement proceedings or a motion to authorize a settlement. XI. CONDITIONS PRECEDENT TO EFFECTIVE DATE OF THE REVISED PLAN A. CONDITIONS PRECEDENT TO EFFECTIVE DATE OF THE REVISED PLAN The following are conditions precedent to the Effective Date that must be satisfied or waived in accordance with Article VIII.B of the Revised Plan.

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1. The New Organizational Documents shall have been, as applicable: (a) delivered or tendered for delivery; (b) executed; (c) consummated; and/or (d) filed. 2. The New Board shall have been appointed in accordance with Article IV.G.2(a) of the Revised Plan. 3. The New Money Second Lien Loan shall have been consummated. 4. The Exit Credit Facility shall have been consummated. 5. The Canadian Recognition Order shall have been issued; provided, however, that entry of the Canadian Recognition Order shall only be a condition to the Effective Date with regard to those Debtors incorporated, formed or otherwise organized under Canadian law. XV. VALUATION ANALYSIS AND FINANCIAL PROJECTIONS (Included in 9.3) XVII. CONFIRMATION PROCEDURES C. STATUTORY REQUIREMENTS FOR CONFIRMATION OF THE REVISED PLAN At the Confirmation Hearing, the Bankruptcy Court shall determine whether the requirements of section 1129 of the Bankruptcy Code have been satisfied. If so, the Bankruptcy Court shall enter the Confirmation Order. The Debtors believe that the Revised Plan satisfies or will satisfy the applicable requirements, as follows:

r The Revised Plan complies with the applicable provisions of the Bankruptcy Code.

r The Debtors, as proponents of the Revised Plan, will have complied with the applicable provisions of the Bankruptcy Code.

r The Revised Plan has been proposed in good faith and not by any means forbidden by law.

r Any payment made or promised under the Revised Plan for services or for costs and expenses in, or in connection with, the Chapter 11 Cases, or in connection with the Revised Plan and incident to the case, has been disclosed to the Bankruptcy Court, and any such payment: (a) made before the Confirmation of the Revised Plan is reasonable; or (b) subject to the approval of the Bankruptcy Court as reasonable if it is to be fixed after the Confirmation of the Revised Plan. r Either each holder of an impaired Claim or Equity Interest has accepted the Revised Plan, or will receive or retain under the Revised Plan on account of that Claim or Equity Interest, property of a value, as of the Effective Date of the Revised Plan, that is not less than the amount that the holder would receive or retain if the Debtors were liquidated on that date under chapter 7 of the Bankruptcy Code. r Each class of Claims that is entitled to vote on the Revised Plan has either accepted the Revised Plan or is not Impaired under the Revised Plan, or

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r

r r

r


the Revised Plan can be confirmed without the approval of each voting class pursuant to section 1129(b) of the Bankruptcy Code. Except to the extent that the holder of a particular Claim will agree to a different treatment of its Claim, the Revised Plan provides that Administrative Claims, Priority Tax Claims, Other Priority Claims and Other Secured Claims will be paid in full on the Effective Date, or as soon thereafter as practicable. At least one class of impaired Claims will accept the Revised Plan, determined without including any acceptance of the Revised Plan by any insider holding a Claim of that class. Confirmation of the Revised Plan is not likely to be followed by the liquidation or the need for further financial reorganization of the Debtors or any successors thereto under the Revised Plan unless such a liquidation or reorganization is proposed in the Revised Plan. All fees of the type described in 28 U.S.C. § 1930, including the fees of the United States Trustee, will be paid as of the Effective Date.

The Debtors believe that: (a) the Revised Plan satisfies or will satisfy all of the statutory requirements of chapter 11 of the Bankruptcy Code; (b) it has complied or will have complied with all of the requirements of chapter 11; and (c) the Revised Plan has been proposed in good faith. 1. Best Interests of Creditors Test/Liquidation Analysis Before the Revised Plan may be confirmed, the Bankruptcy Court must find (with certain exceptions) that the Revised Plan provides, with respect to each Class, that each holder of a Claim or Equity Interest in such Class either: (a) has accepted the Revised Plan; or (b) will receive or retain under the Revised Plan property of a value, as of the Effective Date, that is not less than the amount that such person would receive or retain if Debtors liquidated under chapter 7 of the Bankruptcy Code. In chapter 7 liquidation cases, unsecured creditors and interest holders of a debtor are paid from available assets generally in the following order, with no junior Class receiving any payments until all amounts due to senior Classes have been paid fully or any such payment is provided for:

r r r r

Secured creditors (to the extent of the value of their collateral); Administrative and other priority creditors; Unsecured creditors; Debt expressly subordinated by its terms or by order of the Bankruptcy Court; and r Interest holders. As described in more detail in the Liquidation Analysis set forth in Exhibit I annexed hereto, the Debtors believe that the value of any distributions in a chapter 7 case would be less than the value of distributions under the Revised Plan because, among other reasons, distributions in a chapter 7 case may not occur for a longer period of time, thereby reducing the present value of such distributions. In this regard, it is possible that distribution of the

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proceeds of a liquidation could be delayed for a period in order for a chapter 7 trustee and its professionals to become knowledgeable about the chapter 11 cases and the Claims against the Debtors. In addition, proceeds received in a chapter 7 liquidation are likely to be significantly discounted due to the distressed nature of the sale, and the fees and expenses of a chapter 7 trustee would likely exceed those of the Professionals retained by the Debtors (thereby further reducing Cash available for distribution). 2. Feasibility The Bankruptcy Code requires the Bankruptcy Court to find, as a condition to confirmation, that confirmation is not likely to be followed by a debtor’s liquidation or the need for further financial reorganization, unless that liquidation or reorganization is contemplated by the Revised Plan. For purposes of showing that the Revised Plan meets this feasibility standard, the Debtors have analyzed the Reorganized Debtors’ ability to meet their obligations under the Revised Plan and to retain sufficient liquidity and capital resources to conduct their businesses. The Debtors believe that, with a significantly deleveraged capital structure, their businesses will be able to return to viability. The decrease in the amount of debt on the Debtors’ balance sheet will substantially reduce their interest expense, thus improving their cash flow. The Financial Projections indicate that the Reorganized Debtors should have sufficient cash flow to pay and service their debt obligations and to fund their operations. Accordingly, the Debtors believe that the Revised Plan complies with the financial feasibility standard of section 1129(a)(11) of the Bankruptcy Code. 3. Acceptance by Impaired Classes The Bankruptcy Code requires, as a condition to confirmation, that, except as described in the following section, each class of Claims or Equity Interests that is impaired under the Revised Plan accept the Revised Plan. A class that is not “impaired” under a plan of reorganization is deemed to have accepted the plan and, therefore, solicitation of acceptances with respect to such class is not required. A class is “Impaired” unless the plan: (a) leaves unaltered the legal, equitable and contractual rights to which the Claim or Equity Interest entitles the holder of that Claim or Equity Interest; (b) cures any default and reinstates the original terms of the obligation; or (c) provides that, on the consummation date, the holder of the Claim or Equity Interest receives cash equal to the Allowed amount of that Claim or, with respect to any interest, any fixed liquidation preference to which the Equity Interest holder is entitled or any fixed price at which the Debtors may redeem the security. 4. Confirmation Without Acceptance by All Impaired Classes Section 1129(b) of the Bankruptcy Code allows a Bankruptcy Court to confirm a plan, even if all impaired classes entitled to vote on the plan have not accepted it, provided that the plan has been accepted by at least one impaired Class. Holders of Subordinated Notes Claims, Convertible Subordinated Debentures Claims, Section 510 Subordinated Claims, and Equity Interests in Classes 4, 6, 7 and 8, respectively, are deemed to reject the Revised Plan and, therefore, the Debtors intend to confirm the plan pursuant to section 1129(b) of the Bankruptcy Code.

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Section 1129(b) of the Bankruptcy Code states that, notwithstanding an impaired class’s failure to accept a plan of reorganization, the plan shall be confirmed, at the plan proponent’s request, in a procedure commonly known as “cram down,” so long as the plan does not “discriminate unfairly” and is “fair and equitable” with respect to each class of Claims or Equity Interests that is impaired under, and has not accepted, the plan. Courts will take into account a number of factors in determining whether a plan discriminates unfairly, including the effect of applicable subordination agreements between parties. Accordingly, a plan could treat two classes of unsecured creditors differently without unfairly discriminating against either class. The condition that a plan be “fair and equitable” to a non-accepting class of secured Claims includes the requirements that: (a) the holders of such secured Claims retain the liens securing such Claims to the extent of the allowed amount of the Claims, whether the property subject to the liens is retained by Debtors or transferred to another entity under the plan; and (b) each holder of a secured Claim in the class receives deferred cash payments totaling at least the allowed amount of such Claim with a present value, as of the effective date of the plan, at least equivalent to the value of the secured claimant’s interest in the debtor’s property subject to the liens. The condition that a plan be “fair and equitable” with respect to a nonaccepting class of unsecured Claims includes the following requirement that either: (a) the plan provides that each holder of a Claim of such class receive or retain on account of such Claim property of a value, as of the effective date of the plan, equal to the allowed amount of such Claim; or (b) the holder of any Claim or equity interest that is junior to the Claims of such class will not receive or retain under the plan on account of such junior Claim or equity interest any property. The condition that a plan be “fair and equitable” to a non accepting class of equity interests includes the requirements that either: (a) the plan provides that each holder of an equity interest in that class receives or retains under the plan, on account of that entity interest, property of a value, as of the effective date of the plan, equal to the greater of (i) the allowed amount of any fixed liquidation preference to which such holder is entitled, (ii) any fixed redemption price to which such holder is entitled or (iii) the value of such interest; or (b) if the class does not receive such an amount as required under (a), no class of equity interests junior to the non-accepting class may receive a distribution under the plan. The Revised Plan provides that if any impaired class rejects the Revised Plan, the Debtors reserve the right to seek to confirm the Revised Plan utilizing the “cram down” provisions of section 1129(b) of the Bankruptcy Code. To the extent that any impaired class rejects the Revised Plan or is deemed to have rejected the Revised Plan, the Debtors will request confirmation of the Revised Plan, as it may be modified from time to time, under section 1129(b) of the Bankruptcy Code. The Debtors reserve the right to alter, amend, modify, revoke or withdraw the Revised Plan or any Revised Plan Exhibit or Schedule, including to amend or modify it to satisfy the requirements of section 1129(b) of the Bankruptcy Code, if necessary.

6.13

Data Checklist for DIP Financing

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Data Checklist for DIP Financing

Objective. Section 6.14 of Volume 1 describes financing during the chapter 11 case. Following is a data checklist of the items that should be developed in convincing a new or prior lender to extend credit in the chapter 11 case. Data Checklist for DIP Financing

r Collateral Analysis including r Analysis of Assets available as security including those which cur-

r

r

r r

r r

rently have liens on them Assessment of Ineligible Accounts Receivable and Inventory Estimate of potential Reclamation claims Latest results of physical inventory Damaged goods listing and procedures for returns with vendors List of equipment and most recent appraisals List of trademarks, copyrights, etc. Projection of the P & L, Balance Sheet, Cash Flow Statement, Borrowing Base Calculation tied to management’s cash management reporting and including availability and covenant calculations r By Month for 1 year and Yearly up to 3 years r Projections should have flexibility to create scenarios for negotiations with lenders r Reminder: Availability is everything when lending during chapter 11 r Projections should be “can’t miss” so default isn’t tripped r Loan pricing and fees should be modeled and sensitized to compare to market Cash r Chart of existing cash management system r Sensitivity to lack of trade credit 60 day weekly forecast to secure interim financing until DIP financing is approved by the courts Current trade credit situation r Listing of credit terms and recent changes r Listing of major creditors r Estimated amount of trade credit, if any Historical Financial information from the past 6 months and previous 3 to 5 years Company Profile and Discussion of Events leading to Bankruptcy r Management Profiles r Product brochures and advertising circulars r List of locations owned/leased

r r r r r r

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r Public filings r Recent press releases

r List of Potential Lenders r Look for lenders with experience in the Company’s industry r Gain an understanding of current market terms and conditions r Strategy for Turnaround Source: Lisa M. Poulin and Lee C. Weiner, “Exit and Postpetition Financing,” 16th Annual Bankruptcy and Reorganization Conference (Medford OR: Association of Insolvency and Restructuring Advisors, 1999). 6.14

Factors Determining Success of Plan

Objective. Section 6.17 of Volume 1 describes the process followed in negotiating the terms in a chapter 11 plan. A few of the many factors that influence the negotiations for the terms in a plan are described here. 1. Extent to which early action was taken It is difficult for the owners or officers of a troubled business to admit that they are having financial and operating problems. As a result, decisions to call a meeting of creditors or to file a chapter 11 petition often are postponed until the last minute—just before creditors take the necessary action to shut down the business. This delay benefits no one, including the debtor. There are several reasons why it is advisable to take action as soon as it becomes obvious that some type of remedy is necessary to overcome the burden created by too much debt and inadequate cash flows from operations. First, the debtor at this stage has a considerable asset base. Creditors are not hostile and many of the key employees are still with the company. Many of these employees may leave when they see unhealthy conditions developing; early corrective action may encourage them to stay. In addition, prompt action may make it possible for the debtor to maintain some of the goodwill that was developed during successful operating periods. While the filing of a bankruptcy petition may be the last alternative the debtor might consider, the decision to file should not be delayed when it becomes obvious some type of relief is necessary. Thus, for the reorganization to be successful, it is helpful if there are at least some assets to serve as a base for future operations and reasonable relationships with creditors and employees with some loyalty to the company. 2. Finding a viable part of the business Often companies that file a bankruptcy petition have expanded too quickly. They have moved into areas that are not as profitable as their original business and areas in which the owners are not as knowledgeable. Thus, a question that must be asked at the start of the proceedings is, “Can this business be pruned back or adjusted to operate profitably again?” If it is determined that selected parts of the debtor’s operations can provide a core for a profitable business, the decisions to discontinue the unprofitable parts must be made as soon as possible.

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3. Quality of management If the creditors are going to accept a plan that involves terms other than a cash settlement, they must have adequate confidence in the key executives who will be running the company. This confidence is often absent if there have been no changes in management. Thus, it may be necessary to replace existing top management in order to get the plan approved. As was noted in Part 1, in many public companies, management is replaced with individuals who have experience in turning troubled companies around. For smaller companies where the owner is also the manager, creditors may insist indirectly that operations be turned over to another executive or that a workout specialist be temporarily placed in charge. The workout specialist may work with existing management or with replacements until the business has been turned around. Once the business is turned around, these individuals move on to another business experiencing financial problems. In cases where the creditors are uncomfortable with existing management and where the debtor refuses to make management changes, the creditors may petition the court for the appointment of a trustee to run the business and develop a plan as was discussed above. Often the move to have a trustee appointed will cause management to reconsider its positions and make the necessary changes. 4. Honesty of debtor The creditors are often willing to work with an honest debtor. A debtor that has dealt with the creditors in a reasonable and professional manner is going to find the creditors cooperative in most cases. In situations where the creditors have not received financial and other types of information that could be trusted and where the debtor has been involved in a large number of questionable transactions, the creditors are often less willing to work with the debtor. Often in situations like this the only way any progress toward a plan can take place is if new management runs the company as was discussed above. Otherwise the creditors will demand that the debtor be liquidated. 5. Attitude of the creditors’ committee The interests of the individuals who are on the committee can significantly influence the outcome of the negotiations. It is always good for the committee to consist of several members that are friendly to the debtor. They understand the nature of the problems faced by the debtor and would like to see the business operate successfully again. Often the friendly creditors are those that would like to continue doing business with the debtor after the proceedings are over. The committee in a chapter 11 case, according to section 1102 of the Bankruptcy Code, shall ordinarily consist of the seven largest creditors willing to serve. Since the Code uses the phrase “shall ordinarily consist of,” some discretion is left to the U.S. trustee to decide the makeup of the committee. For example, the committee might consist of less than seven members if a smaller committee would be more efficient under existing circumstances. On the other hand, it might be necessary for the U.S. trustee to select a committee of more than seven members to be sure all unsecured creditors are properly represented. Also, if a committee of unsecured creditors was established prior to the filing of the petition, the U.S. trustee may appoint this committee as

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the official unsecured creditors’ committee. Normally the U.S. trustee would want to see that this committee represents the interests of all the creditors before the appointment is made. 6. Experienced attorneys and accountants It is important that both the debtor and the creditors’ committee be represented by counsel experienced in bankruptcy proceedings. A bankruptcy case presents many unique problems that are different from other types of general legal services. While the debtor’s general counsel may be very competent, they should not be used in bankruptcy unless they have previous bankruptcy experience. The debtor and its counsel also prefer that an attorney with bankruptcy experience represent the creditors’ committee. Likewise the accountants and other professionals involved in the proceedings should have an understanding of how the bankruptcy system in the United States works. 7. Short-range cash budgets The Bankruptcy Code gives the debtor the exclusive right to develop a plan for 120 days or longer if extensions (which are common) are granted. Before the creditors will work with the debtor during this time period and not take other action such as attempting to convert the petition to chapter 7 or to have the chapter 11 case dismissed, they must have assurance that assets will not continue to dissipate during the plan period. This assurance is often provided by cash budgets for the next three to six months. Through these short-range cash plans, the debtor needs to convince the creditors that there will be a positive cash flow and that steps have been taken to reduce overhead, including administrative expenses. If the debtor has failed to meet such budgets in the past, the creditors may have little confidence in the debtor’s projections. In fact, the creditors may insist that the cash projections be reviewed by a CPA or by an individual or firm specializing in preparation of cash budgets for companies in financial trouble. The creditors are subsequently interested in monthly comparisons between actual and projected cash flows. Meeting monthly cash projections helps convince the creditors’ committee that the debtor’s operations are under control. The creditors are then able to place more confidence in the debtor and in the projections that serve as the basis for future payments included in the proposed plan. 8. Development of a viable business plan Before an effective reorganization plan can be developed, it is necessary for the debtor to prepare a business plan. Often, companies do not have any type of business or strategic plan at the time they attempt to work out some form of arrangement with creditors out of court or in a chapter 11 proceeding. Up until the date the petition is filed, management has devoted most of its time to dayto-day problems and has not analyzed the major financial problems faced by the business. It fails to ask questions that are most important for the survival of the business. See Chapter 4. The greater the financial problems, the more time management devotes to day-to-day details and thus, almost no time is spent on providing direction for the company. A properly developed business plan is critical to the development of a reorganization plan.

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9. Determination of reorganization value One of the first and most difficult steps in reaching agreement on the terms of a plan is determining the value of the company. Long-term cash flow projections are helpful in determining the reorganization value of the emerging entity. In fact, if the parties involved in the case can agree on the cash flow projections for the next five years or so, it is much easier to determine the reorganization value of the company. Once the parties—debtor, unsecured creditors’ committee, other creditors’ committee (if appointed), secured creditors, and equity holders—agree on the reorganization value, this value is then allocated among the creditors and equity holders. As can be seen, before the amount that unsecured, secured, and equity holders will receive is determined, the reorganization value of the debtor must be known. These parties are generally unable and often unwilling to agree to the terms of a plan proposed by the debtor without some indication of the value of the company that will emerge from bankruptcy. To provide the information needed by creditors and stockholders to effectively evaluate the proposed plan, it is often useful for the accountant to prepare a pro forma balance sheet showing the impact the proposed plan, if accepted, will have on the financial condition of the company. This pro forma balance sheet is most helpful if it contains the reorganization value rather than historical costs. Thus the assets will be shown at their current values and any excess of the reorganization value over individual assets will be shown. In the pro forma balance sheet, liabilities should be shown at their discounted values and stockholders’ equity should be shown at fair value based on the assumption that the plan will be confirmed. If the parties involved in a chapter 11 case agree on the assumptions underlying the business plan, the long-term cash projections, and the resulting reorganization value of the company that will emerge from chapter 11, successful negotiations on the terms of a plan should not be too difficult. 10. Post-chapter financing Many companies are not successfully reorganized because they were unable to obtain postpetition financing. For various reasons, including both economic and behavioral, the existing lenders will not extend additional credit to the debtor. Thus, the ability to reorganize depends on whether future financing can be obtained from other credit or equity sources. Companies with products where the demand is declining or companies operating in an industry on the decline find it much more difficult to obtain both debt and equity financing than would be the case for companies in a growth industry. For many small businesses the ability to survive depends on locating a new investor that is willing to put up the cash needed to revitalize the business for a substantial share of the outstanding stock.

280 6.15


Plan of Reorganization

Objective. Section 6.24 of Volume 1 describes the debtor’s plan of reorganization under chapter 11 of the Bankruptcy Code. The debtors’ revised joint plan of reorganization from Dura Automotive is presented below to illustrate the structure and content of a chapter 11 plan. IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re:

) Chapter 11 ) DURA AUTOMOTIVE SYSTEMS, INC., et al. ) Case No. 06-11202 (KJC) ) (Jointly Administered) ) Debtors. )

THE DEBTORS’ REVISED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE KIRKLAND & ELLIS LLP Marc Kieselstein, P.C. Roger J. Higgins Ryan Blaine Bennett 200 East Randolph Drive Chicago, Illinois 60601

RICHARDS, LAYTON & FINGER, P.A. Daniel J. DeFranceschi (Bar No. 2732) Jason M. Madron (Bar No. 4431) One Rodney Square 920 North King Street Wilmington, Delaware 19801

Counsel for the Debtors and Debtors-in-Possession Dated: March 31, 2008

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TABLE OF CONTENTS ARTICLE I. DEFINED TERMS AND RULES OF INTERPRETATION A Rules of Interpretation B Defined Terms ARTICLE II. ADMINISTRATIVE AND PRIORITY CLAIMS A Administrative Claims B DIP Facility Claims C Priority Tax Claims D Other Priority Claims ARTICLE III. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS A Summary B Classification and Treatment of Claims and Equity Interests C Subordination D Special Provision Governing Unimpaired Claims E Non-Consensual Confirmation ARTICLE IV. MEANS FOR IMPLEMENTATION OF THE PLAN A Substantive Consolidation B Continued Corporate Existence, Vesting of Assets in the Reorganized Debtors, and Mergers C Treatment of Intercompany Claims D Cancellation of Senior Notes, Subordinated Notes, Convertible Subordinated Debentures, and Equity Interests E Issuance of New Securities F Creation of Retained Professional Escrow Account G Corporate Governance, Directors and Officers, and Corporate Action H New Money Second Lien Loan, Alternative Transactions, and Exit Financing ARTICLE V. TREATMENT OF EXECUTORY CONTRACTS, UNEXPIRED LEASES, AND DEFINED BENEFIT PENSION PLANS A Assumption and Rejection of Executory Contracts and Unexpired Leases B Claims Based on Rejection of Executory Contracts or Unexpired Leases C Cure of Defaults for Executory Contracts and Unexpired Leases Assumed Pursuant to the Plan D Indemnification of Directors, Officers and Employees E Assumption of D & O Insurance Policies F Compensation and Benefit Programs G Collective Bargaining Agreements H Workers’ Compensation Programs

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ARTICLE VI. PROVISIONS GOVERNING DISTRIBUTIONS A Distributions for Claims Allowed as of the Effective Date B Pro Rata Distributions C Delivery of Distributions D Timing of Distributions E Minimum Distribution F Setoffs ARTICLE VII. PROCEDURES FOR RESOLVING DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS OR EQUITY INTERESTS A Resolution of Disputed Claims B Claims Allowance C Allowed Claims ARTICLE VIII. CONDITIONS PRECEDENT TO THE EFFECTIVE DATE A Conditions Precedent to the Effective Date B Waiver of Conditions C Non-Occurrence of Conditions ARTICLE IX. RELEASE, INJUNCTIVE AND RELATED PROVISIONS A Compromise and Settlement B Releases C Exculpation D Preservation of Rights of Action E Discharge of Claims and Termination of Equity Interests F Injunction ARTICLE X. RETENTION OF JURISDICTION ARTICLE XI. MISCELLANEOUS PROVISIONS A Dissolution of Creditors’ Committee B Post-Confirmation, Pre-Effective Date Professionals’ Fees and Final Fee Applications C Payment of Statutory Fees D Modification of Plan E Revocation of Plan F Successors and Assigns G Governing Law H Reservation of Rights I Section 1146 Exemption J Section 1125(e) Good Faith Compliance K Further Assurances L Service of Documents M Filing of Additional Documents N No Stay of Confirmation Order O Aid and Recognition

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THE DEBTORS’ REVISED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE Pursuant to title 11 of the United States Code, 11 U.S.C. §§ 101 et seq., the debtors and debtors-in-possession in the above-captioned and numbered cases hereby respectfully propose the following revised joint plan of reorganization under chapter 11 of the Bankruptcy Code. ARTICLE I. DEFINED TERMS AND RULES OF INTERPRETATION A. Rules of Interpretation 1. For purposes herein: (a) in the appropriate context, each term, whether stated in the singular or the plural, shall include both the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and the neuter gender; (b) any reference herein to a contract, instrument, release, indenture or other agreement or document being in a particular form or on particular terms and conditions means that the referenced document shall be substantially in that form or substantially on those terms and conditions; (c) any reference herein to an existing document or exhibit having been filed or to be filed shall mean that document or exhibit, as it may thereafter be amended, modified or supplemented; (d) unless otherwise specified, all references herein to “Articles” are references to Articles hereof or hereto; (e) the words “herein,” “hereof” and “hereto” refer to the Plan in its entirety rather than to a particular portion of the Plan; (f) captions and headings to Articles are inserted for convenience of reference only and are not intended to be a part of or to affect the interpretation hereof; (g) the rules of construction set forth in section 102 of the Bankruptcy Code shall apply; and (h) any term used in capitalized form herein that is not otherwise defined but that is used in the Bankruptcy Code or the Bankruptcy Rules shall have the meaning assigned to that term in the Bankruptcy Code or the Bankruptcy Rules, as the case may be. 2. The provisions of Fed.R.Bankr.P. 9006(a) shall apply in computing any period of time prescribed or allowed hereby. 3. All references herein to monetary figures shall refer to currency of the United States of America, unless otherwise expressly provided. B. Defined Terms Unless the context otherwise requires, the following terms shall have the following meanings when used in capitalized form herein: 1. “Accrued Professional Compensation” means, at any given moment, all accrued and/or unpaid fees and expenses (including, but not limited to: (a) success fees; and (b) fees or expenses allowed or awarded by a Final Order of the Bankruptcy Court or any other court of competent jurisdiction) for legal, financial advisory, accounting and other services and reimbursement of expenses that are awardable and allowable under sections 328, 330(a) or 331 of the Bankruptcy Code or otherwise rendered prior to the entry of the Confirmation Order by all Retained Professionals in the Chapter 11 Cases that the Bankruptcy Court has not denied by a Final Order, to the extent that any such

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fees and expenses have not been previously paid regardless of whether a fee application has been filed for any such amount. To the extent that the Bankruptcy Court or any higher court denies by a Final Order any amount of a Retained Professional’s fees or expenses, then those amounts shall no longer be Accrued Professional Compensation. 2. “Administrative Claims” means Claims that have been timely filed, pursuant to the deadline and procedure set forth in the Confirmation Order (except as otherwise provided by a separate order of the Bankruptcy Court), for costs and expenses of administration under sections 503(b), 507(b) or 1114(e)(2) of the Bankruptcy Code, including, but not limited to: (a) the actual and necessary costs and expenses incurred after the Petition Date of preserving the Estates and operating the businesses of the Debtors (such as wages, salaries or commissions for services and payments for goods and other services and leased premises); (b) Accrued Professional Compensation; (c) all fees and charges assessed against the Estates under chapter 123 of title 28 United States Code, 28 U.S.C. § 1911-1930; and (d) fees and expenses payable prior to entry of the Confirmation Order under the New Money Second Lien Loan and Exit Credit Facility. 3. “Affiliate” has the meaning set forth at section 101(2) of the Bankruptcy Code. 4. “Allowed” means, with respect to any Claim or Equity Interest, except as otherwise provided herein: (a) a Claim or Equity Interest that has been scheduled by the Debtors in their schedules of liabilities as other than disputed, contingent or unliquidated and as to which Debtors or other party-in-interest has not filed an objection by the Claims Objection Bar Date; (b) a Claim or Equity Interest that either is not Disputed or has been allowed by a Final Order; (c) a Claim or Equity Interest that is allowed: (i) in any stipulation of amount and nature of Claim executed prior to the entry of the Confirmation Order and approved by the Bankruptcy Court; (ii) in any stipulation with Debtors of amount and nature of Claim or Equity Interest executed on or after the entry of the Confirmation Order; or (iii) in or pursuant to any contract, instrument, indenture or other agreement entered into or assumed in connection herewith; (d) a Claim or Equity Interest that is allowed pursuant to the terms hereof; or (e) a Disputed Claim as to which a proof of claim has been timely filed and as to which no objection has been filed by the Claims Objection Bar Date. 5. “Avoidance Actions” means any and all avoidance, recovery, subordination or other actions or remedies that may be brought on behalf of the Debtors or their estates under the Bankruptcy Code or applicable non-bankruptcy law, including, without limitation, actions or remedies under sections 510, 542, 543, 544, 545, 547, 548, 549, 550, 551, 552 and 553 of the Bankruptcy Code, and including the Second Lien Litigation. 6. “Bankruptcy Code” means title I of the Bankruptcy Reform Act of 1978, as amended from time to time, as set forth in sections 101 et seq. of title 11 of the United States Code, and applicable portions of titles 18 and 28 of the United States Code. 7. “Bankruptcy Court” means the United States District Court for the District of Delaware, having jurisdiction over the Chapter 11 Cases and, to the extent of any reference made pursuant to section 157 of title 28 of the United States Code and/or the General Order of the District Court pursuant to section

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151 of title 28 of the United States Code, the United States Bankruptcy Court for the District of Delaware. 8. “Bankruptcy Rules” means the Federal Rules of Bankruptcy Procedure, promulgated under 28 U.S.C. § 2075, the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware, the Local Rules of Civil Practice and Procedure of the United States District Court for the District of Delaware, and general orders and chambers procedures of the Bankruptcy Court, each as applicable to the Chapter 11 Cases and as amended from time to time. 9. “Base Rate” has the meaning ascribed to it in the Prepetition Second Priority Credit Agreement (as that term is defined in the Final DIP Orders). 10. “Business Day” means any day, other than a Saturday, Sunday or “legal holiday” (as that term is defined in Fed.R.Bankr.P. 9006(a)). 11. “Canadian Creditor Distribution” means Cash to be distributed pro rata to holders of Allowed Canadian General Unsecured Claims pursuant to the Plan equal to the higher of (a) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Canadian Information Officer’s report dated March 31, 2008; or (b) the median value of the Canadian Operating Debtor’s assets in a liquidation as detailed in the Liquidation Analysis. 12. “Canadian General Unsecured Claims” means Other General Unsecured Claims against the Canadian Operating Debtor.1 13. “Canadian Information Officer” means RSM Richter Inc., as information officer in the Canadian Proceedings, which provides the Ontario Superior Court of Justice with updates on material activities in the Chapter 11 Cases. 14. “Canadian Operating Debtor” means Dura Automotive Systems (Canada), Ltd. 15. “Canadian Proceedings” means those proceedings commenced when the Debtors filed for creditor protection under the Companies’ Creditors Arrangement Act, as amended, in the Ontario Superior Court of Justice on the Petition Date, administered under commercial court file number 06-CL-6712. 16. “Canadian Recognition Order” means an order in the Canadian Proceedings recognizing and giving full effect to the Plan. 17. “Cash” means legal tender of the United States of America or the equivalent thereof, including bank deposits, checks, and readily marketable securities or instruments issued by an Entity, including, without limitation, readily marketable direct obligations of, or obligations guaranteed by, the United States of America, commercial paper of domestic corporations carrying a Moody’s rating of “A” or better, or equivalent rating of any other nationally recognized rating service, or interest bearing certificates of deposit or other similar obligations of domestic banks or other financial institutions having a shareholders’ equity or capital of not less than one hundred million dollars ($100,000,000) having maturities of not more than one (1) year, at the then best generally available rates of interest for like amounts and like periods. 18. “Causes of Action” means all claims, actions, causes of action, choses in action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, 1 As provided herein and in the Disclosure Statement, no Claims, other than Intercompany Claims,

are pending against the Other Canadian Debtors.

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specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, remedies, rights of set-off, third-party claims, subrogation claims, contribution claims, reimbursement claims, indemnity claims, counterclaims, and crossclaims (including, but not limited to, all claims and any avoidance, recovery, subordination or other actions against insiders and/or any other entities under the Bankruptcy Code, including Avoidance Actions and all such matters set forth in Article VI.F and Article IX.D) of any of the Debtors, the Debtors-in-Possession, and/or the Estates (including, but not limited to, those actions set forth in the Plan Supplement) that are or may be pending on the Effective Date or instituted by the Reorganized Debtors after the Effective Date against any entity, based in law or equity, including, but not limited to, under the Bankruptcy Code, whether direct, indirect, derivative, or otherwise and whether asserted or unasserted as of the date of entry of the Confirmation Order. 19. “Chapter 11 Cases” means cases commenced when the Debtors each filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on the Petition Date, jointly administered under case number 06-11202 (KJC), with the following case numbers: 06-11202, 06-11203, 06-11204, 06-11205, 06-11206, 06-11207, 06-11208, 06-11209, 06-11210, 06-11211, 06-11212, 0611213, 06-11214, 06-11215, 06-11216, 06-11217, 06-11218, 06-11219, 06-11220, 06-11221, 06-11222, 06-11223, 06-11224, 06-11225, 06-11226, 06-11227, 0611228, 06-11229, 06-11230, 06-11231, 06-11232, 06-11233, 06-11234, 06-11235, 06-11236, 06-11237, 06-11238, 06-11239, 06-11240, 06-11241, 06-11242 and 0611243. 20. “Claim” means a “claim” (as that term is defined in section 101(5) of the Bankruptcy Code) against a Debtor. 21. “Claims Objection Bar Date” means the bar date for objecting to proofs of claim, which shall be one year after the Effective Date; provided, however, that the Reorganized Debtors may seek additional extensions of this date from the Bankruptcy Court. 22. “Class” means a category of holders of Claims or Equity Interests as set forth in Article III pursuant to section 1122(a) of the Bankruptcy Code. ], 2008, by 23. “Commitment Letter” means that certain letter, dated [ which the Commitment Parties are committing to provide funding for the New Money Second Lien Loan. 24. “Commitment Parties” means those non-Debtor parties to the Commitment Letter. 25. “Compensation and Benefits Programs” means all employment and severance agreements and policies, and all compensation and benefit plans, policies, and programs of the Debtors applicable to their employees, former employees, retirees and non employee directors and the employees, former employees and retirees of their subsidiaries, including, without limitation, all savings plans, retirement plans, health care plans, disability plans, severance benefit agreements and plans, incentive plans, deferred compensation plans and life, accidental death and dismemberment insurance plans. 26. “Confirmation Order” means the order of the Bankruptcy Court confirming the Plan pursuant to section 1129 of the Bankruptcy Code. 27. “Convertible Preferred Stock” means convertible preferred Stock in New Dura with the following terms: (a) a liquidation preference equal to the Second

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Lien Allowed Claim amount and accrued annual dividend; (b) 20% annual dividend that accrues and increases the liquidation preference; (c) beginning on the third anniversary of the Effective Date, holders of the Convertible Preferred Stock may elect to convert their Convertible Preferred Stock shares into their pro rata share of 92.5% of the New Common Stock, and thereafter, into New Common Stock based on a percentage reflecting any accrued PIK Dividends through such conversion date since the third anniversary, if the Convertible Preferred Stock were to be converted at its full amount including any accrued PIK Dividends and with no prior redemptions; (d) at any time prior to the third anniversary of the Effective Date New Dura may, upon payment, in cash, ratably redeem up to 100% of the Convertible Preferred Stock plus accrued PIK dividends then outstanding; provided, however, that on the date of any such redemption, holders may elect to convert a proportion of their Convertible Preferred Stock shares into New Common Stock shares, which proportion shall be 0% on the Effective Date, 7% on the first anniversary thereof, 14% on the second anniversary thereof and 21% on the third anniversary thereof, respectively, if the Convertible Preferred Stock were to be redeemed in full on those dates; provided, further, however that proportion of Convertible Preferred Stock that may be so converted shall be adjusted as a function of the amount of Convertible Preferred Stock redeemed, the redemption date and any prior redemptions; (e) beginning on the fourth anniversary of the Effective Date, the holders of New Common Stock may call the conversion of all outstanding Convertible Preferred Stock; provided, however, that, either (i) the Convertible Preferred Stock must be trading at a level equal to or exceeding 115% of the liquidation preference of the Convertible Preferred Stock on the date on which the conversion is called, or (ii) the number of shares of New Common Stock into which the Convertible Preferred Stock is then convertible, in the aggregate, is trading at a similar valuation;2 and (f) beginning on the tenth anniversary of the Effective Date, to the extent that the Convertible Preferred Stock remains outstanding, holders representing more than a majority of the Convertible Preferred Stock shall have the right to appoint a majority of the New Board’s directors.3 28. “Convertible Subordinated Debentures” means those certain 7.5% convertible subordinated debentures due March 31, 2028, issued pursuant to the Convertible Subordinated Indenture by Dura Automotive Systems, Inc. 29. “Convertible Subordinated Indenture” means that certain Junior Convertible Subordinated Indenture, dated as of March 20, 1998, by and among Dura Automotive Systems, Inc. (as issuer), and The First National Bank of Chicago (as trustee), as amended, supplemented or otherwise modified from time to time through the Petition Date. 30. “Convertible Subordinated Indenture Trustee” means the “Trustee” (as that term is defined in the Convertible Subordinated Indenture). 2 The

documentation of this provision will provide for customary mechanics for determining liquidity and trading value. 3 The Special Transactions Committee may initiate a redemption of Convertible Preferred Stock at any time, provided that the post-transaction cost of funds meets certain customary parameters for refinancing indebtedness typically found in an indenture; provided, however, a majority of the entire Board of Directors must approve any redemption using funds from debt senior to the Convertible Preferred Stock if the size of the proposed redemption is less than $112.5 million.

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31. “Convertible Subordinated Indenture Trustee Fees” means reasonable, documented fees, disbursements, advances and expenses (including professional fees and expenses) of the Convertible Subordinated Indenture Trustee payable under the Convertible Subordinated Indenture. 32. “Convertible Trust Guarantees” means, collectively: (a) that certain Guarantee Agreement relating to preferred securities issued by Dura Automotive Systems Capital Trust, by and among Dura Automotive Systems, Inc. (as guarantor), and The First National Bank of Chicago (as guarantee trustee), dated March 20, 1998; and (b) that certain Guarantee Agreement relating to common securities issued by Dura Automotive Systems Capital Trust, by and among Dura Automotive Systems, Inc. (as guarantor), and The First National Bank of Chicago (as guarantee trustee), dated March 20, 1998. 33. “Creditors’ Committee” means the official committee of unsecured creditors for the Chapter 11 Cases appointed by the United States Trustee for the District of Delaware, pursuant to section 1102 of the Bankruptcy Code, on November 8, 2006 [Docket No. 170], November 9, 2006 [Docket No. 188], and December 7, 2006 [Docket No. 373]. 34. “Debtors” or “Debtors-in-Possession” means, collectively, Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems, Inc., Dura Automotive Systems of Indiana, Inc., Dura Brake Systems, L.L.C., Dura British Columbia ULC; Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 35. “DIP Agents” means, collectively, the “Postpetition Agents” and “Agents” (as each of those terms are defined in the Final DIP Orders). 36. “DIP Facility” means, collectively, the “Postpetition Revolving Credit Agreement,” “Replacement Term DIP Credit Agreement,” “Revolver DIP Facility,” “Replacement Term DIP Facility,” “Replacement Term DIP Credit Documents,” and applicable “Postpetition Financing Documents” (as each of those terms is defined in the Final DIP Orders). 37. “DIP Lenders” means, collectively, the “Postpetition Revolving Loan Lenders” and “Replacement Term DIP Lenders” (as each of those terms is defined in the Final DIP Orders). 38. “Disclosure Statement” means the Disclosure Statement for the Debtors’ Revised Joint Plan of Reorganization under Chapter 11 of the ], 2008 [Docket No. ], prepared and distributed Bankruptcy Code, dated [ in accordance with the Bankruptcy Code, Bankruptcy Rules, and any other

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applicable law, and approved by the Bankruptcy Court in the Disclosure Statement Order, as it is amended, supplemented, or modified from time to time. 39. “Disputed” means, with respect to any Claim or Equity Interest, any Claim or Equity Interest: (a) listed on the Schedules as unliquidated, disputed or contingent, unless a proof of Claim has been timely filed; (b) as to which a Debtor or Reorganized Debtor has interposed a timely objection or request for estimation in accordance with the Bankruptcy Code and the Bankruptcy Rules; or (c) as otherwise disputed by a Debtor or Reorganized Debtor in accordance with applicable law, which objection, request for estimation or dispute has not been withdrawn or determined by a Final Order. 40. “DTC” means The Depository Trust Company. 41. “Effective Date” means the date selected by the Debtors that is a Business Day after the entry of the Confirmation Order on which: (a) no stay of the Confirmation Order is in effect; and (b) all conditions specified in Article VIII. A have been (i) satisfied or (ii) waived pursuant to Article VIII.B. 42. “Entity” means an “entity” (as that term is defined in section 101(15) of the Bankruptcy Code). 43. “Equity Interest” means any equity interest in a Debtor that existed immediately prior to the Petition Date, including, but not limited to: (a) any common equity interest in a Debtor that existed immediately prior to the Petition Date, including, but not limited to, all issued, unissued, authorized or outstanding shares of common stock, together with any warrants, options or legal, contractual or equitable rights to purchase or acquire such interests at any time; and (b) any preferred equity interest in a Debtor that existed immediately prior to the Petition Date, including, but not limited to, all issued, unissued, authorized or outstanding shares of preferred stock, together with any warrants, options or legal, contractual or equitable rights to purchase or acquire such interests. 44. “Estate” means the estate of a Debtor created on the Petition Date by section 541 of the Bankruptcy Code. 45. “Exculpated Parties” means, collectively, the Debtors, current and former officers and directors of the Debtors that served as officers or directors as of the Petition Date or thereafter, Reorganized Debtors, Canadian Information Officer, DIP Lenders, DIP Agents, Commitment Parties, First Lien Lenders, Second Lien Lenders, Senior Notes Indenture Trustee, Subordinated Notes Indentures Trustee, Convertible Subordinated Indenture Trustee, Creditors’ Committee and members thereof, and each of their respective Representatives (each of the foregoing in its individual capacity as such). 46. “Exit Credit Facility” means the credit facility or facilities to be entered into by certain of the Reorganized Debtors after consultation with the Creditors’ Committee and Second Lien Group on the Effective Date. 47. “Fee Auditor Order” means that order appointing a fee auditor and establishing procedures related to Retained Professionals’ compensation, entered by the Bankruptcy Court on December 22, 2006 [Docket No. 439]. 48. “Final DIP Orders” means (i) that certain Final Order (i) Authorizing Debtors to Obtain Postpetition Financing Pursuant to Sections 363 and 364 of Bankruptcy Code, (ii) Granting Liens and Superpriority Claims to Postpetition Lenders Pursuant to Section 364 of Bankruptcy Code, (iii) Authorizing Use of Cash Collateral Pursuant to Section 363 of Bankruptcy Code,

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(iv) Providing Adequate Protection to Prepetition Lenders Pursuant to Sections 361, 362, 363 and 364 of Bankruptcy Code and (v) Directing Repayment of Certain Prepetition Indebtedness, entered on November 21, 2006 [Docket No. 284] (as amended by Docket Nos. 1975, 2555 and 2695, and as same may be further amended, supplemented or otherwise modified from time to time) and (ii) that certain Final Order (I) Authorizing Debtors to Obtain Replacement and Additional Postpetition Term Loan Financing Pursuant to Sections 363 and 364 of the Bankruptcy Code (II) Granting Liens and Superpriority Claims to Postpetition Lenders Pursuant to Section 364 of the Bankruptcy Code (III) Authorizing the Use of Cash Collateral Pursuant to Section 363 of the Bankruptcy Code and (IV) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001, entered on February 21, 2008 [Docket No. 2826] (as same may be amended, supplemented or otherwise modified from time to time), respectively. 49. “Final Order” means an order or judgment of the Bankruptcy Court, or other court of competent jurisdiction with respect to the subject matter, which has not been reversed, stayed, modified or amended, and as to which the time to appeal, petition for certiorari or move for reargument or rehearing has expired and no appeal or petition for certiorari has been timely taken, or as to which any appeal that has been taken or any petition for certiorari that has been or may be filed has been resolved by the highest court to which the order or judgment was appealed or from which certiorari was sought or has otherwise been dismissed with prejudice. 50. “First Lien Lenders” means, collectively, “Prepetition First Priority Agents” and “Prepetition First Priority Lenders” (as each of those terms is defined in the Final DIP Orders). 51. “General Unsecured Claims” means Claims against any Debtor that are neither Administrative Claims, DIP Facility Claims, Priority Tax Claims, Other Priority Claims, Other Secured Claims, Second Lien Facility Claims, Section 510 Subordinated Claims, nor Equity Interests. 52. “Impaired” means, with respect to a Claim, Equity Interest, or Class of Claims or Equity Interests, “impaired” within the meaning of sections 1123(a)(4) and 1124 of the Bankruptcy Code. 53. “Intercompany Claims” means Claims held by a Debtor or Affiliate of the Debtors against another Debtor or Affiliate of the Debtors. 54. “Liquidation Analysis” means that certain liquidation analysis attached as Exhibit I to the Disclosure Statement for the Debtors’ Revised Joint Plan under Chapter 11 of the Bankruptcy Code dated March 13, 2008, [Docket No]. 55. “Management Equity Incentive Plan” means that certain compensation program consisting of grants of equity, restricted stock or options in an amount of up to 10% of the capital stock of New Dura, the terms of which program are to be determined by the New Board or any compensation committee thereof as soon as reasonably practicable after the Effective Date. 56. “New Board” means, as of the Effective Date, the initial board of directors of New Dura as set forth in the Plan Supplement. 57. “New Common Stock” means the common stock of New Dura. 58. “New Common Stock Price” means the $10.00 per share price of New Common Stock as of the Effective Date.

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59. “New Dura” means that certain corporation formed under the laws of Delaware after the date of the Disclosure Statement and on or prior to the Effective Date. 60. “New Dura Holdings” means that certain corporation formed under the laws of Delaware after the date of the Disclosure Statement and on or prior to the Effective Date that is a wholly-owned subsidiary of New Dura. 61. “New Dura Opco” means that certain corporation formed under the laws of Delaware after the date of the Disclosure Statement and on or prior to the Effective Date that is a wholly-owned subsidiary of Dura Holdings, which will, through one or more subsidiaries or affiliated partnerships, purchase in a taxable transaction substantially all of the assets of Dura Operating Corporation pursuant to Article IV. 62. “New Organizational Documents” means, collectively: (a) the new certificates of incorporation, certificates of organization or limited partnership certificates to be filed by the Reorganized Debtors in their respective states of organization; (b) by-laws, operating agreements, partnership agreements and any other corporate, constituent or organizational documents that may be necessary or appropriate to adopt or file in connection with the incorporation or formation of the Reorganized Debtors; and (c) any other registration rights agreement to be entered into on or prior to the Effective Date. 63. “New Money Second Lien Loan” means a secured term loan entered into by certain of the Reorganized Debtors on the terms set forth in the Commitment Letter. 64. “Nominee” means an entity authorized to hold securities in DTC on behalf of beneficial owners. 65. “Original Plan” means the Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated September 28, 2007 [Docket No. 1924]. 66. “Other Canadian Debtors” means Dura Automotive Canada ULC, Dura British Columbia ULC, Dura Canada LP, Dura Holdings Canada LP, Dura Holdings ULC, Dura Operating Canada LP, and Trident Automotive Canada Co., Trident Automotive, Ltd. 67. “Other General Unsecured Claims” means General Unsecured Claims that are neither Senior Notes Claims, Subordinated Notes Claims, nor Convertible Subordinated Debentures Claims. 68. “Other Priority Claims” means Claims accorded priority in right of payment under section 507(a) of the Bankruptcy Code, other than Priority Tax Claims. 69. “Other Secured Claims” means Secured Claims against the Debtors not specifically described herein; provided, however, that Other Secured Claims shall not include DIP Facility Claims or Second Lien Facility Claims. 70. “Pension Plans” means each of the following pension plans sponsored by the Debtors and covered by Title IV of the Employee Retirement Income Security Act of 1974 (as amended), to the extent such pension plans have not been assumed by a successor to a portion of the business of the Debtors on or prior to the Effective Date: (a) Dura Master Pension Plan (EIN-PN: 382961431/001); (b) Dura Automotive Systems, Inc. Mancelona Union-Represented Employees’ Pension Plan (EIN-PN: 382961431/004); (c) Atwood Mobile Products Inc.

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Supplementary Retirement Plan (EIN-PN: 364334203/005); and (d) Dura Retirement Plan For La Grange Bargaining Employees (EIN-PN: 364334203/024). 71. “Petition Date” means October 30, 2006. 72. “Plan” means this revised joint plan of reorganization under chapter 11 of the Bankruptcy Code, either in its present form or as it may be altered, amended, modified or supplemented from time to time in accordance with the Bankruptcy Code, the Bankruptcy Rules or herewith, as the case may be, and the Plan Supplement, which is incorporated herein by reference. 73. “Plan Supplement” means the compilation of documents and forms of documents, schedules and exhibits to be filed no later than fifteen (15) days prior to the hearing at which the Bankruptcy Court considers whether to confirm the Plan, as it may thereafter be altered, amended, modified or supplemented from time to time in accordance with the terms hereof and in accordance with the Bankruptcy Code and the Bankruptcy Rules, comprising, without limitation, the following documents: (a) the New Organizational Documents; (b) the list of Debtor mergers to be consummated on the Effective Date; (c) a description of retained Causes of Action (including those representing exceptions to the release provisions of Article IX.B) which may be amended or supplemented; (d) to the extent known, the identity of New Board members and the nature of any compensation for any member of the New Board who is an “Insider” under the Bankruptcy Code; (e) the list of executory contracts and unexpired leases to be assumed (including associated cure amounts, if any); (f) the list of executory contracts and unexpired leases to be rejected; (g) the list of unexpired directors’ and officers’ liability insurance policies; (h) the list of Compensation and Benefits Programs to be assumed as amended pursuant to Article V.F.2 or otherwise; and (i) the list of Compensation and Benefits Programs to be rejected. All documents, schedules and exhibits contained in the Plan Supplement must be reasonably acceptable to the Creditors’ Committee and Second Lien Group. 74. “Priority Tax Claims” means Claims of governmental units of the kind specified in section 507(a)(8) of the Bankruptcy Code. 75. “Punitive Damage Claims” means Claims for punitive damages that have been or may be asserted against a Debtor in litigation initiated on or prior to the Petition Date and that have been subordinated by an order of the Bankruptcy Court to Senior Notes Claims, Subordinated Notes Claims, Convertible Subordinated Debentures Claims and Other General Unsecured Claims. 76. “Releasees” means, collectively, the Debtors, current and former officers and directors of the Debtors as of the Petition Date or thereafter, Reorganized Debtors, Canadian Information Officer, Commitment Parties, DIP Lenders, DIP Agent, First Lien Lenders, Second Lien Lenders, Senior Notes Indenture Trustee, Subordinated Notes Indentures Trustee, Convertible Subordinated Indenture Trustee, Creditors’ Committee and members thereof, and each of their respective Representatives (each of the foregoing in its individual capacity as such). 77. “Registration Rights Agreement” means that certain registration rights agreement included in the Plan Supplement. 78. “Releasing Parties” means, collectively, DIP Lenders, DIP Agent, First Lien Lenders, Second Lien Lenders, Senior Notes Indenture Trustee, Creditors’ Committee and members thereof, and holders of Claims voting to accept the

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Plan (each of the foregoing being in its individual capacity as such); provided, however, that the Releasing Parties shall not include holders of Claims voting to reject the Plan. 79. “Reorganized Debtors” means: (a) the Debtors, as reorganized pursuant to and under the Plan or any successor thereto, by merger, consolidation, or otherwise, on or after the Effective Date; (b) New Dura; (c) New Dura Holdings; and (d) New Dura Opco. 80. “Representatives” means, with regard to an Entity, officers, directors, employees, advisors, attorneys, professionals, accountants, investment bankers, financial advisors, consultants, agents (including any administrative or collateral agents under the Exit Credit Facility and the New Money Second Lien Loan) and other representatives (including their respective officers, directors, employees, members and professionals). 81. “Retained Professional” means an Entity: (a) employed in the Chapter 11 Cases pursuant to a Final Order in accordance with sections 327 and 1103 of the Bankruptcy Code and to be compensated for services rendered prior to the Effective Date, pursuant to sections 327, 328, 329, 330 and 331 of the Bankruptcy Code; or (b) for which compensation and reimbursement has been allowed by the Bankruptcy Court pursuant to section 503(b)(4) of the Bankruptcy Code. 82. “Schedules” mean the schedules of assets and liabilities, schedules of executory contracts and statements of financial affairs filed and amended by the Debtors pursuant to section 521 of the Bankruptcy Code. 83. “Scheduling and Disclosure Statement Order” means that certain order approving the Disclosure Statement, entered by the Bankruptcy Court on ], 2008 [Docket No. ]. [ 84. “Second Lien Distribution” means shares of Convertible Preferred Stock to be distributed to the holders of Allowed Second Lien Facility Claims pursuant to the Plan. 85. “Second Lien Facility” means, collectively, the “Prepetition Second Priority Credit Agreement” and “Prepetition Second Priority Financing Documents” (as each of those terms is defined in the Final DIP Orders). 86. “Second Lien Group” means that certain Second Lien Committee (as that term is defined in the Final DIP Orders), as constituted from time to time. 87. “Second Lien Lenders” means, collectively, “Prepetition Second Priority Agents,” “Prepetition Second Priority Lenders” and “Second Lien Committee” (as each of those terms is defined in the Final DIP Orders). 88. “Second Lien Litigation” means, collectively: (a) potential litigation under applicable state law regarding the validity of certain UCC-1 financing statements identified in the Debtors’ Form 8-K report filed with the Securities and Exchange Commission on August 28, 2006; and (b) potential preference litigation under section 547 of the Bankruptcy Code regarding certain UCC-1 financing statements and UCC-1 financing statement amendments identified in the Debtors’ Form 8-K report filed with the Securities and Exchange Commission on August 28, 2006. 89. “Section 510 Subordinated Claims” means Claims subordinated to Senior Notes Claims, Subordinated Notes Claims, Convertible Subordinated Debentures Claims and Other General Unsecured Claims, whether before or after the Effective Date, pursuant to section 510 of the Bankruptcy Code or any other authority, including, but not limited to, Punitive Damage Claims,

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Claims arising from or based upon the Convertible Trust Guarantees, and any other Claim so subordinated by order of the Bankruptcy Court. 90. “Secured Claims” means: (a) Claims that are secured by a lien on property in which the Estates have an interest, which liens are valid, perfected and enforceable under applicable law or by reason of a Final Order, or that are subject to setoff under section 553 of the Bankruptcy Code, to the extent of the value of the Claim holder’s interest in the Estates’, 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; and (b) Claims which are Allowed under the Plan as a Secured Claim. 91. “Senior Notes” means those certain 8.625% senior notes due April 15, 2012, issued pursuant to the Senior Notes Indenture by Dura Operating Corp. 92. “Senior Notes Distribution” means, collectively: (a) the Allowed Senior Notes Claims’ pro rata share of the U.S. Unsecured Creditor Equity Distribution; and (b) each of (i) the Allowed Subordinated Notes Claims’ pro rata share of the U.S. Unsecured Creditor Equity Distribution, pursuant to the subordination provisions of the Subordinated Notes Indentures, and (ii) the Allowed Convertible Subordinated Debentures Claims’ pro rata share of the U.S. Unsecured Creditor Equity Distribution, pursuant to the subordination provisions of the Convertible Subordinated Indenture; provided, that, each of the distributions set forth in items (i) and (ii) shall be distributed directly to the holders of Allowed Senior Notes Claims pursuant to the subordination provisions of the Subordinated Notes Indentures and Convertible Subordinated Indenture. 93. “Senior Notes Indenture” means that certain Indenture, dated as of April 18, 2002, by and among Dura Operating Corp. (as issuer), certain affiliates of Dura Operating Corp. (as guarantors), and BNY Midwest Trust Company (as trustee), as amended, supplemented or otherwise modified from time to time through the Petition Date. 94. “Senior Notes Indenture Trustee” means the “Trustee” (as that term is defined in the Senior Notes Indenture). 95. “Special Transactions Committee” means a special committee of the New Board, as set forth in the Plan Supplement. 96. “Subordinated Notes” means those certain 9% senior subordinated notes (all series) due May 1, 2009, issued pursuant to the Subordinated Notes Indentures by Dura Operating Corp. 97. “Subordinated Notes indentures” means, collectively: (a) that certain Indenture, dated as of April 22, 1999, by and among Dura Operating Corp. (as issuer), certain affiliates of Dura Operating Corp. (as guarantors), and U.S. Bank Trust National Association (as trustee), as amended, supplemented or otherwise modified from time to time through the Petition Date; (b) that certain Indenture, dated as of April 22, 1999, by and among Dura Operating Corp. (as issuer), certain affiliates of Dura Operating Corp. (as guarantors), and U.S. Bank Trust National Association (as trustee), as amended, supplemented or otherwise modified from time to time through the Petition Date; and (c) that certain Indenture, dated as of June 22, 2001, by and among Dura Operating Corp. (as issuer), certain affiliates of Dura Operating Corp. (as guarantors), and U.S. Bank Trust National Association (as trustee), as amended, supplemented or otherwise modified from time to time through the Petition Date.

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98. “Subordinated Notes Indentures Trustee” means, collectively, each and every “Trustee” (as that term is defined in each Subordinated Notes Indenture). 99. “Subordinated Notes Indentures Trustee Fees” means reasonable, documented fees, disbursements, advances and expenses (including professional fees and expenses) of the Subordinated Notes Indentures Trustee payable under the Subordinated Notes Indentures. 100. “Unimpaired” means, with respect to a Claim, Equity Interest, or Class of Claims or Equity Interests, not “impaired” within the meaning of sections 1123(a)(4) and 1124 of the Bankruptcy Code. 101. “U.S. Debtors” means all Debtors other than Canadian Operating Debtor and the Other Canadian Debtors. 102. “U.S. Other General Unsecured Claims” means Other General Unsecured Claims filed against the U.S. Debtors. 103. “U.S. Unsecured Creditor Equity Distribution” means shares of New Common Stock to be distributed to holders of Allowed General Unsecured Claims, other than Canadian General Unsecured Claims, pursuant to the Plan constituting approximately 100% of the New Common Stock. ARTICLE II. ADMINISTRATIVE AND PRIORITY CLAIMS A. Administrative Claims Subject to the provisions of sections 328, 330(a) and 331 of the Bankruptcy Code, each holder of an Allowed Administrative Claim will be paid the full unpaid amount of such Allowed Administrative Claim in Cash: (a) on the Effective Date or as soon as practicable thereafter (or, if not then due, when such Allowed Administrative Claim is due or as soon as practicable thereafter); (b) if such Claim is Allowed after the Effective Date, on the date such Claim is Allowed or as soon as practicable thereafter (or, if not then due, when such Allowed Administrative Claim is due); (c) at such time and upon such terms as may be agreed upon by such holder and the Debtors or the Reorganized Debtors, as the case may be; or (d) at such time and upon such terms as set forth in an order of the Bankruptcy Court; provided, however, that Allowed Administrative Claims comprising obligations incurred in the ordinary course of business or otherwise assumed by a Debtor pursuant hereto will be assumed on the Effective Date, and thereafter, paid or performed by the respective Reorganized Debtor when due in accordance with the terms and conditions of the particular agreements governing any such obligations; provided, further, however that Administrative Claims do not include Claims filed after the applicable deadline set forth in the Confirmation Order (except as otherwise provided by a separate order of the Bankruptcy Court). B. DIP Facility Claims Notwithstanding anything to the contrary herein, on the Effective Date, the Allowed DIP Facility Claims will be paid in full in Cash in accordance with the terms of the DIP Facility, and cash collateral with respect to letters of credit outstanding on the Effective Date shall be provided in accordance with the terms of the DIP Facility, in full and final satisfaction of such Allowed DIP Facility Claims (except those surviving obligations set forth in Article IX.D.4).

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C. Priority Tax Claims 1. On the later of the Effective Date or the date on which a Priority Tax Claim becomes an Allowed Priority Tax Claim, or, in each such case, as soon as practicable thereafter, each holder of an Allowed Priority Tax Claim due and payable on or prior to the Effective Date will receive on account of such Claim, in accordance with section 1129(a)(9)(C) of the Bankruptcy Code, regular installment payments in Cash: (a) of a total value, as of the Effective Date, equal to the Allowed amount of such Claim; (b) which total value shall include simple interest to accrue on any outstanding balance of such Allowed Priority Tax Claim starting on the Effective Date at the rate of interest determined under applicable nonbankruptey law pursuant to section 511 of the Bankruptcy Code; and (c) over a period ending not later than 5 years after the Petition Date. 2. Installment Payments. Any installment payments made pursuant to section 1129(a)(9)(C) of the Bankruptcy Code shall be in equal quarterly Cash payments beginning on the first day of the calendar month following the Effective Date, and subsequently on the first day of each third calendar month thereafter, as necessary. The amount of any Priority Tax Claim that is not otherwise due and payable on or prior to the Effective Date, and the rights of the holder of such Claim, if any, to payment in respect thereof shall: (a) be determined in the manner in which the amount of such Claim and the rights of the holder of such Claim would have been resolved or adjudicated if the Chapter 11 Cases had not been commenced; (b) survive after the Effective Date as if the Chapter 11 Cases had not been commenced; and (c) not be discharged pursuant to section 1141 of the Bankruptcy Code. In accordance with section 1124 of the Bankruptcy Code, and notwithstanding any other provision of the Plan to the contrary, the Plan shall not alter or otherwise impair the legal, equitable, and contractual rights of any holder of a Priority Tax Claim that is not otherwise due and payable on or prior to the Effective Date. D. Other Priority Claims On or as soon as practicable after the Effective Date, each holder of an Allowed Other Priority Claim shall receive, in full and final satisfaction of such Claim, one of the following treatments, in the sole discretion of the Debtors: (a) full payment in Cash of its Allowed Other Priority Claim; or (b) treatment of its Allowed Other Priority Claim in a manner that leaves such Claim Unimpaired. ARTICLE III. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS A. Summary 1. The following table classifies Claims and Equity Interests for all purposes, including voting, confirmation and distribution pursuant hereto and pursuant to sections 1122 and 1123(a)(1) of the Bankruptcy Code. The Plan deems a Claim or Equity Interest to be classified in a particular Class only to the extent that the Claim or Equity Interest qualifies within the description of that Class and shall be deemed classified in a different Class to the extent that any remainder of such Claim or Equity Interest qualifies within the description of such different

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Class. A Claim or Equity Interest is in a particular Class only to the extent that any such Claim or Equity Interest is Allowed in that Class and has not been paid or otherwise settled prior to the Effective Date. 2. Summary of Classification and Treatment of Classified Claims and Equity Interests. Class

Claim

Status

Voting Rights

1 2 3 4 5 6

Other Secured Claims Second Lien Facility Claims Senior Notes Claims Subordinated Notes Claims Other General Unsecured Claims Convertible Subordinated Debentures Claims Section 510 Subordinated Claims Equity Interests

Unimpaired Impaired Impaired Impaired Impaired Impaired

Deemed to Accept Entitled to Vote Entitled to Vote Deemed to Reject Entitled to Vote Deemed to Reject

Impaired Impaired

Deemed to Reject Deemed to Reject

7 8

B. Classification and Treatment of Claims and Equity Interests 1. Class 1—Other Secured Claims (a) Classification: Class 1 consists of Other Secured Claims. (b) Treatment: Each holder of an Allowed Other Secured Claim will be placed in a separate subclass, and each subclass will be treated as a separate class for distribution purposes. On or as soon as practicable after the Effective Date, each holder of an Allowed Other Secured Claim shall receive, in full and final satisfaction of such Claim, in the sole discretion of the Debtors, except to the extent any holder of an Allowed Other Secured Claim agrees to a different treatment, either: (i) the collateral securing such Allowed Other Secured Claim; (ii) Cash in an amount equal to the value of the collateral securing such Allowed Other Secured Claim; or (iii) the treatment required under section 1124(2) of the Bankruptcy Code for such Claim to be reinstated or rendered Unimpaired. (c) Voting: Class 1 is Unimpaired, and holders of Other Secured Claims are conclusively deemed to have accepted the Plan. All Other Secured Claims shall be subject to Allowance under the provisions of the Plan, including, but not limited to, Article VII. 2. Class 2—Second Lien Facility Claims (a) Classification: Class 2 consists of Second Lien Facility Claims. (b) Treatment: On or as soon as practicable after the Effective Date, each holder of an Allowed Second Lien Facility Claim shall receive in full and final satisfaction of such Claim, its pro rata share of the Second Lien Distribution. (c) Voting: Class 2 is Impaired, and holders of Second Lien Facility Claims are entitled to vote to accept or reject the Plan. 3. Class 3—Senior Notes Claims (a) Classification: Class 3 consists of Senior Notes Claims. (b) Treatment: On or as soon as practicable after the Effective Date, each holder of a Class 3 Senior Notes Claim shall receive, in full and final satisfaction of such Claim, its pro rata share of the Senior Notes Distribution.

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(c) Voting: Class 3 is Impaired, and holders of Senior Notes Claims are entitled to vote to accept or reject the Plan. 4. Class 4—Subordinated Notes Claims (a) Classification: Class 4 consists of Subordinated Notes Claims. (b) Treatment: Holders of Subordinated Notes Claims shall neither receive nor retain any property under the Plan, pursuant to the Subordinated Notes Indentures, which subordinate their right to payment to the right of holders of Senior Notes Claims to payment in full prior to any distribution being made to holders of Subordinated Notes Claims. (c) Voting: Class 4 is Impaired, and holders of Subordinated Notes Claims are conclusively deemed to reject the Plan. 5. Class 5—Other General Unsecured Claims (a) Classification: Class 5 consists of Other General Unsecured Claims. (b) Treatment: (i) Class 5A—U.S. Other General Unsecured Claims. On or as soon as practicable after the Effective Date, each holder of an Allowed U.S. Other General Unsecured Claim shall receive, in full and final satisfaction of such Claim, its pro rata share of the U.S. Unsecured Creditor Equity Distribution. (ii) Class 5B—Canadian General Unsecured Claims. On or as soon as practicable after the Effective Date, each holder of an Allowed Canadian General Unsecured Claim shall receive, in full and final satisfaction of such Claim, its pro rata share of the Canadian Creditor Distribution. (iii) If an Allowed Claim is filed against both the Canadian Operating Debtor and a U.S. Debtor the holder of such Allowed Claim shall be entitled, in the alternative, to its pro rata share of either: (a) the Canadian Creditor Distribution; or (b) the U.S. Unsecured Creditor Equity Distribution, whichever is higher. (c) Voting: Class 5 is Impaired, and holders of Other General Unsecured Claims are entitled to vote to accept or reject the Plan; provided, however, that Other General Unsecured Claims shall be subject to Allowance under the provisions of the Plan, including, but not limited to, Article VII. 6. Class 6—Convertible Subordinated Debentures Claims (a) Classification: Class 6 consists of Convertible Subordinated Debentures Claims. (b) Treatment: Holders of Convertible Subordinated Debentures Claims shall neither receive nor retain any property under the Plan, pursuant to the Convertible Subordinated Indenture, which subordinates their right to payment to the right of holders of Senior Notes Claims to payment in full prior to any distribution being made to holders of Convertible Subordinated Debentures Claims. (c) Voting: Class 6 is Impaired, and holders of Convertible Subordinated Debentures Claims are conclusively deemed to reject the Plan. 7. Class 7—Section 510 Subordinated Claims (a) Classification: Class 7 consists of holders of Section 510 Subordinated Claims. (b) Treatment: Holders of Section 510 Subordinated Claims shall neither receive nor retain any property under the Plan. (c) Voting: Class 7 is impaired, and holders of Section 510 Subordinated Claims are conclusively deemed to reject the Plan.

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8. Class 8—Equity Interests (a) Classification: Class 8 consists of Equity Interests. (b) Treatment: Holders of Equity Interests shall neither receive nor retain any property under the Plan. (c) Voting: Class 8 is Impaired, and holders of Equity Interests are conclusively deemed to reject the Plan. C. Subordination The treatment of Claims (including, but not limited to, Subordinated Notes Claims, Convertible Subordinated Debentures Claims, and Section 510 Subordinated Claims) and Equity Interests conforms to contractual, legal and equitable subordination rights relating thereto, whether arising under general principles of equitable subordination, section 510 of the Bankruptcy Code, or otherwise. D. Special Provision Governing Unimpaired Claims Except as otherwise provided in the Plan, nothing under the Plan shall affect the Debtors’ or the Reorganized Debtors’ rights in respect of any Unimpaired Claim, including, but not limited to, all rights in respect of legal and equitable defenses to or setoffs or recoupments against any such Unimpaired Claim. E. Non-Consensual Confirmation The Debtors reserve the right to seek confirmation of the Plan under section 1129(b) of the Bankruptcy Code. To the extent that any Class votes to reject the Plan, the Debtors further reserve the right to modify the Plan in accordance with Article XI.D. ARTICLE IV. MEANS FOR IMPLEMENTATION OF THE PLAN A. Substantive Consolidation 1. The Plan is premised upon substantively consolidating the U.S. Debtors as set forth herein for the limited purposes of confirming and consummating the Plan, including but not limited to voting, confirmation and distribution. Each and every Claim filed or to be filed in the Chapter 11 Cases against any U.S. Debtor shall be considered filed against the consolidated U.S. Debtors and shall be considered one Claim against and obligation of the consolidated U.S. Debtors. 2. All guaranties by any of the U.S. Debtors of the obligations of any U.S. Debtor arising prior to the Effective Date shall be deemed eliminated under the Plan so that any Claim against any U.S. Debtor and any guaranty thereof executed by any other U.S. Debtor and any joint and several liability of any of the U.S. Debtors shall be deemed to be one obligation of the deemed consolidated U.S. Debtors. 3. Such substantive consolidation shall not affect any liens or other security interests held by prepetition secured Claim holders. 4. The Canadian Operating Debtor shall not be substantively consolidated with any other Debtor.

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5. The Other Canadian Debtors shall not be substantively consolidated with any other Debtor. 6. In the event the Bankruptcy Court authorizes the Debtors to substantively consolidate less than all of the U.S. Debtors’ Estates: (a) the Plan shall be treated as a separate plan of reorganization for each Debtor not substantively consolidated; and (b) the Debtors shall not be required to re-solicit votes with respect to the Plan. B. Continued Corporate Existence, Vesting of Assets in the Reorganized Debtors, and Mergers 1. On the Effective Date, all assets of each Estate shall vest in the respective Reorganized Debtor, free and clear of all Claims, Interests, liens, charges or other encumbrances except to the extent otherwise provided herein or in the Confirmation Order. 2. Pursuant to section 1123(a)(5)(D) of the Bankruptcy Code, New Dura Opco shall, through the following steps, acquire the assets of Dura Operating Corporation in a taxable transaction: (a) On or before the Effective Date, certain Dura creditors, or a nominee on behalf of them, shall form New Dura, with nominal capitalization; (b) New Dura shall then form New Dura Holdings; (c) New Dura Holdings shall then form New Dura Opco; (d) New Dura shall make a capital contribution of Convertible Preferred Stock and Common Stock to New Dura Holdings, which shares shall then be contributed to New Dura Opco; (e) On the Effective Date, Dura Operating Corporation will transfer certain assets and the stock of its subsidiaries to New Dura Opco in exchange for the Convertible Preferred Stock and the New Common Stock; (f) On the Effective Date, one or more of the U.S. Debtors shall distribute the New Common Stock and the Convertible Preferred Stock to its creditors on the terms set forth herein; and (g) Dura Operating Corporation shall remain in existence and shall retain certain assets which shall be leased to New Dura Opco; 3. On the Effective Date or as soon as practicable thereafter, the Debtors or Reorganized Debtors shall consummate, pursuant to section 1123(a)(5)(D) of the Bankruptcy Code, those sales of property set forth in the Plan Supplement. 4. On and after the Effective Date, the Reorganized Debtors may engage in any act or activity authorized by the New Organizational Documents, without the Bankruptcy Court’s supervision or approval, and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan or Confirmation Order. 5. On the Effective Date, any provision in any operating agreements, partnership agreements, limited liability company agreements or any other organizational document (as the same may be amended or restated from time to time) of any Debtor or Reorganized Debtor requiring dissolution, liquidation, or withdrawal of a member upon insolvency, bankruptcy or the filing of Chapter 11 Cases: (a) is deemed waived and of no further force and effect; (b) any action taken to prevent or revoke such potential dissolution or liquidation by the Debtors or Reorganized Debtors or potential withdrawal of

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any such Debtors or Reorganized Debtors from the applicable limited liability company or partnership is ratified and deemed effective to prevent such dissolution or liquidation and each such Debtor or Reorganized Debtor shall continue its existence regardless of any such provision. C. Treatment of Intercompany Claims On the Effective Date, the Reorganized Debtors shall, at their sole discretion, reinstate or compromise, as the case may be, Intercompany Claims. D. Cancellation of Senior Notes, Subordinated Notes, Convertible Subordinated Debentures, and Equity Interests 1. On the Effective Date, except to the extent otherwise provided herein, all notes, stock, instruments, certificates, and other documents evidencing the Senior Notes Claims, Subordinated Notes Claims, Convertible Subordinated Debentures Claims, Convertible Trust Guarantees and Equity Interests shall be canceled, shall be of no further force, whether surrendered for cancellation or otherwise, and the obligations of the Debtors thereunder or in any way related thereto shall be discharged. 2. On the Effective Date, except to the extent otherwise provided herein, any indenture relating to any of the foregoing shall be deemed to be canceled, as permitted by section 1123(a)(5)(F) of the Bankruptcy Code, and the obligations of the Debtors thereunder shall be discharged. 3. As of the Effective Date, the transfer register or ledger maintained by Senior Notes Indenture Trustee for the Senior Notes shall be closed, and there shall be no further changes in the record holders of any Senior Notes. 4. As of the Effective Date, the transfer register or ledger maintained by Subordinated Notes Indenture Trustee for the Subordinated Notes shall be closed, and there shall be no further changes in the record holders of any Subordinated Notes. 5. As of the Effective Date, the transfer register or ledger maintained by Convertible Subordinated Indenture Trustee for the Convertible Preferred Securities shall be closed, and there shall be no further changes in the record holders of any Convertible Preferred Securities. 6. Senior Notes Indenture Trustee Fees. Notwithstanding Article IV.D.2, the Senior Notes Indenture shall continue in effect solely: (a) to allow holders of the Senior Notes Claims to receive distributions provided for hereunder; and (b) to preserve those rights of the Senior Notes Indenture Trustee thereunder (including any right to a lien on property held by the Senior Notes Indenture Trustee) to reasonable compensation and reimbursement for reasonable disbursements, advances and expenses. Compensation and reimbursements payable to the Senior Notes Indenture Trustee shall be paid: (a) within two Business Days of the Effective Date, if invoiced no later than four Business Days prior to the Effective Date (upon which payment any right of the Senior Notes Indenture Trustee under the Senior Notes Indenture to a lien on property it holds shall terminate); and, (b) with regard to reasonable disbursements, advances and expenses incurred in connection with the implementation of the Plan, including the issuance of New Common Stock, within ten Business Days of delivery of an invoice to the Reorganized Debtors.

302


7. Subordinated Notes Indentures Trustee Fees (a) On or prior to the Effective Date, the Subordinated Notes indentures Trustee shall submit to the Debtors, Second Lien Group and Creditors’ Committee its invoices with such documentation as is reasonably necessary (and subject to all applicable privileges) to support payment of the Subordinated Notes Indentures Trustee Fees. Any objection to the Subordinated Notes Indentures Trustee Fees must be delivered in writing, containing reasonable specificity as to the nature of the objected-to fees, to each of the Subordinated Notes Indentures Trustee, Debtors, Second Lien Group and Creditors’ Committee within seven Business Days after the submission of such invoice and documentation. (b) If no such objection is delivered, then the Reorganized Debtors shall as soon as practicable thereafter, subject to the terms of this Article IV.D.7, reimburse the Subordinated Notes Indentures Trustee in Cash for the Subordinated Notes Indentures Trustee Fees; provided, however, that in exchange for such payment, the Subordinated Notes Indentures Trustee shall not assert a possessory lien for the same on any distributions provided to and retained by holders of Allowed Class 3 Senior Notes Claims under the Plan; provided, further, however that the Subordinated Notes Indentures Trustee reserves all other rights or arguments to payment other than asserting a possessory lien on any such distributions, and nothing in this Article IV.D.7 or elsewhere in the Plan shall affect or diminish those rights. (c) The Debtors or Reorganized Debtors, as the case may be, the Second Lien Group and the Creditors’ Committee shall not object to that portion of the Subordinated Notes Indentures Trustee Fees that is $1,020,000 or less. (d) The Debtors or Reorganized Debtors, as the case may be, may not pay that portion of the Subordinated Notes Indentures Trustee Fees to which the Debtors, Second Lien Group or Creditors’ Committee has so objected without either: (i) the consent of each of the Subordinated Notes Indentures Trustee, Second Lien Group and the Creditors’ Committee; or (ii) if such consent is not forthcoming, a further order of the Bankruptcy Court upon a motion by the Subordinated Notes Indentures Trustee. 8. Convertible Subordinated Indenture Trustee Fees (a) On or prior to the Effective Date, the Convertible Subordinated Indenture Trustee shall submit to the Debtors, Second Lien Group and the Creditors’ Committee its invoices with such documentation as is reasonably necessary (and subject to all applicable privileges) to support payment of the Convertible Subordinated Indenture Trustee Fees. Any objection to the Convertible Subordinated Indenture Trustee Fees must be delivered in writing, containing reasonable specificity as to the nature of the objected-to fees, to each of the Convertible Subordinated Indenture Trustee, Debtors, Second Lien Group and Creditors’ Committee within seven Business Days after the submission of such invoice and documentation. (b) If no such objection is delivered, then the Reorganized Debtors shall as soon as practicable thereafter, subject to the terms of this Article IV.D.8, reimburse the Convertible Subordinated Indenture Trustee in Cash for the Convertible Subordinated Indenture Trustee Fees; provided, however, that in exchange for such payment, the Convertible Subordinated Indenture Trustee shall not assert a possessory lien for the same on any distributions provided

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to and retained by holders of Allowed Class 3 Senior Notes Claims under the Plan; provided, further, however that the Convertible Subordinated Indenture Trustee reserves all other rights or arguments to payment other than asserting a possessory lien on any such distributions, and nothing in this Article IV.D.8 or elsewhere in the Plan shall affect or diminish those rights. (c) The Debtors or Reorganized Debtors, as the case may be, Second Lien Group and the Creditors’ Committee shall not object to that portion of the Convertible Subordinated Indenture Trustee Fees that is $425,000 or less. (d) The Debtors or Reorganized Debtors, as the case may be, may not pay that portion of the Convertible Subordinated Indenture Trustee Fees to which the Debtors, Second Lien Group or Creditors’ Committee has so objected without either: (i) the consent of each of the Convertible Subordinated Indenture Trustee, Second Lien Group and the Creditors’ Committee; or (ii) if such consent is not forthcoming, a further order of the Bankruptcy Court upon a motion by the Convertible Subordinated Indenture Trustee. E. Issuance of New Securities 1. On or about the Effective Date, New Dura shall issue or reserve for issuance all securities required to be issued pursuant hereto. 2. On or before the Effective Date, new Dura shall make a capital contribution of Convertible Preferred Stock and Common Stock to New Dura Holdings, which shares shall then be contributed to New Dura Opco. 3. After being exchanged for substantially all of the assets of Dura Operating Corporation, the New Common Stock and Convertible Preferred Stock shall be held through DTC and not distributed in the form of certified stock to the extent possible. 4. Securities Registration Exemptions (a) The U.S. Unsecured Creditor Equity Distribution and the Second Lien Distribution are exempt from registration under applicable securities law to the maximum extent permitted by section 1145 of the Bankruptcy Code. (b) The shares of New Common Stock reserved for the Management Equity Incentive Program will be exempt from registration under the Securities Act of 1933 by virtue of section 4(2) thereof or Regulation D promulgated thereunder. 5. The New Common Stock is subject to dilution by conversion of the Convertible Preferred Stock. 6. New Dura shall be a publicly reporting company under the Securities Exchange Act of 1934, as amended. F. Creation of Retained Professional Escrow Account On the Effective Date, the Reorganized Debtors shall establish an escrow account, funded and maintained by the Reorganized Debtors, with the amount necessary to ensure the payment of all Accrued Professional Compensation. G. Corporate Governance, Directors and Officers, and Corporate Action 1. Corporate Action (a) Prior to, on or after the Effective Date, as applicable, all matters provided for hereunder that would otherwise require approval of the shareholders, members, managers, partners or directors of the Debtors or Reorganized

304


Debtors shall be deemed to have been so approved and shall be in effect prior to, on or after the Effective Date, as applicable, pursuant to applicable state law, including the general corporation law of the state of Delaware, without any requirement of further action by shareholders, members, directors, managers or partners of the Debtors or Reorganized Debtors. (b) The Debtors and the Reorganized Debtors are authorized to execute, deliver, file or record such contracts, instruments, releases and other agreements or documents and take such actions as may be necessary or appropriate to effectuate, implement and further evidence the terms and conditions hereof and the securities issued pursuant hereto, including, on the Effective Date, the adoption and filing (as necessary) of the New Organizational Documents, the appointment of directors, officers, managers, members and partners for the Reorganized Debtors, consummation of the New Money Second Lien Loan, consummation of the Exit Credit Facility, and all actions contemplated thereby. (c) The New Organizational Documents shall, among other things: (a) authorize the issuance of New Common Stock and Convertible Preferred Stock; and (b) prohibit the issuance of non-voting securities pursuant to section 1123(a)(6) of the Bankruptcy Code. 2. Directors and Officers of the Reorganized Debtors (a) The composition of the New Board shall be as set forth in the Plan Supplement. (b) The Debtors will disclose in the Plan Supplement, to the extent known: (i) the identity of New Board members; and (ii) the nature of any compensation for any member of the New Board who is an “insider” (as that term is defined in section 101(31) of the Bankruptcy Code). (c) The directors, managers, officers and members of the remaining Reorganized Debtors shall be appointed by the New Board on the Effective Date. The Debtors’ current management will continue as the management of the Reorganized Debtors, subject to review of the New Board. Each such director, manager, partner, officer and member shall serve from and after the Effective Date pursuant to the terms of the New Organizational Documents and applicable state corporation law.

H. New Money Second Lien Loan, Alternative Transactions, and Exit Financing 1. On the Effective Date, New Dura, as a borrower, and certain of the Reorganized Debtors, as guarantors, will consummate the Exit Credit Facility. 2. On the Effective Date, New Dura, as a borrower, and certain of the Reorganized Debtors, as guarantors, will consummate the New Money Second Lien Loan. 3. Notwithstanding Article IV.H.2, the Debtors, in the exercise of their fiduciary duties and after consultation with the Second Lien Group and the Creditors’ Committee, may consummate on the Effective Date an alternative transaction that renders the New Money Second Lien Loan, Commitment Letter or Exit Credit Facility no longer practicable if it: (a) constitutes a higher or better offer; (b) results in more favorable economic or other treatment to holders of General Unsecured Claims or Second Lien Facility Claims; and (c) is approved

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by the Bankruptcy Court on or prior to the date of entry of the Confirmation Order. 4. From and after the Effective Date, the Reorganized Debtors shall have the right and authority without further order of the Bankruptcy Court to raise additional capital and obtain additional financing as the boards of directors, managers or members, as the case may be, of the applicable Reorganized Debtors deem appropriate. ARTICLE V. TREATMENT OF EXECUTORY CONTRACTS, UNEXPIRED LEASES, AND DEFINED BENEFIT PENSION PLANS A. Assumption and Rejection of Executory Contracts and Unexpired Leases 1. Any executory contracts and unexpired leases that are listed in the Plan Supplement as executory contracts or unexpired leases to be assumed, or are to be assumed pursuant to the terms hereof, shall be deemed assumed by the Debtors as of immediately prior to the Effective Date, and the entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of any such assumptions pursuant to sections 365(a) and 1123 of the Bankruptcy Code. 2. Any executory contracts and unexpired leases that have not expired by their own terms on or prior to the Effective Date, which the Debtors have not assumed or rejected during the pendency of the Chapter 11 Cases, which are not listed in the Plan Supplement as executory contracts or unexpired leases to be assumed, which are not to be assumed pursuant to the terms hereof, and that are not the subject of a motion pending as of the Effective Date to assume the same, shall be deemed rejected by the Debtors as of immediately prior to the Petition Date, and the entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of any such rejections pursuant to sections 365(a) and 1123 of the Bankruptcy Code. B. Claims Based on Rejection of Executory Contracts or Unexpired Leases All proofs of claim arising from the rejection of executory contracts or unexpired leases must be filed within thirty (30) days after the earlier of: (1) the date of entry of an order of the Bankruptcy Court approving any such rejection; and (2) the Effective Date. Any Claims arising from the rejection of an executory contract or unexpired lease for which proofs of claim are not timely filed within that time period will be forever barred from assertion against the Debtors, Reorganized Debtors, Estates, their successors and assigns, and their assets and properties, unless otherwise ordered by the Bankruptcy Court or as otherwise provided herein. All such Claims shall, as of the Effective Date, be subject to the discharge and permanent injunction set forth in Article IX.E and Article IX.F. C. Cure of Defaults for Executory Contracts and Unexpired Leases Assumed Pursuant to the Plan Any monetary amounts by which any executory contract and unexpired lease to be assumed pursuant to the Plan or otherwise is in default shall be

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satisfied, pursuant to section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in Cash on or as soon as practicable after the Effective Date or on such other terms as the parties to each such executory contract or unexpired lease may otherwise agree. In the event of a dispute regarding the amount of a cure payment, “adequate assurance of future performance” (within the meaning of section 365 of the Bankruptcy Code), or any other matter pertaining to assumption: (1) the Debtors or Reorganized Debtors, as the case may be, retain the right to reject the applicable executory contract or unexpired lease at any time prior to the resolution of the dispute; (2) cure payments shall only be made following the entry of a Final Order resolving the dispute. D. Indemnification of Directors, Officers and Employees As of the Effective Date, all indemnification provisions currently in place (whether in the bylaws, certificates of incorporation, articles of limited partnership, operating agreements, board resolutions, contracts or otherwise) for the current and former directors, managers, members, officers, employees, attorneys, financial advisors, other professionals and agents of the Debtors and their respective Affiliates shall be deemed to have been assumed by the Reorganized Debtors, and shall survive effectiveness of the Plan. E. Assumption of D&O Insurance Policies 1. As of the Effective Date, the Reorganized Debtors shall be deemed to have assumed all of the Debtors’ unexpired directors’ and officers’ liability insurance policies pursuant to section 365(a) of the Bankruptcy Code. Entry of the Confirmation Order will constitute the Bankruptcy Court’s approval of the Reorganized Debtors’ foregoing assumption of each of the unexpired directors’ and officers’ liability insurance policies, which policies shall be listed in the Plan Supplement. Notwithstanding anything to the contrary contained in the Plan, confirmation of the Plan shall not discharge, impair or otherwise modify any indemnity obligations assumed by the foregoing assumption of the unexpired directors’ and officers’ liability insurance policies, and each such indemnity obligation will be deemed and treated as an executory contract that has been assumed by the Debtors under the Plan as to which no proof of claim need be filed. 2. On or before the Effective Date, the Debtors shall obtain sufficient tail coverage for a period of six (6) years under a directors’ and officers’ insurance policy for current and former officers and directors of the Debtors. F. Compensation and Benefit Programs 1. Notwithstanding Article V.A, all Compensation and Benefits Programs, except the Pension Plans, which the Reorganized Debtors will continue to sponsor and maintain unless terminated prior to entry of the Confirmation Order, shall be treated as executory contracts under the Plan and deemed assumed on the Effective Date pursuant to the provisions of sections 365 and 1123 of the Bankruptcy Code, except for: (a) Compensation and Benefits Programs specifically rejected pursuant to the Plan (to the extent that any such rejection does not violate the Bankruptcy Code, including, but not limited to, sections 1114 and 1129(a)(13) thereof);

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(b) all employee equity or equity-based incentive plans; (c) Compensation and Benefits Programs listed in the Plan Supplement as executory contracts to be rejected; (d) Compensation and Benefits Programs that have previously been rejected; and (e) Compensation and Benefits Programs that as of the entry of the Confirmation Order, are the subject of pending rejection procedures or a motion to reject, or have been specifically waived by the beneficiaries of any employee benefit plan or contract. 2. Any assumption of Compensation and Benefits Programs pursuant to this Article V.F shall be deemed effected without regard to the occurrence of the assumption, Effective Date or consummation of any transaction contemplated hereby or during the Chapter 11 Cases, without triggering any applicable change of control, immediate vesting, termination, or similar provisions therein (unless a Compensation and Benefits Program counterparty timely objects to the assumption contemplated by this Article V.F.2, in which case any such Compensation and Benefits Program shall be deemed rejected as of immediately prior to the Petition Date). No counterparty shall have rights under a Compensation and Benefits Program assumed pursuant to this Article V.F other than those applicable immediately prior to such assumption. 3. Notwithstanding anything to the contrary in this Article V.F, the Reorganized Debtors’ obligations, if any, to pay all “retiree benefits” (as that term is defined in section 1114(a) of the Bankruptcy Code) shall continue unless, and to the extent that, any such retiree benefits have been modified in accordance with section 1114 of the Bankruptcy Code. 4. Notwithstanding anything to the contrary herein, in the event that the Pension Plans do not terminate prior to the entry of the Confirmation Order, all Claims of, or with respect to, the Pension Plans (including any based on fiduciary duties under the Employee Retirement Income Security Act of 1974 (as amended), and those of the Pension Benefit Guaranty Corporation, whether or not contingent, under 29 U.S.C. § 1362(b) for unfunded benefit liabilities, under 29 U.S.C. § 1306(a)(7) for termination premiums, and under 29 U.S.C. § 1362(c) for due and unpaid employer contributions) shall not be discharged, released, exculpated or otherwise affected by the Plan (including Article IX), entry of the Confirmation Order or the Chapter 11 Cases. Notwithstanding anything to the contrary herein, in the event that the Pension Plans do not terminate prior to the entry of the Confirmation Order, obligations of the Debtors under the Pension Plans as of the Effective Date shall become obligations of the Reorganized Debtors and controlled group members. 5. The Plan Supplement shall contain a non-exclusive list of Compensation and Benefits Programs to be assumed pursuant to this Article V.F. G. Collective Bargaining Agreements Notwithstanding Article V.A, all unexpired collective bargaining agreements shall be treated as executory contracts under the Plan and deemed assumed on the Effective Date pursuant to the provisions of sections 365 and 1123 of the Bankruptcy Code, except for collective bargaining agreements: (1) specifically assumed and assigned pursuant to an order of the Bankruptcy Court; (2) as of the entry of the Confirmation Order, are the subject of pending assumption or

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rejection procedures or a motion to assume or reject; or (3) as of the entry of the Confirmation Order, are the subject of pending settlement proceedings or a motion to authorize a settlement. H. Workers’ Compensation Programs As of the Effective Date, the Debtors and the Reorganized Debtors shall continue to honor their obligations under: (1) all applicable workers’ compensation laws in states in which the Reorganized Debtors operate; and (2) the Debtors’ written contracts, agreements, agreements of indemnity, self-insurer workers’ compensation bonds, policies, programs, and plans for workers’ compensation and workers’ compensation insurance. All proofs of Claim on account of workers’ compensation shall be deemed withdrawn automatically and without any further notice to or action, order, or approval of the Bankruptcy Court; provided, however, that nothing in the Plan shall limit, diminish, or otherwise alter the Debtors’ or Reorganized Debtors’ defenses, Causes of Action, or other rights under applicable non-bankruptcy law with respect to any such contracts, agreements, policies, programs, and plans; provided, further, however that nothing herein shall be deemed to impose any obligations on the Debtors in addition to what is provided for under applicable state law. ARTICLE VI. PROVISIONS GOVERNING DISTRIBUTIONS A. Distributions for Claims Allowed as of the Effective Date Except as otherwise provided herein or as may be ordered by the Bankruptcy Court, the Debtors, or the Reorganized Debtors, as the case may be, shall make distributions on the Effective Date or as soon as reasonably practicable thereafter on account of all Allowed Claims that are entitled to receive distributions under the Plan, and shall make further distributions to holders of Claims that subsequently are determined to be Allowed Claims provided, however, that Allowed DIP Facility Claims shall be paid in Cash, in full, on or prior to the Effective Date. For purposes of determining the accrual of interest or rights in respect of any other payment from and after the Effective Date, the New Common Stock and Convertible Preferred Stock to be issued under the Plan shall be deemed issued as of the Effective Date regardless of the date on which they are actually dated or distributed. B. Pro Rata Distributions Distributions allocated on a pro rata basis shall be calculated based solely on Allowed Claims. C. Delivery of Distributions 1. Delivery of Distributions (a) Distributions to holders of Allowed Claims, other than Allowed Canadian General Unsecured Claims, shall be made through DTC to the Nominee of the holder of such Claim to the extent possible; provided, however, that the manner of such distributions shall be determined at the reasonable discretion of the Debtors or Reorganized Debtors, as the case may be.

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(b) For distribution delivery purposes only, the Debtors shall identify the Nominee for holders of Allowed Other General Unsecured Claims and Second Lien Facility Claims in the Plan Supplement. (c) The Claims and Solicitation Agent shall make all distributions of Cash to holders of Allowed Canadian General Unsecured Claims. 2. Address of Record The address of the holder of a Claim shall be, for purposes of distributions made pursuant to the Plan, the address set forth in any proof of Claim filed by such holder, or, in the absence of such a proof of Claim, the address set forth in the Debtors’ or Reorganized Debtors’ books and records. 3. Undeliverable Distributions (a) Holding of Certain Undeliverable Distributions If any distribution to a holder of an Allowed Claim is returned to the Reorganized Debtors as undeliverable, no further distributions shall be made to such holder unless and until the Reorganized Debtors are notified in writing of such holder’s then-current address. Undeliverable distributions shall remain in the possession of the Reorganized Debtors, subject to Article VI.C.3(b), until such time as any such distributions become deliverable. Undeliverable Cash shall not be entitled to any interest, dividends or other accruals of any kind. As soon as reasonably practicable, the Reorganized Debtors shall make all distributions that become deliverable. (b) Failure to Claim Undeliverable Distributions In an effort to ensure that all holders of Allowed Claims receive their allocated distributions, the Reorganized Debtors will file with the Bankruptcy Court sixty (60) days after the Effective Date a listing of the holders of undeliverable distributions. This list will be maintained for as long as the bankruptcy case stays open. Any holder of an Allowed Claim, irrespective of when a Claim became an Allowed Claim, that does not assert a Claim pursuant hereto for an undeliverable distribution (regardless of when not deliverable) within the later of (i) one (1) year after the Effective Date, and (ii) sixty (60) days after the date such Claim becomes an Allowed Claim, shall have its Claim for such undeliverable distribution discharged and shall be forever barred from asserting any such Claim against the Reorganized Debtors or their property. In such cases: (i) any Cash held for distribution on account of such Claims shall be property of the Reorganized Debtors, free of any restrictions thereon; and (ii) any New Common Stock or Convertible Preferred Stock reserved for issuance on account of such Claims shall be canceled and of no further force or effect. Nothing contained herein shall require the Reorganized Debtors to attempt to locate any holder of an Allowed Claim. 4. Distributions Withheld for Disputed Claims The Debtors shall reserve Cash or New Common Stock, as applicable, from distributions to holders of Allowed Senior Notes Claims and Allowed Other General Unsecured Claims equal to the distributions to which holders of Disputed Other General Unsecured Claims would be entitled if such Disputed Other General Unsecured Claims become Allowed Claims. 5. Compliance with Tax Requirements/Allocations In connection with the Plan, to the extent applicable, the Reorganized Debtors shall comply with all tax withholding and reporting requirements imposed on them by any governmental unit, and all distributions pursuant

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hereto shall be subject to such withholding and reporting requirements. For tax purposes, distributions received by holders in full or partial satisfaction of Allowed Claims will be allocated first to unpaid interest that accrued on such Claims, with any excess allocated to the principal amount of Allowed Claims. D. Timing of Distributions Distributions shall be made on the dates set forth in Article II, Article III, and Article VII. E. Minimum Distribution Any other provision of the Plan notwithstanding, the Debtors or Reorganized Debtors, as the case may be, will not be required to make distributions of Cash, New Common Stock or Convertible Preferred Stock less than $50 in value, and each such Claim to which this limitation applies shall be discharged pursuant to Article IX.E, and its holder forever barred pursuant to Article IX.F from asserting that Claim against the Reorganized Debtors or their property. F. Setoffs The Debtors and the Reorganized Debtors may, pursuant to section 553 of the Bankruptcy Code or applicable non-bankruptcy law, set off against any Allowed Claim and the distributions to be made pursuant hereto on account of such Allowed Claim (before any distribution is made on account of such Allowed Claim), the equity interests, rights and Causes of Action of any nature that the Debtors or the Reorganized Debtors may hold against the holder of any such Allowed Claim; provided that neither the failure to effect such a setoff nor the allowance of any Claim hereunder shall constitute a waiver or release by the Debtors or the Reorganized Debtors of any such equity interests, rights and Causes of Action that the Debtors or the Reorganized Debtors may possess against any such holder, except as specifically provided herein. ARTICLE VII. PROCEDURES FOR RESOLVING DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS OR EQUITY INTERESTS A. Resolution of Disputed Claims 1. Prosecution of Claims Objections and Required New Board Approvals (a) The Debtors, prior to the Effective Date, and thereafter the Reorganized Debtors, shall have the exclusive authority to file objections on or before the Claims Objection Bar Date, settle, compromise, withdraw or litigate to judgment objections to any and all Claims, regardless of whether classified or otherwise, and to seek subordination of any Claim pursuant to section 510 of the Bankruptcy Code or any other authority. From and after the Effective Date, the Reorganized Debtors may settle or compromise any Cause of Action or Claim without any further notice to or approval of the Bankruptcy Court. (b) No Disputed Other General Unsecured Claim of S100,000 or more shall be settled or compromised by the Reorganized Debtors without the specific approval of the New Board.

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2. Claims Estimation The Debtors or Reorganized Debtors may, at any time, request that the Bankruptcy Court estimate any contingent or unliquidated Claim 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 Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court will retain jurisdiction to estimate any Claim at any time during litigation concerning any objection to any Claim, including during the pendency of any appeal relating to any such objection in the event that the Bankruptcy Court estimates any contingent or unliquidated Claim, that estimated amount will constitute either the Allowed amount of such Claim or a maximum limitation on such Claim, as determined by the Bankruptcy Court. If the estimated amount constitutes a maximum limitation on such Claim, the Debtors or the Reorganized Debtors may elect to pursue any supplemental proceedings to object to any ultimate payment on such Claim. All of the aforementioned Claims and objection, estimation and resolution procedures are cumulative and not necessarily exclusive of one another. Claims may be estimated and subsequently compromised, settled, withdrawn or resolved by any mechanism approved by the Bankruptcy Court. 3. Payments and Distributions on Disputed Claims Notwithstanding any provision herein to the contrary, except as otherwise agreed by the Reorganized Debtors in their sole discretion, no partial payments and no partial distributions will be made with respect to a Disputed Claim until the resolution of any such disputes by settlement or Final Order. On the date or, if such date is not a Business Day, on the next successive Business Day that is twenty (20) calendar days after the end of the calendar quarter in which a Disputed Claim becomes an Allowed Claim, the holder of such Allowed Claim will receive all payments and distributions to which that holder is then entitled under the Plan. Notwithstanding the foregoing, any holder of both an Allowed Claim and a Disputed Claim in the same Class of Claims will not receive payment or distribution in satisfaction of any such Allowed Claim, except as otherwise agreed by the Reorganized Debtors in their sole discretion or ordered by the Bankruptcy Court, until all such Disputed Claims are resolved by settlement or Final Order. In the event that there are Claims that require adjudication or other resolution, the Debtors and Reorganized Debtors reserve the right to, or shall upon an order of the Bankruptcy Court, establish appropriate reserves for potential payment of any such Claims. B. Claims Allowance Except as expressly provided herein or in any order entered in the Chapter 11 Cases prior to the Effective Date (including the Confirmation Order), no Claim shall be deemed Allowed unless and until such Claim is deemed Allowed under the Plan or the Bankruptcy Code or the Bankruptcy Court has entered a Final Order (including the Confirmation Order) in the Chapter 11 Cases allowing such Claim. Except as expressly provided in the Plan or any order entered in the Chapter 11 Cases prior to the Effective Date (including the Confirmation Order), the Reorganized Debtors will have and shall retain after the Effective Date any and all rights and defenses that the Debtors had with respect to any Claim as of the Petition Date. All Claims of any Entity subject to section 502(d)

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of the Bankruptcy Code shall be deemed disallowed as of the Effective Date unless and until such Entity pays in full the amount that it owes such Debtor or Reorganized Debtor, as the case may be.

C. Allowed Claims Entry of the Confirmation Order shall deem, for all purposes in the Chapter 11 Cases; (1) DIP Facility Claims to be Allowed DIP Facility Claims in the outstanding amount due and owing under each DIP Facility as of the Effective Date, including, without limitation, all Obligations as such term is defined in each DIP Facility and shall include the principal of, interest on, fees and other charges owing in respect of such amounts (including without limitation, all indemnity claims not yet due and owing, all reasonable attorneys’, accountants, financial advisors’ and other fees and expenses that are chargeable or reimbursable under each DIP Facility) and Obligations in respect of letters of credit, if any, pursuant to the Final DIP Orders, as of the Effective Date; (2) Second Lien Facility Claims to be Allowed Second Lien Facility Claims in the amount of $225,000,000, plus outstanding interest at the Base Rate accruing since the Petition Date, fees and expenses payable, but not otherwise paid, as of the Effective Date; (3) Senior Notes Claims to be Allowed Senior Notes Claims in the amount of $418,687,500; (4) Subordinated Notes Claims to be Allowed Subordinated Notes Claims in the amount of $560,718,785; and (5) Convertible Subordinated Debentures Claims to be Allowed Convertible Subordinated Debentures Claims in the amount of $58,336,856. Notwithstanding anything else herein to the contrary, the professional fees and expenses of the advisors to the Second Lien Group, as well as the Prepetition Second Priority Agents (including contractual agent fees and the fees and expenses of lead and local counsel) shall continue to be paid in full, in cash as provided in the Final DIP Orders.

ARTICLE VIII. CONDITIONS PRECEDENT TO THE EFFECTIVE DATE A. Conditions Precedent to the Effective Date The following are conditions precedent to the Effective Date that must be satisfied or waived in accordance with Article VIII.B: 1. The New Organizational Documents shall have been, as applicable: (a) delivered or tendered for delivery; (b) executed; (c) consummated; and/or (d) filed. 2. The New Board shall have been appointed in accordance with Article IV.G.2(a). 3. The New Money Second Lien Loan shall have been consummated. 4. The Exit Credit Facility shall have been consummated. 5. The Canadian Recognition Order shall have been issued; provided, however, that entry of the Canadian Recognition Order shall only be a condition to the Effective Date with regard to those Debtors incorporated, formed or otherwise organized under Canadian law.

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B. Waiver of Conditions The Debtors may, at any time, with the consent of the Creditors’ Committee and the Second Lien Group, which consent shall not be unreasonably withheld, waive any of the conditions to the Effective Date set forth in Article VIII.A without notice to or order of the Bankruptcy Court. C. Non-Occurrence of Conditions If the Effective Date does not occur on or before August 31, 2008, or such other later date as the Debtors, in consultation with the Creditors’ Committee and Second Lien Group may determine upon notice to the Bankruptcy Court, the Plan shall be null and void in all respects, and nothing contained in the Plan or the Disclosure Statement shall: (1) constitute a waiver or release of any Cause of Action or Claim; (2) constitute an admission, acknowledgment, offer or undertaking in any respect by any party, including the Debtors; or (3) otherwise prejudice in any manner the rights of any party, including the Debtors. ARTICLE IX. RELEASE, INJUNCTIVE AND RELATED PROVISIONS A. Compromise and Settlement Pursuant to section 363 of the Bankruptcy Code and Fed.R.Bankr.P. 9019, and in consideration for the distributions and other benefits provided pursuant to the Plan, the provisions of the Plan shall constitute a good faith compromise of all Claims and Equity Interests. The entry of the Confirmation Order shall constitute the Bankruptcy Court’s approval of the compromise or settlement of all Claims and Equity Interests, as well as a finding by the Bankruptcy Court that such compromise or settlement is fair, equitable, reasonable, and in the best interests of the Debtors, Estates, and holders of Claims and Equity Interests. B. Releases 1. Releases by the Debtors. Notwithstanding anything contained in the Plan to the contrary, as of the Effective Date, for the good and valuable consideration provided by each of the Releasees, including, but not limited to: (a) the discharge of debt and all other good and valuable consideration paid pursuant to the Plan or otherwise; and (b) the services of the Debtors’ present and former officers and directors in facilitating the expeditious implementation of the restructuring contemplated by the Plan, and in view of the indemnification pursuant to Article V.D; each of the Debtors hereby provides a full discharge and release to the Releasees (and each such Releasee so released shall be deemed released and discharged by the Debtors) and their respective properties from any and all Claims, Causes of Action and any other debts, obligations, rights, suits, damages, actions, remedies, and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, existing as of the Effective Date or thereafter arising, in law, at equity, whether for tort, contract, violations of federal or state securities laws, or otherwise, based in whole or in part upon any act or omission, transaction, or other occurrence or circumstances existing or taking place prior to or on the Effective Date arising from or related in any way to

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the Debtors, including, without limitation, those that any of the Debtors or the Reorganized Debtors would have been legally entitled to assert (whether individually or collectively) or that any holder of a Claim or Equity Interest or other Entity would have been legally entitled to assert for or on behalf of any of the Debtors or Estates and further including those in any way related to the Commitment Letter, Exit Facility, New Money Second Lien Loan, New Organizational Documents, Chapter 11 Cases, the Original Plan or the Plan; provided, however, that the foregoing provisions of this Article IX.B.1 shall not operate to waive or release from any Causes of Action expressly set forth in and preserved by the Plan or Plan Supplement or any defenses thereto; provided, further, however that the foregoing provisions of this Article IX.B.1 shall not operate to waive or release any Causes of Action accrued by the Debtors in the ordinary course of business against holders of Other General Unsecured Claims. 2. Third Party Release. Notwithstanding anything contained in the Plan to the contrary, as of the Effective Date, the Releasing Parties hereby provide a full discharge and release (and each Entity so released shall be deemed released by the Releasing Parties) to the Releasees and each of their respective Representatives (each of the foregoing in its individual capacity as such), and their respective property from any and all Claims, Causes of Action and any other debts, obligations, rights, suits, damages, actions, remedies, and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, existing as of the Effective Date or thereafter arising, in law, at equity, whether for tort, contract, violations of federal or state securities laws, or otherwise, based in whole or in part upon any act or omission, transaction, or other occurrence or circumstances existing or taking place prior to or on the Effective Date arising from or related in any way to the Debtors, including those in any way related to formulating, negotiating, preparing, disseminating, implementing, administering, confirming or consummating the Plan, Original Plan, Disclosure Statement, Commitment Letter, New Organizational Documents, New Money Second Lien Loan, Exit Credit Facility or any other contract, instrument, release or other agreement or document created or entered into in connection with the Plan, or any other postpetition act taken or omitted to be taken in connection with or in contemplation of the restructuring of the Debtors; provided, however, that the foregoing provisions of this Article IX.B.2 shall not operate to waive or release any of the Claims, Causes of Action or other obligations expressly set forth in and preserved by the Plan or Plan Supplement or any defenses thereto; provided, further, however, that the foregoing provisions of this Article IX.B.2 shall not operate to waive or release any Allowed Claims of Releasing Parties treated under the Plan. 3. Entry of the Confirmation Order shall constitute the Bankruptcy Court’s approval of the releases set forth in this Article IX.B pursuant to Fed.R.Bankr.P. 9019 and its finding that they are: (a) in exchange for good and valuable consideration, representing a good faith settlement and compromise of the Claims and Causes of Action thereby released; (b) in the best interests of the Debtors and all holders of Claims; (c) fair, equitable, and reasonable; (d) approved after due notice and opportunity for hearing; and (e) a bar to any of the Debtors, Reorganized Debtors or Releasing Parties asserting any Claim or Cause of Action thereby released.

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C. Exculpation Notwithstanding anything contained in the Plan to the contrary, the Exculpated Parties shall neither have nor incur any liability to any Entity for any and all Claims, Causes of Action and any other debts, obligations, rights, suits, damages, actions, remedies, and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, existing as of the Effective Date or thereafter arising, in law, at equity, whether for tort, contract, violations of federal or state securities laws, or otherwise, based in whole or in part upon any act or omission, transaction, or other occurrence or circumstances existing or taking place prior to or on the Effective Date arising from or related in any way to the Debtors, including, without limitation, those that any of the Debtors or the Reorganized Debtors would have been legally entitled to assert (whether individually or collectively) or that any holder of a Claim or Equity Interest or other Entity would have been legally entitled to assert for or on behalf of any of the Debtors or Estates and further including those in any way related to the Commitment Letters, New Organizational Documents, Chapter 11 Cases, the Original Plan, or the Plan arising on or after the Petition Date, including any act taken or omitted to be taken in connection with, or related to, formulating, negotiating, preparing, disseminating, implementing, administering, confirming or consummating the Plan, New Money Second Lien Loan, Exit Credit Facility, the Disclosure Statement, New Organizational Documents, Commitment Letters, DIP Facility, or any other contract, instrument, release or other agreement or document created or entered into in connection with the Plan, Original Plan or any other postpetition act taken or omitted to be taken in connection with or in contemplation of the restructuring of the Debtors; provided, however, that the foregoing provisions of this Article IX.C shall have no effect on the liability of any Entity that results from any such act or omission that is determined in a Final Order to have constituted gross negligence or willful misconduct; provided, further, however that each Exculpated Party shall be entitled to rely upon the advice of counsel concerning its duties pursuant to, or in connection with, the above referenced documents; provided, further, however that the foregoing provisions of this Article IX.C shall not apply to any acts, omissions, Claims, Causes of Action or other obligations expressly set forth in and preserved by the Plan or Plan Supplement or any defenses thereto.

D. Preservation of Rights of Action 1. Vesting of Causes of Action (a) Except as otherwise provided in the Plan or Confirmation Order, in accordance with section 1123(b)(3) of the Bankruptcy Code, any Causes of Action that the Debtors may hold against any Entity shall vest upon the Effective Date in the Reorganized Debtors. (b) Except as otherwise provided in the Plan or Confirmation Order, after the Effective Date, the Reorganized Debtors shall have the exclusive right to institute, prosecute, abandon, settle, or compromise any Causes of Action, in their sole discretion and without further order of the Bankruptcy Court, in any court or other tribunal, including, without limitation, in an adversary proceeding filed in one or more of the Chapter 11 Cases provided, however, no

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Cause of Action of $100,000 or more shall be settled or compromised by the Reorganized Debtors without the specific approval of the New Board. (c) Causes of Action and any recoveries therefrom shall remain the sole property of the Debtors and Reorganized Debtors, as the case may be, and holders of Claims shall have no right to any such recovery. 2. Preservation of All Causes of Action Not Expressly Settled or Released (a) Unless a Cause of Action against a holder or other Entity is expressly waived, relinquished, released, compromised or settled in the Plan or any Final Order (including the Confirmation Order), the Debtors expressly reserve such Cause of Action for later adjudication by the Debtors or the Reorganized Debtors (including, without limitation, Causes of Action not specifically identified or described in the Plan Supplement or elsewhere or of which the Debtors may presently be unaware or which may arise or exist by reason of additional facts or circumstances unknown to the Debtors at this time or facts or circumstances which may change or be different from those the Debtors now believe to exist) and, therefore, no preclusion doctrine, including, without limitation, the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, waiver, estoppel (judicial, equitable or otherwise) or laches shall apply to such Causes of Action upon or after the entry of the Confirmation Order or Effective Date based on the Disclosure Statement, Plan or Confirmation Order, except where such Causes of Action have been released in the Plan (including, without limitation, and for the avoidance of doubt, the releases contained in Article IX.B.1) or any other Final Order (including the Confirmation Order). In addition, the Debtors and Reorganized Debtors expressly reserve the right to pursue or adopt any claims alleged in any lawsuit in which the Debtors are a defendant or an interested party, against any Entity, including, without limitation, the plaintiffs or co-defendants in such lawsuits. (b) Subject to the immediately preceding paragraph, any Entity to whom the Debtors have incurred an obligation (whether on account of services, purchase or sale of goods or otherwise), or who has received services from the Debtors or a transfer of money or property of the Debtors, or who has transacted business with the Debtors, or leased equipment or property from the Debtors should assume that any such obligation, transfer, or transaction may be reviewed by the Reorganized Debtors subsequent to the Effective Date and may be the subject of an action after the Effective Date, regardless of whether: (i) such Entity has filed a proof of claim against the Debtors in the Chapter 11 Cases; (ii) the Debtors or Reorganized Debtors have objected to any such Entity’s proof of claim; (iii) any such Entity’s Claim was included in the Schedules; (iv) the Debtors or Reorganized Debtors have objected to any such Entity’s scheduled Claim; or (v) any such Entity’s scheduled Claim has been identified by the Debtors or Reorganized Debtors as disputed, contingent, or unliquidated. 3. Potential Second Lien Litigation After the Effective Date: (a) the Debtors and Reorganized Debtors may not pursue the Second Lien Litigation; (b) any Cause of Action arising from or related to the Second Lien Litigation shall be relinquished, released and discharged: and (c) no other Entity, including, but not limited to, the Creditors’ Committee, Senior Notes Indenture Trustee, Subordinated Notes Indentures Trustee, Convertible Subordinated Indenture Trustee, and any holders of Claims, may maintain any action based on the Second Lien Litigation.

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4. Surviving Post-Effective Date DIP Facility Obligations Notwithstanding anything contained in this Plan, after the Effective Date, those obligations and agreements of the Debtors that expressly survive payment of the “Loans” and/or termination of “Commitments” set forth in Section 10.9 of the “Replacement Term DIP Agreement” and Section 10.9 of the “Postpetition Revolving Credit Agreement” (as each of those terms is defined in the Final DIP Orders) shall be unsecured obligations and agreements solely of the Reorganized Debtors. All such surviving obligations and agreements, for purposes of Article IX.B.2 and Article IX.C, are deemed to be expressly set forth and preserved, and no provision of Article IX.F shall enjoin or limit the enforcement thereof by any DIP Lender. Nothing herein shall prevent any DIP Lender from seeking an injunction from the Bankruptcy Court to enforce the terms of the Plan. E. Discharge of Claims and Termination of Equity Interests Except as otherwise provided herein, and irrespective of any prior orders of this or any other court of competent jurisdiction, on the Effective Date, and effective as of the Effective Date: (1) the rights afforded in the Plan and the treatment of all Claims and Equity Interests herein shall be in exchange for and in complete satisfaction, discharge and release of all Claims and Equity Interests of any nature whatsoever, including any interest accrued on such Claims from and after the Petition Date, against the Debtors and Debtors-in-Possession, or any of their assets, property or Estates; (2) the Plan shall bind all holders of Claims and Equity Interests, regardless of whether any such holders failed to vote to accept or reject the Plan or voted to reject the Plan; and (3) all Claims against and Equity Interests in the Debtors and Debtors-in-Possession shall be satisfied, discharged and released in full, and the Debtors’ liability with respect thereto shall be extinguished completely, including, without limitation, any liability of the kind specified under section 502(g) of the Bankruptcy Code; provided, however, that nothing in this Plan shall discharge any liabilities of the Debtors, or Reorganized Debtors, as the case may be, arising after the entry of the Confirmation Order or that is not otherwise a claim within the meaning of section 101(5) of the Bankruptcy Code, nor shall the Plan preclude a governmental entity from asserting any such liabilities against the Reorganized Debtors; provided, further, however that nothing in the Plan shall discharge any liability to a governmental entity under applicable environmental laws that a Reorganized Debtor or any other Entity may have as the owner or operator of real property on and after the entry of the Confirmation Order. F. Injunction 1. From and after the Effective Date, all Entities are permanently enjoined from commencing or continuing in any manner against the Debtors or Reorganized Debtors, their successors and assigns, and their assets and properties, as the case may be, any suit, action or other proceeding, on account of or respecting any Claim, demand, liability, obligation, debt, right, Cause of Action, interest or remedy released or to be released pursuant to the Plan or the Confirmation Order. 2. Except as otherwise expressly provided for in the Plan or in obligations issued pursuant to the Plan, from and after the Effective Date, all Entities

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shall be precluded from asserting against the Debtors, Debtors-in-Possession, Estates, Reorganized Debtors, their successors and assigns, and their assets and properties, any other Claims or Equity Interests based upon any documents, instruments, or any act or omission, transaction or other activity of any kind or nature that occurred prior to the Effective Date. 3. The rights afforded in the Plan and the treatment of all Claims and Equity Interests in the Plan shall be in exchange for and in complete satisfaction of Claims and Equity interests of any nature whatsoever, including any interest accrued on Claims from and after the Petition Date, against the Debtors or any of their assets or properties. On the Effective Date, all such Claims against, and Equity Interests in, the Debtors shall be satisfied and released in full. 4. Except as otherwise expressly provided for in the Plan or in obligations issued pursuant to the Plan, all Parties and Entities are permanently enjoined, on and after the Effective Date, on account of any Claim or Equity Interest satisfied and released hereby, from: (a) commencing or continuing in any manner any action or other proceeding of any kind against any Debtor or any Reorganized Debtor, their successors and assigns, and their assets and properties; (b) enforcing, attaching, collecting or recovering by any manner or means any judgment, award, decree or order against any Debtor or any Reorganized Debtor, their successors and assigns, and their assets and properties; (c) creating, perfecting, or enforcing any encumbrance of any kind against any Debtor or any Reorganized Debtor or the property or estate of any Debtor or any Reorganized Debtor; (d) asserting any right of setoff, subrogation or recoupment of any kind against any obligation due from any Debtor or any Reorganized Debtor or against the property or estate of any the Debtors or any of Reorganized Debtors, except to the extent a right to setoff, recoupment or subrogation is asserted with respect to a timely filed proof of claim; or (e) commencing or continuing in any manner any action or other proceeding of any kind in respect of any Claim or Equity Interest or Cause of Action released or settled hereunder. ARTICLE X. RETENTION OF JURISDICTION Notwithstanding the entry of the Confirmation Order and the occurrence of the Effective Date, the Bankruptcy Court shall, after the Effective Date, retain such jurisdiction over the Chapter 11 Cases and all Entities with respect to all matters related to the Chapter 11 Cases, the Debtors and the Plan as is legally permissible, including, but not limited to, jurisdiction to: 1. allow, disallow, determine, liquidate, classify, estimate or establish the priority or secured or unsecured status of any Claim or Equity Interest, including the resolution of any request for payment of any Administrative Claim and the resolution of any and all objections to the allowance or priority of Claims or Equity Interests; 2. grant or deny any applications for allowance of compensation or reimbursement of expenses authorized pursuant to the Bankruptcy Code or the Plan, for periods ending on or before the Effective Date;

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3. resolve any matters related to the assumption, assignment or rejection of any executory contract or unexpired lease to which a Debtor is party or with respect to which a Debtor may be liable and to hear, determine and, if necessary, liquidate, any Claims arising therefrom, including those matters related to any amendment to the Plan after the Effective Date pursuant to Article XI.D adding executory contracts or unexpired leases to the list of executory contracts and unexpired leases to be assumed; 4. ensure that distributions to holders of Allowed Claims are accomplished pursuant to the provisions of the Plan; 5. decide or resolve any motions, adversary proceedings, contested or litigated matters and any other matters and grant or deny any applications involving a Debtor that may be pending on the Effective Date or instituted by the Reorganized Debtors after the Effective Date, provided, however, that the Reorganized Debtors shall reserve the right to commence actions in all appropriate jurisdictions; 6. enter such orders as may be necessary or appropriate to implement or consummate the provisions of the Plan, the New Organizational Documents and all other contracts, instruments, releases, indentures and other agreements or documents adopted in connection with the Plan, Plan Supplement or the Disclosure Statement; 7. resolve any cases, controversies, suits or disputes that may arise in connection with the Effective Date, interpretation or enforcement of the Plan or any Entity’s obligations incurred in connection with the Plan; 8. resolve and determine any future indemnification claims of the DIP Lenders and DIP Agents, if any; 9. issue injunctions, enforce them, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any Entity with the Effective Date or enforcement of the Plan, except as otherwise provided in the Plan; 10. enforce Article IX.A, Article IX.B.2 and Article IX.C; 11. enforce the Injunction set forth in Article IX.F; 12. resolve any cases, controversies, suits or disputes with respect to the releases, injunction and other provisions contained in Article IX, and enter such orders as may be necessary or appropriate to implement or enforce all such releases, injunctions and other provisions; 13. enter and implement such orders as necessary or appropriate if the Confirmation Order is modified, stayed, reversed, revoked or vacated; 14. resolve any other matters that may arise in connection with or relate to the Plan, the Disclosure Statement, the Confirmation Order or any contract, instrument, release, indenture or other agreement or document adopted in connection with the Plan or the Disclosure Statement; and 15. enter an order and/or the decree contemplated in Fed.R.Bankr.P. 3022 concluding the Chapter 11 Cases.

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Disclosure Statement Review Checklist

Objective. Section 6.26(d) in Volume 1 of Bankruptcy and Insolvency Accounting contains a discussion of the content of the disclosure statement. The U.S. Trustee’s Office of the Central District of California has provided the following checklist of items that should be included in the disclosure statement. When used as a guideline, the checklist represents all items that should be included; a disclosure statement is not necessarily deficient if some of the items are not present. The exact content will depend on factors such as the nature of the debtor’s business and the type of plan being developed. GUIDE TO PREPARATION OF DISCLOSURE STATEMENTS (“DISCLOSURE STATEMENT GUIDE”) Under § 1125 of the Bankruptcy Code (11 U.S.C. § 101 et seq., the “Code”), the bankruptcy court is required to determine whether a disclosure statement contains adequate information. One of the statutory responsibilities of the United States Trustee is to comment to the court with respect to the adequacy of disclosure statements. 28 U.S.C. § 586(a)(3)(B). The following is a list of informational items that the United States Trustee normally expects to see in an adequate disclosure statement. 1 Purpose of the Disclosure Statement: Explain that the purpose of the disclosure statement is to provide adequate information to enable a hypothetical reasonable member of a class of creditors or shareholders to make an informed judgment concerning the plan. The statement should not resort to “boilerplate” language that disclaims all of the assumptions and dollar amounts contained in the disclosure statement. Such a disclaimer is not only confusing, but undermines the effectiveness of the statement. 2 Description of the Debtor: Describe the debtor and the debtor’s business, including a brief narrative description of the reasons for the debtor’s financial difficulties and the steps taken to alleviate the situation since the inception of the case. The description should address any factors that may be unusual or peculiar to the business, such as seasonal cycles and unique product lines. 3 Management: Disclose the identities of top management, their qualifications and salary levels. Include the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer or voting trustee of the debtor, or any affiliate of the debtor participating in a joint plan with the debtor, or a successor to the debtor under the plan, specifically noting the identity of any insider who will be employed by the reorganized debtor. 4 Description of the Plan: Describe the major provisions of the plan, including each class of creditors, the approximate dollar amount of the claims in each class, and the treatment of unclassified claims (unsecured taxes and administrative expenses). Include an estimated date by which creditors can expect to receive payment and the expected percentage return

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on their claims. The description does not have to be detailed and may refer to the plan. Insider and Affiliate Claims: Disclose the claims asserted by insiders as defined by § 101(31) of the Code, including the identity of the claimant, the affiliation of the insider with the debtor, the circumstances giving rise to the claim, the amount of the claim, and/or whether any or all of such claims have been subordinated and the reasons for such subordination. Means of Performing the Plan: Indicate how the debtor intends to accomplish the goals of the plan, i.e., whether by infusion of cash by an investor, sale of real or personal property, continued business operations, issuance of stock or otherwise. If an investor is to provide funds, financial information regarding the investor’s ability to provide such funds should be included. Stock Issued for Debt: If the debtor plans to issue stock for all or part of its debt, indicate if such stock is exempt from securities laws under § 1145 of the Code and describe the stock or securities, including information such as voting rights, interest rate, accumulation of dividends, liquidation preference, potential market values after confirmation, the existence of other classes of stock, whether the market for the stock is limited, any restrictions on transferability, etc. The debtor should state whether the stock is registered under § 5 of the Securities Act or, if not, what exemption from registration is claimed and the basis for such claim. Historical and Current Financial Information: Include historical and current financial data including cash flow statements, profit and loss statements, and balance sheets from at least the date of filing to the present. The balance sheets should indicate whether they were audited and identify the accountants who prepared them. Also indicate, possibly in a separate schedule, the debtor’s estimate of current values of assets and the bases for the estimates (i.e., cost or appraisals). Valuations must reflect fair market value, not book value or some other measure. Projections: Of equal importance is projected postpetition financial data—using the same assumptions as used in preparing the historical financial information—including a balance sheet reflecting the anticipated financial condition of the debtor on the date that the plan is projected to be confirmed. Use of spreadsheets is encouraged. In order to allow full analysis, financial information must be provided on both a cash and accrual basis. The identity of the accountants who assisted in preparation of the financial projections should also be disclosed. Include projections as far into the future as is practicable, including assumptions used in formulating the projections, such as expected sales levels, gross and net profit levels and inventory acquisition. At a minimum, the period covered by the projections should be commensurate with the period of payment deferral under the plan. Marketing Efforts: Indicate what efforts the debtor has made to market its properties that are currently for sale, including the identity of the listing agent, the listing price, any offers received or anticipated, pending litigation that might affect the sale of the property, the equity in the

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property (including the source of the valuation), and any alternatives for marketing the property. Cash Requirements/Administrative Claims: Indicate what administrative claims are outstanding (including any unpaid United States Trustee quarterly fees and estimates of claims for expenses not yet incurred) and whether any administrative claim holders have waived their right under the Code to be paid in cash at the time of confirmation. Indicate the source of cash to pay these claims. If the debtor expects a cash infusion from an outside source or from principals that must be later repaid, the identity of the source as well as the repayment terms should be disclosed. Similarly, the effect of such infusions (i.e., principal and interest payments) should be reflected in the projections. Liquidation Analysis: Section 1129(a)(7)(A) of the Code provides that if any class of claims or interests is impaired under the plan, each holder of a claim or interest in that class must either accept the plan or the amount each holder receives under the plan must be greater than what that holder would receive if the debtor were liquidated under chapter 7. Thus, the plan should indicate the present value of the payments to each creditor under the plan and compare the percentage return to claim holders with what the holders would receive under a chapter 7 liquidation. Obviously, such an analysis requires assumptions regarding liquidation values, administrative costs, etc., and these assumptions and the bases for them should also be disclosed. Absolute Priority Rule: Section 1129(b) provides that if an impaired class has not accepted the plan, the court may not confirm the plan unless it does not discriminate unfairly, and is fair and equitable, with respect to each impaired class of claims or interests. The disclosure statement should indicate whether the plan meets this standard with respect to every impaired class, and should specifically indicate whether any holder of any claim or interest that is junior to the claims of an impaired class will receive or retain any property under the plan, on account of such junior claim or interest. Legal Proceedings: Briefly describe all material legal proceedings to which the debtor is a party, proceedings the debtor contemplates instituting, and legal proceedings that have been threatened against the debtor. The information should include the court in which the litigation is pending, its present status, the relief sought, the debtor’s prognosis for the outcome, and the effect, if any, on the plan. Disclose the procedures for objecting to claims and exercise of the trustee’s avoiding powers. Tax Analysis: Describe the plan’s tax impact on the debtor, the debtor’s equity interest holders and creditors. Vote Required for Approval: Indicate which classes are impaired and entitled to vote and the vote required for approval of the plan. Also, clearly indicate that creditors or interest holders can choose to vote for or against the plan. Postpetition Events: Indicate whether any major postpetition events have occurred that might affect the case, such as the appointment of a creditors’

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Sample Disclosure Statement by Unsecured Creditors’ Committee (Selected Items)

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committee, a trustee, an examiner or the existence of litigation with significant consequences to the ability of the debtor to meet the plan requirements. Source: U.S. Trustee’s Office, Central District of California. 6.17 Sample Disclosure Statement by Unsecured Creditors’ Committee (Selected Items) Objective. Section 6.26 of Volume 1 describes the nature of the disclosure statement. This sample statement consists of selected provisions for a disclosure statement prepared by the unsecured creditors’ committee. In order to illustrate all of the items that were included in the disclosure statement, the complete table of contents of the disclosure statement precedes these selected excerpts: (a) (b) (c) (d) (e)

Table of Contents Liquidation Analysis The Reorganized Debtor Summary of Plan of Reorganization Certain Federal Income Tax Consequences of the Plan

(a) Table of Contents COMMITTEE’S DISCLOSURE STATEMENT I. INTRODUCTION A General Information B Plan Overview C Manner of Voting 1 Classes Entitled to Vote 2 Procedure for Voting D Confirmation of the Plan 1 Solicitation of Acceptances of the Plan 2 Votes Considered in Determining Acceptance of the Plan 3 Hearing on Confirmation of the Plan 4 Determining Whether Impaired Classes Have Accepted the Plan 5 Confirmation of the Plan Without Consent of all Impaired Classes II. THE DEBTOR A General Description B Growth of Care Enterprises C Operations 1 Health Care Operations 2 Health Care Reimbursement Programs 3 Regulations

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III. IV. V.

VI. VII.

VIII.

IX.


4 Competition 5 Employees RECENT HISTORY OF THE LONG-TERM CARE INDUSTRY COMPANY HISTORY—1985 THROUGH JUNE 1987 ACTIONS REPORTEDLY TAKEN BY CARE TO ADDRESS ITS OPERATING PROBLEMS A Facility Management Changes B Current Revenue Enhancement Efforts C Quality Assurance Department D Nursing Cost Reduction E Regulatory Compliance COMPANY HISTORY—BANKRUPTCY FILING THROUGH PRESENT RECENT FINANCIAL RESULTS A Comparison of Fiscal 1987 to Fiscal 1986 B 1988 Results (Unaudited) LIQUIDATION ANALYSIS A Assumptions 1. Liquidation Scenarios 2. Liquidation Values a Cash b Accounts Receivable c Inventory d Prepaid Assets e Notes Receivable f Refundable Taxes g Property and Equipment/Net h Mortgage Notes Receivable i Other Assets j Restricted Funds k Excess of Costs Over Net Assets Acquired l Administrative Expenses m Priority Claims B Adjustment for Facilities Sold Since Analysis C Liquidation Analysis Conclusions THE REORGANIZED DEBTOR A Development of the Committee’s Business Plan B Summary of Business Plan a Sale of Facilities b Profit Improvement Actions (1) Facilities Profit Improvements (2) Facilities Ancillary Charge Recovery (3) Facilities Private Pay Price Increases (4) HCN Cost Reductions (5) Corporate Expense Reductions

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(6) Employee Benefit Program c Increased Medi-Cal Reimbursement d Financial Impact of Medicare Catastrophic Coverage Act of 1988 e Major Assumptions f Operating Revenues and Expenses g Capital Spending Requirements h Balance Sheet Items i Bankruptcy Related Expenses j Hazelbaker Litigation C Funding of the Plan 1 Sources of Funding for Plan 2 Estimated Funds Necessary to Satisfy New Notes D Reorganization Value of the Company E Transfer of Property Interests to the Reorganized Debtor F Officers and Directors of the Reorganized Debtor 1 Officers 2 Background of New Officers 3 Directors G Affiliates Remaining in Chapter 11 Proceedings X. SUMMARY OF PLAN OF REORGANIZATION A Classification of Claims B Treatment of Claims C Treatment of Interests D Estimation of Claims E Description of New Common Stock F Description of Shareholder Warrants G Securities Law Considerations H Executory Contracts and Unexpired Leases I Disputed C/I Reserve J Unclaimed Property K Surrender of Old Notes and Old Debentures L Distribution of Fractions M Creditor’s Committee N Conditions to Confirmation XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN A General Tax Considerations B Tax Consequences to the Company 1 Net Operating Losses 2 Discharge of Indebtedness 3 Alternative Minimum Tax 4 Consolidated Federal Income Tax Return Issues 5 Tax Reorganization XII. LITIGATION A Ramona Manor Convalescent Hospital v. Care Enterprises, et al. B Weinberger v. Care Enterprises, Inc.

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C Litigation Between the Debtor and its Affiliates and the Former Shareholders of First Ohio Investment Group and Their Affiliates 1 The Managed Facilities Litigation a Americare Corp., v. Alliance Health Care Corp., et al. b Americare Corp., Americare Southwest, Inc. and Americare Southwest of Arizona, Inc. v. Alliance Health Care Company, et al. c Roswell Health Care Company v. Lee R. Bangerter, et al. d Americare Corp. v. Las Cruces Health Care Company, Ralph E. Hazelbaker and John M. Haemmerle e Managed Facilities Litigation in the Bankruptcy Court 2 Litigation Arising Out of the Sale of Americare and First Ohio a Care Enterprises, Inc. v. Ralph E. Hazelbaker, et. al. b Ralph E. Hazelbaker, et al. v. Care Enterprises, Inc., Americare Corp., and First Ohio Investment Group, Inc. 3 Litigation Arising Out of the Leased Facilities a Americare Southwest, Inc., v. Rio Rancho Health Care Company, Ralph E. Hazelbaker and John M. Haemmerle; and Americare Southwest Inc. v. Las Palomas Health Care Company, Ladera Health Care Company, Ralph E. Hazelbaker and John M. Haemmerle b Americare Southwest, Inc. Lease Assumption c Americare Southwest, Inc. v. Rio Rancho Health Care Company, Ladera Health Care Company, Las Palomas Health Care Company, Ralph E. Hazelbaker and John M. Haemmerle 4 Litigation over Rejected Leases a Roswell Health Care Company v. Americare b Coral Gables Lease Rejection c Rejection of the Toledo/Colonial and Brookhaven Leases 5 Development Corp. of America et al., vs. Care Enterprises Inc., et al. and related claims 6 Miscellaneous Claims filed by Ralph Hazelbaker and John Haemmerle D Bank of Arizona v. Americare Corp. E Zev Karkomi v. Americare Corp., Circleville Health Care Corp., Lancaster Health Care Corp., Monroe Park Care Center, Inc., New Lexington Health Care Corp., Pomeroy Health Care Corp., Ralph E. Hazelbaker, John M. Haemmerle and Care Enterprises and Zev Karkomi vs. First Ohio Investment Group F Hanover Real Estate Associates v. Care Enterprises, Inc. G Department of Health and Human Services v. Care Enterprises H Pinkerton and Laws Company v. Americare Corp., and Salem Health Care Corp. I Cotter Health Centers v. Care Enterprises J City of Los Angeles v. Care Enterprises, Inc.

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XIII. DISCHARGE OF DEBTS, DISCHARGE COURT’S JURISDICTION A Discharge of Debts B Discharge Injunction C Retention of Jurisdiction XIV. EFFECT OF CONFIRMATION

INJUNCTION

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AND

(b) Liquidation Analysis When evaluating the terms of the Plan, each creditor and shareholder should compare their treatment under the Plan with how they would be treated if the Debtor were liquidated under chapter 7 of the Bankruptcy Code. A liquidation analysis was prepared by the Debtor based on available 1987 year-end balance sheet information. Although a number of months have elapsed since year end, the Debtor expects that the net result of the liquidation analysis would not differ significantly from an analysis based on more current information. The Debtor’s Liquidation Analysis is attached as Exhibit “2”. A. Assumptions 1. Liquidation scenarios The liquidation analysis sets forth two scenarios: (1) a “forced” liquidation over twelve months; and (2) an “orderly” liquidation over thirty-six months. All assets were assumed to be converted to cash within the time frame or each scenario. 2. Liquidation values a. Cash Assumed to be liquidated at 100% under both scenarios. b. Accounts Receivable All long-term care (“LTC”) facility receivables were assumed to be collected at an average rate of 80% under an orderly liquidation to reflect the difficulty of collecting receivables for discontinued facilities and 60% under a forced liquidation to reflect further discounts that might to be taken to convert to cash within the shorter time frame. The value of government program receivables net of deposits, retentions, and adjustments/allowances was assumed to be collected at 75% under an orderly liquidation and 50% under a forced liquidation, again to reflect the difficulties that would be encountered in converting to cash within the shorter time frame. Health Care Network (“HCN”) receivables were assumed to be included in the HCN sales price. c. Inventory The value of inventory at the LTC facilities was included in the liquidated facility values. The balance of the inventory consists primarily of pharmaceuticals at HCN and was assumed to be included in the HCN liquidated value. d. Prepaid Assets Prepaid items such as insurance, rent, licenses and fees were assumed to have a liquidated value of 100% either through cash refunds or direct reductions in the administrative costs of a chapter 7. Items such as deferred expenses and fees were assumed to have no liquidation value.

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e. Notes Receivable It was assumed that notes receivable which represent the current portion of mortgage notes receivable would be collected at 100% under either liquidation scenario. f. Refundable Taxes It was assumed that refundable taxes would be converted to cash at 100% under either liquidation scenario. g. Property and Equipment/Net The liquidation value of the LTC facilities was derived by the Debtor from independent appraisals of each facility previously prepared by Valuation Counselors. It was assumed that the LTC facilities would be sold on a one-off basis or in small blocks. Discounts from appraised values were assumed to be 20% for owned facilities and 30% for leaseholds in an orderly liquidation. Discounts from appraised values were assumed to be 40% for owned facilities and 50% for leaseholds in a forced liquidation. Appraised values were assumed to be further reduced by reductions such as landlord consent fees in leaseholds, employee benefits payable, typical physical plant problems, and brokers’ commission. It was assumed that the net cash value of HCN would be $9,600,000 in an orderly liquidation and 15% less or $8,100,000 in a forced liquidation. The sales price would include all HCN assets. While HCN has generated profits in the past, it is believed that it would sell at a significant discount since approximately 70% of its business is with Care and the balance is on thirty day contracts. Valuation Counselors appraised HCN at $11,600,000. It was also assumed for both LTC facilities and HCN that the value of capitalized lease assets would equal the value of capitalized lease liabilities. LTC facility and HCN equipment was assumed to be included in the facility/HCN sales prices. The remaining equipment, primarily located at Corporate, was assumed to be worth 10% under either liquidation scenario. h. Mortgage Notes Receivable It was assumed that mortgage notes receivable could be liquidated at a rate that would provide a 15% return to potential buyers. Individual notes were analyzed and the principal balance discounted where necessary to provide a 15% return. The net result was a 26% average reduction in the principal amount which was assumed to be valid under both liquidation scenarios. i. Other Assets Items such as lease deposits were assumed to have a liquidated value of 100% either through cash refunds, additions to sales prices or direct reductions in the administrative costs of a chapter 7. Items such as deferred expenses and fees were assumed to have a liquidated value of 0%. j. Restricted Funds Restricted funds held in escrow for the payment of industrial revenue bonds were assumed to have a liquidated value of 100% either through conversion to cash or through the direct reduction of debt. k. Excess of Costs Over Net Assets Acquired It was assumed that goodwill would not have any value under either liquidation scenario. l. Administrative Expenses Administrative expenses for chapter 7 legal and accounting/transaction costs/general administration are rough estimates, which may be unrealistically

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high. Estimates for chapter 7 trustee’s fees were based on the statutory payment of 3% of the gross proceeds of the estate to be distributed. Chapter 11 administrative expenses consisted of estimates of expenditures to date and rough estimates of future expenditures. m. Priority Claims Priority claims were based on rough extrapolations of known priority claims for the Debtor and its Affiliates. B. Adjustment for Facilities Sold Since Analysis Since the Liquidation Analysis was prepared, Care sold or disposed of five facilities. The sales resulted in a reduction of the liquidation value for all facilities from $530,000 to $717,000 depending on whether the liquidation was “forced” or “orderly.” Of that amount, the sale of the Hillcrest facility reduced the liquidation value for all facilities from $150,000 to $210,000. The Hillcrest sale was a unique situation, with the facility being sold to a nearby Catholic hospital for a price exceeding the facility’s appraised value. C. Liquidation Analysis Conclusions The Debtor estimates the gross liquidation value of Care’s December 31, 1987 assets to be approximately $118,000,000 in a “forced” liquidation and $154,000,000 in an “orderly” liquidation given the nature of the assets and today’s market conditions. The Debtor estimated administrative costs of liquidating the assets to be $22,000,000 in a “forced” liquidation and $33,000,000 in an “orderly” liquidation, which may be unrealistically high. It is estimated that there would be approximately $3,000,000 in priority claims under either liquidation scenario. The estimated net liquidation proceeds available for both secured and unsecured claims are approximately $93,000,000 in a “forced” liquidation and $117,000,000 in an “orderly” liquidation. In liquidation, secured creditors would receive 100¢ on the dollar, and unsecured creditors would receive from 3¢ to 18¢ on the dollar, depending upon whether the liquidation was “forced” or “orderly.” Under the Committee’s Plan of Reorganization, secured creditors receive 100¢ on the dollar and all unsecured creditors will receive cash or securities worth significantly more than the estimated chapter 7 dividend. (c) The Reorganized Debtor The Committee’s Plan of Reorganization is based upon its Business Plan, which projects the cash the Company expects to generate during the period 1989–1995. Described below are: (1) the methodology used to develop the Committees Business Plan; and (2) a summary of the Business Plan and the elements of the Committee’s Plan of Reorganization affecting the forecasted financial performance of the Company. A. Development of the Committee’s Business Plan The Committee’s accountants, Ernst & Whinney, assisted the Committee in preparing its Business Plan. Attached to this Disclosure Statement as

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Exhibit “3” is the most recent Accountants’ Report prepared for the Committee. A detailed description of the services provided by Ernst & Whinney to the Committee is set forth below. Specifically, the Committee’s accountants: 1. Obtained and read the Debtor’s Business Plan (including consolidated projected financial statements and projected financial statement data for Care’s facilities, Health Care Network and corporate and regional expenses), the Debtor’s Disclosure Statement and “Care Enterprises—Analysis of Catastrophic Health Legislation.” 2. Interviewed key management personnel, industry experts and analysts as to the underlying assumptions used in the preparation of the consolidated projected financial statements. 3. Utilizing long-term care specialists, analyzed the facility/regional data supporting Care’s assumptions used in preparing the consolidated projected financial statements. 4. Analyzed June through December utilization, to supplement the 1988 five month (January through May) “running rate” calculations prepared by Care. 5. Revised the assumptions used by Care in formulating the projected consolidated financial statements. Made additional assumptions as necessary to account for items not included in the original projected consolidated financial statements prepared by Care, and to account for differences between the Debtor’s Plan of Reorganization and the Committee’s Plan. 6. Obtained the micro-computer model used by Care to prepare the projected consolidated financial statements and modified the model to reflect the revised assumptions and additional assumptions referred to above. Assembled projected consolidated financial statements and the pro-forma 1988 year end balance sheet for the Committee’s Business Plan.

B. Summary of Business Plan The Committee’s 1989–1995 Business Plan projects the generation of additional cash to service the New Notes to be issued to the Banks and other indebtedness of the Company, principally from the following sources: 1. The sale of approximately thirty percent (30%) of the Company’s nursing home facilities and the subsequent reduction of regional and corporate costs by approximately twenty percent (20%) as a result. 2. The implementation of profit improvement programs, which were scheduled to begin in August 1988 and be implemented by mid-1989. These are in addition to profit improvement programs instituted by the Company in 1987 and early 1988. 3. Medi-Cal reimbursement rates are assumed to increase by five percent (5%) in 1989 from their 1988 levels. In 1990 and years thereafter, Medi-Cal reimbursement levels are projected to increase by amounts equal to the rate of inflation. 4. The positive financial impact of the Medicare Catastrophic Coverage Act of 1988. A copy of the Company’s December 1988 “Analysis of Catastrophic Health Legislation” is attached for informational purposes as Exhibit “4” [not included].

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5. The conversion of virtually all unsecured debt to New Common Stock in the reorganized Debtor. The Committee’s projected consolidated financial statements for 1989–1995 are presented in Exhibit “3”. The following is a more detailed discussion of the items summarized above as well as the Committee’s major planning assumptions. a. Sale of Facilities The Business Plan calls for the sale of twenty-three facilities between January 1989 and June 1990, including all of the facilities in the Utah region. This is in addition to nine other facilities which have been or will be sold, closed, or otherwise disposed of by Care during the second half of 1988. The Committee assumes that the facilities will be sold for one hundred percent (100%) of appraised value in all cash sales. After 1990, the Company will own only sixtynine (69) facilities. Shown in Exhibit “5” [not included] are the facilities which are being sold, closed or otherwise disposed of together with the actual expected cash proceeds from each. The facilities to be eliminated were determined based on the Company’s analysis of financial, operational, logistical and legal considerations. Shown in Exhibit “6” [not included] are the facilities which will continue to be operated by the Company. b. Profit Improvement Actions The profit improvement programs called for by the Business Plan are described below (figures shown are for the Company at its current size): (1) Facilities Profit Improvements, $5.3 million Reduction of nursing, housekeeping, laundry, dietary, food, patient activities, social services, education, and administrative expenses at the facilities through the implementation of improvement programs and other means. The changes are assumed to have no negative impact on patient care. Timing of the profit improvements: sixty percent (60%) by December 31, 1988, eightyfive percent (85%) by March 31, 1989; 100% by June 30, 1989. The Committee is currently unable to verify the impact, if any, of the profit improvement programs implemented by the Company to date. (2) Facilities Ancillary Charge Recovery, $0.4 million Improved recovery of ancillary charges through improved record keeping. (3) Facilities Private Pay Price Increases, $3.2 million Increases in private pay rates, cost reductions and other industry factors are assumed to result in payor mix shift of five percent (5%) of private pay patients to Medicaid. This projected shift will erode the dollar impact of the projected private pay rate increases. The decrease in private pay census comes as a result of: (i) rates being raised at some facilities to levels higher than the highest rates of local competitors; (ii) rates being raised at some facilities disproportionate to the quality level of the facility; (iii) loss of some historical rate “advantages”; (iv) a general trend toward obtaining Medi-Cal eligibility for a greater number of patients who were previously self-pays; and (v) the impact of cost-savings on the real or perceived quality of care at various facilities. While the private pay rate increases are expected to have a positive dollar impact of $3.2 million per year, after taking into account decreases in private pay census the financial

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impact is expected to be reduced by approximately one-third in each year of the projection period. (4) HCN Cost Reductions, $0.5 million Reduced cost of goods sold as a result of taking prompt pay discounts and more aggressive product contracting. Projected reduction based on comparisons of prices paid by similar companies. (5) Corporate Expense Reductions, $4.4 million Reduction of personnel and non-personnel costs through elimination of nonvital, low-value-added and redundant activities, procedural improvements, upgrading the quality of people in certain positions, and replacement of the existing general ledger system. (6) Employee Benefit Program, $1.2 million Modification of Care’s employee benefit program to eliminate the Company’s 401K Plan, change employee/Care share of contributions to insurance plans. Impact on people employed at the facilities is assumed to be relatively minor. c. Increased Medi-Cal Reimbursement Historically, Medi-Cal reimbursement has lagged behind nursing home cost inflation in California. The assumption of a five percent (5%) increase in 1989 and the general assumption that Medi-Cal reimbursement increases will equal the rate of inflation are based primarily upon interviews with the Rates Development Branch of Medi-Cal and the California Association of Health Facilities, as well as recent experience in annual rate increases for the Medical Program. Eventually, the response of industry pressure for rate increases is likely to be a total redesign of the reimbursement system rather than the onetime inflation “catch-up” predicted by Care. Because the timetable for and details of any system redesign are currently unknown, assumptions based on historical precedent have been used. d. Financial Impact of Medicare Catastrophic Coverage Act of 1988 A portion of Care’s patients requiring a high level of care and whose Medicare coverage has lapsed will, as of January 1, 1989, be re-eligible for Medicare coverage under the new 150-day annual eligibility provision of the Medicare Catastrophic Coverage Act of 1988 (the “Act”). In addition to “tube feeders,” other classes of patients are assumed to be re-eligible for Medicare coverage, including patients requiring intravenous therapy and total parenteral nutrition, tracheotomy patients, respirator patients, insulin-dependent diabetic patients, and patients with stage III and IV pressure sores. Additionally, it is assumed that a portion of patients requiring a high level of care will be eligible for an additional 50 days of Medicare coverage per annum due to the expansion of Medicare coverage under the new legislation. The categories of patients eligible for the additional coverage is assumed to include insulin-dependent diabetic patients as well as tube feeders. Finally, it is assumed that a percentage of patients in Care’s facilities who become acutely ill during the course of the year and remain in the facilities during the acute phase of their illness will qualify for Medicare coverage during their post-acute stays in Care’s facilities.

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The Committee has incorporated into its projected consolidated financial statements Care’s December 1988 estimate of the financial impact of the Act. Because the Committee has not yet been able to review Care’s actual operating results with respect to the impact of the Act since its implementation on January 1, 1989, there are likely to be further revisions to the financial impact estimates. (In fact, Care has already revised its December 1988 estimates based upon certain as yet unsubstantiated assumptions.) Additionally, the Committee believes that Care has failed to present or consider the negative impact on reimbursable costs of additional patient volume; the probable loss in revenue associated with conversion of private pay days to Medicare; the likely overstatement of days of eligibility in view of the historical distribution of patient stays; and the possible narrowing of the scope of Medicare benefits as Regulations and Instructions to intermediaries are promulgated. When these items are taken into account, the assumptions about the positive financial impact of the Act may decrease significantly. Finally, as noted elsewhere in the Disclosure Statement, numerous bills have been introduced in Congress which would have the effect of delaying or repealing these Medicare benefits. e. Major Assumptions Historical data, adjusted where appropriate, was used as the basis for projecting revenues and expenses in addition to capital spending and balance sheet items. Economic projections specific to the nursing home industry provided by Data Resources Inc. (DRI) were utilized, where available, to forecast rates of inflation going forward. f. Operating Revenues and Expenses Revenue/Expense Element Revenue Related Occupancy

Mix

Medicare Rates

Medicaid (in cost-based states)

Medi-Cal

Major Assumptions Changed at certain facilities. Care’s analysis modified by twelve month (January to December 1988) year-to-date utilization statistics, reexamination of preliminary market information, and interviews with Care’s Management. See Exhibit “7” [not included]. No significant change except for a mix shift from Medicaid and private to Medicare as a result of recent changes in federal government reimbursement programs. Adjusted downward to reflect impact of cost reductions in 1988 and 1989 (rates are cost-based); assumed to increase in relation to cost inflation thereafter. Same as treatment of medicare rates, except for an upward adjustment made to reflect increased nursing salaries. Described in prior section; assumed to keep pace with inflation.

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(Continued) Revenue/Expense Element

Major Assumptions

Private Pay Rates

Adjusted to market levels in January 1989; increase 1% more than inflation in 1989 and 1990; increase with inflation thereafter. Increase at 50% of the rate of inflation going forward reflecting increasing competition for HMO business. Increase with inflation.

HMO

All Other Expenses (After Cost Reductions) Nursing in California

Nursing Costs Outside California Secondary Effect of Increase in Minimum Wage Leases, Mortgage Payments, Other Fixed Expenses Depreciation Income Taxes

Interest

10 to 15% (planned at 12.5%) for the first three years of the plan; increase with DRI’s overall projected rate of inflation for nursing costs thereafter. Nursing costs projected to increase in accordance with DRI projections. Implementation of the new wage will result in a 5% raise in salaries for 15% of Care’s California workforce in 1989. In accordance with lease, mortgage and other contractual terms. Based on history and future capital spending. A federal tax rate of 34% is assumed. A state tax rate of 9.3% is assumed. The special insolvency limitation for the utilization of net operating loss (“NOL”) carryovers which is available under § 382 of the Internal Revenue Code is used. A NOL carryover of $55 million for federal tax purposes and $27 million for state tax purposes is assumed. No assumptions relating to alternative minimum tax and investment tax credit carryover provisions have been included in the calculations of taxes other than the limitation of NOL utilization under alternative minimum tax rules. In accordance with the Committees Plan of Reorganization, and mortgages, leases and other contracts.

It has been assumed that regulatory changes will not significantly impact Care’s operating costs going forward. A $1,000,000 contingency (in 1988 dollars) has been included in the projections to reflect the cost of responding to the estimated three decertification actions per year. g. Capital Spending Requirements Capital spending requirements in 1988 dollars have been projected at $350 per bed in 1989, $400 per bed in 1990, $450 per bed in 1991, and $500 per bed in 1992, and thereafter at the facilities, $200,000 per year for corporate and regional expenditures, and approximately $200,000 per year for the Health

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Care Network. The Company contends that these spending levels are needed to maintain physical plant and equipment in working order and provide for necessary refurbishment of facilities when required. The future capital spending requirement projections are less than actual capital spending requirements in 1986 ($1,200 per bed) and 1987 ($727 per bed) when the Company completely remodeled a number of facilities. The future projections contemplate making required capital improvements to all facilities on an ongoing basis. h. Balance Sheet Items With some exceptions, working capital items are projected to increase with revenue and expenses going forward, based on their historical relationships. Before the elimination of any facilities, Care believes that it will reduce receivables by $1,000,000 between the beginning and the middle of 1989 as a result of better management of receivables. Certain current liabilities, particularly reserves for bankruptcy and litigation, are left unchanged or reduced going forward as actual payments are made. Fixed assets increase or decrease in the future based on capital spending and depreciation. Prepetition debt is projected in accordance with the Plan. i. Bankruptcy Related Expenses Bankruptcy related professional expenses are estimated by the Debtor to be $8,180,000 in total as detailed in Exhibit “8” [not included]. Of this amount, $1,160,000 was paid in 1988. The remaining portion of $7,020,000 is assumed paid in 1989. Professional fees are difficult to project with precision and the Debtor believes that, depending upon the length of time the chapter 11 case continues, actual professional costs may be higher or lower than those projected. j. Hazelbaker Litigation The Hazelbaker litigation is discussed, along with other litigation, at Article XII of this Disclosure Statement. For planning purposes, it was assumed that $500,000 in cash/expense would be expended net of any recoveries in 1989 and that the various litigation actions would be self-funding thereafter. The Business Plan projects no net cash to be received as a result of the litigation even though the Company is optimistic that a substantial recovery will be obtained in 1990 or 1991. C. Funding of the Plan 1. Sources of Funding for Plan The Plan will be funded through operating and sales activities. Below is a summary of the funds estimated to be generated by each activity in excess of amounts expended for operations and debt service to lenders other than the Banks. Activities 1. Business operations 2. Sale or disposition of facilities

Estimated Amount of Funds to Be Generated ($ millions) $75 5 Total $80

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This Committee is currently negotiating with Paradigm Corp. for the sale of additional facilities and the settlement of the litigation pending between the Company and the former controlling shareholders of Americare and first Ohio and their affiliates. Additionally, the Committee may also obtain, prior to the Confirmation Date, commitments for financing from one or more financial institutions or investors to satisfy the cash requirements of the Plan. The terms of any such financing may include the issuance of debt and/or equity securities to the prospective lender or investor. Under the Plan, Reorganized Care is also free to sell, refinance or otherwise dispose of one or more facilities between the Confirmation Date and the Effective Date to fund the Plan. 2. Estimated Funds Necessary to Satisfy New Notes The total estimated funds necessary to satisfy the New Notes to be paid over the 1989–1995 period is approximately $40,000,000. This amount may decrease by the payment of Excess Cash, if any, to the Banks which would decrease the interest paid over the 31/2 year period. The cost of replacing the letters of credit issued by the Banks, which are to be cancelled three months after repayment of the New Notes, has not been included in the $45,000,000 estimates.

D. Reorganization Value of the Company The Committee’s investment bankers, Houlihan, Lokey, Howard & Zukin Capital (“HLHZ”), have conducted a preliminary investigation and analysis of the Company. The purpose of the investigation and analysis is to determine the fair market value of the Company as a going concern on a debt-free basis. HLHZ’s preliminary opinion, attached hereto as Exhibit “9”, is that the fair market value of the Company on a debt-free basis is in the range of $140– 160 million. While this opinion is preliminary in nature and subject to further investigation, HLHZ believes that its final conclusion will fall near the bottom end of the range. By comparison, the liabilities of the Company far exceed $180.0 million.

E. Transfer of Property Interests to the Reorganized Debtor As of the Effective Date of the Plan, the Reorganized Care shall retain and be revested with all property of the Estate.

F. Officers and Directors of the Reorganized Debtor The Plan contemplates a change in the Debtors’ Board of Directors and senior management. The Committee is presently identifying candidates to serve on the Board and has selected candidates to replace the Chief Executive and the Chief Financial Officer, . Officer, The Committee plans to have selected new Board members by the time the Court approves the form of this Disclosure Statement, and to the extent feasible, this Disclosure Statement shall be amended to identify the persons who have been selected. In any event, such persons shall be designated at

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least 15 days prior to the Confirmation Date in order to comply with section 1129(a)(5) of the Bankruptcy Code. 1. Officers and , but will otherwise continue with Reorganized Care will replace current management. Richard E. Matthews will assume the position of Care’s Chief Executive Officer and John Rasmussen will act as Care’s Chief Financial Officer. The officers of Reorganized Care and their post reorganization salaries are as follows:

Name

Position

Salary

Richard E. Matthews John Rasmussen Richard Matros Lance Samuelson

Chief Executive Officer, President Chief Financial Officer Executive Vice President Secretary and Vice President of Administration Vice President Quality Assurance Vice President Marketing Chief Information Officer, Vice President Financial Information Services Asst. Vice President Risk Management

$ $ $120,000 $ 79,764

Barbara Garner John Goates Mike Anderson

Roger Randall

$ 75,000 $ 66,000 $116,000

$ 62,000

2. Background of New Officers Richard E. Matthews, selected by the Committee to serve as Care’s Chief Executive Officer, has more than 16 years experience as a consultant/chief executive for companies in corporate restructuring, workout and reorganization proceedings. Mr. Matthews’ prior health care related experience includes his service as the court appointed trustee in the successful reorganization of Pacific Homes and service as a consultant to Watts Health Foundation/United Health Plan in its successful reorganization proceeding. Mr. Matthews has also served as a special consultant to the United States Department of Health, Education and Welfare and the State Department. In 1972, Mr. Matthews served as the President and Chief Executive Officer of Olympic Plastics Company, which commenced proceedings under Chapter XI of the former Bankruptcy Act. Mr. Matthews continued to manage and operate the business during the reorganization proceeding, located a purchaser for the stock of the company and negotiated the terms of a successful plan. John W. Rasmussen, selected by the Committee to serve as Care’s Chief Financial Officer, has for the past six years served as a consultant/chief financial officer for a variety of companies involved in reorganization proceedings and workouts. Mr. Rasmussen is a Certified Public Accountant with ten years auditing experience with Peat, Marwick, Mitchell & Co. Mr. Rasmussen’s industry experience is extremely broad, and includes health maintenance organization; savings and loan; real estate; construction; and business software development and distribution.

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3. Directors Reorganized Care will have a new five-member Board of Directors. Richard E. Matthews, Care’s new Chief Executive Officer will serve on the Board. The four additional Directors will be identified by the Committee at least 15 days before the Confirmation Date.

G. Affiliates Remaining in Chapter 11 Proceedings The Committee’s Plan concerns only the chapter 11 case of Care Enterprises, Inc., the parent company. Immediately after the Confirmation Date, and will be removed from the management and boards of directors of all debtor and non-debtor subsidiaries. The Committee anticipates that new management will promptly formulate and pursue confirmation of a chapter 11 plan or plans for the subsidiaries remaining under the Bankruptcy Court’s jurisdiction.

(d) Summary of Plan of Reorganization This Disclosure Statement summarizes the Committee’s Plan of Reorganization, but is qualified in its entirety by the full text of the Plan itself. The Plan is proposed only for Care Enterprises, Inc. All terms defined in the Plan have the same meaning in this Disclosure Statement. The Plan, if confirmed, will bind the Debtor, any entity acquiring property under the Plan or otherwise transferring property pursuant to the Plan, and all creditors and shareholders of the Debtor. All creditors, shareholders, and other interested parties are urged to read the Plan carefully.

A. Classification of Claims The Plan designates fifteen (15) classes of Allowed Claims and Interests. Administrative Claims, reclamation claims, claims for set-off and priority tax claims specified in Bankruptcy Code sections 507(a)(1), 546, 553 and 507(a)(7), respectively, have not been classified and are excluded from the designation of classes. A claim or Interest is in a particular class only to the extent that the claim is an Allowed Claim, Allowed Secured Claim or Allowed Interest in that class. 1. Class 1: Class 1 consists of all Allowed Claims entitled to priority under sections 507(a)(3), (4), (5) and (6) of the Bankruptcy Code. 2. Class 2: Class 2 consists of the Allowed Secured Claim of Santa Barbara Savings secured by a Lien on Colonial Convalescent Hospital and Hilltop Convalescent Hospital. 3. Class 3: Class 3 consists of the Allowed Secured Claim of Home Federal Savings & Loan secured by a Lien on Hilltop Convalescent Hospital and Georgian Court Convalescent Hospital. 4. Class 4: Class 4 consists of the Allowed Secured Claim of Union Bank which is secured by a lien on Washington Manor and Cedarhaven Convalescent Hospital.

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5. Class 5: Class 5 consists of the Allowed Secured Claim of FTC Servicing Corp., as agent, which is secured by a lien on an apartment building located in Phoenix, Arizona. 6. Class 6: Class 6 consists of the Allowed Secured Claim of California Federal Savings and Loan which is secured by a lien on a deposit account located in Los Angeles, California. 7. Class 7: Class 7 consists of the Allowed Secured Claims of Citibank, N.A. as agent for Wells Fargo Bank, N.A. and Citibank, N.A. 8. Class 8: Class 8 consists of all Allowed Claims against the Debtor in an amount equal to or less than $500.00, or which have been reduced by an election in writing by the holder of such claim to the sum of $500.00, in full and complete satisfaction of such claim. To be included in Class 8, holders of Allowed Claims that exceed $500.00 must file a written election to reduce their claim to $500.00 within the time allowed for filing ballots accepting or rejecting the Plan. 9. Class 9: Class 9 consists of all Allowed Claims arising out of guarantees executed by the Debtor before the Petition Date, pursuant to which the Debtor guaranteed the obligation of any Affiliate. 10. Class 10: Class 10 consists of Allowed Claims held by Affiliates of the Debtor. 11. Class 11: Class 11 consists of all Allowed Claims for goods purchased by the Debtor or services rendered to the Debtor, other than legal, accounting or investment banking services, prior to the date the Debtor commenced its chapter 11 case. 12. Class 12: Class 12 consists of all Allowed Claims for personal injury which are covered by insurance and Allowed Claims for Worker’s Compensation. 13. Class 13: Class 13 consists of all Allowed Claims other than personal injury claims covered by insurance, which (i) were the subject of litigation pending against the Debtor in a court of competent jurisdiction or before an administrative tribunal as of the date the Debtor commenced its chapter 11 case or (ii) were scheduled as disputed in the list of creditors filed by the Debtor with the Bankruptcy Court. 14. Class 14: Class 14 consists of all unsecured Allowed Claims, other than claims in Classes 8, 9, 10, 11, 12 and 13. Class 14 includes, without limitation, the Allowed Claims of the holders of Public Debt, the deficiency claims of secured creditors, and claims arising from the rejection of executory contracts and leases. 15. Class 15: Class 15 consists of all Allowed Interests of the Debtor.

B. Treatment of Claims THE HOLDER OF A CLAIM WILL RECEIVE A DISTRIBUTION UNDER THE PLAN ONLY IF IT IS AN “ALLOWED CLAIM.” An Allowed Claim means a claim against the Debtor to the extent that the claim was listed on the schedules filed by the Debtor and not listed as disputed, contingent, or unliquidated or as to which proof of such claim was timely filed and which, if it is a Disputed Claim, is allowed by the Court. Distributions to the holders

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of Allowed Claims under the Plan are in full satisfaction of those Allowed Claims (including any interest accrued thereon). Except as otherwise provided in the Plan, all claims against and Interests in the Debtor arising prior to the Confirmation Date will be discharged by the Plan on the Effective Date. (See Article XIII below.) Class 1 (Priority Claims): The Priority portion of Allowed Claims for wages, contributions to employee benefit plans, and those arising from consumer deposits, if any, will be paid in cash in full on the Effective Date, or as soon thereafter as is practicable, unless otherwise ordered by the Court. Accrued and unpaid vacation and sick leave will be reinstated and used by current employees pursuant to company policy. Classes 2, 3, 4, 5 and 6 (Secured Claims other than the Banks): The Allowed Secured Claims in Classes 2, 3, 4, 5 and 6 will retain unaltered the legal, equitable and contractual rights to which such claims entitle the holder thereof. If the Debtor is in default to the holder of any such claims, the Debtor shall, on the Effective Date, as soon as is practical thereafter (i) cure all existing defaults, other than defaults relating to the insolvency or financial condition of the Debtor, defaults arising from the commencement of the Debtor’s case or defaults based upon the appointment of or taking possession by a trustee or custodian; (ii) reinstate the original maturity of the Allowed Secured Claim as though no such default had occurred and pay the allowed secured claim according to that original maturity; (iii) compensate the holder of the Allowed Secured Claim under which there was a default for any damages incurred based upon that claimant’s reasonable reliance on the contractual provision under which there was a default or applicable loss; and (iv) comply with all other terms of the obligations without alteration. Class 7 (Secured Claims of the Banks): The Banks will receive on the Effective Date (i) a cash payment of $500,000 or less on account of agent fees, letter of credit fees and related expenses; (ii) the Initial Cash Payment; (iii) the Net Available Cash, if any, remaining on the Effective Date; and (iv) the New Notes to be issued to the Banks. The New Notes mature approximately three and onehalf years after the Effective Date, with interest accruing at a rate equal to prime plus 2%. Interest will be paid monthly on the New Notes. Commencing on the last day of the third full calendar quarter after the Confirmation Date, the New Notes call for quarterly payments of $1.5 million escalating thereafter to $3.5 million (less the interest payments) with a final payment at the maturity of the New Notes equal to all unpaid principal and accrued interest. The New Notes may be further reduced by the payment of Excess Cash as provided for in the Plan. This payment of Excess Cash would enable the Banks to receive an accelerated payment of the New Notes if the performance of Reorganized Care is better than that projected by the Committee. With respect to contingent claims arising from the Bank’s issuance of pre-petition letters of credit, the Plan provides for the payment, annually in advance, of a letter of credit fee equal to 2% of the face amount of letters of credit outstanding. The letters of credit will be cancelled no later than three months after payment in full of the New Notes. Under the Plan, the Banks will retain their pre-petition liens and, to the extent legally and contractually permissible, receive a lien on all other property of the Debtor and its subsidiaries, except for the Unencumbered

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Property, to secure the New Notes and the Debtor’s repayment obligation in the event of a drawing under any letter of credit. Class 8 (Small Claims): The Bankruptcy Code permits the separate classification of claims consisting of unsecured claims that are less than or reduced to an amount approved by the Bankruptcy Court for purposes of administrative convenience. Class 8 consists of all unsecured Allowed Claims against the Debtor which were $500.00 or less, or more than $500.00, but have been reduced to $500.00 at the election of the holder thereof. Where a creditor has filed multiple proofs of claim for different indebtedness owed to such creditor by the Debtor, the claims will be aggregated so that, for example, if five claims, each for $400.00 arising from separate transactions were filed, the creditor would have one claim for $2,000, not five claims of $400.00 each. Holders of Class 8 Allowed Claims will receive cash in the full amount of such Allowed Claims (up to a maximum of $500.00) on or shortly after the Effective Date. An election by any holder to be included in Class 8 must be indicated on such holder’s ballot and received by the Committee on or before the deadline for receipt of ballots accepting or rejecting the Plan. Classes 9 and 10 (Pre-Petition Guaranties and Affiliates Claims): From time to time, the Debtor has guaranteed or entered into agreements to cause support and performance of the obligations of its Affiliates to third parties. These guaranties will remain in place following confirmation of the Plan. The Debtor has also incurred obligations to its Affiliates in the ordinary course of its business. Likewise, from time to time, the Affiliates have incurred obligations to the Debtor. The Debtor’s schedules reflect that, as of the Petition Date, the amounts owed by the Affiliates to the Debtor exceeded the amounts owed by the Debtor to its Affiliates. The Allowed Claims, if any, held by the Affiliates net of amounts owing to the Debtor are unaffected by the Plan. Class 11 (Trade Claims): Class 11, consisting of Allowed Claims for goods purchased by the Debtor and certain services rendered to the Debtor, will receive on the Effective Date, or as soon as practicable thereafter, a cash distribution equal to 50% of their Allowed Claims. The holder of any Class 11 Allowed Claim may elect, in lieu of a cash distribution, to receive one share of New Common Stock for each $10.00 of such holder’s Allowed Claim. Unless waived by a vote of the Committee, confirmation of the Plan is conditioned upon the allowed claims in Class 11 totalling to no more than $1,500,000. Class 12 (Personal Injury and Worker’s Compensation Claims): Allowed Claims for personal injuries which are covered by insurance and allowed claims for Worker’s Compensation will retain unaltered the legal, equitable and contractual rights to which such claim entitles the holder thereof. Classes 13 and 14 (Claims for damages and all other unsecured claims): Classes 13 and 14 consist of all unsecured Allowed Claims against the Debtor other than those classified in Classes 8, 9, 10, 11 and 12. The holders of Class 13 and Class 14 Allowed Claims will receive one share of New Common Stock for each $10.00 of Allowed Claim. In making the distribution to the holders of Class 13 and 14 claims, subordination agreements will be enforced to the same extent that such agreements are enforceable under applicable non-bankruptcy law.

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C. Treatment of Interests THE HOLDER OF AN EQUITY SECURITY INTEREST MAY RECEIVE A DISTRIBUTION UNDER THE PLAN ONLY IF IT IS AN “ALLOWED INTEREST.” An Allowed Interest means an equity security interest of the Debtor to the extent listed in the List of Equity Security Holders filed with the Court or otherwise of record, or as to which proof of such interest was filed and which, if it is a Disputed Interest, is allowed by the Court. Distributions under the Plan will be made to the holders of Allowed Interests of record as of the time of the commencement of distribution. Class 15 (Equity Security Holders): The Debtor has issued an outstanding two classes of Common Stock, Class A and Class B. Additionally, the Debtor has authorized, but not issued, Preferred Stock. The holders of Allowed Interests in Class 15 will receive, subject to certain conditions, a Pro Rata Distribution of Shareholder Warrants to purchase up to twenty-percent (20%), in the aggregate, of the outstanding New Common Stock of Reorganized Care on a fully diluted basis. The Distribution of Shareholder Warrants is conditioned upon (i) acceptance of the Plan by the holders of Allowed Interests, excluding negative votes cast by insiders and (ii) the Committee’s ability to confirm the Plan under § 1129(b) of the Code if any class of Allowed Claims fails to accept the Plan. In any event, all Common Stock and Preferred Stock of the Debtor will be cancelled, annulled and extinguished. D. Estimation of Claims The claims against the Debtor’s Estate are estimated as follows: Class of Claim

Estimated Amounts

1. 2.

$50,000 5,500,000

Priority Claims (Class 1) Secured Claims other than the Secured Claims of Wells Fargo Bank, N.A. and Citibank, N.A. (Class 2, 3, 4, 5 and 6) 3. Secured Claims of Citibank, N.A. and Wells Fargo Bank N.A. (Class 7) 4. Allowed Claims of less than $500.00 (Class 8) 5. Allowed Claims arising from guarantees of Affiliate Obligations (Class 9) 6. Unsecured Claims of Affiliates (Class 10) 7. All unsecured Allowed Claims for goods and services, excluding legal, accounting and investment banking services (Class 11) 8. Allowed Claims for personal injury, Workers’ Compensation (Class 12) 9. Allowed Claims for damages, excluding personal injury, or which are the subject of litigation (Class 13) 10. Allowed Claims of holders of 9% Convertible Senior Subordinated Debentures and 16% Senior Subordinated Notes (Class 14) 11. All unsecured Allowed Claims, other than Public Debt and Class 8, 9, 10, 11, 12 and 13 claims (Class 14) Administrative Claims

39,000,000 unknown contingent unknown -0750,000

contingent unknown contingent unknown 72,000,000

2,400,000 5,000,000

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E. Description of New Common Stock The Plan contemplates the issuance of New Common Stock, having a par value of $.01 per share, to the holders of Public Debt and other unsecured creditors in Classes 13 and 14. The New Common Stock will be issued at the rate of one share per $10.00 of each holder’s Allowed Claim. Additional shares of New Common Stock may be authorized to fulfill any management stock programs. Common stockholders will be entitled to cast one vote for each share held of record, to receive, subject to limitations in the New Notes, such dividends as may be declared by the Board of Directors out of legally available funds and to share pro rata in any distribution of the Debtor’s assets after payment of all debts and other liabilities. Stockholders will not have pre-emptive rights or other rights to subscribe, except those, if any, specified in the Plan, for additional shares and the New Common Stock is not subject to conversion or redemption. The New Common Stock will be, when issued, fully paid and non-assessable. Finally, no other classes of stock are currently contemplated for issuance by Reorganized Care, nor can any such class be authorized or issued except with the concurrence of a majority of the shares of New Common Stock voting at a meeting called for such purpose and an appropriate amendment to the Certificate of Incorporation. F. Description of Shareholder Warrants Shareholder Warrants to purchase a number of shares of New Common Stock equal to twenty-five percent (25%) of the number of shares Distributed to the holders of Allowed Claims will be issued to the holders of Allowed Interests in Class 15. Warrant certificates will be issued (each entitling the holder to purchase one share of New Common Stock) and will expire on the fifth anniversary of the date of their issue. The exercise price will be $10.00 per share for the first twelve (12) months, escalating thereafter by $1.00 per year on each anniversary of the date of issuance. In the event of a merger, sale of all or substantially all of Reorganized Care’s assets or other similar transaction respecting Reorganized Care, which shall be defined to exclude transactions with Affiliates, the Shareholder Warrants shall be callable after appropriate notice for $.25 per warrant share, but will not otherwise be subject to call. The Shareholder Warrants will be issued pursuant to a warrant agreement containing customary antidilution adjustment provisions. The Shareholder Warrants will be transferable, and may be exercised by delivery of the Warrants, together with the notice of exercise properly completed, and payment of the exercise price, either by certified or cashier’s check payable to Reorganized Care. As noted elsewhere in the Disclosure Statement, HLHZ’s preliminary opinion is that the fair market value of the Company on a debt-free basis is in the range of $140–160 million. Assuming a value of $150 million, secured indebtedness of $100 million (leaving $50 million of net reorganization value), and a Distribution of New Common Stock to the holders of Allowed Claims totalling to $80 million, the New Common Stock should have a value of $6.25 per share. If the market price of the New Common Stock were $6.25 immediately after the Confirmation Date, the Shareholder Warrants would have substantial time

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or speculative value. In any event, if, as the Committee believes, the Company is insolvent, the value of the Shareholder Warrants will be much greater than the current value of all Allowed Interests, which is zero. G. Securities Law Considerations Pursuant to the exemption from registration afforded by Section 1145 of the Bankruptcy Code, the New Common Stock and Shareholder Warrants issuable pursuant to the Plan, and any New Common Stock issued upon exercise of the Shareholder Warrants will not be registered under the Securities Act of 1933, as amended (the “1933 Act”) or under any state securities laws. In general, such securities may be freely traded by a creditor receiving them under the Plan without registration under the 1933 Act or other laws, unless such creditor is an “underwriter” with respect to such securities, as that term is defined in the Bankruptcy Code. Under Section 1145(b) of the Bankruptcy Code, an underwriter is a person or entity who (i) purchases a claim against or interest in the Debtor with a view to the distribution of the securities received on account of such claim or interest, (ii) offers to sell such securities on behalf of the holders thereof (except offers to sell fractional interest), (iii) offers to buy such securities with a view to the distribution thereof pursuant to an agreement made in connection with the Plan, or (iv) is an “issuer” with respect to the Debtor, as the term “issuer” is defined in Section 2(11) of the 1933 Act. In this context, an “issuer” under Section 2(11) includes any person directly or indirectly controlling, controlled by or under direct or indirect common control with the Debtor. Whether a person is an “issuer,” and therefore an “underwriter” for purposes of Section 1145(b) depends upon a number of factors, including: the relative size of the person’s voting securities in the Debtor; the distribution and concentration of other voting securities in the Debtor; whether the person, either alone or acting in concert with others, has a contractual or other relationship giving that person power over management policies and decisions; and whether the person actually has such power notwithstanding the absence of formal indicia of control. An officer or director of the Debtor may be deemed to be a controlling person, particularly if his position is coupled with ownership of a significant percentage of voting stock. In addition, the legislative history of Section 1145 suggests that a creditor receiving at least 10% of the securities of a reorganized debtor would be deemed to be a controlling person. Based on the published views of the Securities and Exchange Commission, the Committee believes that a person who receives less than 1% of a class of securities generally would not be deemed to be an underwriter and that creditors receiving more than 1% (but less than 10%) are not necessarily deemed to be underwriters. Persons who are not issuers, but are otherwise underwriters under section 1145(b) of the Bankruptcy Code, may resell the securities received under the Plan in ordinary trading transactions. Because of the complex and subjective issues involved in determining underwriter status and what constitutes an ordinary trading transaction engaged in by an entity which is not an issuer, creditors are urged to consult with their counsel concerning whether they will be able to trade freely the securities received.

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The Committee believes that most recipients should be in a position to resell such securities in reliance upon an exemption from the 1933 Act registration requirements. If the Committee has reason to believe that a recipient of the securities issued pursuant to the Plan may be an underwriter, it may require assurances from such recipient that he is aware of Section 1145 of the Bankruptcy Code and the requirements of the 1933 Act regarding resale of such securities, and that any of the securities held by him would be sold in compliance with the Code and the 1933 Act. The Securities Exchange Act of 1934 (the “1934 Act”) provides for the registration of classes of securities (i) listed on a national securities exchange; or (ii) traded in the over-the-counter market where the Company’s assets exceed $5.0 million and shareholders total to more than 500 in number. The Committee will use its best efforts to cause the Debtor to apply for a listing for the New Common Stock and the Shareholder Warrants on a nationally recognized securities exchange. In the event such a listing cannot be obtained, the Committee believes that it is likely that such securities will be traded in the over-the-counter market. Registration under section 12 of the 1934 Act will obligate the Reorganized Debtor to file periodic reports with the Securities and Exchange Commission pursuant to section 13 of the 1934 Act. Additionally, Reorganized Care will become subject to the proxy and tender offer rules and its officers, directors and principal shareholders will become subject to the insider reporting and short swing profit recovery provisions of the 1934 Act. The Committee will use its best effort to cause the Debtor to register the New Common Stock and the Shareholder Warrants before confirmation of its Plan to avoid any lapse in such reporting.

H. Executory Contracts and Unexpired Leases 1. Under the Plan, all executory contracts and unexpired leases which have not been assumed pursuant to a prior order of the Bankruptcy Court or which are subject to a motion already filed with the Bankruptcy Court are rejected, except the following, which are assumed under the plan: (a) Software Licensing Agreement with Collier-Jackson, Inc. (b) Master Lease Agreement with Comdisco, Inc. for telephone equipment. (c) Software Licensing and Development Agreement with Automated Programming Technologies, Inc. (d) Equipment lease with Maryland National Leasing Corporation. (e) Purchase Agreement with Development Corp. of America and Ralph E. Hazelbaker. (f) Automobile lease agreements (three) with Galles Rental. (g) Duplicator lease agreement with Eastman Kodak Company. (h) Telephone equipment lease agreement and amendments with AT&T Information Systems. (i) Software Licensing Agreements (two) with Infocentre. (j) Software Agreement and Customer Support Services Agreement with Hewlett-Packard. (k) Agreement for equipment sale with Amcare Microsoftware Systems.

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(l) Agreement for AMS License Programs with Amcare Microsoftware Systems. Claims arising from such rejection must be filed no later than thirty (30) days following the Confirmation Date.

I. Disputed C/I Reserve On the Effective Date, the Distributions reserved for the holders of Disputed Claims and Disputed Interests will be held in trust by Reorganized Care in a segregated account. The cash and New Common Stock to be deposited into the Disputed C/I Reserve will be equal to that which would be distributed on account of all Disputed Claims if such Disputed Claims were allowed in full, or such lesser amount of cash and New Common Stock as may be found by the Court to constitute a sufficient reserve for all Disputed Claims. Any interest or dividends which are paid in cash or in kind on account of cash and New Common Stock attributable to the Disputed Claims prior to the disbursements will be added to the Disputed C/I Reserve. The cash contained in the Disputed C/I Reserve will be invested as permitted by order of the Bankruptcy Court. All New Common Stock held in the Disputed C/I Reserve will be deemed to be issued and outstanding and with respect to any matter requiring a vote of shareholders, will be deemed to vote on such matter in the same proportions as the votes actually cast by all holders of New Common Stock. When any Disputed Claim or Disputed Interest becomes an Allowed Claim or Allowed Interest subsequent to the Effective Date, the distributions on account of such Allowed Claim or Allowed Interest will be deposited with the Disbursing Agent, Indenture Trustees and/or stock transfer agent for delivery to the holder as soon as practicable thereafter.

J. Unclaimed Property Any Distributions from the Indenture Trustees, Disbursing Agent and/or stock transfer agent under the Plan which are unclaimed after 180 days following the Effective Date will be returned to Reorganized Care. Reorganized Care will then deposit this unclaimed property in the Unclaimed Property Reserve. Any principal, interest, or dividends payable in cash or in kind which may have been paid on account of Unclaimed Property will be held for the benefit of holders of Allowed Claims which have failed to claim Unclaimed Property. For a period of five years following the Effective Date, any Unclaimed Property and any interest, principal or dividend payment attributable to such unclaimed property will be delivered to the holders thereof upon presentation of evidence satisfactory to Reorganized Care that such holder is entitled to such Unclaimed Property. All rights to claim Unclaimed Property will terminate five years following the Effective Date, and Unclaimed Property will then be returned to Reorganized Care as its property free and clear of any claims or obligations of Reorganized Care under the Plan.

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K. Surrender of Old Notes and Old Debentures As a condition to receiving any Distribution under the Plan, the holders of Public Debt must surrender their Old Notes and Old Debentures. Following confirmation, the holders of Public Debt will receive specific instructions regarding the time and manner in which the Old Notes and Old Debentures are to be surrendered. Old Notes and Old Debentures may be surrendered to receive the Distributions to which the holders of Public Debt are entitled for a period of five years after the Effective Date. If no surrender occurs during this period, no Distribution may be made to such holders of Public Debt. L. Distributions of Fractions The Plan provides that one share of New Common Stock will be issued for each $10.00 of Allowed Claim. All fractions of New Common Stock and Shareholder Warrants which would otherwise have been distributed will be aggregated in separate pools (“the Fractional Pools”) on the date of such Distribution. Holders of Allowed Claims and Allowed Interests who would otherwise be entitled to receive fractions will be ranked according to the size of the fractions to which such holder would otherwise be entitled. If two or more holders are entitled to the same fraction (as rounded to the second decimal place), the ranking of such holders will be determined by lot. Based on such ranking, the whole shares of New Common Stock and Shareholder Warrants will be distributed to the holders entitled to the largest fractions of each until all of the whole units of New Common Stock and Shareholder Warrants in the Fractional Pools have been distributed. M. Creditors’ Committee Following confirmation of the Plan, the Creditors’ Committee will continue in its current form until the Effective Date, after which it will continue on a reduced basis. The Committee will have the right to participate in hearings which take place after the Effective Date, such as hearings to modify or amend the Plan, hearings on applications for professionals’ compensation, and on objections to claims. Members of the Committee will continue to serve without compensation, but shall be reimbursed for their reasonable and necessary expenses. Attorneys, accountants and other professionals employed by the Committee, who continue to be employed after the Effective Date, will be compensated by Reorganized Care. If Reorganized Care objects to the compensation requested by such professionals, it may apply to the Bankruptcy Court for a determination of the compensation due. N. Conditions to Confirmation Unless waived by a vote of the Committee, confirmation of the plan is expressly conditioned upon: (i) the Committee obtaining, prior to the Confirmation Date, the Banks’ agreement to restructure the indebtedness of certain Affiliates to the Banks; and (ii) Class 11 Allowed Claims totaling in amount to no more than $1,500,000.

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(e) Certain Federal Income Tax Consequences of the Plan A. General Tax Considerations Certain significant federal income tax consequences of the Plan under the Internal Revenue Code of 1986, as amended (the “Tax Code”), are described below. The Plan will limit Care’s ability to use its net operating loss carryovers (“NOLs”) and its general business tax credit carryovers (“BTCs”) to reduce its federal income tax liabilities on future earnings. The tax consequences of the Plan are subject to many uncertainties due to the complexity of the Plan, the unsettled nature of several of the tax issues presented by the Plan and the lack of interpretative authority regarding certain changes in the tax law, including changes made to the applicable sections of the Tax Code by the Bankruptcy Tax Act of 1980, the Tax Reform Act of 1984, and the Tax Reform Act of 1986. The Committee has not received an opinion of counsel as to the tax consequences of the Plan. Uncertainties with regard to federal income tax consequences of the Plan also arise due to the fact that certain information, including the Company’s federal and state income tax returns have not been reviewed or audited by the Committee. Events subsequent to the date of this Disclosure Statement, such as the enactment of additional tax legislation, could also change the federal income tax consequences of the Plan and the transactions contemplated thereunder. CREDITORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS, TO REVIEW THIS MATERIAL AND TO CONSIDER THE TAX CONSEQUENCES OF THE PLAN TO THEM, INCLUDING THE EFFECT OF FOREIGN, STATE AND LOCAL TAXES. THIS DISCLOSURE STATEMENT IS NOT INTENDED TO BE AND SHOULD NOT BE CONSTRUED AS LEGAL OR TAX ADVICE TO ANY CREDITOR.

B. Tax Consequences to the Company 1. Net Operating Losses During recent years, the Company has incurred substantial net operating losses. The Company estimates that, as of the taxable year ending December 31, 1988, its NOL carryovers and other tax shields total to approximately $78 million. Operating losses incurred in a taxable year may be carried forward for 15 years and used to offset income earned in those years. The NOLs expire at various dates through the year 2002. In addition, the Company estimates that it has consolidated BTCs of approximately $4,021,000 (adjusted pursuant to the Tax Reform Act of 1986) which can be used as a credit against future federal income tax liabilities. The BTCs will expire in the year 2002. Certain provisions of the Tax Code, including the limitations imposed by Sections 382 and 383 of the Tax Code, the regulations governing the filing of consolidated federal income tax returns and the rules governing debt cancellation income, may affect the amount of NOL and BTC carryovers which will be available to the Company if certain events occur, including changes in the nature of its business and changes in the ownership of its stock. Each of these provisions is discussed below.

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Section 382 of the Tax Code imposes limitations on a corporation’s use of its NOLs against future taxable income if the ownership of the stock of the corporation changes by certain prescribed percentages. Section 383 of the Tax Code provides limitations on the use of tax credit carryovers under rules essentially identical to those contained in Section 382 of the Tax Code. Section 382(a) of the Tax Code provides that the amount of income which may be offset by a debtor’s NOLs is limited to an annual amount (hereinafter described) after any “ownership change.” An ownership change occurs, in general, if the percentage of stock held by any one or more 5% shareholders has increased by more than 50 percentage points over the lowest percentage of stock held by those shareholders during the applicable testing period. Generally, the testing period is the 3-year period ending on the date any 5% shareholder’s ownership interest changes. The term “5% shareholders” is broadly defined and certain groups of less than 5% shareholders are aggregated together and treated as one 5% shareholder. It is anticipated that under the present Committee Plan an ownership change will occur. If an ownership change occurs, the taxpayer’s use of its NOLs thereafter is limited to an annual amount (the “annual limitation amount”) equal to the product of (i) the federal long-term tax-exempt rate in effect at the time of the ownership change (currently approximately 7.5%) times (ii) the fair market value of the stock immediately prior to the ownership change. However, if the ownership change occurs as a result of an exchange of stock for debt in a bankruptcy proceeding, the annual limitation amount is increased to reflect any increase in the value of the stock which is attributable to any surrender or cancellation of creditor’s claims in exchange for stock, pursuant to Section 382(1)(6) of the Tax Code (the “special insolvency limitation”). The special insolvency limitation thus reflects any increase in value of the stock attributable to debt cancellation in the bankruptcy reorganization. For example, if the value of a corporation’s stock before its reorganization is $200 and the value of its stock increases to $1,000 after its reorganization as a result of the surrender of its creditors’ claims for stock in the reorganization, the use of NOLs will be limited to $75 ($1,000 × 7.5%) using the annual limitation amount. It is estimated that there is no value in the Company’s stock before reorganization under the Committee’s Plan, and that the value of the stock immediately subsequent to the reorganization may be $50,000,000, which is the midpoint of the range identified in HLHZ’s preliminary opinion of value. No assurance can be given that the value of the stock for Section 382 purposes will be determined to be $50 million, and a higher or lower value may ultimately apply. In the event the value is less than $50 million, the utilization of the NOL would be reduced in accordance with the foregoing formula. Section 382(1)(5) of the Tax Code provides an alternative to the special insolvency limitation for a corporation in a bankruptcy proceeding if two requirements are met (the “bankruptcy alternative”). First, any ownership change must occur as part of a plan of reorganization approved by the court during that bankruptcy proceeding. Second, persons who were shareholders or creditors of the corporation immediately before the ownership change must own, immediately after the ownership change as a result of the ownership of their prior interests, stock which has at least 50% of the total voting power and 50% of the total value of all of the stock. For purposes of this 50% ownership

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test, stock transferred to a creditor in satisfaction of indebtedness is only taken into account if such indebtedness was either held by the creditor for at least 18 months prior to the filing of the bankruptcy proceeding or arose in the ordinary course of the trade or business. Such indebtedness will be referred to as “qualifying indebtedness.” Since a substantial portion of the New Common Stock will be distributed under the Committee’s Plan to those who hold publicly traded debt, there is a significant doubt that the Committee can demonstrate that it can satisfy the requirements of Section 382(b)(5). If a corporation meets the foregoing requirements, neither the annual limitation amount nor the special insolvency limitation will apply to limit the amount of annual income which can be offset by NOLs. Instead, the corporation’s NOLs will be reduced by (a) the interest paid or accrued by the corporation during the current taxable year prior to the ownership change and in the three preceding taxable years on that portion of the indebtedness with respect to which stock is issued under the plan (the “interest reduction”) and (b) one-half of the excess of the amount of debt discharged in the bankruptcy reorganization over the fair market value of the stock exchanged therefor. Furthermore, if a second ownership change occurs within two years after the use of the bankruptcy alternative, all of the NOLs will be eliminated for periods subsequent to the second ownership change. 2. Discharge of Indebtedness As a result of the Plan, the Allowed Claims of Class 8 and Class 11 debtholders will be settled in exchange for cash, but Class 11 holders have the option to receive one share of new common stock for each $10 of such holder’s Allowed Claim. It is probable that the IRS will treat the Company as if it settled the claim for cash at an amount less than the full amount of the claim and in turn purchased the shares for cash. As a general rule when debt is discharged in a bankruptcy proceeding in exchange for cash or other property having a value less than the face amount of the debt discharged, the debtor’s NOLs are reduced by the amount of such difference (the “debt discharge rule”). However, in the case of Class 13 and 14 debtholders who receive only New Common Stock for each $10 of the Allowed Claim in exchange for the debt discharged, the debt discharge rule does not apply, even though the stock has a fair market value less than the face amount of the debt discharged. In such a case the debtor does not sustain a reduction in its NOLs. This concept is commonly referred to as the “stock-for-debt exception” to the debt discharge rule. In order to qualify for the stock-for-debt exception, the stock transferred to creditors must not be considered “de minimis” within the meaning of Section 108(e)(8) of the Tax Code. This section generally defines a “de minimis” case as one where nominal or token shares are issued. The Committee believes that the New Common Stock to be issued under the Plan should not be considered as nominal or token. Therefore, the Company should sustain no reduction of its NOLs with respect to the Allowed Claims of the Class 13 and 14 creditors exchanged for New Common Stock. The Company will sustain a reduction of its tax attributes where debts are satisfied only for cash (or considered to be satisfied only for cash) at less than face value without any stock being issued as in the case of Class 8 and 11 claims. However, Section 108(e)(2) of the Tax Code provides that there will be no reduction of NOLs if the payment of the liability discharged would have given rise to a

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deduction for federal income tax purposes such as a purchase of office supplies with less than one year’s useful life. Under the Committee’s Plan the number and amount of claims in Class 8 and 11 claims have not yet been estimated but it does not appear to represent a significant amount in relation to the overall amount of debt being restructured or the amount of NOL being preserved. 3. Alternative Minimum Tax The Tax Reform Act of 1986 added an alternative minimum tax applicable to corporations which replaces the “add on” corporate minimum tax. The tax equals 20% of the corporation’s alternative minimum taxable income (“AMTI”) in excess of a $40,000 exemption (which is phased out at higher income levels) and is payable only to the extent it exceeds the corporation’s regular federal income tax liability. Because certain deductions in determining a corporation’s taxable income are added back and other adjustments are made in calculating AMTI, it is quite possible for a corporation to have no taxable income or even a loss and still owe an alternative minimum tax. AMTI is computed by modifying the corporation’s taxable income for certain adjustments and preferences. One adjustment which will increase the Company’s liability for the alternative minimum tax is the limitation on the use of NOLs in computing AMTI. A corporation may use its NOLs in calculating its regular taxable income and its AMTI. However, the NOLs that are allowable against AMTI may not exceed 90% of AMTI, so that a corporation’s AMTI can never be reduced solely through use of its NOLs. As a result, the Company would be liable for an alternative minimum tax even if its taxable income in a year is less than the available NOLs, so that it has no regular taxable income. For example, if the Company earns taxable income in 1990 of $10 million and has an allowable net operating loss carryover equal to at least $10 million, its taxable income would be zero. However, assuming no other adjustments, its AMTI would be $1 million and its alternative minimum tax liability would be $200,000 because only 90% of AMTI can be offset by NOLs. 4. Consolidated Federal Income Tax Return Issues The ability of the Company to use its NOLs in future years may be affected by the Treasury Department Regulations governing the filing of consolidated federal income tax returns. The major limitations are the separate return limitations year rules (the “SRLY Rules”) and the consolidated return change of ownership rules (the “CRCO Rules”). Neither of these rules will completely eliminate the NOLs. If the SRLY rules apply, a net operating loss can be used only to offset the income of the entity which incurred the loss and cannot offset the income of other companies in the affiliated group. If the CRCO Rules apply, the losses of the members of an affiliated group cannot be used to offset income of any corporation which becomes a member of the group after the year in which the loss was incurred. The CRCO Rules should apply to the Company because there likely will be a change in the ownership of the Debtor’s stock (as defined in the consolidated return Treasury Regulations). Thus, if the Company’s consolidated group acquires a profitable new member of the group, the income of such member could not be offset by the current affiliated group’s NOLs. Moreover, the SRLY Rules should apply to the Debtor’s bankruptcy reorganization. Accordingly, each of the Debtor’s subsidiaries that remains in existence following the reorganization

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will only be able to use its NOLs to offset its own income and not to offset the income of other subsidiaries of the Company’s consolidated group. Since the losses are almost entirely at the parent level, as a practical matter the SRLY Rules should not have negative tax consequences unless the company acquires or is acquired by an outside corporation or changes its line of business. Although the Committee’s business plan does not contemplate the reorganized Debtor acquiring or being acquired by another corporation or changing its line of business during the 1989–95 period, the Committee has not ruled out this possibility. 5. Tax Reorganization Under the Plan, the holders of unsecured debt (excluding ordinary trade debt) and Public Debt will exchange their Allowed Claims for shares of New Common. Trade creditors of the Company will exchange their Allowed Claims for cash or be considered to do so. If any Allowed Claims constitute “securities” for federal income tax purposes (“tax securities”), exchange of such tax securities should qualify as a recapitalization of Care Enterprises, Inc. under Section 368(a)(1)(E) of the Tax Code. Under Section 1032 of the Tax Code, the Company should recognize no gain or loss on the issuance of its New Common in the bankruptcy reorganization. Exhibit “2” Care Enterprises Liquidation Analysis Gross Proceeds ($ 000’s)

Current Assets Cash Accounts Receivable/Net Facility Receivables HCN Receivables Government Program Receivables Inventory Facility Inventory HCN Inventory Prepaid Assets Notes Receivable Refundable Taxes TOTAL CURRENT ASSETS Other Assets Property and Equipment/Net LTC Facilities HCN Misc. Equipment Mortgage Notes Receivable Other Assets Restricted Funds Excess of Costs Over Net Assets Acquired TOTAL OTHER ASSETS TOTAL ESTIMATED GROSS PROCEEDS

Forced Liquidation Value $

2,500

Orderly Liquidation Value $

2,500

11,000 N/A 4,200

11,000 N/A 6,200

N/A N/A 3,600 1,000 600 $ 22,900

N/A N/A 3,600 1,000 600 $ 24,900

$ 72,300 8,100 500 8,600 1,900 3,700

$101,200 9,600 500 8,600 1,900 3,700

0 $ 95,100

0 $125,500

$118,000

$150,400

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Exhibit “2” Care Enterprises Liquidation Analysis Net Proceeds ($000’s)

Current Assets Total Estimated Gross Proceeds Chapter 7 Administrative Expenses Legal and Accounting Transaction Costs Trustee’s Fees General Administration Chapter 7 Administrative Expenses Estimated Proceeds Available for Claims Estimated Priority Claims Wages/Benefits Taxes Estimated Proceeds Available for Secured and Unsecured Claims Secured Liabilities at 12/31/87 Unsecured Liabilities at 12/31/87

Forced Liquidation Value

Orderly Liquidation Value

$118,000

$150,400

(3,000) (3,000) (3,500) (7,500)

(6,000) (3,000) (4,600) (15,000)

(5,000)

(5,000)

$96,000

$116,800

(1,500) (1,500)

(1,500) (1,500)

$93,000 88,000 161,000

$113,800 88,000 161,000

Exhibit “3” The Official Creditors’ Committee of Care Enterprises, Inc. At your request, we have performed the agreed-upon procedures enumerated below, to the projected consolidated financial statements of Care Enterprises, Inc., Debtor in Possession (“Care”) as prepared by Care in connection with and included in Care’s Amended Joint Disclosure Statement dated March 17, 1989 (“Care’s Amended Disclosure Statement”) filed with the United States Bankruptcy Court. The projected financial statements include projected consolidated balance sheets as at December 31, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 and projected consolidated income statements and projected consolidated cash flows for the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994 and 1995. It is understood that this report and the projected consolidated financial statements accompanying this report are solely for your information to assist you in effectuating a Plan of Reorganization (“Creditors’ Plan”) to be filed with the United States Bankruptcy Court and not for any other purpose. Our procedures were as follows: 1 We obtained and read the projected consolidated financial statements included in Care’s Amended Disclosure Statement as discussed above. 2 We applied adjustments to Care’s projected consolidated financial statements resulting from differences between (i) assumptions used in the projected consolidated financial statements included in Care’s Amended Disclosure Statement and (ii) assumptions used in the accompanying projected consolidated financial statements.

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3 We applied the pro forma adjustments reflecting the Creditors’ Plan to the December 31, 1988 year end projected balance sheet. 4 We assembled (i) the accompanying projected consolidated financial statements utilizing the financial model used by Care and provided to us and (ii) the pro forma 1988 year end balance sheet. Because the procedures described above do not constitute an examination of the projected consolidated financial statements in accordance with standards established by the American Institute of Certified Public Accountants (“AICPA”), pursuant to the standards set forth in Statement on Standards for Accountants’ Services on Prospective Financial Information issued by the AICPA, we do not express an opinion on whether the projected consolidated financial statements are presented in conformity with AICPA presentation guidelines or on whether the underlying assumptions provide a reasonable basis for the presentation. Had we performed additional procedures or had we made an examination of the projected consolidated financial statements in accordance with standards established by the AICPA, matters might have come to our attention that would have been reported to you. Furthermore, there will usually be differences between forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. ERNST & WHINNEY Century City Los Angeles, California April 14, 1989 CARE ENTERPRISES, INC. DIFFERENCES BETWEEN (i) ASSUMPTIONS USED IN THE ACCOMPANYING PROJECTED CONSOLIDATED FINANCIAL STATEMENTS AND (ii) ASSUMPTIONS USED IN PROJECTED CONSOLIDATED FINANCIAL STATEMENTS FOUND IN CARE’S AMENDED DISCLOSURE STATEMENT APPENDIX A Assumptions Used in Care’s Amended Disclosure Statements Occupancy Levels With certain specified exceptions, future facility occupancy levels are projected to be the same as May 31, 1988 year-to-day levels.

Assumptions Used in the Accompanying Projected Consolidated Financial Statements Projected occupancy levels for some facilities are changed from those used in Care’s Amended Disclosure Statement to reflect changes in occupancy levels experienced subsequent to May 31, 1988.

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Medi-Cal Catch-Up In 1989 and 1990, Medi-Cal reimbursement increases are assumed to be 1% greater than inflation, i.e., are assumed to increase from 1988 levels by 7.7% in 1989 and 8.2% in 1990. In 1991, Medi-Cal reimbursement is assumed to 4% greater than inflation. In years thereafter, Medi-Cal reimbursement increases are assumed to equal the rate of inflation. Private Pay Census Shift The rate increases and cost cuts assumed in Care’s Amended Disclosure Statement will have no effect on the facilities’ private pay census.

Ripple Effect The implementation of the new California minimum wage is not assumed to have a “ripple” effect (i.e., it will not result in salary increases for any class of workers other than those directly affected). Impact of Catastrophic Health Legislation Medicare patient days are projected to increase as of 1989 based on Care’s review of the impact of the passage of the Medicare Catastrophic Coverage Act of 1988 (the “Act”) included in Care’s January 1989 document “Care Enterprises—Analysis of Catastrophic Health Legislation” included as Exhibit “1” in the Care’s Amended Disclosure Statement.

Nursing Costs Care will achieve its targeted nursing cost reductions by June 30, 1989 and will maintain these levels in subsequent years. Decertification Contingency The cost of curing threatened decertification actions ranging from $800,000 to $1,100,000 is assumed.

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In 1989, Medi-Cal reimbursement rates are assumed to increase 5% from their 1988 levels. In 1990 and years thereafter, Medi-Cal reimbursement rates are projected to increase by amounts equal to the general rate of inflation.

For each year of the 1989–1995 projection period, Care facilities will experience a shift in payor mix from private pay to Medicaid of 5% of private pay levels assumed in Care’s Amended Disclosure Statement. Implementation of the minimum wage is estimated to have the effect of raising the salaries of 15% of Care’s California workforce by 5% in 1989.

All assumptions are as detailed in Care’s December 1988 document, “Care Enterprises—Analysis of Catastrophic Health Legislation” included elsewhere in this disclosure statement. The projected consolidated financial statements of Care included in Care’s Amended Disclosure Statement reflect subsequent revisions to such assumptions which revisions resulted in increases in projected revenues. Such revisions have not been incorporated in the accompanying projected consolidated financial statements. Nursing costs will exceed targeted levels by 3.4%, the same percentage by which actual December 1988 nursing costs exceed levels targeted by Care. The cost of curing decertification actions are assumed to be greater than Care’s assumptions by $200,000 each year.

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Interest on Cash Balances Interest is calculated on outstanding cash balances at interest rates of 7% to 16%. Terms of Reorganization Plan Bank Debt All bank debt is assumed to be paid over the course of the three year period from 1989 to 1991.

Interest on outstanding cash balances is calculated at 7%.

A new note of $37,200,000 will be issued. Such amount is subject to change based upon the actual amount of accrued interest and certain fees through the effective date. The terms of the note are as follows:

(i) $10 million principal payment (ii) (iii)

(iv)

(v)

within 120 days of the confirmation date. Interest payable monthly at prime plus 2%. Prime rate assumed to be 11.5%. Quarterly principal payments (less interest component) beginning March 31, 1990 as follows: March 31, 1990—$1.5 million June 30 and September 30, 1990—$2.5 million per quarter December 31, 1990—$3.5 million March 31, 1991 through September 1992—$3.5 million per quarter December 31, 1992—remaining unpaid balance Beginning March 31, 1990, quarterly payments equal to excess net operating cash, as defined, payable 60 to 120 days after the end of each quarter. Estimated bank fees of $300,000 paid annually in advance for Agents’ and letter of credit fees.

In addition, an estimated payment of $350,000 to cover outstanding letter of credit fees, outstanding Agent fees and other miscellaneous fees are paid within 120 days of the confirmation date. Bank Letter of Credit A non-cash collateralized letter of credit will be issued to cover workers’ compensation claims at a fee of $82,000 in 1989 and $110,000 in the years 1990–1995.

A non-cash collateralized letter of credit will be issued to cover workers’ compensation claims. Letter of credit expires March 31, 1993. Fee included in (v) above.

6.17


Trade Debt All trade debt will be paid over the course of the three-year period from 1989 to 1991.

Bondholder Debt All bondholder debt will be paid over the course of the seven-year period from 1989 to 1995. Additional Financing Additional mortgage debt incurred. The cash flow and interest expense on such new mortgage debt is reflected in all financial statements for the years 1990 to 1995.

Income Taxes Net operating losses (NOL) carried forward for tax computation purposes are not assumed to be subject to limitation.

357

A maximum of $3 million in “true trade debt” (as defined in the Creditors’ Plan) will be paid at a rate of $.50 per $1.00 of value. A $1.5 million fund will be available to pay these trade claims. Remaining trade debt will be converted to equity. All bondholder debt will be converted to equity.

Debt financing in the amount of $10 million is obtained within 120 days of the confirmation date. Certain assets of the Company are pledged as security for such debt. To the extent that cash proceeds are received from sales of assets in excess of those amounts assumed in Care’s Amended Disclosure Statement, the need for such additional financing would be reduced. The special insolvency limitation for the utilization of net operating loss (“NOL”) carryovers which is available under § 382(1)(6) of the Internal Revenue Code is used.

358

Current Cash Accounts Receivable, Open Facilities Accounts Receivable, Eliminated Facilities Inventory, Open Facilities Inventory, Eliminated Facilities Prepaids Normal Course of Business, Open Facilities Normal Course of Business, Eliminated Facil. Bankruptcy Related & Refundable Subtotal Prepaids Notes Receivable Receivables from Prior Owner of Americare Total Current Assets Property, Plant & Equipment, Net—Open Property, Plant & Equipment, Net—Eliminated Mortgage Notes Receivable Other Assets—Open Facilities Other Assets—Eliminated Facilities Restricted Funds—Open Facilities Excess of Cost Over Net Assets Acquired—Open Excess of Cost Over Net Assets Acquired—Elim. Total Assets Current Liabilities Excluding Reorganized Debt & New Mortgages Accounts Payable, Open Facilities Accounts Payable, Eliminated Facilities

Assets

Care Enterprises Consolidated Balance Sheet ($ in Thousands)

$ 4,591 24,037 3,902 3,340 141 2,168 12 1,600 3,780 269 100 40,160 96,163 2,625 11,729 7,853 227 4,351 3,645 1,591 $168,343

$ 7,703 246

2,065 79 1,800 3,944 245 100 39,177 101,215 19,008 11,998 7,853 518 4,086 3,738 3,380 $190,972

$ 7,336 1,587

1989

$ (500) 22,915 8,706 3,181 587

1988 Year-End Projected (1)

$ 8,134 0

2,290 0 1,600 3,890 294 100 38,512 92,039 20 11,436 7,853 0 4,616 3,551 0 $158,026

$ 5,286 25,358 59 3,527 0

1990

$ 8,565 0

2,411 0 0 2,411 315 100 35,157 88,681 20 11,120 7,853 0 4,881 3,458 0 $151,169

$ 1,624 26,993 0 3,714 0

1991

$ 9,019 0

2,539 0 0 2,539 346 100 37,149 86,135 20 10,774 7,853 0 5,146 3,364 0 $150,441

$ 1,584 28,670 0 3,911 0

1992

$ 9,497 0

2,673 0 0 2,673 380 100 49,971 83,876 20 10,395 7,853 0 5,411 3,271 0 $160,796

$ 12,544 30,156 0 4,118 0

1993

$10,001 0

2,815 0 0 2,815 417 100 64,611 81,884 20 9,978 7,853 0 5,676 3,177 0 $173,199

$ 25,187 31,757 0 4,336 0

1994

$10,531 0

2,964 0 0 2,964 457 100 79,972 80,881 20 9,521 7,853 0 5,941 3,084 0 $187,272

$ 38,443 33,443 0 4,566 0

1995

359

16,265 114 4,701 1,047 580 280 22,987 1,686 100 32,722 52,807 1,191 2,500 4,501 0 7,616 200 12,317 0 0 0 27,200 0 0 0 0 10,000 29,607 $168,343

16,265 519 4,800 1,700 1,200 280 24,764 1,727 100 35,514 54,493 6,694 2,500 4,600 6,394 8,116 200 19,310 0 0 0 27,200 0 0 0 0 10,000 35,261 $190,972

0 0 0 20,872 0 0 0 0 7,500 30,796 $158,026

4,308 0 7,616 200 12,124

16,265 0 4,508 494 580 280 22,127 1,730 125 32,116 51,077 1,042 2,500

0 0 0 9,690 0 0 0 0 5,000 39,895 $151,169

4,107 0 7,616 200 11,923

16,265 0 4,307 46 580 280 21,478 2,334 125 32,502 48,743 917 2,500

0 0 0 0 0 0 0 0 2,500 53,810 $150,441

3,906 0 7,616 200 11,722

16,265 0 4,106 0 580 280 21,231 2,012 125 32,387 46,731 792 2,500

0 0 0 0 0 0 0 0 0 68,726 $160,796

3,705 0 7,616 200 11,521

16,265 0 3,905 0 580 280 21,030 2,192 111 32,830 44,539 681 2,500

0 0 0 0 0 0 0 0 0 83,132 $173,199

3,603 0 7,616 200 11,419

16,265 0 3,803 0 580 280 20,928 2,379 105 33,412 42,160 576 2,500

0 0 0 0 0 0 0 0 0 99,175 $187,272

3,595 0 7,616 200 11,411

16,265 0 3,795 0 580 280 20,920 2,475 100 34,025 39,685 476 2,500

(1) Assumed confirmation date of January 1, 1989. Actual confirmation date would most likely be in the third quarter of fiscal year 1989.

Accrued Liabilities Normal Course of Business—Open Facilities Normal Course of Business—Eliminated Facil. Workmens Comp. Reserve for Discontinued Operations Contingency Reserve Accrued Consulting Fees Subtotal Accrued Liabilities Current Portion of Long Term Debt—Open Current Portion of Long Term Debt—Eliminated Total Current Liabilities Excl. Reorg. Debt Long Term Debt (Facilities)—Open Long Term Debt (Facilities)—Eliminated Deferred Income Taxes Other Liabilities L.T. Workmens Comp Bankruptcy Reserves Litigation Reserves Other Adjustments Subtotal Other Liabilities Reorganization Debt Bondholder Debt Subordinated Unsecured Promissory Notes Preferred Stock Notes Payable, Citicorp & Wells Convenience Claims Trade Payables Accrued Interest Not Paid—Bank Debt Accrued Interest Not Paid—Bonds Additional Financing Equity Total Liabilities and Equity

360

Medicare Revenues Medicaid Revenues Private Revenues Veteran Revenues HMO Revenues Ancillary Revenues Other Revenues Revenues Nursing Building Expenses Utilities Housekeeping Laundry Expenses Dietary Expenses Food Expenses Patient Activity Expenses Social Service Expenses Education Expenses Ancillary Expenses Employee Benefits Administrative Expenses Direct Expenses Cost Reductions to be Realized Gross Profit Rent Expense

Care Enterprises Consolidated Income Statement ($ in Thousands)

$ 11,683 109,336 49,462 1,558 3,887 48,482 8,291 232,699 62,061 3,911 5,010 5,493 3,359 8,999 7,216 2,070 1,098 2,111 33,747 24,340 23,254 182,669 712 49,318 7,512

1989 $ 10,883 97,900 49,476 1,470 3,940 48,967 8,259 220,895 58,179 3,460 4,611 4,887 2,992 8,078 6,440 1,795 996 1,843 33,157 22,703 21,767 170,908 N.A. 49,988 6,486

1990 $ 11,503 102,215 53,202 1,546 4,076 51,729 8,430 232,701 63,180 3,568 4,776 5,052 3,096 8,389 6,581 1,830 1,041 1,910 34,664 23,462 22,684 180,234 N.A. 52,467 6,541

1991 $ 12,119 110,177 56,074 1,630 4,186 54,424 8,543 247,152 66,566 3,757 5,020 5,335 3,269 8,858 6,831 1,933 1,099 2,016 36,459 24,657 23,928 189,729 N.A. 57,423 6,707

1992 $ 12,768 116,126 59,102 1,718 4,299 57,259 8,699 259,970 70,133 3,957 5,275 5,633 3,452 9,353 7,091 2,041 1,161 2,130 38,346 25,914 25,242 199,727 N.A. 60,243 6,874

1993

$ 13,452 122,396 62,293 1,810 4,415 60,242 9,158 273,766 73,892 4,166 5,545 5,948 3,645 9,876 7,360 2,155 1,225 2,248 40,332 27,234 26,628 210,255 N.A. 63,511 7,052

1994

$ 14,174 129,006 65,656 1,908 4,534 63,379 9,641 288,299 77,851 4,387 5,827 6,282 3,850 10,428 7,640 2,276 1,295 2,375 42,420 28,620 28,089 221,340 N.A. 66,959 7,253

1995

361

94 (5,564) 90 $(5,654) $232,699 (208,241) (2,600) (5,620) (265) (1,000) 14,972

Revenues Operating and G&A Expenses HCN-Facilities Duplicate Profit Facility Interest Expense Change in Restricted Funds Decertification Contingency Cash Operating Income

4,615 12,733 24,860 8,587 15,870 5,620 3,672 0 850 1,550 1,199 (35) 2,600 1,000 (6,845) 0 368

Other Indirect Expense Corporate Expenses SG&A Expense Depreciation Expense Operating Profit Interest Expense (Facilities) Interest Expense—Bank Debt Interest Expense—Trade Credit Loan Fees Interest Expense—Add. Financing Interest Income (Notes Recvbl.) Interest Income—Cash Reserves HCN, Facility Duplicate Profit Decertification Contingency Gain/(Loss) on Sale of Facilities Cont. Losses at Closed Fclts. A/R Writeoffs at Closed Facilities Recapture of Unused Reserves Amortization of Goodwill Earnings Before Taxes Income Taxes Net After Tax Income $220,895 (194,242) (2,800) (5,215) (265) (1,000) 17,373

4,181 12,668 23,335 7,607 19,046 5,215 3,672 0 300 1,550 1,175 321 2,800 1,000 (4,333) 0 271 0 94 1,308 119 $1,189 $247,152 (214,813) (3,100) (4,970) (265) (1,100) 22,904

94 14,214 299 $13,915

94 9,181 82 $9,099 $232,701 (204,215) (2,900) (5,096) (265) (1,100) 19,125

4,663 13,714 25,084 7,261 25,078 4,970 1,308 0 300 775 1,120 114 3,100 1,100 0 451 0

4,429 13,011 23,981 7,354 21,132 5,096 2,818 0 300 1,163 1,149 370 2,900 1,100 0 0 0

$259,970 (225,966) (3,200) (4,831) (265) (1,200) 24,509

94 17,771 2,855 $14,916

4,910 14,455 26,238 7,209 26,795 4,831 0 0 75 388 1,090 111 3,200 1,200 0 438 0

$273,766 (237,712) (3,400) (4,675) (265) (1,200) 26,515

94 20,999 6,593 $14,406

5,169 15,236 27,457 7,188 28,867 4,675 0 0 0 0 1,056 878 3,400 1,200 0 433 0

(Continued)

$288,299 (250,094) (3,600) (4,474) (265) (1,300) 28,566

94 24,630 8,587 $16,043

5,442 16,058 28,754 6,460 31,745 4,474 0 0 0 0 1,019 1,763 3,600 1,300 0 430 0

362 (124) 0 1,496 4,196 227 (3,483) 16,581 (119) 0

(5,503) 0 1,164 18,172 291 (3,535) 12,735 (90) 0

Change in Long Term Debt (Facilities)—Eliminated Recapture of Unused Reserves Interest Income Net Book Value of Prop. & Equip. Retired or Sold Book Value of Other Assets Retired or Sold Capital Spending Cash after Capital Spending/Asset Disposition/Extraordinary Items Tax Expense Change in Deferred Income Taxes

(1,320) (187) 431 (121) 0 (1,197) 16,176 0 (193) (193) (553) 0 (4,333) (271) 3,636

1990

(1,123) (159) 367 (103) 0 (1,018) 13,954 200 (719) (6,993) (653) 0 (6,845) (368) 3,571

1989

Change in Accounts Receivable Change in Inventory Change in Accounts Payable Change in Prepaid Expenses Change in Accrued Liabilities Subtotal Change in Working Capital Cash after Operations Change in Prepaid Expenses (Non-Operating) Change in Accrued Liabilities (Non-Operating) Change in Other Liabilities Change in Reserve for Discontinued Operations Cont. Losses at Closed Facil. after Reserves Gain/(Loss) on Sale of Facilities Receivables Writeoff at Eliminated Facilities Change in Working Capital—Eliminated Facilities

(Continued)

(82) 0

(125) 0 1,519 0 0 (3,996) 15,819

(1,636) (187) 431 (121) 0 (1,513) 17,612 1,600 (201) (201) (448) 0 0 0 59

1991

(299) 0

(125) 0 1,234 0 0 (4,715) 16,851

(1,676) (197) 454 (128) 0 (1,547) 21,357 0 (201) (201) (46) (451) 0 0 0

1992

(2,855) 0

(125) 0 1,201 0 0 (4,950) 18,443

(1,487) (207) 478 (135) 0 (1,351) 23,158 0 (201) (201) 0 (438) 0 0 0

1993

(6,593) 0

(111) 0 1,934 0 0 (5,196) 21,048

(1,600) (218) 503 (142) 0 (1,457) 25,058 0 (102) (102) 0 (433) 0 0 0

1994

(8,587) 0

(105) 0 2,782 0 0 (5,457) 23,805

(1,686) (230) 530 (149) 0 (1,535) 27,031 0 (8) (8) 0 (430) 0 0 0

1995

363

Cash after Taxes Change in Notes Receivable Change in Rcvbl. from Prior Americare Owner Change in Mortgage Notes Receivable Cash Available for Interest Payments and Principal Reductions Change in Long Term Debt (Facilities)—Open Additional Financing Interest Expense—Additional Financing Cash Available for Pre-Petition Debt Change in Bank Debt Interest on Bank Debt Change in Bondholder Debt Change in Promissory Notes Loan Fees Change in Preferred Stock Cash Dividends Payments in Kind Change in Convenience Claims Change in Trade Debt Interest on Trade Debt Change in Cash

16,462 (25) 0 294 16,731 (1,686) (2,500) (1,550) 10,995 (6,328) (3,672) 0 0 (300) 0 0 0 0 0 0 $695

12,645 (24) 0 269 12,890 (1,727) 0 (1,550) 9,613 0 (3,672) 0 0 (850) 0 0 0 0 0 0 $5,091

(1,730) (2,500) (1,163) 10,638 (11,182) (2,818) 0 0 (300) 0 0 0 0 0 0 ($3,662)

15,737 (22) 0 315 16,030 (2,334) (2,500) (775) 11,259 (9,690) (1,308) 0 0 (300) 0 0 0 0 0 0 ($39)

16,552 (31) 0 346 16,868 (2,012) (2,500) (388) 11,035 0 0 0 0 (75) 0 0 0 0 0 0 $10,960

15,588 (34) 0 380 15,934 (2,192) 0 0 12,643 0 0 0 0 0 0 0 0 0 0 0 $12,643

14,455 (37) 0 417 14,835

(2,379) 0 0 13,256 0 0 0 0 0 0 0 0 0 0 0 $13,256

15,218 (40) 0 457 15,635

364

Cash Accounts Receivable—Open Facilities Accounts Receivable—Eliminated Facilities Inventory—Open Facilities Inventory—Eliminated Facilities Prepaids Normal Course of Business—Open Facilities Normal Course of Business—Eliminated Facil. Bankruptcy Related & Refundable SUBTOTAL PREPAIDS Notes Receivable Receivables from Prior Owner of Americare TOTAL CURRENT ASSETS Property, Plant & Equipment, Net—Open Property, Plant & Equipment, Net—Eliminated Mortgage Notes Receivable

Assets Current

Care Enterprises, Inc. Adjusted Projected Balance Sheet December 31, 1988 ($ in Thousands)

2,065 79 1,800 3,944 245 100 40,677 101,215 19,008 11,998

1,000 22,915 8,706 3,181 587

1988 Year-End as Projected Amount

Ref #

Pro-Forma Adjustments

1,000 22,915 8,706 3,181 587 0 2,065 79 1,800 3,944 245 100 40,677 101,215 19,008 11,998

1989 Year-End Projected Pro-Forma

365

Other Assets—Open Facilities Other Assets—Eliminated Facilities Restricted Funds—Open Facilities Excess of Cost over Net Assets Acquired—Open Excess of Cost over Net Assets Acquired—Elim. TOTAL ASSETS Liabilities Current Liabilities Excluding Reorganized Debt & New Mortgages Accounts Payable—Open Facilities Accounts Payable—Eliminated Facilities Accrued Liabilities Normal Course of Business—Open Facilities (1) Normal Course of Business—Eliminated Facil. Workmens Comp. Reserve for Discontinued Operations Contingency Reserve Accrued Consulting Fees SUBTOTAL ACCRUED LIABILITIES Current Portion of Long Term Debt—Open Current Portion of Long Term Debt—Eliminated TOTAL CURRENT LIABILITIES EXCL. REORG. DEBT Long Term Debt (Facilities)—Open Long Term Debt (Facilities)—Eliminated Deferred Income Taxes Other Liabilities L.T. Workmens Comp Bankruptcy Reserves Litigation Reserves Other Adjustments SUBTOTAL OTHER LIABILITIES

7,853 518 4,086 3,738 3,380 192,472

7,336 1,587 16,265 519 4,800 1,700 1,200 280 24,764 1,727 100 35,514 54,493 6,694 2,500 4,600 6,394 8,116 200 19,310

7,853 518 4,086 3,738 3,380 192,472

7,336 1,587 16,265 519 4,800 1,700 1,200 280 24,764 1,727 100 35,514 54,493 6,694 2,500 4,600 6,394 8,116 200 19,310

366

ADJUSTMENTS: (1) Conversion of Bondholder Debt into Equity (2) Accrued Interest on Bank Debt (3) Convert Non-“True Trade Payables” into Equity (4) Conversion of Bondholder Accrued Interest into Equity (5) Additional Mortgage-Based Borrowings (6) Initial Bank Pay Down (7) Pay-off of “True Trade Payables”

TOTAL LIABILITIES AND EQUITY

Accrued Interest—Bank Debt Accrued Interest Not Paid—Bonds Additional Mortgage Debt EQUITY

Trade Payables

Convenience Claims

Reorganization Debt Bondholder Debt Subordinated Unsecured Promissory Notes Preferred Stock Notes Payable—Citicorp & Wells

192,472

2,400 5,524 0 (42,175)

5,400

300

0 0 34,800

67,712

1988 Year-End as Projected

(3,900) (1,500) (2,400) (5,524) 10,000 67,712 3,900 5,524 300

2,400 (10,000) (300)

(67,712)

Amount

(3) (7) (2) (4) (5) (1) (3) (4) (3)

0 (2) (6) (3)

(1)

Ref #

Pro-Forma Adjustments

192,472

0 0 0 10,000 35,261

27,200

0

0

1989 Year-End Projected Pro-Forma

6.17


367

EXHIBIT “9” January 9, 1989 The Official Committee of Unsecured Creditors of Care Enterprises, Inc. c/o Perry L. Landsberg, Esq. Sidley & Austin 1049 Century Park East Suite 3500 Los Angeles, CA 90067 Gentlemen: At your request, on behalf of the Official Committee of Unsecured Creditors of Care Enterprises, Inc. (the “Committee”) we have conducted a preliminary analysis of Care Enterprises, Inc. (hereinafter sometimes referred to as “Care” or the “Company”) and herewith submit this letter on our preliminary findings. Our conclusions are preliminary in nature and subject to further investigation and analysis. The purpose of this preliminary analysis was to express an opinion regarding the fair market value, as of approximately the date of letter, of the Company as a going concern on a debt-free basis. Care Enterprises, Inc., headquartered in Tustin, California, operates skilled and intermediate nursing facilities. On March 28, 1988, Care filed a voluntary petition with the United States Bankruptcy Court for relief under Chapter 11 of Title 11 of the United States Code. The Company is currently operating as a debtor in possession. The term “fair market value”, as used herein, is defined as the amount at which the Company, on a debt-free basis, would change hands between a willing buyer and a willing seller, each having reasonable knowledge of all relevant facts, neither being under any compulsion to act, with equity to both. In the course of our preliminary investigation, we have, among other things: 1 visited Company headquarters and toured several of the Company’s facilities; 2 discussed with certain members of the management of the Company the history, nature and future prospects of the business; 3 reviewed a 1987 SEC 10-K filing for the Company which contained, among other things, audited financial statements for the three fiscal years ended December 31, 1987; 4 reviewed unaudited financial statements for the 10 months ended October 31, 1988; 5 reviewed the Care Enterprises Business Plan dated October, 1988; 6 reviewed the Debtor’s Joint Disclosure Statement; 7 reviewed publicly-available information on companies we deemed similar to Care;

368


8 reviewed various schedules prepared by Ernst & Whinney, accounting experts retained by the Committee; and 9 conducted such other reviews and studies as we deemed appropriate. These data have been accepted, without further verification, as correctly reflecting the results of the operations and financial condition of the Company, in accordance with generally accepted accounting principles applied on a consistent basis. With respect to the financial forecasts, we have assumed that they have been reasonably prepared and reflect management’s estimates of the future financial results and condition of the Company, and that there has been no material adverse change in the assets, financial condition, business or prospects of the Company since the date of the most recent financial statements and projections made available to us. All such assumptions have been made only for the purpose of this letter, and are subject to future adjustment as the circumstances may warrant. In our preliminary analysis of Care, we have taken into account the incomeand cash-generating capability of the Company. Typically, an investor contemplating an investment in a company on a going-concern basis with income- and cash-generating capability similar to that of Care will evaluate the potential returns of his investment weighted with the potential investment risks. Accordingly, we have utilized market comparative approaches and discounted future cash flow approaches in our preliminary analysis of the Company. In market comparison approaches, appropriate measures of the Company’s earnings and cash flow potential are developed. These levels of earnings and cash flow are meant to be representative of the potential levels the Company can generate in the near-term future. In our preliminary analysis of Care, the Company’s historical financial results, the Company’s business plan, and financial schedules prepared by Ernst and Whinney were utilized to develop various representative levels of cash flow. Since the Company’s recent historical results have been very poor, we gave significant weighting to the Company’s projections as modified by Ernst & Whinney. The second component of market comparative approaches entails the development of capitalization rates. Price to earnings and other ratios derived from the public marketplace reflect investors’ sentiments toward particular industries in general and certain companies specifically. Our preliminary analysis compared the investment attributes of Care to those of a group of comparable, publicly-traded companies. This analysis served as a basis for the selection of appropriate risk-adjusted capitalization rates for Care. The third component of a market comparison approach is the selection and application of control premiums. Price to earnings and other ratios derived from the public marketplace represent transactions in minority blocks of stock. To reflect the value of a company on a control or enterprise basis, a control premium must be applied. Our preliminary analysis included a premium for Care we felt appropriate based on an analysis of premiums paid for control in the public marketplace.

6.17


369

The discounted future cash flow approach takes various measures of projected cash flow and discounts them back at an appropriate risk adjusted discount rate to present value. In our preliminary analysis of Care, we utilized projections prepared by management modified by certain adjustments determined by Ernst and Whinney. Discount rates were developed considering the Company’s capital structure, rates of return required in the public marketplace, and the risk of realizing the Company’s projected cash flow. Based on the investigation, premises, provisos and analyses outlined above and described more fully in the forthcoming report, it is our preliminary opinion that the fair market value of Care Enterprises Inc. on a debt-free basis is reasonably stated in range of ONE HUNDRED FORTY MILLION DOLLARS ($140,000,000) to ONE HUNDRED SIXTY MILLION DOLLARS ($160,000,000). Furthermore, while this opinion is preliminary in nature and subject to further investigation, we currently believe that our final conclusion will fall near the bottom end of this range. In accordance with recognized professional ethics, our professional fees for this service are not contingent upon the opinion expressed herein, and neither Houlihan, Lokey, Howard & Zukin Capital, nor any of its employees have a present or intended financial interest in the Company. HOULIHAN, LOKEY, HOWARD & ZUKIN CAPITAL, A California Limited Partnership

370


6.18 Sample Disclosure Statement for Involuntary Filed Petition (Selected Data) Objective. Section 6.26 of Volume 1 describes the content of the disclosure statement. The selected information for General Homes Corporation given here indicates the focus of the disclosure statement and its interrelationship with the plan of reorganization. This statement reveals the following data: (a) (b) (c) (d) (e) (f) (g) (h) (i)

Results of Operations Activities during the Gap Period Activities Subsequent to the Order for Relief Selected Operating and Financial Data Liquidation Analysis Introduction Overview Recommendations Reorganized General Homes Corporation

INFORMATION REGARDING GENERAL HOMES CORPORATION (a) Results of Operations 1 Restructuring Efforts Initiated in Fiscal Year 1988. A significant portion of the Company’s assets is located, and a substantial amount of the Company’s activities has been conducted, in Houston and Dallas/Fort Worth, whose economies are heavily dependent on the energy, real estate and financial services businesses. Such market areas were adversely affected by a prolonged downturn in such businesses and the resultant effects on other businesses. The Company continued to market homes in all its subdivisions because of the cash flow generated by sales of completed homes, but responded to reduced demand by suspending homebuilding construction in certain subdivisions in Houston and discontinuing homebuilding construction in all subdivisions in New Orleans. The valuation of inventories is based on the Company’s plans for each property and the Company’s estimate of the financial ability of the Company to carry out such plans. The Company’s inventories were (i) intended for use in the Company’s current or near-term homebuilding activities or (ii) identified to be sold in an orderly manner to third parties or joint ventures to which the Company may be a party. Inventories intended for use in the Company’s homebuilding operations are stated at the lower of cost or net realizable value. “Cost” includes land acquisition and development costs, housing construction costs, indirect costs related to development and construction activities, and interest and property taxes incurred during the development and construction period. “Net realizable value” is based on the estimated sales price of the final product (usually a house) less the aggregate of estimated costs to complete the product and estimated disposal costs. If the Company estimates that the cost of inventories upon

6.18

Sample Disclosure Statement for Involuntary Filed Petition (Selected Data)

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completion will exceed Net Realizable Value, the Company provides a reserve for such excess costs. Inventories to be offered for sale are stated at the lower of Cost or fair value. “Fair value” is the estimated sales price of the property, as is, allowing a reasonable time for orderly disposal, less disposal costs. Prior to March 1988, the Company planned to use substantially all inventories in the ordinary course of its homebuilding activities and, accordingly, the inventory valuation at the lower of Cost or Net Realizable Value was based upon the ultimate construction and sale of single-family homes. In March 1988, the Company revised its plans for certain real estate assets. The Company identified certain of its assets, including land and lots, to be sold in an orderly manner to third parties or to joint ventures to which the Company could have been a party to meet the Company’s liquidity needs. Such inventories identified for sale were then stated as the lower of Cost or fair value (rather than Net Realizable Value). Generally, fair value was lower than Net Realizable Value because of the market conditions discussed above. Reducing the assets identified for sale to fair value and reducing certain other assets to Net Realizable Value as estimated in March 1988 resulted in a pre-tax charge to Cost of sales of $91,138,000 at that time (including $6,381,000 primarily related to single-family housing located in subdivisions in which construction had been suspended or discontinued). The Company’s March 1988 estimates of fair value and Net Realizable Value were based on its knowledge of then current conditions in its real estate markets and the Company’s plans for its assets as reflected in its business plan. In addition, the Company had available independent appraisals of certain real estate assets obtained in late fiscal year 1987 to supplement its knowledge of the real estate markets. In the Company’s markets, particularly Houston, there was significant uncertainty in March 1988 about real estate fair values. As discussed above, the Company and the Bank Group executed the Credit Agreement and the Company proposed significant modifications to the terms of the Exchange Offers, which would result in an immediate change in voting control of the Company upon consummation. None of such modifications were contemplated by the Company in the business plan in effect in March 1988. As a result, the Company believed an accounting reorganization would be appropriate when the debt restructurings were completed. In January 1989, in contemplation of the accounting quasi-reorganization and debt restructurings, the Company initiated a valuation of significantly all of its real estate assets. The Company based its valuation of inventories on independent appraisals of substantially all the Company’s real estate assets. Such appraisals were completed in May 1989. The 1989 appraisals indicated that a further impairment in fair value had occurred in the Company’s real estate assets that were identified as held for sale in 1988 when compared to the 1988 valuations. Additionally, it was determined that the fair value of those assets stated at Net Realizable Value was significantly less than the carrying value. There was still very little apparent demand by third parties for unimproved land in Houston, which circumstance has been confirmed by the 1989 appraisals and the Company’s experience of trying to sell certain properties since March 1988. The Company believed that then current market conditions would continue for the foreseeable future.

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The conditions for effecting the accounting quasi-reorganization could not be satisfied until the Exchange Offers were completed and other conditions were met. The two most significant conditions were the existence of positive net worth and a reasonable expectation of future profitability. However, the Company concluded that it was appropriate to reduce the carrying value of its real estate assets to fair value as of March 31, 1989 because the valuations initiated in January 1989 indicated that the current fair value of the Company’s real estate assets was substantially less than the carrying values of such assets. Reducing the Company’s real estate assets and certain other assets to fair value based on the 1989 valuations resulted in a pre-tax charge to Cost of sales of $113,022,000 in March 1989. A summary of the charge-offs is as follows (in thousands):

March 31,

Single-family housing completed or under construction Improved lots Land and development costs Investments in unconsolidated finance subsidiaries Other TOTAL

1988

1989

$ 6,381 38,031 29,575 17,000 151 $91,138

$ 7,974 22,774 75,926 2,700 3,648 $113,022

Beginning in fiscal year 1988, GHC began efforts to reduce costs associated with its operations. Despite such efforts, GHC incurred significant losses in each of the three fiscal years preceding the filing of the Involuntary Petition, including pretax charge-offs on real estate assets and collateralized mortgage obligations aggregating approximately $200,000,000. As of the Petition Date, the Company reported a stockholders’ deficit of approximately $186,000,000 (unaudited). Substantial portions of GHC’s Residential Inventory and Developed and Undeveloped Land are located in markets adversely affected by the prolonged downturn in the energy, real estate and financial services businesses and the resultant effects on other businesses. A significant decrease in demand for housing and other real estate was a direct result of such downturn, particularly in the Houston and Dallas/Fort Worth markets. In such areas, apartment vacancy rates and an available supply of foreclosed homes reduced the demand for new homes among GHC’s traditional customer groups. The strength of the Company’s other markets also decreased. Annual sales of new single-family homes in the Phoenix and Tampa markets continued to decline since 1986, and the homebuilding industry in both markets became increasingly competitive. In July 1989, GHC experienced a change in top management and aggressively continued the cost-cutting measures which it began in fiscal year 1988. These measures included making operational and personnel changes to reduce costs and improve operating efficiencies. Several key managers were replaced

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or dismissed in both homebuilding and mortgage operations. GHC created a new operating environment including centralized accounting procedures and controls and more formalized approval processes, resulting in reductions of fixed costs and closer coordination between GHC and FGMC in closing home sales, pricing of GHC Homes and originating mortgage loans. GHC also reviewed and revised its marketing plans and capital expenditure programs to better integrate GHC’s current and long term plans.1 GHC also implemented a system which lowered the fixed portion and increased the incentive based component of key managers’ compensation. GHC reduced marketing costs by decreasing the number of Model Homes in most subdivisions, reducing advertising expenses to the most cost effective mediums, and providing additional incentives to sales counselors. Improved status reporting by FGMC and other mortgage companies provided GHC with more effective control over Residential Inventory. In addition, FGMC coordinated the acquisition of certain loan commitments to better integrate the pricing of GHC Homes with the marketing strategy for each subdivision. Pricing of GHC Homes has also been revised to reflect a higher market price, thus improving gross profit margins. Notwithstanding these efforts by GHC to streamline its business and improve profitability, GHC continued to operate in adverse markets which hampered its ability to service its debt. A significant portion of GHC’s assets were located, and a substantial amount of GHC’s activities have been conducted, in the Houston and Dallas/Fort Worth markets. Such market areas have continued to be adversely affected by the prolonged downturn in the energy, real estate and financial services businesses and the resultant effects on other businesses. The Company sustained substantial net losses for the fiscal years ended September 30, 1987, 1988 and 1989. 2 Fiscal Year 1990 to the Petition Date. The Company began fiscal year 1990 with approximately forty (40) active subdivisions. At the Petition Date, the number of active subdivisions had been reduced to approximately thirty-one (31). The reduction in the number of active subdivisions primarily resulted from the difficulty GHC encountered, due to its financial condition, in purchasing replacement Lots in new and existing subdivisions and management’s actions to wind down operations in unprofitable subdivisions. By the end of fiscal year 1990, annualized operating expenses had been reduced from fiscal year 1987 by approximately $33,000,000. GHC improved its gross profit margin on home sales. While these steps dramatically improved the results of operations, GHC continued to incur a significant amount of interest on its outstanding indebtedness. During the nine months ending June 30, 1990, net income before interest expense, extraordinary items, and discontinued operations was approximately $2,800,000 (unaudited). However, GHC accrued interest expenses of approximately $28,400,000 (unaudited) resulting in a net loss of approximately 1 During fiscal year 1990, these actions resulted in an annualized decrease of more than $15,000,000

in operating expenses and an increase of gross profit margin by 2.1 percentage points.

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$25,600,000 (unaudited), before extraordinary items and discontinued operations. Following the termination of the Exchange Offers, it became virtually impossible for GHC to acquire additional land and Lots and suppliers became more hesitant to extend credit to GHC, often reducing credit lines and requiring faster payment and/or cash payments in advance of shipment. 3 Filing of the Involuntary Petition. After the termination of the Exchange Offers, GHC initiated negotiations to restructure the obligations to the Bank Group on terms substantially different from the Credit Agreement. During the negotiations, GHC and the Bank Group exchanged new term sheets contemplating a new restructuring whereby GHC would separate its homebuilding and land development operations to attempt to enhance the profitability of an ongoing entity consisting of homebuilding operations. During the course of GHC’s negotiations with the Bank Group, Stanford N. Phelps (“Phelps”), a Noteholder, contacted management of GHC demanding that GHC undertake certain actions. Specifically, Phelps demanded that GHC, among other things, appoint Phelps and a person designated by Phelps to GHC’s board of directors, remove certain existing board members, adopt an unspecified management incentive plan, and agree that under restructuring, GHC’s existing shareholders would receive nothing. Phelps threatened that GHC’s failure to satisfy these requests would result in commencement of an involuntary bankruptcy case against GHC. GHC subsequently informed Phelps that GHC was unable and unwilling to meet these demands. On July 10, 1990, while GHC was attempting to reach an accord with the Bank Group, the Petitioning Creditors filed the Involuntary Petition. Shortly thereafter, the Bank Group terminated negotiations regarding the restructuring and the temporary forbearance agreement executed in connection with the Credit Agreement.

(b) Activities during the Gap Period Subsequent to the filing of the Involuntary Petition on July 10, 1990, GHC conducted its operations and has provided the administrative functions required of a publicly-held company in chapter 11. Because of GHC’s initial attempts to contest the Involuntary Petition, an Order for Relief was not entered by the Bankruptcy Court until August 14, 1990. The period between the date of the filing of the Involuntary Petition and the entry of the Order for Relief is referred to as the “Gap Period.” GHC’s actions during the Gap Period were designed to mitigate the damages caused by the filing of the Involuntary Petition while continuing existing business operations. During the Gap Period, GHC immediately began to consolidate its operations. On August 3, 1990, GHC terminated more than 200 employees thereby reducing its work force by almost fifty percent (50%).

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1 The Involuntary Case. As previously discussed, GHC’s Chapter 11 Case began upon the filing of an Involuntary Petition by S.N. Phelps & Co., Eleanora M. Crosby and Howard E. Leppla. Initially, GHC contested the Involuntary Petition by requesting that the involuntary case be dismissed and filing a complaint for damages against the Petitioning Creditors and Stanford N. Phelps, individually, based upon certain procedural defects in the Involuntary Petition, the lack of any substantive basis warranting the involuntary chapter 11 case and bad faith. Based upon the detrimental effect the pending involuntary case had upon GHC’s business operations and the termination of negotiations by the Bank Group, GHC was unable to contest the Involuntary Petition and filed a conditional Consent to Entry of Order for Relief. On August 14, 1990, the Bankruptcy Court entered an Order for Relief against GHC adjudging GHC as a Debtor and Debtor in Possession under chapter 11 of the Bankruptcy Code. On August 14, 1990, GHC filed an Emergency Motion of General Homes Corporation to Amend or Clarify Order for Relief requesting that the Bankruptcy Court either amend or clarify the Order for Relief to expressly provide that GHC’s claims and causes of action against the Petitioning Creditors under section 303(i) of the Bankruptcy Code were not waived by virtue of the entry of the Order for Relief. On August 17, 1990, the Bankruptcy Court entered an Amended Order for Relief expressly providing that the claims and causes of action of GHC against the Petitioning Creditors were preserved. 2 Cash Collateral. Following the commencement of the Involuntary Case and the termination of the temporary forbearance agreement, GHC entered into negotiations with the Bank Group regarding the continued use of cash collateral in order to sustain its ongoing business operations. On August 1, 1990, GHC filed with the Bankruptcy Court a Motion for Authority to Approve Temporary Agreement Regarding Cash Accounts and Use of Cash Collateral (“Motion for Authority to Approve Temporary Agreement”) requesting that, subject to certain modifications, the Bankruptcy Court approve GHC’s continued use of cash collateral and maintenance of bank accounts in accordance with prepetition agreements with the Bank Group. After a hearing on the Motion for Authority to Approve Temporary Agreement, on August 9, 1990, the Court entered an Agreed Order granting GHC the authority to use cash collateral through August 21, 1990. 3 Payments to Ordinary Course Creditors During and After the Gap Period. During GHC’s Gap Period, GHC continued to incur trade debt in the ordinary course of business. Concerned with the effect non-payment would have upon GHC’s continued operations, GHC filed a Motion for Authority to Pay Certain Prepetition Unsecured Claims and Gap Period Claims (the “Motion to Pay”). GHC believed that failure to continue to pay certain Claims incurred during the Gap Period and certain prepetition Claims would have a disastrous effect on its ability to continue to conduct its business. On August 8, 1990, the

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Bankruptcy Court entered an Order granting the relief requested in the Motion to Pay. This Order authorized GHC to continue to pay certain Claims, consisting primarily of Claims of potential prepetition Mechanics’ and Materialmen’s lien Claimants, prepetition Homeowner warranty Claims, employee Claims and Claims incurred during the Gap Period. The Order was subsequently extended and the majority of such Claims have been paid. (c) Activities Subsequent to the Order for Relief The filing of the Involuntary Petition has had a material adverse effect on GHC’s ability to restructure its senior debt with the Bank Group, and GHC’s ability to purchase land and Lots for the development and construction of homes. Upon the entry of the Order for Relief, GHC began conducting its operations as a Debtor in Possession pursuant to the authority granted by the Bankruptcy Code. A summary of the significant post-Order for Relief events is set forth below. 1 Cash Collateral. On August 15, 1990, GHC filed a Motion for Authority to Use Cash Collateral in Accordance With Section 363 of the Bankruptcy Code requesting that the Bankruptcy Court authorize GHC’s use of cash collateral which was subject to the prepetition liens and security interests of the Bank Group. Based upon an agreement reached between the Bank Group and GHC, on August 22, 1990, the Bankruptcy Court entered an Interim Agreed Order Authorizing Use of Cash Collateral and Granting Additional or Replacement Liens and Administrative Priority Claims (the “Interim Order”). The Interim Order authorized GHC’s use of cash collateral for certain ordinary operating expenses as set forth in monthly cash budgets submitted by GHC to the Bank Group. Based upon an agreement among GHC, the Bank Group and the Official Committee for Unsecured Creditors (the “Committee”), the Bankruptcy Court continued the terms and conditions of the Interim Order until October 24, 1990, at which time the Bankruptcy Court entered a final Agreed Order Authorizing Use of Cash Collateral and Granting Additional or Replacement Liens and Administrative Priority Claims (the “Agreed Order”). 2 Joint Administration. On January 9, 1991, FGMC filed a Voluntary Petition for Relief with the Bankruptcy Court. Based upon, among other things, the corporate affiliation between GHC and FGMC, the Debtors filed a Motion for Joint Administration, requesting that the Bankruptcy Court approve the administrative consolidation of the Debtors’ Chapter 11 Cases in accordance with Bankruptcy Rule 1015. After notice and hearing, on January 25, 1991 the Bankruptcy Court entered an Order of Joint Administration. 3 Executory Contracts and Unexpired Leases. As of the commencement of GHC’s Chapter 11 Case, GHC was a party to numerous executory contracts and unexpired leases relative to various aspects

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of GHC’s business operations. During the course of this Chapter 11 Case, management of GHC has reviewed the executory contracts and unexpired leases of the bankruptcy estate and filed appropriate pleadings seeking to assume or assume and assign those contracts and leases which are beneficial and necessary to the future operations of GHC and to reject those contracts and leases which are burdensome to the bankruptcy estate. A primary concern during the initial stages of GHC’s bankruptcy case was GHC’s ability to assume and preserve certain option contracts which granted GHC the option to purchase land and Lots for the purpose of future development and construction (the “Option Contracts”). GHC sought and obtained Bankruptcy Court approval to extend the time within which GHC was required to purchase land and Lots under the Option Contracts. As a result of such extension, and continued negotiations with the Bank Group regarding the use of cash collateral to purchase certain land and Lots, GHC has been able to preserve its rights under the Option Contracts which GHC believes are necessary and beneficial to its continued operations. GHC has filed and will continue to file motions requesting that the Bankruptcy Court approve GHC’s assumption of those Option Contracts necessary and beneficial to GHC’s bankruptcy estate. Based upon the time limitations imposed in the Bankruptcy Code relative to GHC’s assumption of leases of nonresidential real property, management of GHC has been required to examine the future needs of a reorganized entity with respect to the existing nonresidential real property leases. GHC has obtained approval of the Bankruptcy Court of GHC’s rejection of office space leases in Tampa, Florida and Phoenix, Arizona, and has filed a motion seeking approval of a new lease agreement for the corporate offices in Houston, Texas. GHC has also filed pleadings with the Bankruptcy Court seeking to assume certain other nonresidential real property leases, including warehouse leases and ground leases relative to billboard advertising. On August 1, 1990, GHC entered into employment agreements with James W. Olafson, William A. Le Sage and James C. Alexander (the “Executives”). GHC sought such approval by motion, and the Bank Group and the Committee filed objections to assumption of the employment agreements. The employment agreements were subsequently renegotiated and GHC and the Executives entered into Restated Employment Agreements. On December 20, 1990, the Bankruptcy Court approved the Restated Employment Agreements, noting that the continued employment of the Executives on the terms and conditions set forth in the Restated Employment Agreements will benefit GHC’s estate and is essential to GHC’s reorganization. GHC has also filed several motions to assume and reject various executory contracts and unexpired leases during the pendency of its Chapter 11 Case. Several executory contracts and unexpired leases which in GHC’s business judgment were not advantageous to the estate have been rejected. Certain other executory contracts and unexpired leases which in GHC’s estimation constitute valuable and necessary property to the estate have been assumed. 4 Sale of Assets. In connection with its reorganization efforts, GHC determined that certain miscellaneous personal property, consisting primarily of surplus Model Home

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furniture and surplus office furniture and equipment, was no longer necessary to GHC’s continued business operations. Accordingly, GHC sought and obtained approval of the Bankruptcy Court to sell these miscellaneous items of personal property. GHC has conducted several sales of such assets pursuant to the authority granted by the Bankruptcy Court. In connection with its reorganization efforts, GHC anticipates future sales of personal property prior to confirmation of the Plan. On August 15, 1990, GHC requested authority from the Bankruptcy Court to sell certain assets, including all existing and future GHC Homes and subdivided Lots within existing subdivisions, in the ordinary course of business free and clear of liens. GHC also requested approval of an escrow agreement between GHC and its title company subsidiaries to facilitate closings of GHC Homes. Subsequent to the Bankruptcy Court’s approval of such requests in an order entered on August 23, 1990, GHC entered into the escrow agreement and has continued to sell residential properties in the ordinary course of business. GHC has also entered into the Greenstone Contract, dated November 8, 1990, with Greenstone Group, Inc. (“Greenstone”), subject to Bankruptcy Court approval. Neither Greenstone, nor any of its officers, directors or shareholders are affiliated with or insiders of GHC as those terms are defined in the Bankruptcy Code. The Greenstone Contract was negotiated at arm’s length and in good faith by GHC. The Greenstone Contract provides for the sale of certain nonperforming assets of GHC, which GHC does not believe to be essential to its reorganization efforts, and certain performing assets which Reorganized GHC will repurchase or have the option to repurchase. The Greenstone Contract is also subject to approval by the Bank Group. In the event the Greenstone Contract is consummated, the Bank Group shall be paid approximately $19,500,000 in Cash on the Distribution Date for the assets sold to Greenstone, which amount represents the original contract price of $26,000,000 less certain additional adjustments as follows: Greenstone original contract price: Less—Reimbursement of GHC from a MUD Land and development assets to be retained by GHC Reduction for 75% of estimated book value of lots to be used by GHC prior to closing the Greenstone sale Payment of seller financed debt Estimated closing costs and proration of ad valorem taxes Estimated Additional Cash Distribution to the Bank Group With Greenstone

$26,000,000 (1,411,000) (1,230,000) (1,200,000) (1,617,000) (1,050,000) $19,492,000

Upon closing the Greenstone transaction GHC would repurchase certain Lots at a cost of seventy-five percent (75%) of GHC’s book value of such Lots, as defined. It is anticipated that upon closing of the transaction, the book value of such Lots will be approximately $6,700,000 and the note amount will be approximately $5,000,000. 5 Continued Business Operations. During the pendency of its bankruptcy case, GHC has continued to maintain possession of its property and operate its business as a debtor in possession

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pursuant to sections 1107 and 1108 of the Bankruptcy Code. Pursuant to such operations, GHC has continued to purchase Lots and construct homes vital to its reorganization effort. In this regard, GHC has sought and obtained Bankruptcy Court approval of the use of cash collateral for the purpose of, among other things, the purchase of lots under existing lot option contracts, the construction of sold and unsold homes, including Model Homes, and the expenditure of funds for the development of certain subdivisions. GHC’s continued ability to develop subdivisions, purchase Lots and construct homes has allowed GHC to maintain certain levels of inventory which will enhance the viability of Reorganized GHC. 6 Other Activities. On June 11, 1990, GHC entered into an Agreement (the “Prepetition Agreement”) with Texas-New Mexico Power to ensure the availability of underground electric utility services in Section Six, Phase Three of the Meadow Bend subdivision in League City, Texas. Prior to the filing of the Involuntary Petition, GHC deposited approximately $78,131 into a Certificate of Deposit Account at Bank One to serve as surety for the Prepetition Agreement. To provide for underground electric utility services in Meadow Bend Subdivision, Section Six, Phase Two, GHC negotiated another Agreement (the “Postpetition Agreement”) with Texas-New Mexico Power Company, which required a deposit of not more than $100,000 in a Certificate of Deposit Account as surety for the Postpetition Agreement. Failure to obtain such electric utilities would have precluded GHC’s sale of certain Lots, and GHC’s ability to construct homes, in the Meadow Bend Subdivision. On September 27, 1990, GHC filed a Motion to Assume the Prepetition Agreement and to Enter Into Postpetition Agreement. On October 31, 1990, the Bankruptcy Court entered an Order authorizing GHC to assume the Prepetition Agreement, enter into the Postpetition Agreement and purchase, endorse and/or pledge to Texas-New Mexico Power Company a $100,000 Certificate of Deposit as security for the Postpetition Agreement. On November 29, 1990, GHC deposited $60,412.18 into a Certificate of Deposit Account at Bank One to serve as surety for the Postpetition Agreement. On October 24, 1990, GHC sought Bankruptcy Court authority to enter into an escrow agreement with HOW for the continued issuance of warranties to purchasers of GHC Homes. Under the escrow agreement, GHC will deposit $400 into an escrow account upon closing of each GHC Home and HOW will issue a warranty to the purchaser. The Bankruptcy Court granted such authority on December 17, 1990 and GHC has continued to make such deposits upon the closing of GHC Homes. In connection with its restructuring, GHC has analyzed its ongoing requirements with respect to computer facilities and its existing computer equipment. Pursuant to such analysis, GHC determined that the purchase of certain computer hardware and software would significantly benefit GHC’s ongoing business operations as opposed to the lease of computer equipment which existed as of the commencement of this bankruptcy case. Based upon such analysis, GHC sought and obtained Bankruptcy Court approval of the rejection of its existing computer leases and purchase of certain computer equipment and software which will allow GHC to reduce its overall computer related costs.

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7 Class Action Litigation. Prior to the filing of the Involuntary Petition, GHC and FGMC had been named as defendants in a class action lawsuit which is more fully described in Section IX, “Litigation.” On October 19, 1990, GHC commenced an adversary proceeding against the Class Action Claimants seeking a declaratory judgment that all Claims asserted by the Class Action Claimants were subordinated in accordance with section 510(b) of the Bankruptcy Code. On November 9, 1990, GHC and the Class Action Claimants filed a Joint Motion for Approval of Compromise and Settlement of Claims so as to allow the Class Action Claimants a $200,000 Allowed Claim against GHC’s estate. See Section IX.B.2., “Postpetition Litigation—Mansi Litigation—Declaratory Relief.” 8 Additional Matters. In addition to the matters listed above, GHC has defended numerous motions to lift the automatic stay. The majority of these motions were filed by Homeowners seeking authority to pursue prepetition litigation pending against GHC. See Section IX.B.4., “—Postpetition Litigation—Stay Relief.” (d) Selected Operating and Financial Data The results of operations for the Company are set forth in the Consolidated Statements of Operations for the Years Ended September 30, 1987, 1988 and 1989, attached hereto as Exhibit “4-A.” [Exhibits omitted] The Company’s unaudited statement of operations from October 1, 1989 through the date of the Involuntary Petition and from the date of the Involuntary Petition through December 31, 1990 is attached hereto as Exhibit “4-B(1).” (e) Liquidation Analysis The liquidation value of GHC’s assets is projected to be, as of March 31, 1991, approximately $110,242,000 (unaudited). Attached as Exhibit “4-F(1)” to this Disclosure Statement is GHC’s Liquidation Analysis estimating the value of the GHC assets. As set forth in the Notes to the Liquidation Analysis in Exhibit “4-F(2),” the Liquidation Analysis assumes, among other things, that GHC’s assets would be liquidated in an orderly manner by a chapter 7 trustee over a six (6) month period under chapter 7 of the Bankruptcy Code. The liquidation analysis also assumes that there would be payment of chapter 7 trustee fees and expenses. Readers are urged to review Exhibits “4-F(1)” through “4-F(4)” for the other assumptions and methodology of GHC’s Liquidation Analysis. [Exhibits omitted] SUMMARY OF GENERAL HOMES CORPORATION’S PLAN (f) Introduction THE DESCRIPTION OF THE GHC PLAN IN THIS SECTION IS A BRIEF SUMMARY ONLY. CREDITORS, INTEREST HOLDERS AND PARTIES IN

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INTEREST ARE URGED TO REVIEW THE GHC PLAN ITSELF WHICH IS ATTACHED AS EXHIBIT “2-A” TO THIS DISCLOSURE STATEMENT FOR A FULL UNDERSTANDING OF THE PROVISIONS OF THE GHC PLAN. The Plan submitted by GHC constitutes GHC’s proposal for restructuring its financial obligations to enable GHC to continue its business operations in the future. GHC believes that, considering all of the facts and circumstances, the GHC Plan described in this Disclosure Statement provides equitable recoveries to all Creditors based upon GHC’s financial condition and the requirements of the Bankruptcy Code. (g) Overview The GHC Plan contemplates the reorganization of GHC from a public company to a reorganized and substantially smaller private corporation. Based upon, among other reasons, the expense associated with the operation of a publicly traded company, GHC believes that continuing GHC’s business operations as a private entity will enhance the reorganized entity’s overall profitability and result in a viable business operation. In order for Reorganized GHC to be a privately held corporation, the Securities and Exchange Commission requires that the shares of stock must be held by not more than 300 persons. On or before the Distribution Date, the GHC Plan provides for the occurrence of the following transactions: (a) all Administrative Expenses, Priority Non-Tax Claims, Employee Benefit Plan Claims, and Priority Tax Claims will either be paid in full in Cash, reserved for by appropriate Distributions of Cash into Reserves, or treated in accordance with the applicable provisions of the Bankruptcy Code; (b) GHC and Greenstone shall, subject to the consent of the Bank Group and certain other conditions, close the transactions contemplated by the Contract of Sale (the “Greenstone Contract”); (c) if the Greenstone Contract is consummated, the Bank Group shall receive (i) the net proceeds from the Greenstone Contract, (ii) certain assets of GHC, (iii) a New Note, (iv) New Preferred Stock and New Common Stock and, (v) substantially all of the noncash assets of GHA; (d) if the Greenstone Contract is not consummated, the Bank Group shall receive (i) certain assets of GHC, (ii) a New Note, (iii) New Preferred Stock and New Common Stock, and (iv) substantially all of the noncash assets of GHA; (e) if the Greenstone Contract is consummated, the Allowed Claims in Classes GHC-6 through GHC-9 shall be paid in full in Cash or alternatively, if the Greenstone Contract is not consummated the assets securing the Claims in such classes shall be transferred to the Liquidating Trust, subject to the liens securing such Claims; (f) GHC shall deposit $1,500,000 in an Unsecured Creditors’ Trust for the benefit of holders of General and Other Unsecured Claims; (g) all of the Notes and existing shares of Preferred Stock, Common Stock and the GHC Stock Options shall be cancelled, annulled and extinguished, and holders of such Notes, Preferred Stock, Common Stock and GHC Stock Options will not receive any Distribution under the Plan; and (h) Reorganized GHC shall retain all other assets, including certain real property and the improvements thereon which will continue to be subject to the liens of the Bank Group.

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The Plans provide for a release and discharge of all Claims against any officer, director, independent accountant, consultant, attorney or employee of the Debtors, through the Confirmation Date acting in their individual capacity or in their capacity as an officer, director, independent accountant, consultant, attorney or employee, for any matter or thing which is the basis of, or relates directly or indirectly to, any Claim against the Debtors. It is intended that this release bar Creditors from instituting suit on behalf of the estate, to the extent Creditors would be so entitled, against such parties and potential insurers thereof. The Committee contends that the release and discharge of Claims against nondebtor third parties is improper and has commenced an investigation of causes of action which might be brought on behalf of the estate against the released parties. If such actions are meritorious, successful prosecution could result in the estate recovering sums available for distribution to Creditors. In an effort to assist Creditors and Interest holders in evaluating the Plan, the Debtor has prepared a summary of the treatment of each class of Claims and Interests under the GHC Plan, under a cramdown of the GHC Plan, and under a chapter 7 liquidation of GHC. This “Summary of Treatment of Claims and Interests Under the Plan” is attached as Exhibit “6” to this Disclosure Statement.

(h) Recommendations Various creditor group representatives and other parties have requested the opportunity to present their positions, favorable and negative, concerning this Disclosure Statement, the Plans and the transactions contemplated thereby and the Debtors have agreed to permit the inclusion of such positions in this Disclosure Statement. THE POSITIONS PRESENTED IN THIS DISCLOSURE STATEMENT AND ATTRIBUTED TO PARTIES OTHER THAN THE DEBTORS DO NOT NECESSARILY REFLECT THE POSITIONS OF THE DEBTORS. 1 The Debtors. Debtors believe that creditors entitled to vote on the Plans should vote to accept the Plans. The Plans are the product of many months of negotiations between the Debtors and their various creditor constituencies. The Debtors believe that the Plans provide all Creditors with the best opportunity to receive maximum value for their Claims. Debtors believe that the Liquidation Analysis attached hereto demonstrates that the values to be received by Creditors under the Plans exceeds the values that would be received by Creditors in a liquidation of the Debtors under chapter 7. The Debtors have a high degree of confidence in the feasibility of the Plans. The Plans have been prepared utilizing the assumptions contained in the GHC business plan and projections. 2 The Bank Group. The Bank Group supports the basic concept of the GHC Plan. With the exception of perhaps one bank, the Bank Group believes that under the facts and circumstances of these cases, the Plan incorporates the most favorable treatment that Creditors can reasonably expect in this Chapter 11

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Case. Subject to further analysis and/or negotiation, the Bank Group is working toward final acceptance of the GHC Plan. Notwithstanding the foregoing, the members of the Bank Group have the right to reject the proposed treatment in the GHC Plan and object to confirmation within the deadlines set by the Bankruptcy Court. 3 Unsecured Creditors Committee. The Committee of GHC, whose members consist of Noteholders and the Indenture Trustee, oppose acceptance of the GHC Plan and recommend Creditors of GHC vote to reject the GHC Plan. 4 Other Creditor Groups. No other creditor group has made a recommendation regarding the Plans.

(i) Reorganized General Homes Corporation 1 Business Plan. Reorganized GHC intends to construct and sell homes in Houston and Dallas/Fort Worth, Texas. Initially, Reorganized GHC intends to operate twelve existing subdivisions, six in Houston and six in Dallas/Fort Worth. As Reorganized GHC builds out each existing subdivision, replacement subdivisions will be acquired. Reorganized GHC intends to acquire such replacement subdivisions by Lot purchases and by executing Lot option contracts with third parties whenever possible. Through Fiscal Year 1995, the planning horizon of the business plan, Reorganized GHC expects to expand to 16 subdivisions with aggregate sales of 1,000 homes, generating approximately $85,000,000 in revenue annually. Reorganized GHC will employ approximately 30 corporate and regional personnel, who will perform operational, management, financial, accounting and administrative duties, and 60 field personnel, primarily construction managers and sales counselors. Reorganized GHC will continue to employ independent contractors to construct homes and use outside real estate brokers to sell homes. Reorganized GHC’s business plan has a single focus: to operate a profitable regional homebuilding company relying on its established reputation in the Houston and Dallas/Fort Worth markets. The following briefly describes the operations in the Houston and Dallas/ Fort Worth markets. Additionally, the table below illustrates the projected operating results for these markets. a. Houston. Houston will continue to be Reorganized GHC’s largest market. Management intends to continue to operate six existing subdivisions at the start of the business plan. Management identified these subdivisions based upon location, profitability, availability of Lots and type of product (program). Five of these “ongoing” subdivisions represent the “first-time” homebuyer market with average sales from $72,000 to $84,000. The remaining subdivision sells to the “move-up” homebuyer with an average sales price of $148,000. These subdivisions are projected to gradually sell out by the end of 1993. As these subdivisions sell out and close, new replacement subdivisions will be opened. Reorganized GHC intends to increase the number of active subdivisions to nine by year end 1992 and to ten by year end 1995. On average, the

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replacement subdivisions will approximate the current mix between first-time home buyer and move-up buyer markets, however, the timing of completing “on-going” subdivisions will effect the average price. b. Dallas/Fort Worth. Management intends to continue to operate six existing metroplex subdivisions. Of the six active subdivisions in the plan, all are either in the “first time” or “first-time move-up” home buyer segment with average sales prices ranging between $95,000 and $105,000, or in the “move-up” home buyer segment with an average sales price of $131,000. Reorganized GHC intends to operate six to seven subdivisions in the Dallas/Fort Worth market. As the current subdivisions sell out and close, replacement subdivisions will be opened. The current subdivisions will begin selling out in the fourth quarter of 1991. On average, the replacement subdivisions will approximate the current mix between first-time home buyer and moveup buyer markets, however, the timing of completing “on-going” subdivisions will affect the average price. Projected Financial and Operating Data 6 Months Ended 1991 Active Projects Houston Dallas/Fort Worth Total Units Closed Houston Dallas/Fort Worth Revenue (in 000’s) Houston Dallas/Fort Worth Average Selling Price Houston Dallas/Fort Worth

1992

1993

1994

1995

6 6

9 6

10 6

9 6

10 6

145 135 280

504 358 862

512 364 876

618 387 1,005

599 409 1,008

$ 12,380 13,568 $ 25,948

$40,623 35,263 $75,886

$39,684 35,209 $74,893

$48,267 37,043 $85,310

$47,093 39,149 $86,242

$ 85,381 $100,504

$80,601 $98,500

$77,508 $96,728

$78,103 $95,718

$78,619 $95,7182

2 Financial Projections. The financial projections for Reorganized GHC are set forth in order to demonstrate in sufficient detail the ability of Reorganized GHC to service its obligations under the GHC Plan and to address the viability of Reorganized GHC as a going concern. The assets and liabilities of GHC are set forth in the unaudited consolidated Balance Sheets of GHC as of the date of the Involuntary Petition and December 31, 1990, attached as Exhibit “4-B(2)” to this Disclosure Statement. The unaudited Projected Balance Sheet of Reorganized GHC presented in Exhibit “4-D(1)” evidences the anticipated effect of the transactions contemplated by the GHC Plan. The Projected Balance Sheet is presented as of March 31, 1991, and assumes that Confirmation has occurred and that all Distributions

6.18


385

contemplated by the GHC Plan and the FGMC Plan, including the issuance of new securities to certain GHC Creditors, have been made. GHC does not, as a matter of policy, make public projections of future financial position or results of operations. However, the Projected Operating Results attached hereto as Exhibit “4-E” reflect the expected results of implementing the actions described in the business plan. Arthur Andersen & Co. has examined the financial projections. The projected financial and operating data and the summarized Projected Operating Results should be read in conjunction with the report of independent public accountants and summary of significant assumptions to financial projections. Significant hypothetical assumptions form the basis for the projected operating results and such assumptions are discussed in the report of independent public accountants and the summary of significant assumptions to financial projections. Actual results may differ substantially from the projections as a result of changing market and economic conditions in the future. There is no assurance that the results projected for Reorganized GHC will be achieved. The financial projections present, to the best of management’s knowledge and belief, results of operations and cash flows of Reorganized GHC for the projections period. Accordingly, the projections reflect management’s judgment as of January 4, 1991, the date such schedules were prepared, of the current and expected future conditions affecting Reorganized GHC and its expected operating strategies during the projections period. The projections are based on certain assumptions, including hypothetical assumptions which are described in the “Summary of Significant Assumptions” attached to Exhibit “4-E.” Actual results may differ substantially from the projections as a result of changing market and economic conditions in the future. There is no assurance that the results projected for Reorganized GHC will be achieved. These projections may be materially and adversely affected by unforeseeable events. The accounting policies used in the projections are substantially similar to those used by GHC as described in notes to GHC’s historical financial statements. 3 Value of Reorganized GHC. Sovereign Capital Partners, Inc. (“Sovereign”) has conducted an analysis of Reorganized GHC. Based upon the discounted value of estimated future cash flows, Sovereign estimates the enterprise value of Reorganized GHC to be $33,975,000. Sovereign has also valued the equity to be issued by Reorganized GHC and estimates the value of the New Preferred Stock to be $7,300,000 and the value of the New Common Stock to be $7,070,000. Upon completion of the written report, a copy of the Sovereign analysis will be made available for review or copying upon request to counsel for GHC.

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GENERAL HOMES CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) July 10, 1990 ASSETS Cash First mortgage loans held for sale, at lower of cost or market Receivables: Home sales Other Inventories: Residential— Single-family housing completed or under construction Improved lots Land and development costs Total inventories First mortgage loans held for investment, net Other assets LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Liabilities not subject to compromise: Accounts payable and accrued liabilities Liabilities subject to compromise: Accounts payable and accrued liabilities Revolving debt, term debt and notes payable Subordinated notes Total liabilities Commitments and contingencies Stockholders’ equity (deficit): Preferred stock, no par, 100,000,000 shares authorized, none outstanding Common stock, $.01 par, 150,000,000 shares authorized, 15,009,048 shares issued and outstanding Additional paid-in capital Deficit Total stockholders’ deficit

December 31, 1990

$14,769 15,554

$58,372 531

1,772 6,827

4,540 10,220

61,292 29,430 90,722 120,620 211,342 16,526 13,220 $280,010

21,904 26,660 48,564 100,607 149,171 1,388 10,856 $235,078

$—

$5,944

72,732 253,497 139,975 466,204 —

60,548 229,108 139,975 435,575 —

—

—

150

150

88,752 (275,096) (186,194) $280,010

88,752 (289,399) (200,497) $235,078

The accompanying notes are an integral part of these financial statements.

387

Land and Development costs Total inventories Other assets

ASSETS Cash First mortgage loans held for sale Receivables: Home sales Other First mortgage loans held for investment, net Inventories: Residential— Single-family housing completed or under construction Improved lots $ 61,722 — 2,470 8,654 —

19,243 26,473 45,716 99,705 145,421 7,397 $ 225,664

4,540 10,220 1,388

21,904 26,660 48,564 100,607 149,171 10,856 $ 235,078

Projected

(6,550) (18,953) (25,503) (96,764) (122,267) (7,171) $(191,689)

(2,470) (8,534)

$ (51,247)

Pro forma Adjustments

(Continued)

12,693 7,520 20,213 2,941 23,154 226 $33,975

— 120 —

$10,475 —

Projected After Reorganization

March 31, 1991 Projection

$ 58,372 531

December 31, 1990 Actual

GENERAL HOMES CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands, Except Share Data)

388 $ 69,236 229,120 139,975 438,331 —

150

88,752 (301,569) (212,667) $ 225,664

$ 66,492 229,108 139,975 435,575 —

150

88,752 (289,399) (200,497) $ 235,078

7,069 0 14,370 $33,975

1

1 (81,683) 301,569 227,037 $(191,689)

—

7,300

7,300 (150)

—

$ 200 19,405 0 19,605 —

$ (69,036) (209,715) (139,975) (418,726)

NOTE 1: The projected balance sheet was prepared by using the October 31, 1990 actual balance sheet and applying to such balance sheet: projected results of operations through March 31, 1991; projected cash flow through March 31, 1991; and significant known transactions occurring in November and December, 1990. The projected balance sheet was not revised to use the actual December 31, 1990 balance sheet because the resulting changes were not significant. NOTE 2: Projected assets after reorganization are stated at estimated fair market value on an asset by asset basis, which resulted in projected total assets of $34,473. The enterprise value of reorganized GHC as determined by Sovereign Capital Partners, Inc. (Sovereign), based upon the discounted value of estimated future cash flows, is estimated at $33,975. Thus, other assets were reduced by $498 to record negative goodwill. The face amount of the term debt payable to the Bank Group is projected to be $19,728, but its estimated fair market value is $19,405. The values shown in the equity section were also estimated by Sovereign. NOTE 3: If the plan confirmation date is postponed until June 30, 1991, it is anticipated that the mix of assets available for distribution will change from the March 31, 1991 projection; but the total distribution will not change.

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT) Accounts payable and accrued liabilities Revolving debt, term debt and notes payable Subordinated notes Total liabilities Stockholders’ equity (deficit): Preferred stock, no par, 100,000,000 shares authorized, none outstanding Preferred stock, $.01 par, 150,000 shares authorized, 100,000 shares issued and outstanding Common stock, $.01 par, 150,000,000 shares authorized, 15,009,048 shares issued and outstanding Common stock, $.01 par, 105,000 shares authorized, 90,000 shares issued and outstanding Additional paid-in capital Deficit Total stockholders’ deficit

GENERAL HOMES CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands, Except Share Data) (Continued)

6.19

6.19

Standing Chapter 12 Trustee’s Instructions to Debtor’s Counsel

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Objective. Section 5.44 of Volume 1 describes how the debtor in most chapter 12 cases is allowed to remain in possession, but, concurrently, a chapter 12 standing trustee is appointed. The following letter is an example of the type of communication that might be used by a chapter 12 standing trustee to inform a debtor-in-possession of his or her responsibilities. , Esq. 926 South Hill Street Denver, CO. RE: Chapter 12 Bankruptcy Case No. Dear

Debtors:

.

You have filed a petition for relief for a family farmer under Chapter 12 of the Bankruptcy Code on behalf of the above debtor. I am hereby notifying the debtor and you, as attorney for the debtor, of the following: 1. Section 521 of the Bankruptcy Code requires the debtor to cooperate with the United States Trustee and the Standing Chapter 12 Trustee appointed in this case. The debtor is also required to furnish information required by the United States Trustee and the Standing Chapter 12 Trustee in supervising the administration of this case, including regular reports of operations of the debtor’s farming enterprise. Also as required by Bankruptcy Rule X-1008, you and the debtor are required to give the Standing Chapter 12 Trustee and the United States Trustee notice of all motions and other pleadings filed in this case. 2. The debtor must provide the Standing Chapter 12 Trustee with the following financial and informational reports: a. Summary of Operations for Chapter 12 case. The enclosed report is an informational report showing the debtor’s acreage, results from last year’s operation and estimates or projections for the current or next crop year. This form should be completed and received in the Standing Chapter 12 Trustee office at least five days prior to the first meeting of creditors. b. Monthly Cash Receipts and Disbursements Statement. The enclosed form should be self-explanatory. The debtor must report no later than the 10th day following the end of the month all of his receipts or income, in cash or by check, received during the month. The receipts should be itemized by kind, quantity and dollar amount, for example: “Sold 2,000 bushels of corn—$2,000,” “Sold 10 beef cattle—$4,000,” “Sold 5 tons of hay—$275.” Likewise, all expenses paid in cash or by check should be itemized. As indicated, household or family living expenses need not be itemized but a lumpsum of cash used or spent for household or family living expenses should be shown. Operating expenses should be itemized under appropriate headings such as fuel, feed, veterinary expense, repairs, etc. Be sure the debtor knows how to complete that part of the form which calls for a monthly reconciliation of cash. c. Tax Deposit Statement. If the debtor is a family farm corporation or if the debtor has employees for which he must withhold income taxes or pay social security taxes, he must complete the tax deposit statement enclosed with this letter, and provide evidence of payment. d. Insurance Statement. Within ten days after the date of this letter, the debtor must provide the Standing Chapter 12 Trustee with a verified statement

390


or written evidence from his insurance carrier or broker that he has fire and extended coverage on his buildings and equipment and also motor vehicle insurance on all vehicles operated on public highways. If no such insurance is currently in effect, the debtor must explain why it is not in force. The debtor shall immediately notify the Standing Chapter 12 Trustee of any lapse, cancellation or proposed cancellation of any insurance coverage. 3. Under Section 1231 of Chapter 12 of the Bankruptcy Code, a separate taxable entity is created for state and local tax purposes commencing on the day the Chapter 12 petition was filed. Therefore, the debtor is required to commence keeping books and records for the new separate taxable entity. This means that the debtor should do the following: a. The books and records of the debtor are to be closed as of the date of filing the bankruptcy petition, and a new set of books and records must be kept thereafter for the debtor-in-possession under Chapter 12. b. All of the debtor’s bank accounts must be closed immediately upon the filing of the Chapter 12 petition, and new bank accounts opened. All amounts from the old accounts and all receipts are to be deposited in the new bank accounts, and all disbursements should be made by check. The new bank accounts must be in the name of the debtor as “Chapter 12 Debtor-in-possession”, and this description should also appear on the new bank prenumbered blank checks for his checking account. c. The debtor must keep a file (or envelope) for copies of all bills, invoices and sales slips for purchases or payments he makes after the petition is filed. d. The debtor, if an individual, must file a state and local (if required) tax return for that part of the taxable year which ended on the date the Chapter 12 petition was filed as provided by Section 1231 of the Bankruptcy Code. 4. You will receive a separate notice of the date, time and place for the first meeting of creditors under Section 341 of the Bankruptcy Code. Both the debtor and his attorney must attend that meeting, at which the debtor will be examined, under oath, by the Standing Chapter 12 Trustee and by any creditors who may attend. The debtor must bring with him to that meeting a copy of his last year’s federal, state, and local (if required) income tax returns, Form 1040, and all Schedules filed with the return, including Schedule F. The copy of the income tax returns must be filed with the Standing Chapter 12 Trustee at the First Meeting as an Exhibit. 5. In addition to the Monthly Cash Receipts and Disbursements Statement referred to in paragraph 2.b. above, within 60 days after the end of a calendar year (or fiscal year), the debtor must complete and file with the Standing Chapter 12 Trustee a Schedule F and Form 4835 of IRS Form 1040 for any part of the first calendar or taxable period ending after the date on which the Chapter 12 petition was filed. The Schedule F and Form 4835 must report all income and all expenses to the end of the calendar (fiscal) year. Since Section 1231(b) of Chapter 12 requires the Standing Chapter 12 Trustee to make a state or local tax return for an individual debtor-in-possession, the Standing Chapter 12 Trustee will consult further with you and the debtor-in-possession in order to live up to the joint responsibilities to prepare the tax returns. The debtor is responsible for filing and paying all federal taxes as usual. 6. Since Congress specified that Chapters 1, 3 (except for Section 361) and 5 of the Bankruptcy Code also apply to cases under Chapter 12 of the Bankruptcy Code, you should emphasize to your client that he may not:

6.19


391

a. Retain or employ attorneys, accountants, appraisers, auctioneers or other professional persons without court approval. This includes employing the attorney who filed the petition to provide services after the filing. See 11 U.S.C. Section 327. b. Compensate any attorney, accountant, appraiser, auctioneer or other professional except as allowed by the Court. See 11 U.S.C. Section 330. c. Use cash collateral (or cash equivalents) without the consent of the secured creditors or court authorization. See 11 U.S.C. Section 363(c)(2). Cash collateral includes proceeds, products, offspring, rents, or profits of property subject to a security interest when reduced to cash. d. Obtain credit or incur unsecured debt other than in the ordinary course of business without court authorization. See 11 U.S.C. Section 364(b). e. Incur secured debt without court authorization. See 11 U.S.C. Section 364(c). f. Pay any creditor for goods or services provided before the filing of the petition except as provided in a confirmed plan. See 11 U.S.C. Section 549. 7. A Chapter 12 plan must be filed within 90 days of the date of filing of the petition (11 U.S.C. Section 1221). Failure to comply is cause for dismissal under 11 U.S.C. Section 1208. The statement of current income and current expenditures required to be filed under 11 U.S.C. Section 521(l) should be accurate and should be reviewed and modified, if necessary, prior to the Section 341 meeting. Failure to provide an accurate statement may result in denial of confirmation, dismissal, or conversion to a Chapter 7 liquidation. Also, be advised that the Trustee will oppose all plans that call for payments outside the plan, including payments to secured creditors during the 3 to 5 year time period the plan is administered by the Trustee. 8. Liquidation Analysis. Under Section 1225(a)(4) of Chapter 12, you must be able to provide at the hearing on confirmation of the plan that the amount that will be distributed under the plan for each allowed unsecured claim is not less than the amount that would be paid on the claim if the debtor were liquidated under Chapter 7. A claim filed by an unsecured creditor is allowed unless the debtor or the Chapter 12 Trustee files an objection to it in Court and the Court sustains the objection. I would suggest that you give consideration to the early preparation of an accurate analysis of the liquidation value of all of the property of the debtor’s estate which you must be prepared to offer as an Exhibit at the confirmation hearing, or the Court may not be able to confirm your plan. 9. Failure to Comply. Failure of the debtor to comply with the instructions contained in this letter may be grounds for dismissal of this Chapter 12 case under Section 1208 of the Bankruptcy Code. I am providing your client with a copy of this letter. If you or the debtor have any question about this letter or the enclosed instructions, please call or write to me at 303 East Seventeenth Avenue, Suite 1000, Denver, Colorado 80203, (303) 839-1204. The trustee’s percentage fee to be collected on all payments under plans has been set by the Attorney General at 10 percent on the first $450,000 paid under the plan, and three percent on the overage. Sincerely, Standing Chapter 12 Trustee

7 Retention of the Accountant and Fees

7.1 Protocol: Separating Interim Management from Financial Advisory Functions Objectives. Excerpts from “Protocol” designed to separate the some of the financial advisory functions from the interim management are reproduced below. Protocol for Engagement I. Retention Guidelines A. XYZ is a firm that provides turnaround and crisis management services, financial advisory services, management consulting services, information systems services and claims management services. In some cases the firm provides these services as advisors to management, in other cases one or more of its staff serve as corporate officers and other of its staff fill positions as full time or part time temporary employees (“crisis manager”), and in still other cases the firm may serve as a claims administrator as an agent of the Bankruptcy Court. XYZ and its affiliates will not act in more than one of the following capacities in any single bankruptcy case: (i) crisis manager retained under Sec. 363, (ii) financial advisor retained under Sec. 327, (iii) claims agent/claims administrator appointed pursuant to 28 U.S.C. § 156(c) and any applicable local rules or (iv) investor/acquirer; and upon confirmation of a Plan may only continue to serve in a similar capacity. Further, once XYZ or one of its affiliates is retained under one of the foregoing categories it may not switch to a different retention capacity in the same case. However, with respect to subsequent investments by Questor this prohibition is subject to the time limitations set forth in IV.B below. B. Engagements involving the furnishing of interim executive officers1 whether prepetition or postpetition (hereinafter “crisis management” engagements) shall be provided through XYZ Services LLC (“XYZS”). 1 “Executive

officers” shall include but is not necessarily limited to Chief Executive Officer, President, Chief Operating Officer, Treasurer, Chief Financial Officer, Chief Restructuring Officer, Chief Information Officer, and any other officers having similar roles, power or authority, as well as any other officers provided for in the company’s bylaws.

393

394

Retention of the Accountant and Fees

C. XYZS shall seek retention under section 363 of the Bankruptcy Code. The application of XYZS shall disclose the individuals identified for executive officer positions as well as the names and proposed functions of any additional staff to be furnished by XYZS. In the event the Debtor or XYZS seeks to assume additional or different executive officer positions, or to modify materially the functions of the persons engaged, a motion to modify the retention shall be filed. It is often not possible for XYZS to know the extent to which full time or part time temporary employees will be required when beginning an engagement. In part this is because the extent of the tasks that need to be accomplished is not fully known and in part it is because XYZS is not yet knowledgeable about the capability and depth of the client’s existing staff. Accordingly, XYZS shall file with the Court with copies to the UST and all official committees a report of staffing on the engagement for the previous month. Such report shall include the names and functions filled of individuals assigned. All staffing shall be subject to review by the Court in the event an objection is filed. D. Persons furnished by XYZS for executive officer positions shall be retained in such positions upon the express approval thereof by an independent Board of Directors whose members are performing their duties and obligations as required under applicable law (“Board”), and will act under the direction, control and guidance of the Board and shall serve at the Board’s pleasure (i.e. may be removed by majority vote of the Board). E. The application to retain XYZS shall make all appropriate disclosures of any and all facts that may have a bearing on whether XYZS, its affiliates, and/or the individuals working on the engagement have any conflict of interest or material adverse interest, including but not necessarily limited to the following: 1. Connection, relationship or affiliation with secured creditors, postpetition lenders, significant unsecured lenders, equity holders, current or former officers and directors, prospective buyers, or investors. 2. Involvement as a creditor, service provider or professional of any entity with which XYZ or any affiliate has an alliance agreement, marketing agreement, joint venture, referral arrangement or similar agreement. 3. Any prepetition role as officer, director, employee or consultant,2 but service as a prepetition officer will not per se cause disqualification.

2 In

no case shall any principal, employee or independent contractor of XYZ, XYZS and affiliates serve as a director of any entity while XYZ, XYZS or any affiliate is rendering services in a bankruptcy proceeding, and XYZ, XYZS and their affiliates shall not seek to be retained in any capacity in a bankruptcy proceeding for an entity where any principal, employee or independent contractor of XYZ, XYZS and affiliates serves or has previously served as a director of the entity or an affiliate thereof within two years prior to the petition date. During such two year period, neither XYZ, XYZS or affiliates shall have provided any professional services to the entity nor shall any individuals associated with XYZ, XYZS and affiliates have served as an Executive Officer.

7.1

Protocol: Separating Interim Management from Financial Advisory Functions

395

4. Any prepetition involvement in voting on the decision to engage XYZ or XYZS in the bankruptcy case, and/or any prepetition role carrying the authority to decide unilaterally to engage XYZ or XYZS. 5. Information regarding the size, membership and structure of the Board so as to enable the UST and other interested parties to determine that the Board is independent. 6. Whether the executive officers and other staff for the engagement are expected to be engaged on a full time or part time basis, and if part-time whether any simultaneous or prospective engagement exists that may be pertinent to the question of conflict or adverse interest. 7. The existence of any unpaid balances for prepetition services. 8. The existence of any asserted or threatened claims against XYZ, XYZS or any person furnished by XYZ/XYZS arising from any act or omission in the course of a prepetition engagement. F. Disclosures shall be supplemented on a timely basis as needed throughout the engagement. G. Where XYZ does not act as a crisis manager its retention will be sought as a financial advisor under section 327 of the Code or as a Court appointed claims representative. II. Compensation A. Compensation in crisis management engagements shall be paid to XYZS. B. The application to retain XYZS shall disclose the compensation terms including hourly rates and the terms under which any success fee or back-end fee may be requested. C. XYZS shall file with the Court, and provide notice to the UST and all official committees, reports of compensation earned and expenses incurred on at least a quarterly basis. Such reports shall summarize the services provided, identify the compensation earned by each executive officer and staff employee provided, and itemize the expenses incurred. The notice shall provide a time period for objections. All compensation shall be subject to review by the Court in the event an objection is filed (i.e., a “negative notice” procedure). D. Success fees or other back-end fees shall be approved by the Court at the conclusion of the case on a reasonableness standard and shall not be pre-approved under section 328(a). No success fee or back-end fee shall be sought upon conversion of the case, dismissal of the case for cause or appointment of a trustee. III. Indemnification A. Debtor is permitted to indemnify those persons serving as executive officers on the same terms as provided to the debtor’s other officers and directors under the corporate bylaws and applicable state law, along with insurance coverage under the debtor’s D&O policy. B. There shall be no other indemnification of XYZ, XYZS or affiliates.

396


IV. Subsequent Engagements A. Pursuant to the “one hat” policy as stated above, after accepting an engagement in one capacity, XYZ and affiliates shall not accept another engagement for the same or affiliated debtors in another capacity. B. For a period of three years after the conclusion of the engagement, Questor shall not make any investments in the debtor or reorganized debtor where XYZ, XYZS or another affiliate has been engaged. 7.2 Declaration of Financial Advisor in Support of Debtors’ Application to Be Retained to Provide Fresh Start Reporting and Valuation Services Objective. Section 7.7 of Volume 1 discusses the affidavit or declaration generally filed with the application for retention. The declaration filed by Michael Sullivan of Huron Consulting in the Delta Airlines case is an example of support submitted with the application for a retention order. DECLARATION OF MICHAEL C. SULLIVAN IN SUPPORT OF THE APPLICATION OF THE DEBTORS FOR ENTRY OF AN ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 2014(a) FOR AUTHORITY TO EMPLOY AND RETAIN HURON CONSULTING SERVICES LLC (PRACTICING AS HURON CONSULTING GROUP) TO PROVIDE FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS NUNC PRO TUNC TO DECEMBER 1, 2006 Pursuant to Rule 2014(a) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), Michael C. Sullivan, being duly sworn, declares as follows: 1. I am a Managing Director of Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”). I submit this declaration (the “Declaration”) on behalf of Huron in support of the application of Delta Air Lines, Inc. (“Delta”) and those of its subsidiaries that are debtors and debtors in possession in these proceedings (collectively, the “Debtors”), dated January 4, 2007, to retain Huron to provide Fresh-Start Reporting (as defined below) and valuation services to the Debtors, nunc pro tunc to December 1, 2006 (the “Application”), pursuant to the terms and conditions set forth in the Application and that certain professional services agreement entered into between Huron and the Debtors, dated December 1, 2006 (the “December 2006 Professional Services Agreement”), a copy of which is annexed to the Application as Exhibit B. Except as otherwise noted, I have personal knowledge of the matters set forth herein and would testify competently thereto if called as a witness. Professional Qualifications 2. Huron is a multi-disciplined consulting firm with practices in areas including bankruptcy, financial restructuring advisory, valuation and litigationrelated services for public and private companies, lenders, creditors, equity

7.2

Declaration of Financial Advisor in Support of Debtors’ Application

397

holders and impartial constituents (such as examiners or trustees). Huron maintains an office in New York City and has offices in other locations throughout the United States. 3. Huron’s typical engagements include: providing valuation, corporate finance, restructuring and turnaround services to companies and lenders; performing financial investigations, litigation analysis, expert testimony and forensic accounting for attorneys; and providing strategic planning, operational consulting, strategic sourcing and organizational and technology assessments in a variety of industries, including transportation, manufacturing, healthcare, higher education, legal, consumer products and energy. 4. For over 25 years, professionals in Huron’s employ have served as advisors to management, to creditors and to trustees or examiners, and Huron has assisted in bringing numerous companies successfully through the complexities of chapter 11 bankruptcy. Huron’s expertise in management, finance and accounting, combined with its understanding of the complex interests of stakeholders in a bankruptcy proceeding, allow Huron’s professionals to provide the insight stakeholders need to weigh the risks and benefits of various actions in a bankruptcy setting. 5. Prior to serving as a Managing Director with Huron, I was a partner in Arthur Andersen LLP’s corporate restructuring practice, specializing in financial consulting in corporate turnaround, loan workouts and bankruptcy situations. I am a certified public accountant licensed and in good standing in the states of New York and New Jersey. 6. My bankruptcy and restructuring experience includes: development and evaluation of strategic business plans on behalf of debtors and creditors, including the evaluation of customer and product profitability, store/plant profitability, overhead structure and industry viability; analysis for providing expert testimony on business performance, lost profits and underlying claims for damages; preparation and evaluation of valuation reports, including enterprise value and liquidation analyses; negotiation and evaluation of plans of reorganization and underlying post-confirmation documents and covenants; service as a court directed examiner to investigate related-party transactions; analysis and formulation of operating and financial process improvements and provisional technical advisor to engagement teams on financial and accounting issues regarding “fresh-start” reporting and postpetition and post-confirmation accounting. My experience spans many industry sectors, including transportation and airlines. 7. Upon emerging from chapter 11, in order to prepare and present its financial statements in accordance with generally accepted accounting principles in the Unites States, the Debtors must comply with SOP 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code issued by the Accounting Standards Board of the American Institute of Certified Public Accountants (“SOP 90-7”), which requires, among other things, that the Debtors (a) record the effects of their plan of reorganization, (b) revalue their assets and liabilities in their books of entry, (c) develop an emergence balance sheet and (d) early adopt any new accounting pronouncements (collectively, “Fresh-Start Reporting”). The Debtors propose to engage Huron to provide the services described in the December 2006 Professional Services Agreement to

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ensure that the Debtors are able to comply with the requirements of Fresh-Start Reporting. 8. Huron has substantial experience in providing similar services to other companies, including airlines, in chapter 11. Most recently, Huron has provided Fresh-Start Reporting services to UAL Corporation (“UAL”) and ATA Holdings Corp. I was the Managing Director responsible for leading Huron’s efforts to assist these airlines with their adoption of Fresh-Start Reporting and, as a result, I am very familiar with the accounting and financial reporting, and the subtleties, of certain transactions encountered by companies in the airline industry and adopting Fresh-Start Reporting. 9. None of the Debtors’ other professionals have been retained to provide Fresh-Start Reporting services. 10. Accordingly, the proposed retention of Huron on the terms set forth in this Application and in the December 2006 Professional Services Agreement is in the best interest of the Debtors, their estates, creditors, and other parties in interest. Services to Be Provided 11. On January 26, 2006, Delta and Huron entered into a professional services agreement (the “January 2006 Professional Services Agreement,” and together with the December 2006 Professional Services Agreement, the “Professional Services Agreements”). The services that Huron has and/or will render are described in greater detail in the Professional Services Agreements. Any references to or summaries of the Professional Services Agreements herein are qualified by the express terms of the Professional Services Agreements, which shall govern if there is any conflict. 12. In the ordinary course of Delta’s business,3 and pursuant to the terms of the January 2006 Professional Services Agreement, Huron was retained by Delta as an Additional Professional Person (as defined in the OCP Motion). The scope of work being performed under the January 2006 Professional Services Agreement is to (1) assist management with financial reporting integral to day-to-day matters, specifically advisory assistance in the interpretation and application of generally accepted accounting principles for companies in chapter 11, and (2) assist in year-end goodwill impairment analysis. Through November 2006, total fees for services provided by Huron under the January 2006 Professional Services Agreement aggregate $347,421. 13. Recently, Delta requested that Huron expand the scope of its work to include those items detailed in the December 2006 Professional Services Agreement. Delta also discussed with the Office of the United States Trustee the expansion of Huron’s scope of work. Based upon such discussion, Huron is 3 The

Debtors’ retention of non-legal professionals in the ordinary course of their businesses comports with the order granting the Debtors’ Motion Pursuant to Sections 105(a), 327(e), 328 and 330 of the Bankruptcy Code and Bankruptcy Rule 2014(a) Authorizing the Debtors to Employ Ordinary Course Professionals, dated September 14, 2005 (the “OCP Motion”). In the OCP Motion, the Debtors made clear (in footnote 3) that the employment of Additional Professional Persons (as defined in the OCP Motion) would not be subject to the Ordinary Course Professional Fee Caps or the De Minimis Ordinary Course Professional Fee Caps (each as defined in the OCP Motion).

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seeking Bankruptcy Court approval as a retained professional. As set forth in the December 2006 Professional Services Agreement, Huron will undertake the following services, which fall into two discrete work streams: Fresh-Start Consulting and Valuation Consulting: Fresh-Start Consulting a) Assistance with Disclosure Statement and Financial Projections i. Assist management in applying Fresh-Start adjustments to and disclosures for the projected financial information b) Preparation and substantiation of Fresh-Start Balance Sheet under SOP 90-7 i. Assist management in the development of an implementation approach for Fresh-Start Reporting, culminating in a strategy and work plan for the project ii. Assist management in connection with its recording of adjustments to reflect the impact of the discharge of debt and other plan of reorganization requirements, including related tax implications iii. Assist management in connection with its recording of adjustments to assets and liabilities in accordance with SFAS 141 as required by SOP 90-7 iv. Assist management with its preparation of analyses supporting adjustments v. Assist management with respect to responses to requests from Delta’s external auditors with respect to Fresh-Start Reporting c) Posting of Fresh-Start entries back to books of entry i. Assist management in connection with its determination of reorganization related and revaluation adjustments necessary to record these items to the books of entry of the appropriate legal entities, including, if necessary, preparation of supporting materials ii. Work with accounting, legal and tax advisors to assist management in determining the allocation of the earnings impact to separate legal entities within the Delta structure in accordance with statutory requirements iii. Assist management in connection with its estimating of recoveries to claimants for accrual accounting purposes, including comparison with Delta’s claims database to estimate liabilities related to contingent, unliquidated and disputed claims iv. Assist management in allocation of reorganization value to Delta’s legal entities d) Assistance with Financial Reporting i. Assist management in preparing supporting accounting information for timely record keeping matters and financial reporting requirements ii. Assist management in preparing accounting information and disclosures in support of public financial filings such as 10K’s or 10Q’s

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iii. Assist management with regard to valuation matters that impact financial reporting iv. Assist management with memoranda supporting accounting positions Valuation Consulting a) Assistance and valuation work at Delta per Fresh-Start under SOP 90-7 for both Disclosure Statement and Fresh-Start Balance Sheet purposes i. Assist management in the identification of tangible and intangible assets ii. Assist management with its estimate of the fair value of specific assets and liabilities, including performing valuations of certain assets and liabilities, as agreed to with management iii. Assist with assignment of values to reporting units, as required iv. Discuss valuation methodology and results with Delta’s external auditors v. Assist Delta and its advisors with asset and liability valuation adjustments 14. The Debtors have retained The Blackstone Group L.P. (“Blackstone”) and Giuliani Capital Advisors LLC (“GCA”) as financial advisors during these chapter 11 cases. Huron will work closely with the Debtors and each of the Debtors’ retained professionals to clearly delineate each professional’s respective duties so as to prevent unnecessary duplication of services whenever possible. Blackstone is advising the Debtors on their capital raising efforts and certain valuation matters related specifically to the equity of the Debtors. GCA is advising the Debtors with respect to restructuring initiatives, assisting in cash flow and liquidity forecasting and reporting and in communicating with the various constituencies in chapter 11. Huron’s scope of work with respect to Fresh-Start Reporting is not and will not be duplicative of the services provided by the Debtors’ other retained professionals. Disinterestedness of Professionals 15. In connection with the preparation of this Declaration, Huron has conducted a relationship search of its contacts with: (a) the Debtors, affiliates and subsidiaries; (b) other entities in which Delta has a significant non-controlling equity stake; (c) codeshare, Skymiles and/or significant Lounge Partners; (d) Delta Connection Carriers (non-Delta entities only); (e) directors; (f) directors’ significant affiliations; (g) senior executive officers; (h) significant employee related parties (including: unions, pension plan trustees and administrators of benefit plans); (i) significant professionals; (j) significant on-airport and offairport lessors (landlords and capital leases); (k) significant insurance related parties; (l) significant customers and vendors; (m) significant holders of debt (and parties related thereto); (n) significant banking relationships; (o) significant aircraft lendors and lessors; (p) indenture trustees; (q) significant equity security holders; (r) parties to significant litigation; (s) parties who filed a notice of appearance; (t) members of the official committee of unsecured creditors appointed in the Debtors’ chapter 11 cases; and (u) certain other significant parties

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identified by the Debtors. Huron’s review, completed under my supervision, consisted of a query of the names of parties falling within the above listed categories through an internal computer database containing names of individuals and entities that are present or recent former clients of Huron. 16. Based on the results of such review, Huron does not have any connection with any of the identified parties in matters related to these proceedings, other than those parties listed on Exhibit I to this Declaration and discussed below. Huron has provided and likely will continue to provide services unrelated to the Debtors’ cases for various parties, creditors, or equity security holders of the Debtors, including those parties listed on Exhibit I to this Declaration. Huron’s assistance to these parties has been related to providing various business consulting services and, in those cases indicated, assisting the entity during its own chapter 11 case. To the best of my knowledge, no services have been provided to these parties that involve their rights in the Debtors’ cases, nor does Huron’s involvement in these cases compromise Huron’s ability to continue such consulting services. Huron may in the future provide services unrelated to the Debtors’ cases for other creditors, equity security holders or parties in interest in these cases. 17. Huron has been retained by Northwest Airlines Corporation (“Northwest”), which previously filed a chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. In addition, in the past, Huron was retained by UAL and ATA Holdings Corp., in their respective chapter 11 cases. Both UAL and ATA Holdings Corp. confirmed chapter 11 plans during 2006. Huron continues to provide services to Northwest and to UAL. The Huron engagement team involved in the Debtors’ cases is a separate group of professionals from the engagement team working on the Northwest chapter 11 case and from those still working for UAL. The accompanying Exhibit II to this Declaration lists the only member of the Huron engagement team working with the Debtors who previously worked on the Northwest chapter 11 case, the time spent on that engagement and the nature of the involvement. The personnel from Huron providing services as part of the engagement team to the Debtors pursuant to this Application will not provide services to Northwest. The Huron Managing Director leading the Northwest engagement is James Lukenda, who has devoted approximately 5 hours to the Delta chapter 11 cases, primarily for consultations on the technical interpretation and application of general bankruptcy accounting principles relating to the airline industry, and on the general application of SOP 90-7. These consultations have been of a limited nature involving the consideration of industry precedents in positions adopted and other high-level consultation matters. Mr. Lukenda and I intend to continue to have such high-level consultations. I also expect that the Huron employees providing valuation services to the Debtors and to Northwest as part of those separate engagement teams, Allen Arnett and Joseph DiSalvatore, will from time to time have high-level consultations and discussions relating to the application of intangible asset and liability valuation principles generally. At no time during any of these consultations will confidential information ever be discussed. 18. Additionally, Huron has established, and intends to continue to maintain, its customary confidentiality safeguards between the Huron engagement team providing services to the Debtors and the engagement teams providing services to Northwest pursuant to its respective application.

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19. To the best of my knowledge, Huron is a “disinterested person” as that term is defined in section 101(14) of chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”), as modified by section 1107(b) of the Bankruptcy Code, in that, Huron: (a) is not a creditor, equity security holder or insider of the Debtors; (b) is not and was not an investment banker for any outstanding security of the Debtors; (c) has not been, within three years before the date of the filing of the Debtors’ chapter 11 petition, (i) an investment banker for a security of the Debtors, or (ii) an attorney for such an investment banker in connection with the offer, sale, or issuance of a security of the Debtors; and (d) was not, within two years before the date of filing of the Debtors’ chapter 11 petitions, a director, officer, or employee of the Debtors or of any investment banker as specified in subparagraph (b) or (c) of this paragraph. 20. As part of its diverse practice, Huron appears in numerous cases, proceedings and transactions involving many different professionals, including attorneys, accountants and financial consultants, some of which may represent claimants and parties-in-interest in the Debtors’ chapter 11 cases. Further, Huron has in the past, and may in the future, be represented by several attorneys and law firms in the legal community, some of whom may be involved in these proceedings. In addition, Huron has in the past, and will likely in the future, be working with or against other professionals involved in these cases in matters unrelated to these cases. Based on our current knowledge of the professionals involved, and to the best of my knowledge, none of these business relations constitute interests materially adverse to the Debtors herein in matters upon which Huron is to be employed, and none are in connection with this case. 21. Huron will conduct an ongoing review of its files to ensure that no disqualifying circumstances arise, and if any new relevant facts or relationships are discovered, Huron will supplement its disclosure to the Court. 22. To the best of my knowledge, Huron has not been retained to assist any entity or person other than the Debtors on matters relating to, or in connection with, these chapter 11 cases. If this Court approves the proposed employment of Huron by the Debtors, Huron will not accept any engagement or perform any service in these chapter 11 cases for any entity or person other than the Debtors. Huron will, however, continue to provide professional services to entities or persons that may be creditors of the Debtors or parties in interest in these chapter 11 cases; provided, however, that such services do not relate to, or have any direct connection with, these chapter 11 cases. Professional Services Compensation 23. Subject to Court approval and in accordance with the terms and conditions of the December 2006 Professional Services Agreement, Huron intends to charge for the professional services rendered to the Debtors in these chapter 11 cases as follows: r A monthly advisory fee (the “Monthly Advisory Fee”) of $290,000, of which $165,000 shall be for Fresh-Start Consulting and $125,000 shall be for Valuation Consulting. Delta and Huron shall meet and confer from

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time to time, review the amount of the Monthly Advisory Fee and make adjustments when appropriate. Upon the termination of the December 2006 Professional Services Agreement, Huron shall return a prorated portion of the Monthly Advisory Fee to Delta, to adjust for any partial month period in the month of such termination. r In addition to the fees that are or may be payable to Huron under the December 2006 Professional Services Agreement, Huron’s reasonable out-ofpocket expenses incurred in connection with its activities will be payable by Delta on a monthly basis. Such expenses will include, but not be limited to travel, accommodations and meals, overnight delivery, database access charges, telephone, facsimile, postage, printing and duplication, documentation materials and similar items. Monthly expenses are payable by Delta upon its receipt of an invoice for expenses from Huron. 24. Huron will seek to have payment of such compensation and reimbursement of expenses approved in accordance with the Bankruptcy Code, the Bankruptcy Rules, and the Local Bankruptcy Rules for the Southern District of New York and any applicable orders of this Court. 25. No commitments have been made or received by Huron, nor any member thereof, as to compensation or payment in connection with these cases other than in accordance with the provisions of the Bankruptcy Code and orders of this court. Further, Huron has no agreement with any other entity to share with such entity any compensation received by Huron in connection with these chapter 11 cases. 26. The foregoing constitutes the statement of Huron pursuant to sections 327(a), 328(a), 329, and 504 of the Bankruptcy Code and Bankruptcy Rules 2014(a) and 2016(b). 27. Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct, and that this Declaration was executed on January 4, 2007, in Atlanta, Georgia. /s/ Michael C. Sullivan Declarant: Michael C. Sullivan Title: Managing Director

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Exhibit I. Summary of Relationships Listing of parties with business relationships with Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”) unrelated to the Debtors’ chapter 11 cases: A. General Relationships AIG Ace American Insurance Akin Gump Strauss Hauer & Feld American Express ABN Amro Allstate Life Insurance Arnold & Porter AT&T Bank of America Bank of New York Bryan Cave Cadwalader, Wickersham & Taft Chevron Products Citgo Petroleum Coca Cola Company ConocoPhillips Debevoise & Plimpton Deloitte & Touche DLA Piper Duane Morris Fannie Mae Farella Braun Martel Foley Lardner Fulbright Jaworski Goodwin Procter Hogan Hartson Holland & Knight LLP Honeywell Internal Revenue Service John Hancock Jones Day

Kelley Drye Warren King Spalding Latham Watkins Liberty Mutual Fire Insurance Co McDermott Will & Emery LLP Milestone Scientific, Inc Mintz Levin Cohn Ferris Glovsky Morrison & Foerster LLP Navigant Capital Advisors New York Life Insurance Co Northern Southern Corporation O’Melveny & Myers Pacific Life Insurance Pitney Bowes Price Waterhouse Coopers Rockwell Collins, Inc Siemens Building Technologies State Farm St. Paul Travelers Insurance Co Thelen Reid & Priest Travelers Insurance/Travelers Group Inc United Airlines United Healthcare Group US Airways Verizon Vinson & Elkins LLP Wachovia Walt Disney White & Case Wyndham

Huron, as a multi-disciplined consulting firm, may currently provide, or in the recent past may have provided, one or more consulting services to the parties listed above, including but not necessarily limited to, forensic accounting assistance, valuation services, strategic sourcing assistance or corporate advisory assistance. To the best of my knowledge and belief, none of the matters related to Huron’s assistance to these parties involved the Debtors or these chapter 11 cases.

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B. Airline Industry Relationships Huron has in the past assisted, or is currently assisting, other companies in the airline industry with restructuring matters. These are as follows: UAL Corporation ATA Holdings Corporation NWA Corporation Air Jamaica Huron has not been involved with, and will refrain from future involvement with, any interline matters between the Debtors and the companies listed above if Huron’s retention in these cases is approved by the Court, except to the extent that Huron may have limited involvement with the gathering or transmittal of information related to such matters to parties in these cases. The Debtors in these chapter 11 cases have numerous business relationships and creditors. As of the filing of this attachment, Huron continues to process information regarding these relationships and creditors and will update this attachment if necessary. Exhibit II. Summary of Debtors’ Engagement Team Members with NWA Airlines, Inc. Involvement List of members of the Debtors’ Huron engagement team who have worked on the Northwest chapter 11 case in 2006:

Huron Team

Title

Sullivan, Michael

Managing Director

2006 Hours on Nature of Involvement on Other NWA Airline Matter 6.6

Consulted with NWA team on financial reporting matters during chapter 11 for airlines and the application of “fresh start” accounting in preparation for emergence from chapter 11

Current Status No current NWA involvement

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Exhibit B PROFESSIONAL SERVICES AGREEMENT THIS PROFESSIONAL SERVICES AGREEMENT is made and entered into as of the 1st day of December, 2006 (the “Effective Date”), by and between Delta Air Lines, Inc., with its principal place of business at 1030 Delta Boulevard, Atlanta, Georgia 30320 (“Delta”), and Huron Consulting Services, LLC, with its principal place of business at 550 W. Van Huron, Chicago, Illinois 60607 (“Consultant”). 1.0 SCOPE OF SERVICES 1.1 Services; Statement of Work. Consultant agrees to provide to Delta the professional consulting services (“Services”) identified on the Statement of Work attached to and incorporated in this Agreement. The Statement of Work describes in detail the Services to be provided and applicable schedules and charges. 1.2 Errors, Defects, and Omissions. Consultant shall immediately correct all errors, defects and omissions in the Services without any additional costs to Delta, except as to errors caused by Delta referenced in the Statement of Work. 1.3 Timeliness. Time is of the essence in this Agreement. The parties intend for the Services hereunder to be performed in accordance with the time frames set forth in the applicable Statement of Work. 2.0 ORGANIZATION OF CONTRACTOR PERSONNEL 2.1 Starting. If any Consultant employee assigned to perform Services under any Statement of Work is nonacceptable to Delta for any reason, Delta shall notify Consultant in writing and Consultant shall promptly remove the named Consultant employee from performing such work or Services. Consultant shall, if requested by Delta, promptly provide a replacement employee with equal or better qualifications and skills to continue such work or to complete the remainder of the applicable Statement of Work at no increase in cost to Delta. 2.2 Reassignment by Consultant. Consultant agrees to use reasonable efforts to ensure the continuity of personnel assigned to perform Services under any Statement of Work. Consultant agrees to consult with Delta regarding any reassignment of its personnel assigned to perform Services. 2.3 Safety Rules. Consultant’s personnel shall abide by applicable Delta safety, security and similar work-related policies, procedures, controls and rules; provided that nothing in this Agreement shall be construed as entitling Consultant’s personnel to any benefits or privileges provided by Delta to its employees. 2.4 No Subcontracting. Consultant shall not subcontract all or any portion of Consultant’s Services under this Agreement without Delta’s express written consent. 2.5 Independent Consultant. Nothing contained in this Agreement shall be construed to constitute Consultant as a partner, employee or agent of Delta, nor shall either party have the authority to bind the other in any respect, it being intended that each shall remain responsible for its own actions. Consultant is retained only for the purposes and to the extent set forth in this

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Agreement, and Consultant’s relationship to Delta shall be that of an independent contractor. Neither Consultant nor Consultant’s personnel shall be deemed to be Delta’s employees. Consultant shall be solely responsible for, and shall indemnify and hold Delta harmless against, the payment of compensation to Consultant personnel assigned to perform Services. Consultant shall be solely responsible for, and shall indemnify and hold Delta harmless against, the payment of employment benefits, if any, workers’ compensation, disability benefits and unemployment insurance, and for withholding and remitting any local, state or federal payroll-related taxes or assessments related to performance of the Services. 3.0 WORK PRODUCT 3.1 Title. Upon full payment of all amounts due Consultant in connection with the relevant Statement of Work, Delta shall have exclusive title to and use of all copyrights, patents, trade secrets, or other intellectual property rights associated with any programmed software, procedures, work-flow methods, reports, manuals, visual aids, documentation, ideas, concepts, techniques, inventions, processes, or works of authorship developed, provided or created by Consultant or its employees or contractors during the course of performing work for Delta (“Work Product”). Delta shall have the sole right to obtain and to hold in its own name copyright, patent, trademark, trade secret, and any other registrations, or other such protection as may be appropriate to any Work Product, and any extensions and renewals thereof. All such Work Product made in the course of the Services rendered hereunder shall, to the extent possible, be deemed “works made for hire” within the meaning of the Copyright Act of 1976, as attended (the “Act”). Consultant hereby expressly disclaims any interest in any and all Work Product. To the extent that any work performed by Consultant is found as a matter of law not to be a “work made for hire” under the Act, Consultant hereby assigns to Delta the sole right, title and interest, including the copyright, in and to all such Work Product, and all copies of them, without further consideration. Consultant shall obtain specific agreement to the terms of this Section from each of its employees and contractors assigned to perform Services under this Agreement. Notwithstanding the foregoing, Consultant shall retain all right and title to documents and materials developed prior to or independent of the Delta engagement (“Consultant Property”). To the extent its deliverables to Delta contain Consultant Property, Consultant grants Delta and any Affiliate a non-exclusive, non-assignable, royalty-free license to use it in connection with the deliverables and the subject of the Statement of Work and for no other or further use without Consultant’s prior written consent. 3.2 Registration, Sale, and Distribution. Neither Consultant nor its personnel will copyright, patent, trademark, designate as its trade secret, sell, or distribute any Work Product. 3.3 Perfection of Delta’s Interest. Consultant shall give Delta and any person designated by Delta, at Delta’s expense, such reasonable assistance as may be required to perfect the rights described in this Article 3, including, but not limited to, execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment in the United States and any foreign country.

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3.4 Residual Ideas, Concepts or Techniques. Notwithstanding the foregoing in this Article 3, Consultant shall not be required to limit its use of any residual ideas, concepts or techniques developed pursuant to Consultant’s efforts under this Agreement, which are general in nature and do not include any Work Product or Confidential Business Information, as defined in Section 5.1 of this Agreement. 4.0 FEES AND EXPENSES 4.1 Rates. Consultant agrees to invoice Delta for the Services provided to Delta by Consultant under any Statement of Work in accordance with the fee structure act forth on that Statement of Work. 4.2 Invoices. All invoices shall include Consultant’s tax identification, number and a detailed description of Services rendered. Delta will reimburse Consultant for the reasonable and actual out-of-pocket travel-related expenses incurred by Consultant’s employees in connection with the performance of Consultant’s obligations hereunder, provided that such expenses (including living accommodations, ground transportation, meals, and air fare) are reasonable. Furthermore, all expense reimbursement requests by Consultant shall require supporting documentation. At Delta’s discretion. Delta shall provide to Consultant, and Consultant shall use, vouchers, also known as “air scrip”, for Consultant’s employees to travel on Delta Air Lines while performing under this Agreement. At Delta’s request, Consultant shall provide supporting documentation for any requested travel, living, and out-of-pocket expenses. 4.3 Payments. The charges invoiced to Delta by Consultant in accordance with this Article 4, except for any amounts disputed by Delta, shall be payable by Delta in accordance with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the local rules and orders of the Bankruptcy Court. In case of a dispute between Delta and Consultant over charges that have been billed to Delta, Delta may withhold amounts equal to the disputed amount until the parties settle such dispute. 4.4 Records. Consultant shall maintain complete and accurate records, in a form in accordance with generally accepted accounting principles, to substantiate Consultant’s charges under any invoice. Consultant shall retain such records for a period of three (3) years from the date of completion of all Services under the applicable Statement of Work. 4.5 Audit. Delta shall have access to all records of Consultant, including all support documentation, for the purpose of verifying any and all charges billed to Delta under this Agreement. Consultant shall cooperate with Delta by providing Delta with access to Consultant’s records within seven (7) days of Delta’s request. The examination of such records shall be conducted at a mutually agreeable time and place. 4.6 Taxes. Consultant’s fees do not include taxes. Delta is responsible for and will pay all applicable sales, use, excise, value added and other taxes associated with the provision or receipt of the Services and deliverables. Delta shall not be charged for, and Consultant shall pay, any taxes based on the net or gross income of Consultant or taxes imposed on Consultant in lien of income taxes or income tax increases, including value added taxes.

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5.0 CONFIDENTIAL INFORMATION 5.1 Confidential Business Information. During the term of this Agreement and for a period of five (5) years thereafter, each party (for the purpose of this Article, a “Receiver”) shall maintain in strict confidence, and agree not to disclose to any third party, except as necessary for the performance of the Agreement when authorized by the other party (for the purposes of this Article, a “Discloser”) in writing, Confidential Business Information that the receiver receives from the discloser or its affiliates. “Confidential Business Information” means all non-public information of a competitively sensitive nature concerning the discloser or its affiliates, including, but not limited to, this Agreement and any other non-public information (whether in writing or retained as mental impressions) concerning research and development; present and further projections; operational costs and processes, financial data and reports, pricing, cost or profit factors; quality programs; annual and long-range business plans; marketing plans and methods; customers or suppliers; contracts and bids; and personnel. 5.2 Exclusions. Confidential Business Information does not include: information that is, or subsequently may become within the knowledge of the public generally through no fault of the Receiver; information that the Receiver can show was previously known to it as a matter of record at the time of receipt; information that the Receiver may subsequently obtain lawfully from a third party who has lawfully obtained the information free of any confidentiality obligations; or information that the Receiver may subsequently develop as a matter of record, independently of disclosure by the Discloser. 5.3 Trade Secrets. During the term of this Agreement and for so long thereafter as applicable state law allows, the parties agree to maintain in strict confidence, and agree not to use or disclose except as authorized in writing by the Discloser, Trade Secrets as defined by applicable state law. 5.4 Third Party Information. The confidentiality provisions in this Article 5 apply to and shall protect the confidentiality of information provided to the Discloser by third parties. 5.5 Court Order. Notwithstanding the foregoing restrictions in sections 5.1 and 5.2, the Receiver may disclose Confidential Business Information or Trade Secrets to the extent required by an order of any court or other governmental authority, but only after the Receiver has notified the Discloser and Discloser has had the opportunity, if possible, to obtain reasonable protection for such information in connection with such disclosure. 5.6 Injunctive Relief. The Receiver acknowledges that disclosure of any Confidential Business Information or Trade Secret by it or its employees will give rise to irreparable injury to the discloser or the owner of such information, not adequately compensated by damages. Accordingly, the Discloser or such other party may seek and obtain injunctive relief against the breach or threatened breach of the undertakings in this Article, in addition to any other legal remedies which may be available, without the requirement of posting bond. The Receiver further acknowledges and agrees that the covenants contained in this Article are necessary for the protection of the Discloser’s legitimate business interests and are reasonable in scope and content.

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6.0 WARRANTY 6.1 Standard of Performance. Consultant represents and warrants that all Services shall be performed: (a) in a diligent, efficient and trustworthy manner, (b) for the purpose of advancing and improving Delta’s business; and (c) consistent with the highest professional standards in the field. 6.2 Infringement. Consultant represents and warrants that the Services and Work Product provided under this Agreement will not infringe upon or violate any patent, copyright, trade secret or other proprietary right of any third party. 6.3 Equal Opportunity. Consultant represents and warrants that it will not discriminate against any employee or applicant for employment because of race, color, religion, disability, sex, national origin, age or any other unlawful criterion and that it shall comply with all applicable laws against discrimination and all applicable rules, regulations and orders issued thereunder or in implementation thereof. The Equal Opportunity Clauses set forth in 41 C.F.R., sections 60-1.4 (a), 60-250.5 (a) and 60-741.5 (a) are incorporated herein by this reference. 6.4 Consultance with Laws. Consultant represents and warrants that it will, in the performance of this Agreement, comply with all applicable federal, state, and local laws, rules, regulations, orders, and ordinances, including all laws and regulations governing the hiring of aliens. 7.0 LIABILITY AND INSURANCE 7.1 General Indemnity. Each party shall indemnify and hold the other party, its officers, directors, employees, and agents harmless from any claims, liability, damage, or expense, including reasonable attorney’s fees and costs, relating to or arising out of its negligence or willful misconduct related to this Agreement or its breach of this Agreement. 7.2 Infringement Indemnity. Consultant agrees to indemnify, defend and hold harmless Delta, its officers, directors, employees, and agents against any damage (including reasonable attorney’s fees and expenses), suit, or proceeding brought against Delta for patent, copyright, trade secret or other proprietary right infringement arising out of the Services performed or Work Product delivered by Consultant under this Agreement (“Infringement Claim”). Delta shall give Consultant prompt written notice of the Infringement Claim, allow Consultant the sole control of the defense or settlement of the Infringement Claim, and provide Consultant with assistance, information, and authority reasonably necessary to carry out Consultant’s obligations under this Section. Consultant shall reimburse Delta its reasonable out-of-pocket expenses incurred in providing such assistance. In the event an injunction is threatened or issued against Delta relating to an Infringement Claim, in addition to any other obligation Consultant may have to Delta under the Agreement or otherwise, Consultant shall, at Consultant’s option: procure for Delta, at Consultant’s expense, a license from the patent, copyright or other proprietary right owner to use the Services; or modify or replace the offending portion of the Services and Work Product and, at Consultant’s expense, to make the Service and Work Product non-infringing without materially impairing their usefulness or performance. 7.3 Exclusions and Limitations. Notwithstanding anything to the contrary in this agreement, in no event shall either party be liable to the other for consequential, indirect, special, incidental or similar damages, nor shall a party’s

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liability to the other exceed the greater of three (3) times the value of the statement of work under which the liability arises, or the total amount paid by Delta to Consultant under this agreement in the twelve (12) months prior to when the liability arises. The foregoing exclusions and limitations of liability shall not apply in the event of Consultant’s infringement of intellectual property rights or breach by either party of the confidentiality obligations set forth in this agreement. 7.4 Insurance. Consultant shall maintain throughout the term of this Agreement: Workers’ Compensation insurance with statutory limit and Employer’s Liability insurance in an amount not less than $500,000; and Commercial General Liability insurance with a combined single limit for bodily injury and property damage of not less than $1,000,000 per occurrence. All insurance policies shall be primary, without contribution from any other insurance carried by Delta. All policies shall provide for contractual liability and shall include a standard cross-liability clause or endorsement. All policies shall name Delta as an additional insured (except for Workers’ Compensation). Upon Delta’s request, Consultant shall provide Delta with a certificate evidencing this coverage and providing not less than thirty (30) days prior written notice of cancellation, termination or material change. Consultant’s liability under this Agreement shall not be limited by the amount or type of insurance required under this Section. 8.0 TERMINATION OF AGREEMENT 8.1 Term. This Agreement (which includes the attached Statement of Work) shall commence on the Effective Date and shall continue in effect thereafter for a period of one (1) year, or until the completion of Services under any Statement of Work entered into prior to the expiration of this Agreement, whichever is later, unless terminated as provided in this Agreement. 8.2 Breach. In addition to any other remedy available under this Agreement or otherwise, either party may terminate this Agreement (or any Statement of Work) if the other party breaches any material provision of this Agreement (or the applicable Statement of Work) and has not cured the breach within thirty (30) days after receipt of written notice of the breach. 8.3 Termination Without Cause. Delta may terminate this Agreement (or any Statement of Work) at any time without cause effective immediately upon Consultant’s receipt of written notice from Delta. Consultant may terminate this Agreement at any time without cause effective thirty (30) days after Delta’s receipt of written notice from Consultant: provided, however, that Consultant shall be required to complete any Statement of Work entered into before the effective date of such a termination. Delta’s sole and exclusive obligation to Consultant upon either party’s termination under this Section shall be the payment of unpaid charges due and payable for Services properly performed up to the effective date of termination. In no event will Delta be liable to Consultant for any anticipated fees or profits on account of a termination under this Section. The parties acknowledge that the first $100 paid under this Agreement is adequate and specific consideration for the rights under this Section.

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9.0 MISCELLANEOUS 9.1 Recruiting of Employees. During the term of this Agreement, and for six (6) months following its termination or expiration, neither party shall engage or offer employment to any of the other party’s or its affiliates’ employees or former employees who had been employed by the other party or its affiliates on matters related to the subject matter of this Agreement (including any Statement of Work) within six (6) months of such engagement or offer. 9.2 Promotion. Consultant agrees that it will not, without prior written consent of Delta’s Director of Corporate Operations Sourcing department, or their designee, in each instance (a) use in advertising, publicity or otherwise the name of Delta or any Affiliate, or any employee of either, nor any trademark, trade device, service mark, symbol or any abbreviation, contraction or simulation thereof owned by Delta or any Affiliate, (b) represent, directly or indirectly, that any product or service provided by Consultant has been approved or endorsed by Delta or any Affiliate, or (c) make any statement to any customer, supplier, or other person with regard to the transactions contemplated by this Agreement, except as required by law, provided, that Consultant may refer to Delta as a customer reference in non-public dealings with potential customers. 9.3 Progress Reports. Upon request by Delta, Consultant will submit a detailed progress report to Delta. Such progress reports will detail Services performed to date and estimated time to complete. 9.4 Assignment. This Agreement shall inure to the benefit of the parties and their successors and permitted assigns. Neither party may assign this Agreement, in whole or in part, without the prior written consent of the other, and any attempt to make such an assignment shall be void. Notwithstanding the foregoing. Delta reserves the right to assign this Agreement to any Affiliate, to any entity that gains Control of Delta by way of merger, acquisition, or otherwise, or to any third-party service provider acting on Delta’s behalf and for Delta’s benefit. “Affiliate” means Delta Air Lines, Inc. (“Delta Air Lines”) and any individual, corporation, partnership, association, or business that directly or indirectly through intermediaries, controls, is controlled by or is under common control with Delta Air Lines or Delta. An ownership, voting or similar interest representing at least 50% of the total interests then outstanding of the pertinent entity shall constitute “control” for the purposes of this definition. 9.5 Air Travel. Consultant agrees that its personnel performing Services under this Agreement will make every reasonable effort to use Delta Air Lines for air travel associated with the performance of any Statement of Work. 9.6 Governing Law. This Agreement will be construed in accordance with and governed by the laws of the State of Georgia, USA, without giving effect to its conflicts of law principles. 9.7 Surviving Sections. Articles 5, 6, and 7, Sections 4.4, 4.5, 4.6, 9.1, 9.2, 9.6, and this Section 9.7 shall survive termination or expiration of this Agreement, in addition to any provisions which by their nature should, or by their express terms do, survive or extend beyond termination or expiration of this Agreement. 9.8 Complete Agreement. This Agreement constitutes the complete agreement and understanding between the parties and supersedes all prior agreements and understandings between the parties with respect to the subject

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matter hereof. This Agreement may be modified only by a writing, signed by both parties, which specifically identifies this Agreement by name and date. 9.9 Even Construction. The parties acknowledge that this Agreement was the subject of fair negotiation between parties adequately represented by counsel of their choice. Neither party shall be considered the “drafter” of this Agreement for the purpose of construing any of its terms and conditions. 9.10 Headings. Article and Section headings and numbers are provided for convenience only, and shall not affect the construction or interpretation of this Agreement. 9.11 Days. References to “days” or a “day” shall mean a calendar day, unless otherwise stated. 9.12 Notices. Any notice or communication required to be given by either party to this Agreement shall be in writing and shall be hand delivered or sent by certified mail, return receipt requested, or by confirmed facsimile transmission to the addresses indicated below or such other address as either party may specify to the other. If to Consultant: Huron Consulting Group, LLC Attn: Michael C. Sullivan 1120 Avenue of the Americas 8th Floor New York, NY 10036 Telephone: 646-277-2213 If to Delta: Delta Air Lines, Inc. Vice President—Accounting Dept. 837 PO Box 20706 Atlanta, GA 30320-2574 Telephone: 404-715-9411 9.13 Supplier Diversity. Consultant acknowledges that (i) Delta is committed to enhancing business opportunities for small business, veteran-owned small business, HUBZone small business, small disadvantaged business and women-owned small business enterprises (collectively, “Small Business”) as first and second tier suppliers to Delta, and (ii) Delta believes that every reasonable attempt should be made to include and utilize Small Business supplier firms as suppliers to Delta, as long as they are competitive on price, quality and service, and provide the best overall value for Delta. Consultant agrees to cooperate with Delta to achieve the general objective of including Small Business supplier firms as suppliers to Delta, in accordance with the guidelines described in clause (ii) above, and to use all commercially reasonable efforts to include Small Business supplier firms in its procurement process. Upon request, Consultant shall complete and submit to Delta a Supplier Diversity Quarterly Utilization Report, in such format as Delta may reasonably specify. 9.14 Conflict. In the event of any conflict between this Agreement and the attached Statement of Work, this Agreement shall control.

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9.15 Other Services. Consultant has advised you that it may provide professional services to financial institutions, investment funds or related entities, which may hold, or have held, the obligations of Delta. Delta, by signing this Agreement, waives any conflict in respect thereof. IN WITNESS WHEREOF, the parties have set their hands and seals as of the date first written above. Huron Consulting Services, LLC

Delta Air Lines, Inc.

(Consultant) By:

By: (Signature)

(Signature)

Name:

Name: BRYAN K. TREADWAY

Title: MANAGING DIRECTOR

Title: VICE PRESIDENT-ACCOUNTING

Statement of Work We, Delta Air Lines, Inc., (“Delta”) are engaging your firm, Huron Consulting Services, LLC, (“Huron”) to perform the following financial advisory services. This Statement of Work (the “SOW”) is an attachment to the Professional Services Agreement between Delta and Huron entered as of December 1, 2006 (“Agreement”). This SOW shall be governed by and subject to the terms and conditions of the Agreement. The effective date of this SOW shall be December 1, 2006. Huron and Delta are parties to that certain Professional Services Agreement entered as of January 26, 2006 (the “First PSA”). The First PSA shall govern those statements of work entered into under it, but this SOW shall be governed by the Agreement, without reference to the First PSA. Huron shall provide Fresh Start Consulting and Valuation Consulting work, as defined below (the “Services”): Fresh Start Consulting

r Assistance with Disclosure Statement and Financial Projections r Assist management in applying Fresh-Start adjustments to and disclosures for the projected financial information

r Preparation and substantiation of Fresh-Start Balance Sheet under SOP 90-7 r Assist management in the development of an implementation approach for Fresh-Start Accounting, culminating in a strategy and work plan for the project r Assist management in connection with its recording of adjustments to reflect the impact of the discharge of debt and other plan of reorganization requirements, including related tax implications r Assist management in connection with its recording of adjustments to assets and liabilities in accordance with SFAS 141 (and SFAS 157) as required by SOP 90-7 r Assist management with its preparation of analyses and memorandum supporting adjustments

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r Assist management with respect to responses to requests from Delta’s external auditors with respect to Fresh-Start Accounting

r Posting of Fresh-Start entries back to books of entry r Assist management in connection with its determination of reorganization related and revaluation adjustments necessary to record these items to the books of entry of the appropriate legal entities, including, if necessary, preparation of supporting materials r Work with accounting, legal and tax advisors to assist management in determining the allocation of the earnings impact to separate legal entities within the Delta structure in accordance with statutory requirements r Assist management in connection with its estimating of recoveries to claimants for accrual accounting purposes, including comparison with Delta’s claims database to estimate liabilities related to contingent, unliquidated and disputed claims r Assist management in allocation of reorganization value to Delta’s legal entities r Assistance with Financial Reporting r Assist management in preparing supporting accounting information for timely record keeping matters and financial reporting requirements r Assist management in preparing accounting information and disclosures in support of public financial filings such as 10K’s or 10Q’s r Assist management with memoranda supporting accounting positions Valuation Consulting Perform a valuation of all the intangible assets and certain liabilities of Delta Air Lines, Inc. and Comair, Inc., which are expected to include: Intangible Assets

r r r r r r r r r r

Developed software; Trademarks and trade names; Customer lists/Customer relationships; Patents, Copyrights and Proprietary Technology; Routes and Slots (as required); Code Share and Alliance Agreements; Delta SkyMiles (“Partners”) program; Assumed Contracts; Licenses and Operating Certificates; and “Other” assets as identified in a completeness assessment.

Liabilities

r Non-current liabilities excluded from Liabilities Subject to Compromise; r Capital Leases; r Deferred Revenue;

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r Liability associated with SkyMiles program; r Purchase Commitments; and r “Other” liabilities as identified in a completeness assessment. Huron will review the valuation of operating leases performed by another firm to assist Delta in ensuring the appropriate accounting adjustments are made with respect to favorable/unfavorable operating leases upon emergence. In addition, Delta will require assistance with the data gathering as well as preparation of schedules and analysis to assist us in determining the impact of fresh start accounting on matters related to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”), including the impact on existing deferred tax balances and valuation allowances, and integrating asset values developed as part of this project with a separate project connected with Delta’s analysis of the implications of Section 382 of the Internal Revenue Code. The valuation consulting will be initially performed prior to Delta’s emergence from Chapter 11 bankruptcy protection. Upon emergence, it will be updated and revised for any changes in assumptions or data. Your firm will provide a draft narrative report, which will include the following:

r Explanation of the provisions of SOP 90-7, valuation methodology and

r r

r r r

key assumptions used in estimating the Fair Value of each asset and liability, discussion of useful lives of each of the assets valued, and Fair Value conclusions by asset and liability; Fair Value Summary Schedule with references to the underlying schedules relating to each individual asset or liability valuation; A “Completeness Assessment” including assets that were considered and excluded along with the reasons for excluding those assets based on the appropriate accounting reasons including the nature and materiality of the accounts, and appropriate accounting literature; Reporting Unit Fair Value Summary Schedule; Discount rate analyses and separate valuation exhibits for each asset and liability valued; and Estimates of asset lives with narrative support for estimated lives.

Further, to the extent necessary, your firm will provide other “position papers” as required. Your firm’s draft narrative report and position papers will be subject to review with Delta’s auditors (Ernst & Young). The purpose of this Statement of Work is to meet Delta’s financial reporting requirements associated with SOP 90-7 Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and will be utilized by Delta in establishing our Fresh Start opening balance sheet and will be disclosed within the financial information provided in our Disclosure Statement filings. The valuations may also be utilized by Delta in making certain determinations for income tax reporting purposes, and may be used by lenders for financing collateral purposes. The valuations and related support and explanations may

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be shared with our independent auditors, lenders, tax and other advisors and, if necessary, the U.S. Securities and Exchange Commission and the Internal Revenue Service. The methodologies you utilize to estimate fair value will coincide with Statement of Financial Accounting Standard No. 141—Business Combinations and Statement of Financial Accounting Standard No. 157—Fair Value Measurements. Deliverables Huron will communicate its findings in materials or reports prepared in connection with the Agreement (“Deliverables”). Such Deliverables are Delta Confidential Business Information under the Agreement, and will be communicated solely to Delta, unless Huron is otherwise directed by Delta. Any decision to implement such recommendations will be solely that of Delta. Huron’s role will be advisory only. Any materials prepared by Huron are solely for the use of and disclosure by Delta as provided in this SOW, and, under Delta’s direction, its officers, directors and employees, and should not be relied upon by any other party for any other purpose. Limitations on Services Huron’s Services are limited to those specifically noted in this Agreement and do not include accounting, tax-related assistance, or advisory services except as specifically described herein. Huron will not be expressing any professional opinions on financial statements or performing attest procedures with respect to other information in conjunction with this engagement. Huron’s Services are not designed, nor should they be relied upon, to disclose weaknesses in internal controls, financial statement errors, irregularities, or illegal acts. Huron will, however, inform Delta of any irregularities, or illegal acts that do come to our attention incidental to our assistance. Delta shall be responsible for providing the information necessary for Huron’s review and analysis. The accuracy and completeness of such information, upon which Huron will rely and which will form the basis of any recommendation Huron helps to prepare, is the responsibility of Delta. Delta Responsibilities In connection with Huron’s provision of Services, Delta will perform the tasks, furnish the personnel, provide the resources, and undertake the responsibilities specified below. Delta will designate an employee or employees within its senior management who will make or obtain all management decisions with respect to this engagement on a timely basis. Delta also agrees to ensure that all assumptions are accurate and to provide Huron with such further information Huron may need, which Huron can rely on to be accurate and complete. Delta also agrees to cause all levels of its employees and contractors to cooperate fully and timely with Huron. Huron will be entitled to rely on all of Delta’s decisions and approvals and will not be obligated to evaluate, advise on, confirm, or reject such decisions and approvals. Prior to commencing work, Huron will provide an initial data request outlining information requirements for performing the Services. To help maximize the value of Huron’s work and to keep the project moving on schedule, Delta

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will comply with all of Huron’s reasonable requests and provide Huron timely access to all information and locations reasonably necessary to its performance of the Services. Supplemental data requests will be discussed between Huron and Delta on an as-needed basis. The successful delivery of Huron’s Services, and the fees charged, are dependent on (i) Delta’s timely and effective completion of its responsibilities, (ii) the accuracy and completeness of any assumptions, and (iii) timely decisions and approvals by Delta management. Delta will be responsible for any delays, additional costs, or other liabilities caused by any deficiencies in the assumptions or in carrying out its responsibilities. As provided in the Declaration of Michael C. Sullivan in Support of the Application of the Debtors for Authority to Employ and Retain Huron Consulting Services, LLC filed in connection with Delta’s Chapter 11 case: (i) Huron provides professional services to entities or persons that may be creditors of Delta or parties in interest to Delta’s Chapter 11 cases; (ii) such services do not relate to, or have any direct connection with, Delta’s Chapter 11 cases; and (iii) Huron will continue to provide professional services to entities or persons that may be creditors of Delta or parties in interest to Delta’s Chapter 11 cases provided, however, that such services do not relate to, or have any direct connection with, Delta’s Chapter 11 cases. Fees and Expenses Fees: Upon execution of this Agreement, Delta shall pay Huron $260,000 and commencing on the first business day of each calendar month thereafter, Delta shall pay Huron an advisory fee (the “Monthly Advisory Fee”) of $290,000, of which $165,000 shall be for Fresh Start Consulting and $125,000 shall be for Valuation Consulting. Delta and Huron shall meet and confer from time to time, review the amount of the Monthly Advisory Fee and make adjustments when appropriate. Upon the termination of this Statement of Work pursuant to Section 8.3 of the Agreement, Huron shall return a prorated portion of the Monthly Advisory Fee to Delta, to adjust for any partial month period in the month of such termination. Out-of-Pocket Expenses: In addition to the fees that are or may be payable to Huron under this Agreement, Huron’s reasonable out-of-pocket expenses incurred in connection with its activities under this Agreement will be payable by Delta on a monthly basis. Such expenses will include, but not be limited to travel, accommodations and meals, overnight delivery, database access charges, telephone, facsimile, postage, printing and duplication, documentation materials and similar items. Monthly expenses are payable by Delta upon its receipt of an invoice for expenses from Huron. Delta, with the assistance and cooperation of Huron, shall promptly apply to the Bankruptcy Court in its Chapter 11 cases for approval of this Agreement pursuant to sections 327 and 328 (a) of the Bankruptcy Code, and for this Agreement to be subject to review under section 328 (a) of the Bankruptcy Code and not subject to review under section 330 of the Bankruptcy Code. If Consultant’s engagement hereunder is approved by the Bankruptcy Court, Delta shall pay all fees and expenses of Consultant as set forth herein as permitted under the applicable orders of the Bankruptcy Court. The terms of this paragraph

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are for the benefit of Consultant and may be waived, in whole or in part, by Consultant. To the extent that Delta requests Huron to perform additional services not contemplated by this SOW, fees for such services shall be mutually agreed upon by Huron and Delta, in writing, and, to the extent that Bankruptcy Court approval is required, the services shall be approved by the Bankruptcy Court in advance. Acknowledged and Accepted: Delta Air Lines, Inc. By: Bryan K. Treadway Title: Vice President—Accounting Date: Huron Consulting Services, LLC By: Michael C. Sullivan Title: Managing Director Date: 12/28/06

420 7.3


Affidavit for Retention of Financial Advisor for Debtor

Objective. Section 7.7 of Volume 1 describes the content of the affidavit or declaration a financial advisor must file with the application for retention. This affidavit from Vertis Holdings Inc. relating to retention of Jeffery Stegenga as financial advisor for the debtor provides an example of the content of such a declaration. IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

In re: VERTIS HOLDINGS, INC., et al.,

Debtors.

x : : : : : : : : x

Chapter 11 Case No. 08-

()

(Jointly Administered)

DEBTORS’ APPLICATION PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND RULE 2014 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE FOR AUTHORIZATION TO EMPLOY AND RETAIN ALVAREZ & MARSAL NORTH AMERICA, LLC AS RESTRUCTURING ADVISORS TO THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE Vertis Holdings, Inc. (“Vertis Holdings”) and its affiliated debtors in the above-referenced chapter 11 cases, as debtors and debtors in possession (collectively, “Vertis” or the “Debtors”),1 hereby submit this application (the “Application”) for an order (the “Proposed Order”) pursuant to sections 327(a) and 328(a) of title 11 of the United States Code (the “Bankruptcy Code”) and rule 2014 of the Federal Rules of Bankruptcy Procedure for authorization to employ and retain Alvarez & Marsal North America, LLC, together with its wholly owned subsidiaries, agents, affiliates and independent contractors (collectively, “A&M”) to serve as restructuring advisors to the Debtors in these cases nunc pro tunc to the commencement date. In support of this Application, the Debtors respectfully state as follows: Background 1. On the date hereof (the “Commencement Date”), the Debtors each commenced with this Court a voluntary case under chapter 11 of the Bankruptcy 1 The

Debtors in these cases, along with the last four (4) digits of each Debtor’s federal tax identification number, are Vertis Holdings (1556), Vertis, Inc. (8322), Webcraft, LLC (6725), Webcraft Chemicals, LLC (6726), Enteron Group, LLC (3909), Vertis Mailing, LLC (4084), and USA Direct, LLC (5311).

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Code (the “Vertis Debtors’ Reorganization Cases”). The Debtors are authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Further, a motion pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for joint administration of the Debtors’ chapter 11 cases is pending before this Court. 2. Prior to the Commencement Date, the Debtors solicited votes on the Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Vertis Holdings, Inc., et al., proposed by Vertis Holdings, Inc., et al. and ACG Holdings, Inc., et al. (the “Vertis Prepackaged Plan”) through their disclosure statement pursuant to sections 1125 and 1126(b) of the Bankruptcy Code (the “Disclosure Statement”). As discussed more fully below, the Vertis Prepackaged Plan has been accepted by all classes entitled to vote in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code. Vertis’ Businesses 3. Vertis is one of the leading commercial printers, providing advertising inserts, newspaper products, direct mail services and related services to grocery stores, drug stores and other retail chains, general merchandise producers and manufacturers, financial and insurance service providers, newspapers and advertising agencies. By offering an extensive list of solutions across a broad spectrum of media, Vertis enables its clients to reach target customers with the most effective message. 4. Vertis operates primarily through two reportable business segments: advertising inserts (“Advertising Inserts”) and direct mail (“Direct Mail”). In addition, Vertis also provides premedia and related services (“Premedia”) as well as media planning and placement services (“Media Services”). 5. Advertising Inserts provides a full array of targeted advertising insert products and services. The products and services include targeted advertising insert programs for retailers and manufacturers, newspaper products (TV magazines, Sunday magazines, color comics and special supplements), and consumer research. Vertis is one of the leading providers of advertising inserts, newspaper TV listing guides and Sunday comics in the United States. In 2007, Vertis produced more than 31 billion advertising inserts, with the Advertising Insert segment accounting for approximately 66.7% of Vertis’ total revenue for 2007. 6. Direct Mail provides a full array of targeted direct marketing products and services. The products and services include highly customized one-to-one marketing programs, direct mail production with varying levels of personalization, data design, collection and management to identify target audiences, mailing management services, automated digital fulfillment services, effectiveness measurement and response management, and warehousing and fulfillment services. Revenue from the Direct Mail segment accounted for approximately 26.4% of Vertis’ total revenue for 2007. 7. Premedia, Media Services and other technologies assist clients with advertising campaigns, including digital content management, graphic design and animation, digital photography, compositing and retouching, in-store displays, billboards and building wraps, consulting services, newspaper advertising development and media planning, and placement and software solutions that deliver messages through alternative media channels such as emails, texting,

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personalized “URLs” and the Internet. Premedia, Media Services and other technologies accounted for the remainder of Vertis’ total revenue for 2007. 8. Vertis Holdings is the parent corporation of Vertis, Inc. The other Debtors are wholly-owned direct or indirect subsidiaries of Vertis, Inc. (collectively, the “Vertis Subsidiary Debtors”). All business operations are carried out by Vertis, Inc., the Vertis Subsidiary Debtors, and Vertis Inc.’s non-debtor subsidiaries. Each of the Debtors is either a Delaware corporation or Delaware limited liability company. Vertis’ principal executive offices are located at 250 West Pratt Street, Baltimore, Maryland 21201. 9. As of May 31, 2008, Vertis, Inc. and the Vertis Subsidiary Debtors had approximately 5,414 employees in North America and their unaudited consolidated financial statements reflected $1.3 billion of revenue for the prior 12-month period, assets of approximately $523 million and liabilities of approximately $1.4 billion. As of March 31, 2008, Vertis Holdings’ unaudited consolidated financial statements reflected assets of approximately $523 million and liabilities of approximately $1.7 billion. The Proposed Vertis Prepackaged Plan 10. The Vertis Prepackaged Plan contemplates a comprehensive financial restructuring of the Debtors’ existing equity and debt structures and effectuates a merger (the “Merger”) of the Debtors and ACG Holdings, Inc. (“ACG Holdings”), American Color Graphics, Inc. (“ACG”), American Images of North America, Inc., Sullivan Marketing, Inc., and Sullivan Media Corporation (collectively, the “ACG Debtors”). As a result of the Merger, ACG Holdings and its subsidiaries will become wholly-owned direct and indirect subsidiaries of Vertis. 11. Prior to the Commencement Date, the ACG Debtors also solicited votes on the ACG Debtors’ proposed joint prepackaged chapter 11 plans of reorganization (the “ACG Prepackaged Plan,” and, collectively with the Vertis Prepackaged Plan, the “Prepackaged Plans”). The ACG Debtors have, contemporaneously with the commencement of the Vertis Debtors’ Reorganization Cases, commenced voluntary cases under chapter 11 of the Bankruptcy Code seeking confirmation of the ACG Prepackaged Plan (the “ACG Debtors’ Reorganization Cases”). The ACG Debtors are co-proponents of the Vertis Prepackaged Plan in the Vertis Debtors’ Reorganization Cases and the Vertis Debtors are co-proponents of the ACG Prepackaged Plan in the ACG Debtors’ Reorganization Cases. The Prepackaged Plans provide that they will become effective simultaneously with each other and the consummation of the Merger. 12. The Vertis Prepackaged Plan and Disclosure Statement were filed on the Commencement Date. As set forth in the FBG Affidavit, the proposed Vertis Prepackaged Plan has been accepted in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code by all classes entitled to vote.2 Specifically, 100% of the classes consisting of Vertis Holdings General 2 Although the holder of the Vertis Term Loan Claim and the Vertis Holdings Term Loan Guarantee

Claim (as defined in the Disclosure Statement) voted to reject the Vertis Prepackaged Plan, the Vertis Prepackaged Plan provides that such votes shall be disregarded and such claims will be unimpaired if the Debtors opt to pay the Vertis Term Loan Claim in full on the Effective Date. As the Debtors have decided to pay the holder of the Vertis Term Loan Claim in full in cash on the

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Unsecured Claims, Vertis Second Lien Notes Claims and Vertis Senior Subordinated Notes Claims, both by number and by amount that voted on the Vertis Prepackaged Plan, voted to accept the Vertis Prepackaged Plan. The class consisting of Vertis Senior Notes Claims voted to accept the Vertis Prepackaged Plan by 98.6% in amount and 98.3% in number of those voting on the Vertis Prepackaged Plan. 13. The ACG Prepackaged Plan was filed on the Commencement Date. As set forth in the Affidavit of Service and Vote Certification of Financial Balloting Group LLC filed concurrently with the ACG Debtors’ chapter 11 petitions, the proposed ACG Prepackaged Plan has been accepted by all classes entitled to vote in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code. Specifically, the holders of ACG Second Lien Notes Claims voted to accept the ACG Prepackaged Plan by 99.9% in amount and 95.3% in number of those voting on the ACG Prepackaged Plan. 14. On the effective date of the Prepackaged Plans (the “Effective Date”), Vertis shall issue the following securities: (i) new second lien notes of Vertis in the same principal amount as its existing second lien notes (i.e., $350 million) (the “New Vertis Second Lien Notes”); (ii) new senior notes of Vertis in the total principal amount of $200 million (the “New Vertis Senior Notes,” and, together with the New Vertis Second Lien Notes, the “New Vertis Notes”); (iii) one class of common stock of Vertis Holdings (the “New Common Stock”); and (iv) new warrants, which may be exercised, subject to certain terms and conditions described in more detail below, to purchase a number of shares of New Common Stock equal to an aggregate of 11.5% of the number of outstanding shares of New Common Stock as of the Effective Date at an exercise price of $0.01 per share (the “New Warrants”). The New Vertis Notes will be guaranteed by all of Vertis’ domestic subsidiaries following consummation of the Merger. 15. The foregoing securities will be distributed under the Prepackaged Plans as follows: (i) holders of Vertis, Inc. 93/4 % Senior Secured Second Lien Notes due 2009 will receive New Vertis Second Lien Notes in the same principal amount as their existing notes; (ii) holders of Vertis, Inc. 107/8 % Senior Notes due 2009 will receive $107 million of New Vertis Senior Notes and 57.04% of the outstanding shares of the New Common Stock; (iii) holders of Vertis, Inc. 131/2 % Senior Subordinated Notes due 2009 will receive $27 million of New Vertis Senior Notes, 10% of the outstanding shares of the New Common Stock and the New Warrants; and (iv) holders of American Color Graphics, Inc. 10% Senior Second Secured Notes due 2010 will receive $66 million of the New Vertis Senior Notes and 32.96% of the New Common Stock. 16. In addition, the Vertis Prepackaged Plan provides for the payment in full of (i) allowed administrative expense claims, (ii) federal, state, and local tax claims, and (iii) certain other priority non-tax claims, and leaves holders of general unsecured claims against the Vertis Debtors (other than Vertis Holdings) unimpaired. Furthermore, as permitted by the Vertis Prepackaged Plan, the Vertis Term Loan Claim will be paid in full on the Effective Date, leaving both it and the Vertis Holdings Term Loan Guarantee Claim unimpaired. Effective Date, the classes consisting of the Vertis Term Loan Claim and the Vertis Holdings Term Loan Guarantee Claim are not entitled to vote.

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Holders of general unsecured claims against Vertis Holdings, which are claims arising under that certain Mezzanine Note and Warrant Purchase Agreement, originally dated as of December 7, 1999, by and among Vertis Holdings and various purchasers and under certain management services agreements, will receive their pro rata share of $3.232 million and an aggregate of $1,048,149 (plus up to $25,000 in legal expenses) in accordance with, and in exchange for the obligations provided in, certain side letter agreements. The existing common stock of Vertis Holdings will be cancelled with no distribution. 17. The restructuring contemplated by these prepackaged chapter 11 cases will reduce the Vertis Debtors’ leverage and enhance the Vertis Debtors’ longterm growth prospects and competitive position. In addition to reducing their debt, the Vertis Debtors expect to improve their operating performance and enhance their value through the realization of significant cost-saving Mergerrelated synergies. Jurisdiction 18. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Relief Requested 19. By this Application, the Debtors request, pursuant to sections 327(a) and 328(a) of the Bankruptcy Code, and Bankruptcy Rule 2014(a) entry of the Proposed Order authorizing them to employ and retain A&M as restructuring advisors on the terms set forth herein. For reference the prepetition engagement letter between the Debtors and A&M dated March 11, 2008 (the “Engagement Letter”) is attached hereto as Exhibit “A.” In support of the application the Debtors submit the Affidavit of Jeffery J. Stegenga (the “Stegenga Affidavit”), attached hereto as Exhibit “B.” The Proposed Order is attached hereto as Exhibit “D.” A&M’s Qualifications 20. The Debtors are familiar with the professional standing and reputation of A&M. The Debtors understand and recognize that A&M has a wealth of experience in providing advisory services in restructurings and reorganizations and enjoys an excellent reputation for services it has rendered in large and complex chapter 11 cases on behalf of debtors and creditors throughout the United States. 21. Jeffery J. Stegenga, the Managing Director of A&M leading this assignment, is well-suited to provide the restructuring services required by the Debtors. Mr. Stegenga has an extensive background in providing services to financially distressed and/or chapter 11 debtors in the past. Certain of his Company-side representations include SIRVA, Inc., Tower Automotive, Meridian Automotive, The Babcock & Wilcox Company, Harnischfeger Industries, Sleepmaster, Inc. and Federal Mogul Corporation. 22. Moreover, Mr. Stegenga and various other A&M employees have devoted substantial amounts of time and effort pre-filing to, among other things, supporting the financial department in the management of its liquidity resources, assisting the Debtors in their contingency planning efforts and supporting the Debtors in the obtainment of their Debtor-in-Possession financing

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facility. A&M professionals were invaluable to the Debtors throughout this process and have played an instrumental role in their recent restructuring efforts to date. Scope of Services 23. Among other things, A&M will provide assistance to the Debtors with respect to the management of the pre-packaged restructuring process, including the development of ongoing supplemental business and financial analyses and supporting restructuring negotiations between the Debtors, their advisors and their creditors with respect to the completion of their exit strategy related to these chapter 11 cases. 24. A&M will provide such restructuring support services as A&M and the Debtors shall deem appropriate and feasible to manage and advise the Debtors in the course of the chapter 11 cases, if and to the extent needed, including, but not limited to: A) Assistance to the Debtors in the preparation of financial related disclosures required by the Court, including the Schedules of Assets and Liabilities, the Statement of Financial Affairs and Monthly Operating Reports; B) Assistance to the Debtors with information and analyses required pursuant to the Debtors’ debtor-in-possession financing; C) Assistance with the identification and implementation of short-term cash management procedures; D) Assistance with the identification of executory contracts and leases and performance of cost/benefit evaluations with respect to the assumption or rejection of each; E) Assistance to the Debtors’ management team and counsel focused on the coordination of resources related to the ongoing reorganization effort; F) Assistance in the preparation of financial information for distribution to creditors and others, including, but not limited to, cash flow projections and budgets, cash receipts and disbursement analysis, analysis of various asset and liability accounts, and analysis of proposed transactions for which Court approval is sought; G) Attendance at meetings and assistance in discussions with potential investors, banks and other secured lenders, any official committee(s) appointed in these cases, the United States Trustee, other parties in interest and professionals hired by the same, as requested; H) Analysis of creditor claims by type, entity, and individual claim, including assistance with development of databases, as necessary, to track such claims and; I) Rendering such other general business consulting or such other assistance as Debtors’ management or counsel may deem necessary that are consistent with the role of a restructuring advisor and not duplicative of services provided by other professionals in this proceeding. 25. Except for the indemnification and liability limiting paragraphs in Section 8 of the Engagement Letter, or as otherwise set forth herein, no other provision of the Engagement Letter governs the post-petition engagement of A&M.

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A&M’s Disinterestedness 26. A&M has informed the Debtors that, except as may be set forth in the Stegenga Affidavit it (i) has no connection with the Debtors, their creditors, or other parties in interest in this case, (ii) does not hold any interest adverse to the Debtors’ estates, and (iii) believes it is a “disinterested person” as defined by section 101(14) of the Bankruptcy Code. 27. A&M will conduct an ongoing review of its files to ensure that no conflicts or other disqualifying circumstances exist or arise. If any new material facts or relationships are discovered or arise, A&M will provide the Court with a supplemental affidavit. 28. A&M has agreed not to share with any person or firm the compensation to be paid for professional services rendered in connection with these cases. Terms of Retention 29. A&M is not owed any amounts with respect to its pre-petition fees and expenses. 30. The Debtors understand that A&M intends to apply to the Court for allowance of compensation and reimbursement of expenses for restructuring advisory support services in accordance with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, corresponding local rules, orders of this Court and guidelines established by the United States Trustee. The customary hourly rates, subject to periodic adjustments, charged by A&M professionals anticipated to be assigned to this case are as follows: Managing Directors Directors / Senior Directors Associates / Senior Associates Administration / Analysts

$600–750 $400–600 $200–400 $ 85–200

31. In addition to compensation for professional services rendered by A&M personnel, A&M will seek reimbursement for reasonable and necessary expenses incurred in connection with the Debtors’ chapter 11 cases, including but not limited to, transportation costs, lodging, food, telephone, copying, and messenger services. 32. A&M has received various retainers in connection with preparing for the filing of these chapter 11 cases. The unapplied residual retainer, which is estimated to total approximately $175,000, will constitute a general retainer for post-petition services, will not be segregated by A&M in a separate account, and will be held until the end of these chapter 11 cases and applied to A&M’s finally approved fees in these proceedings. 33. A&M will seek interim and final allowance of compensation and reimbursement of expenses pursuant to sections 330 and 331 of the Bankruptcy Code, applicable Bankruptcy Rules, local rules and orders of the Court and any procedures fixed by order of the Court. 34. The Debtors are submitting, concurrently on the Commencement Date, a separate application for the retention of Lazard Freres & Co. LLC (“Lazard”) as financial advisors to the Debtors and FTI Consulting, Inc. (“FTI”) as operational and financial advisors to the Debtors. Lazard, FTI and A&M have advised the Debtors that they will make every effort to avoid duplication of their work.

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Dispute Resolution Procedures 35. The Debtors and A&M have agreed, subject to the Court’s approval of this Application, that: (a) any controversy or claim with respect to, in connection with, arising out of, or in any way related to this Application or the services provided by A&M to the Debtors as outlined in this Application, including any matter involving a successor in interest or agent of any of the Debtors or of A&M, shall be brought in this Court or the United States District Court for the District of Delaware (the “District Court”) (if the reference is withdrawn); (b) A&M and the Debtors and any and all successors and assigns thereof, consent to the jurisdiction and venue of such court as the sole and exclusive forum (unless such courts do not have or retain jurisdiction over such claims or controversies) for the resolution of such claims, causes of actions, or lawsuits; (c) A&M and the Debtors, and any and all successors and assigns thereof, waive trial by jury, such waiver being informed and freely made; (d) if this Court, or the District Court (if the reference is withdrawn), does not have or retain jurisdiction over the foregoing claims and controversies, A&M and the Debtors, and any and all successors and assigns thereof, will submit first to non-binding mediation; and, if mediation is not successful, then to binding arbitration, in accordance with the dispute resolution procedures (as set forth in Exhibit “C” attached hereto); and (e) judgment on any arbitration award may be entered in any court having proper jurisdiction. By this Application, the Debtors seek approval of this agreement by the Court. Further, A&M has agreed not to raise or assert any defense based upon jurisdiction, venue, abstention or otherwise to the jurisdiction and venue of this Court or the District Court (if the reference is withdrawn) to hear or determine any controversy or claims with respect to, in connection with, arising out of, or in any way related to this Application or the services provided hereunder. The Relief Requested Is Appropriate 36. Based on the foregoing, the Debtors submit that the relief requested is necessary and appropriate, is in the best interests of their estates and creditors, and should be granted in all respects. Notice 37. No trustee, examiner or statutory creditors’ committee has been appointed in these chapter 11 cases. Notice of this Application has been provided to: (i) the United States Trustee for the District of Delaware; (ii) the Debtors’ thirty (30) largest unsecured creditors (on a consolidated basis); (iii) Winston & Strawn LLP, 35 W. Wacker Drive, Chicago, Illinois 60601, Attn: Brian I. Swett, Esq., and Winston & Strawn LLP, 200 Park Avenue, New York, New York 10166, Attn: William D. Brewer, Esq., as counsel to the agent under the Debtors’ postpetition senior secured credit agreement and prepetition senior secured credit agreement; (iv) Emmet, Marvin & Martin, LLP, 120 Broadway, 32nd Floor, New York, New York 10271, Attn: Edward P. Zujkowski, Esq., as counsel to The Bank of New York, as indenture trustee under the 93/4 % Indenture, the 107/8 % Indenture, and the 131/2 % Indenture; (v) Akin Gump Strauss Hauer & Feld LLP, 590 Madison Avenue, New York, New York 10022, Attn: Ira Dizengoff, Esq. and David Simonds, Esq., and Pepper Hamilton LLP, Hercules Plaza, Suite 5100, 1313 Market Street, Wilmington, DE 19899-1709,

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Attn: David M. Fournier, Esq., as co-counsel to the Vertis Informal Committee;3 (vi) Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, Attn: Kristopher M. Hansen, Esq. and Jayme T. Goldstein, Esq., as counsel to the Vertis Second Lien Noteholder Group; (vii) Dewey & LeBoeuf LLP, 1301 Avenue of the Americas, New York, New York 10019, Attn: Martin J. Bienenstock, Esq., as counsel to those certain holders of notes under the 131/2 % Indenture that are signatories to the Restructuring Agreement; (viii) Ropes & Gray LLP, One International Place, Boston, MA 02110, Attn: Steven T. Hoort, Esq., as counsel to certain Vertis shareholders; (ix) Wollmuth Maher & Deutsch LLP, 500 Fifth Avenue, New York, New York 10110, Attn: Paul R. DeFilippo, Esq., and Manton, Sweeney, Gallo, Reich & Bolz LLP, 92-25 Queens Blvd., Rego Park, New York 11374, Attn: Frank Bolz, Esq., as counsel to CLI; (x) Simpson Thatcher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017, Attn: Mark J. Thompson, Esq., as counsel to the Evercore Parties; (xi) Kirkland & Ellis LLP, Citigroup Center, 153 East 53rd Street, New York, New York 10022-4611, Attn: Paul M. Basta, Esq., and Kirkland & Ellis LLP, Aon Center, 200 East Randolph Drive, Chicago, Illinois 60601, Attn: Ray C. Schrock, Esq. and Chad J. Husnick, Esq., as counsel to the ACG Debtors; and (xii) Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, New York 10005, Attn: Dennis F. Dunne, Esq., Abhilash M. Raval, Esq., and Debra Alligood White, Esq., as counsel to the ACG Informal Committee ((i) through (xii), collectively, the “Notice Parties”). The Debtors submit that no other or further notice need be provided. No Previous Request 38. No previous request for the relief sought herein has been made to this or any other Court. WHEREFORE the Debtors respectfully request entry of the Proposed Order granting the relief requested herein and such other and further relief as the Court may deem just and appropriate. Dated: July 15, 2008 Baltimore, Maryland By: Barry C. Kohn Chief Financial Officer

3 Capitalized terms used and not otherwise defined in this section shall have the meanings ascribed

to them in the Vertis Prepackaged Plan.

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EXHIBIT B Affidavit of Jeffery J. Stegenga IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE


Debtors.

x : : : : : : : : x


()


AFFIDAVIT OF JEFFERY J. STEGENGA PURSUANT TO FEDERAL RULE OF BANKRUPTCY PROCEDURE 2014 IN SUPPORT OF DEBTORS’ APPLICATION PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND RULE 2014 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE FOR AUTHORIZATION TO EMPLOY AND RETAIN ALVAREZ & MARSAL NORTH AMERICA, LLC AS RESTRUCTURING ADVISORS TO THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE STATE OF MARYLAND COUNTY OF BALTIMORE

) ) )

ss.:

Jeffery J. Stegenga, being duly sworn, hereby deposes and says as follows: 1. I am a Managing Director with Alvarez and Marsal North America, LLC (together with its wholly owned subsidiaries, agents, independent contractors and employees, “A&M”), a restructuring advisory services firm with numerous offices throughout the country. I submit this affidavit on behalf of A&M (the “Affidavit”) in support of the application (the “Application”)4 of the debtors (the “Debtors”)5 in the above-captioned chapter 11 cases for an order authorizing the employment of A&M as restructuring advisors under the terms and conditions set forth in the Application. Except as otherwise noted,6 I have personal knowledge of the matters set forth herein. 4 Capitalized

terms not otherwise defined herein shall have the meanings ascribed to such terms in the Application. 5 The Debtors in these cases are Vertis Holdings, Inc., Vertis, Inc., Webcraft, LLC, Webcraft Chemicals, LLC, Enteron Group, LLC, Vertis Mailing LLC, and USA Direct, LLC. 6 Certain of the disclosures herein relate to matters within the personal knowledge of other professionals at A&M and are based on information provided by them.

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Disinterestedness and Eligibility 2. In connection with the preparation of this Affidavit, A&M conducted a review of its contacts with the Debtors, their non-debtor affiliates, and certain entities holding large claims against or interests in the Debtors that were made reasonably known to A&M. A listing of the parties reviewed is reflected in Schedule “A” to this Affidavit. A&M’s review, completed under my supervision, consisted of a query of the Schedule “A” parties in a database containing the names of individuals and entities that are represented by A&M. A summary of such relationships that A&M identified during this process is set forth in Schedule “B” hereto. 3. Based on the results of its review, except as discussed below, A&M does not have an active relationship with any of the parties listed in Schedule “A” in matters related to these proceedings. In the course of its review, A&M learned that one of its employees who is working on these cases has a sibling at General Electric Antares Capital. 4. In addition, A&M has provided and could reasonably be expected to continue to provide services unrelated to the Debtors’ cases for the various entities shown on Schedule “B.” A&M’s assistance to these parties has been related to providing various financial restructuring, litigation support, business consulting and/or tax services. To the best of my knowledge, no services have been provided to these parties-in-interest which involve their rights in the Debtors’ cases, nor does A&M’s involvement in this case compromise its ability to continue such consulting services. 5. Further, as part of its diverse practice, A&M appears in numerous cases, proceedings, and participates in transactions that involve many different professionals, including attorneys, accountants, and financial consultants, who represent claimants and parties-in-interest in the Debtors’ chapter 11 cases. Further, A&M has performed in the past, and may perform in the future, advisory consulting services for various attorneys and law firms, and has been represented by several attorneys and law firms, some of whom may be involved in these proceedings. Based on our current knowledge of the professionals involved, and to the best of my knowledge, none of these relationships create interests materially adverse to the Debtors in matters upon which A&M is to be employed, and none are in connection with these cases. 6. A&M does not believe it is a “creditor” of any of the Debtors within the meaning of section 101(10) of the Bankruptcy Code. Further, neither I nor any member of the A&M engagement team serving the Debtors, to the best of my knowledge, is a holder of any of the Debtors’ debt or equity securities. 7. To the best of my knowledge, no employee of A&M is a relative of, or has been connected with, any judge of the bankruptcy court for this district, the United States Trustee in this district or any employee of the office of the United States Trustee in this district. 8. To the best of my knowledge, A&M is a “disinterested person” as that term is defined in section 101(14) of the Bankruptcy Code, in that A&M: a. is not a creditor, equity security holder, or insider of the Debtors; b. was not, within two years before the date of filing of the Debtors’ chapter 11 petitions, a director, officer, or employee of the Debtors; and c. does not have an interest materially adverse to the interest of the Debtors’ estates or of any class of creditors or equity security holders.

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9. In addition, to the best of my knowledge and based upon the results of the relationship search described above and disclosed herein, A&M neither holds nor represents an interest adverse to the Debtors. 10. It is A&M’s policy and intent to update and expand its ongoing relationship search for additional parties in interest in an expedient manner. If any new material relevant facts or relationships are discovered or arise, A&M will promptly file a supplemental affidavit pursuant to Rule 2014(a) of the Bankruptcy Rules. Professional Compensation 11. Subject to Court approval and in accordance with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, applicable United States Trustee guidelines, and the local rules of this Court, A&M will seek payment for compensation on an hourly basis, plus reimbursement of actual and necessary expenses incurred by A&M. A&M’s customary hourly rates as charged in bankruptcy and non-bankruptcy matters of this type by the professionals assigned to this engagement are outlined in the Application. These hourly rates are adjusted annually. 12. According to A&M’s books and records, during the ninety day period prior to the Petition Date, A&M received approximately $1.7 million from the Debtors for professional services performed and expenses incurred. Further, A&M’s current estimate is that it has received unapplied advance payments from the Debtors in excess of prepetition billings in the amount of $175,000. The Debtors and A&M have agreed that any portion of the advance payments not used to compensate A&M for its prepetition services and expenses will be held and applied against its final postpetition billing and will not be placed in a separate account. 13. To the best of my knowledge, (a) no commitments have been made or received by A&M with respect to compensation or payment in connection with these cases other than in accordance with applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, and (b) A&M has no agreement with any other entity to share with such entity any compensation received by A&M in connection with these chapter 11 cases. Dated this 14th day of July 2008 By: Jeffery J. Stegenga Managing Director Sworn to and subscribed before me this 14th day of July, 2008 Notary Public

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SCHEDULE A EXHIBIT C Dispute Resolution Procedures Dispute Resolution Procedures The following procedures shall be used to resolve any controversy or claim (“dispute”) as provided in this Agreement. If any of these provisions are determined to be invalid or unenforceable, the remaining provisions shall remain in effect and binding on the parties to the fullest extent permitted by law. Mediation A dispute shall be submitted to mediation by written notice to the other party or parties. In the mediation process, the parties will try to resolve their differences voluntarily with the aid of an impartial mediator, who will attempt to facilitate negotiations. The mediator will be selected by agreement of the parties. If the parties cannot agree on a mediator, a mediator will be designated by the American Arbitration Association (“AAA”) or JAMS/Endispute at the request of a party. Any mediator so designated must be acceptable to all parties. The mediation will be conducted as specified by the mediator and agreed upon by the parties. The parties agree to discuss their differences in good faith and to attempt, with the assistance of the mediator, to reach an amicable resolution of the dispute. The mediation will be treated as a settlement discussion and therefore will be confidential. The mediator may not testify for either party in any later proceeding relating to the dispute. No recording or transcript shall be made of the mediation proceedings. Each party will bear its own costs in the mediation. The fees and expenses of the mediator will be shared equally by the parties. Arbitration If a dispute has not been resolved within 90 days after the written notice beginning the mediation process (or a longer period, if the parties agree to extend the mediation), the mediation shall terminate and the dispute will be settled by arbitration and judgment on the award rendered by the arbitration may be entered in any court having jurisdiction thereof. The arbitration will be conducted in accordance with the procedures in this document and the Arbitration Rules for Professional Accounting and Related Services Disputes of the AAA (“AAA Rules”).

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EXHIBIT D IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE


Debtors.

x : : : : : : : : x


()


ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AUTHORIZING THE EMPLOYMENT AND RETENTION OF ALVAREZ & MARSAL NORTH AMERICA, LLC AS RESTRUCTURING ADVISORS FOR THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE Upon the application (the “Application”)7 of Vertis Holdings, Inc. and certain of its direct and indirect subsidiaries, as above-captioned debtors and debtors in possession (collectively, the “Debtors”),8 pursuant to sections 327(a) and 328(a) of title 11 of the United States Code (the “Bankruptcy Code”) and rule 2014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for authorization to employ and retain Alvarez & Marsal North America, LLC, together with its wholly owned subsidiaries, agents, affiliates and independent contractors (collectively, “A&M”) to serve as restructuring advisors to the Debtors in these cases; and upon the affidavit of Jeffery J. Stegenga in support of the Application; and consideration of the Application and the relief requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b); and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Application having been provided to the Notice Parties, and it appearing that no other or further notice need be provided; and it appearing that A&M neither holds nor represents any interest adverse to the Debtors’ estates; and it appearing that A&M is “disinterested,” as that term is defined in section 101(14) of the Bankruptcy Code; and it appearing that the relief requested in the Application is in the best interest of the Debtors’ estates and their creditors; after due deliberation and sufficient cause appearing therefore, it is hereby ORDERED, that the Application is hereby granted; and it is further 7 Capitalized terms not defined herein shall have the meanings ascribed to them in the Application. 8 The

Debtors in these cases are Vertis Holdings, Inc., Vertis, Inc., Webcraft, LLC, Webcraft Chemicals, LLC, Enteron Group, LLC, Vertis Mailing LLC, and USA Direct, LLC.

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ORDERED, that in accordance with sections 327(a) and 328(a) of the Bankruptcy Code, Bankruptcy Rule and rule 2014-1 of the Local Rules for the United States bankruptcy Court for the District of Delaware (the “Local Rules”), the Debtors are authorized to employ and retain A&M as of the Commencement Date as their restructuring advisors on the terms set forth in the Application; and it is further ORDERED, that A&M shall be compensated in accordance with the procedures set forth in sections 330 and 331 of the Bankruptcy Code and any applicable local or federal rules of bankruptcy procedure, and such procedures as may be fixed by order of this Court; and it is further ORDERED, that the indemnification obligations of the Debtors set forth in the Engagement Letter are approved, subject during the pendency of these chapter 11 cases to the following: a. A&M shall not be entitled to indemnification, contribution or reimbursement pursuant to the Engagement Letter for services, unless such services and the indemnification, contribution or reimbursement therefor are approved by the Court; b. The Debtors shall have no obligation to indemnify A&M, or provide contribution or reimbursement to A&M, for any claim or expense that is either: (i) judicially determined (the determination having become final) to have arisen from A&M’s gross negligence, willful misconduct, breach of fiduciary duty, if any, bad faith or self-dealing; (ii) for a contractual dispute in which the Debtors allege the breach of A&M’s contractual obligations unless the Court determines that indemnification, contribution or reimbursement would be permissible pursuant to United Artists Theatre Co. et al. v. Walton (In re United Artists Theatre Co. et al.), 315 F.3d 217 (3d Cir. 2003); or (iii) settled prior to a judicial determination as to A&M’s gross negligence, willful misconduct, breach of fiduciary duty, or bad faith or self-dealing but determined by this Court, after notice and a hearing to be a claim or expense for which A&M should not receive indemnity, contribution or reimbursement under the terms of the Engagement Letter as modified by this Order; c. If, before the earlier of (i) the entry of an order confirming a chapter 11 plan in these cases (that order having become a final order no longer subject to appeal), and (ii) the entry of an order closing these chapter 11 cases, A&M believes that it is entitled to the payment of any amounts by the Debtors on account of the Debtors’ indemnification, contribution and/or reimbursement obligations under the Engagement Letter (as modified by this Order), including without limitation the advancement of defense costs, A&M must file an application therefor in this Court, and the Debtors may not pay any such amounts to A&M before the entry of an order by this Court approving the payment. This subparagraph (c) is intended only to specify the period of time under which the Court shall have jurisdiction over any request for fees and expenses by A&M for indemnification, contribution or reimbursement, and not a provision limiting the duration of the Debtors’ obligation to indemnify A&M.

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All parties in interest shall retain the right to object to any demand by A&M for indemnification, contribution or reimbursement; and d. Any limitation on any amounts to be contributed by the parties to the Engagement Letter under the terms of the Engagement Letter shall be eliminated; and it is further ORDERED, that this Court shall retain jurisdiction with respect to all matters arising or related to the implementation and enforcement of this Order. Dated:

, 2008 United States Bankruptcy Judge

436 7.4


Affidavit of Accountant for Unsecured Creditors’ Committee

Objective. Section 7.7 of Volume 1 describes the content of the affidavit that an accountant must file with the court prior to being retained. Given here is an example of an affidavit for retention as the accountant for the unsecured creditors’ committee. UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: LOEWEN GROUP INTERNATIONAL, INC., a Delaware Corporation, et al., Debtors

Jointly Administered Case No. 99-1244 (PJW) Chapter 11

AFFIDAVIT OF DEWEY IMHOFF PURSUANT TO RULE 2014(A) OF THE RULES OF BANKRUPTCY PROCEDURE STATE OF NEW YORK COUNTY OF NEW YORK

) ) )

ss.: New York

July 28, 1999

DEWEY IMHOFF, being duly sworn, deposes and says: 1. I am a certified public accountant and a partner of the accounting and consulting firm of PricewaterhouseCoopers LLP (“PwC”), with offices at 1177 Avenue of the Americas, New York, New York 10036. 2. This affidavit is being submitted in support of the application (the “Application”) to retain the firm of PwC as accountants to the Official Committee of Unsecured Creditors (the “Committee”) pursuant to 11 U.S.C. § 327 and Bankruptcy Rule 2014. 3. Affiant states that he and the other professionals employed by PwC are well qualified to act as the Committee’s accountants. PwC professionals have served as accountants and financial advisors to debtors, creditors and trustees in numerous chapter 11 proceedings. The professionals assigned to this engagement possess the requisite experience to handle complex bankruptcy matters. 4. Services to be provided to the Committee by PwC will include, but are not limited to, those set forth in the Application. 5. To the best of the Affiant’s knowledge, PwC is not a creditor, an equity security-holder, or an insider of the Debtors. To the best of Affiant’s knowledge, neither Affiant nor any other partner, principal or staff person of PwC has any connection with or holds any interest materially adverse to the interests of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in the Debtors, the Debtors’ creditors, or any other party in interest, or their respective attorneys and accountants, which would impair PwC’s independence or ability to objectively perform professional services for the Committee.

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6. As a member of one of the world’s largest professional service networks, PwC provides services to a diverse worldwide client base. PwC has on occasion provided, and may continue to provide services to certain creditors and parties in interest of the Debtors, including services provided to various entities shown on Schedule 1 of the Imhoff Affidavit, in matters unrelated to these proceedings. Our assistance to these parties has been primarily related to audit, tax, consulting and other advisory services. No services have been provided to these creditors or other parties in interest which could impact their rights in the Debtors’ cases, nor does PwC’s involvement in this case compromise its ability to continue such audit, tax, consulting and other advisory services. PwC will not represent these or other unsecured creditors’ individual interests in these matters except as accountants to the Committee. 7. Because PwC is an international accounting firm with more than 8,700 partners and over 99,000 professional staff, and the Debtors are a multinational enterprise with thousands of creditors and other relationships, it is likely that the firm has provided, and will provide in the future, accounting, auditing, tax, consulting or other advisory services to other entities who are or may become involved in this proceeding but who are unknown to me. PwC has not and will not represent the interests of any of these aforementioned entities in connection with these proceedings, except as accountants to the Committee. If PwC discovers additional information that requires disclosure, PwC will file a supplemental disclosure with the Court as promptly as possible. 8. Furthermore, given the magnitude and diversity of its client base and its scope of offices worldwide, PwC is, at any point in time, involved as a party or witness in numerous court and administrative proceedings and other general matters requiring the retention of outside legal counsel. As a result, PwC may have retained, may currently retain, or may in the future retain, certain law firms involved in the proceedings at hand. Ashby & Geddes Debevoise & Plimpton Hebb & Gitlin Kilpatrick Stockton LLP Meighen Demers Morgan, Lewis & Bockius LLP Reid and Riege, P.C. Walsh Monzack and Monaco Bingham Dana LLP Fasken Campbell Godfrey Jones, Day, Reavis & Pogue Mayer, Brown & Platt Milbank, Tweed, Hadley & McCloy, LLP Morris, Nichols, Arsht & Tunnell Thelen Reid & Priest LLP Young, Conaway, Stargatt & Taylor LLP

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In addition, PwC may presently, may have been in the past or may in the future be retained by such law firms to provide attestation or advisory services. Any such retention by PwC of these firms or any such retention of PwC by these firms is, was or will be wholly unrelated to these proceedings and does not and will not impair PwC’s independence, disinterestedness, or ability to objectively provide professional services to the Committee. 9. To the best of Affiant’s knowledge, PwC has no connection with any Judge of the Bankruptcy Court for this district, the United States Trustee in this district, or any person employed by the Office of the United States Trustee in this district, such that the appointment of PwC would be prohibited by Rule 5002 of the Federal Rules of Bankruptcy Procedures. 10. Prior to the Petition Date, PwC was retained as accountants by Hebb & Gitlin, a Professional Corporation (“Hebb Gitlin”) in its capacity as counsel to an ad hoc committee of senior secured debtholders of Loewen (the “Ad Hoc Committee”), as more fully described in paragraph 11 of the Application. Teachers Insurance and Annuity Association of America, Magten Asset Management Corporation, Allied Capital, CalPERS, and State Street Bank & Trust Company are five of the former members of the Ad Hoc Committee who are presently members of the Committee. As set forth in paragraph 11 of the Application, PwC received a retainer from the Debtors for prepetition services provided to the Ad Hoc Committee. After PwC’s application of the funds from the Retainer as described in paragraph 13 of the Application, the Debtors do not owe PwC any amount for services performed prior to the Petition Date. 11. PwC understands that it will be paid for services rendered after application, notice and hearing in accordance with applicable provisions of the Bankruptcy Code, Bankruptcy Rules and the orders, procedures and local rules of this Court. 12. Affiant requests that PwC be permitted to submit to the Bankruptcy Court applications for payment of professional fees and reimbursement of expenses computed pursuant to our normal and customary hourly rates. PwC will apply for compensation for its services rendered, and reimbursement for its expenses incurred, in accordance with (i) 11 U.S.C. §§ 330 and 331 of the Bankruptcy Code and Rule 2016 of the Bankruptcy Rules, (ii) the rules and orders of this Court, and (iii) pursuant to any additional procedures that may be established by the Court in these cases. PwC recognizes that it will be required to submit applications for interim and/or final allowances of compensation. PwC will request compensation on an interim basis as provided under the Bankruptcy Code, or as otherwise approved by this Court. These applications will set forth in reasonable detail the services rendered, the time spent and by whom, plus all reasonable out-of-pocket disbursements in accordance with the guidelines of this Court. The hourly rates, to be charged by PwC in performing the services set forth in the Application filed herewith, range as follows:

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Partner Director/VP Manager Senior Associate Associate Analyst Support

United States US$ – US$ – US$ – US$ – US$ – US$ – US$ –

Canada7 Cdn$ – Cdn$ – Cdn$ – Cdn$ – Cdn$ – N/A – Cdn$ –

Our charges for the foregoing services will be billed on an hourly basis, plus necessary and reasonable out-of-pocket expenses as actually incurred. Hourly fees set forth above contain no amounts for fixed/overhead charges or any other expenses deemed not allowable by this Court. In the normal course of business, PwC revises its hourly rates effective July 1st of each year and PwC requests that effective July 1st, and each year thereafter, the aforementioned rates be revised to, and be considered at, the regular hourly rates in effect at that time. Any such adjustments will be disclosed to the Debtors and this Court. Hourly rates for specialists (e.g., tax, systems, etc.) may vary from the rates set forth above, but in any event will be consistent with those rates charged to other clients of the firm for specialist services. 13. I hereby represent that neither Affiant nor PwC has agreed to share with any person the compensation to be paid for the services rendered in this case (as prohibited by statute), save amongst the PwC partners. 14. PwC will supplement this affidavit if and when necessary, to disclose any further pertinent relationships that require disclosure in this proceeding. 15. Affiant further states that this affidavit is in accordance with Section 327 of the Bankruptcy Code and Bankruptcy Rule 2014. 16. To the best of Affiant’s knowledge, PwC is a “disinterested person” as that term is defined in 11 U.S.C. § 101(14). /s/ Dewey Imhoff Dewey Imhoff Partner PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 (212)596-7178 Sworn to before me on this 28 day of July 1999. /s/ Diana Gharbi Notary Public 7 PwC

will convert fees and expenses incurred by its Canadian practice (including any goods and services tax, due in accordance with applicable law) into U.S. dollars at applicable month-end currency rates as provided in the Wall Street Journal or comparable financial publication. Expenses incurred in Canadian dollars by U.S. professionals will be billed at actual US$ charged by PwC’s corporate credit card provider.

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7.5 Affidavit of Investment Banker Filed Prior to Retention by Debtor Objective. Section 7.7 of Volume 1 describes the nature of the affidavit or declaration an investment banker might file with the bankruptcy court prior to being retained. The affidavit filed in the Dura Automotive System bankruptcy case illustrates how an affidavit filed by an investment banker to be retained by the debtor might be constructed. IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re: DURA AUTOMOTIVE SYSTEMS, INC., et al.,1 Debtors.

) ) ) ) ) ) )


(

)

Jointly Administered

DEBTORS’ APPLICATION TO EMPLOY AND RETAIN MILLER BUCKFIRE & CO., LLC AS INVESTMENT BANKER TO THE DEBTORS AND DEBTORS-IN-POSSESSION The above-captioned debtors and debtors-in-possession (collectively, the “Debtors”) hereby file this application (the “Application”) for entry of an order, authorizing the employment and retention of Miller Buckfire & Co., LLC (“Miller Buckfire”) as investment banker to the Debtors in the above-captioned cases.2 In support of this Application, the Debtors rely on the Affidavit of Marc D. Puntus, a managing director of Miller Buckfire (the “Puntus Affidavit”), a copy of which is attached hereto as Exhibit B. In further support of this Application, the Debtors respectfully state as follows:3 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C, Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C, Dura Gladwin L.L.C, Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C, Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp, Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., SpecTemp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 2 A copy of the proposed order (the “Order”) is attached hereto as Exhibit A. 3 The facts and circumstances supporting this Application are further set forth in the Affidavit of Keith Marchiando, Chief Financial Officer of Dura Automotive Systems, Inc., in Support of First Day Motions (the “First Day Affidavit”), filed contemporaneously herewith.

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Affidavit of Investment Banker Filed Prior to Retention by Debtor

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JURISDICTION 1. This Court has jurisdiction over this Application under 28 U.S.C. § 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C, § 157(b)(2). Venue of this proceeding and this Application in this District is proper under 28 U.S.C. §§ 1408 and 1409. 2. The statutory bases for the relief requested herein are sections 327(a) and 328(a) of title 11 of the United States Code, 11 U.S.C. §§ 101–1330, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Bankruptcy Code”) and Rules 2014(a), 2016 and 5002 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). BACKGROUND 3. On October 30, 2006 (the “Commencement Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (the “Reorganization Cases”). The Debtors are operating their businesses and managing their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or statutory committee has yet been appointed in these Reorganization Cases. RELIEF REQUESTED 4. By this Application, the Debtors seek entry of an order pursuant to sections 327(a) and 328(a) of the Bankruptcy Code and Rules 2014(a), 2016, and 5002 of the Bankruptcy Rules, (a) authorizing the employment and retention of Miller Buckfire as investment banker to the Debtors in these Reorganization Cases upon the terms and conditions contained in the Engagement Letter (the “Engagement Letter”), dated as of August 2, 2006, a copy of which is attached hereto as Exhibit C, and incorporated by reference herein, as modified by the proposed Order; (b) approving the terms of Miller Buckfire’s employment, including the proposed fee structure and the indemnification provisions, set forth in the Engagement Letter, as modified by the proposed Order; and (c) granting such other and further relief as the Court deems appropriate. 5. Debtors further request that, for judicial economy and administrative convenience, the relief requested herein to apply to any of the Debtors’ affiliates and their respective estates that subsequently commence chapter 11 cases without the need for any further requests or motions. MILLER BUCKFIRE’S QUALIFICATIONS 6. Miller Buckfire commenced operating on July 16, 2002, as an independent firm providing strategic and financial advisory services in large-scale corporate restructuring transactions. Miller Buckfire is owned and controlled by Henry S. Miller and Kenneth A. Buckfire and by the employees of Miller Buckfire. Miller Buckfire currently has approximately 45 employees, many of whom were employees of the Financial Restructuring Group of Dresdner Kleinwort Wasserstein, Inc. before July 16, 2002.

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7. Miller Buckfire’s professionals have extensive experience in providing financial advisory and investment banking services to financially distressed companies and to creditors, equity holders and other constituencies in reorganization proceedings and complex financial restructurings, both in- and out-of-court. For instance, Miller Buckfire’s professionals are providing or have provided financial advisory, investment banking, and other services in connection with the restructuring of Acterna Corporation; Aerovias Nacionales de Colombia S.A.; Allied Holdings, Inc.; Applied Extrusion Technologies, Inc.; AT&T Latin America; Aurora Foods Inc.; Avado Brands, Inc.; Birch Telecom, Inc.; Bruno’s Inc.; Burlington Industries; Cajun Electric Power Corporation; Calpine Corporation; Cambridge Industries; Carmike Cinemas; Celotex Corporation; Centerpoint Energy; Citation Corporation; CMS Energy Corporation; Criimi Mae, Inc.; CTC Communications; Dana Corporation; Delta Air Lines, Inc.; Dow Corning Corporation; Drypers, Inc.; EaglePicher Holdings Inc.; Exide Technologies; Favorite Brands International Inc.; FLYi, Inc.; Foamex International; Focal Communications Corporation; FPA Medical Management; Gate Gourmet; Grand Union Co.; Heartland Wireless; Horizon Natural Resources Company; Huntsman Corporation; ICG Communications; ICO Global Communication, Ltd.; IMPATH Inc.; Interstate Bakeries Corporation; J.L. French Automotive Castings; Kmart Corporation; Level (3) Communications; Loewen Group; McLeodUSA; Micro Warehouse; Mirant Corp.; Montgomery Ward & Co.; National Airlines; Oakwood Homes; Pacific Crossing Limited; Pathmark Stores, Inc.; Pegasus Satellite Communications; PennCorp Financial Group, Inc.; Pioneer Companies; PSINet; Polaroid Corporation; Polymer Group, Inc.; The Spiegel Group; Sunbeam Corporation; TECO Energy; Trans World Airlines; US Office Products; U.S. Generating Florida Partnerships; Vulcan, Inc. and Women First Healthcare, Inc. 8. On August 2, 2006, the Debtors retained Miller Buckfire to serve as their investment banker in connection with their restructuring efforts. Since that time, Miller Buckfire, among other things, has: (a) analyzed the Debtors’ current liquidity and projected cash flow; (b) assisted the Debtors in evaluating their restructuring alternatives; and (c) conducted a comprehensive process to secure debtor in possession financing (“DIP Financing”) for the Debtors on the most competitive terms and conditions available on behalf of the Debtors. 9. With respect to the DIP Financing, Miller Buckfire worked with the Debtors under an accelerated timeframe to identify potential lenders, including the Debtors’ prepetition secured lenders and other third party lenders, willing to provide DIP Financing in an amount sufficient to provide adequate liquidity for the Debtors during their chapter 11 cases. This process resulted in an agreement with Goldman Sachs Credit Partners, L.P., General Electric Capital Corporation and Barclays Capital PLC (collectively, the “DIP Lenders”) to provide up to $300 million in postpetition financing to the Debtors.4 10. As a result of this prepetition work performed on behalf of the Debtors, Miller Buckfire acquired significant knowledge of the Debtors and their businesses and is now intimately familiar with the Debtors’ financial affairs, debt structure, operations and related matters. Likewise, in providing prepetition 4 Contemporaneously

with the filing of this Application, the Debtors have filed a motion seeking interim and final approval of this DIP Financing facility

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services to the Debtors, Miller Buckfire’s professionals have worked closely with the Debtors’ management and other professionals. Accordingly, Miller Buckfire has developed relevant experience and expertise regarding the Debtors that will assist it in providing effective and efficient services in these cases. The Debtors believe that Miller Buckfire is both well-qualified and uniquely able to represent them in their Reorganization Cases in a most efficient and timely manner. SCOPE OF SERVICES 11. Pursuant to the Engagement Letter, at the request and direction of the Debtors, Miller Buckfire will provide the Debtors investment banking services specified in the Engagement Letter, including:5 (a) advising and assisting the Debtors in structuring and effectuating the financial aspects of any restructuring or sale transaction or transactions proposed to be undertaken by the Debtors; (b) if applicable, identifying, soliciting and negotiating with potential lenders or investors in connection with any financing or potential acquirers in connection with any sale; (c) providing financial advice and assistance to the Debtors in developing and seeking approval of a restructuring plan, including participating in negotiations with entities or groups affected by the plan; and (d) participating in hearings before the Court with respect to the matters upon which Miller Buckfire has provided advice, including, as relevant, coordinating, with the Debtors’ counsel with respect to testimony in connection therewith. 12. The Debtors require Miller Buckfire’s advice and services in order to maximize the value of their estates. The Debtors believe that these services will not duplicate the services that other professionals will be providing the Debtors in these Reorganization Cases. Although the Debtors also wish to retain Glass & Associates, Inc. (“Glass”) as financial advisors, the two firms will each be performing unique services for the Debtors. Miller Buckfire will focus on structuring, evaluating, and assisting the consummation of a financial restructuring and any related financing(s) and/or sale transaction(s), while Glass will focus on evaluating, overseeing, and assisting the Debtors in the financial aspects of its operational restructuring. In short, Miller Buckfire will carry out distinct functions and will use reasonable efforts to coordinate with the Debtors’ other retained professionals to avoid the unnecessary duplication of services. COMPENSATION 13. The terms of Miller Buckfire’s proposed compensation are fully set forth in the Engagement Letter (the “Fee Structure”), and the Debtors respectfully refer this Court to the Engagement Letter for a full recitation of its terms. In 5 The description of the Engagement Letter in this Application is a summary. To the extent that this

Application and the terms of the Engagement Letter are inconsistent, the terms of the Engagement Letter control.

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summary, under the terms of the Engagement Letter and subject to the Court’s approval, Miller Buckfire will receive:6 (a) Monthly Advisory Fee: a Monthly Advisory Fee of $200,000 for each month during the term of this engagement, provided that 50% of the amount of any Monthly Advisory Fee in excess of $800,000 (four months of Monthly Advisory Fees) paid to Miller Buckfire will be credited to the extent actually paid against any Restructuring Transaction Fee payable to Miller Buckfire; (b) Restructuring Transaction Fee: If the Debtors consummate a Restructuring Transaction, a Restructuring Transaction Fee of $6,700,000 (after taking account for a credit for 50% of the DIP Financing Fee paid to Miller Buckfire prior to the filing of these Reorganization Cases); (c) Sale Transaction Fee: If the Debtors consummate a Sale Transaction, a Sale Transaction Fee of 1.0% of the Aggregate Consideration of any such Sale; (d) Financing Fee: If the Debtors consummate any Financing Transaction(s), the Debtors will pay Miller Buckfire a Financing Fee of: (i) 3.0% of the gross proceeds of any indebtedness issued that is unsecured or subordinated, and (ii) 5.0% of the gross proceeds of any equity or equity-linked securities or obligations issued. (e) In addition to the fees described above, and regardless of whether any transaction occurs, the Debtors shall promptly reimburse Miller Buckfire for all reasonable out-of-pocket expenses (including travel and lodging, data processing and communications charges, courier services, fees and expenses of legal counsel and other necessary expenses). (f) In addition to the foregoing, the Debtors have agreed to the indemnification provisions contained in the Engagement Letter subject to the modified contained in the proposed retention order, which are standard modified for this District. 14. The Fee Structure is consistent with Miller Buckfire’s normal and customary billing practices for comparably sized and complex cases, both in- and out-of-court, involving the services to be provided in these cases. 15. Miller Buckfire and the Debtors believe that the foregoing compensation arrangements are both reasonable and market-based. In determining the level of compensation to be paid to Miller Buckfire and its reasonableness, the Debtors compared Miller Buckfire’s fee proposal to the other proposals received by the Debtors in the investment banking selection process. The Debtors also compared Miller Buckfire’s proposed fees with the range of investment banking fees in other large and complex chapter 11 cases. In both instances, the Debtors found Miller Buckfire’s proposed fees to be reasonable and within the range of other comparable transactions. 16. To induce Miller Buckfire to do business with the Debtors in bankruptcy, the compensation structure described above was established to reflect the 6 Terms

used in this summary without definitions have the meanings set forth in the Engagement Letter. To the extent that this Application and the terms of the Engagement Letter are inconsistent, the terms of the Engagement Letter control, subject to the modifications in the proposed retention order.

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difficulty of the extensive assignments Miller Buckfire expects to undertake and the potential for failure. 17. Miller Buckfire will file interim and final fee applications for the allowance of compensation for services rendered and reimbursement of expenses incurred in accordance with applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, Local Rules of Bankruptcy Practice and Procedure for the United States Bankruptcy Court for the District of Delaware, and any applicable orders of the Court. 18. Although Miller Buckfire does not charge for its services on an hourly basis, Miller Buckfire nevertheless will maintain records of time spent by its professionals in connection with the rendering of services for the Debtors by category and nature of the services rendered; provided, however, that Miller Buckfire seeks approval to maintain time records in half-hour increments. 19. The Debtors acknowledge and agree that Miller Buckfire’s strategic and financial expertise as well as its capital markets knowledge, financing skills, restructuring capabilities and mergers and acquisitions expertise, some or all of which may be required by the Debtors during the term of Miller Buckfire’s engagement hereunder, were important factors in determining the Fee Structure and that the ultimate benefit to the Debtors of Miller Buckfire’s services hereunder could not be measured by reference to the number of hours to be expended by Miller Buckfire’s professionals in the performance of such services. 20. The Debtors also acknowledge and agree that the Fee Structure has been agreed upon by the parties in anticipation that a substantial commitment of professional time and effort will be required of Miller Buckfire and its professionals hereunder, and in light of the fact that such commitment may foreclose other opportunities for Miller Buckfire and that the actual time and commitment required of Miller Buckfire and its professionals to perform its services hereunder may vary substantially from week to week or month to month. 21. In sum, in light of the foregoing and given the numerous issues which Miller Buckfire may be required to address in the performance of its services hereunder, Miller Buckfire’s commitment to the variable level of time and effort necessary to address all such issues as they arise, and the market prices for Miller Buckfire’s services for engagements of this nature both out-of-court and in a chapter 11 context, the Debtors believe that the Fee Structure is market-based and fair and reasonable under the standards set forth in section 328(a) of the Bankruptcy Code. 22. All compensation will be sought in accordance with section 328(a) of the Bankruptcy Code, as incorporated in sections 329 and 331 of the Bankruptcy Code, the Bankruptcy Rules, and orders of the Court, and shall not be subject to the standard of review in section 330 of the Bankruptcy Code. 23. As set forth in the Puntus Affidavit, Miller Buckfire has not shared or agreed to share any of its compensation from the Debtors with any other person, other than as permitted by section 504 of the Bankruptcy Code.

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INDEMNIFICATION PROVISIONS 24. The Engagement Letter further provides that the Debtors will indemnify, hold harmless and defend Miller Buckfire and its affiliates and its respective directors, officers, members, managers, shareholders, employees, agents and controlling persons and its respective successors and assigns (collectively, the “Indemnified Parties”) under certain circumstances (such indemnification obligation being referred to as the “Indemnification Provisions”), which provisions are attached to and made a part of the Engagement Letter. These are standard provisions, both in chapter 11 cases and outside chapter 11 and, as modified by the proposed retention order, reflect the qualifications and limits on the indemnification provisions that are customary in Delaware and other jurisdictions. 25. The Debtors and Miller Buckfire believe that the Indemnification Provisions are customary and reasonable for financial advisory and investment banking engagements, both out-of-court and in chapter 11 cases. See, e.g., In re FLYi, Inc., No. 05-20011 (MFW) (Bankr. D. Del. January 17, 2006) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Foamex International, Inc., No. 05-12685 (PJW) (Bankr. D. Del. October 17, 2005) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Oakwood Homes Corporation, No. 02-13396 (PJW) (Bankr. D. Del. July 21, 2003) (order authorizing retention of Miller Buckfire on similar terms); In re United Artists Theatre Company, No. 00-3514-SLR (Bankr. D. Del. Dec. 1, 2000) (order authorizing indemnification of Houlihan, Lokey by debtors). The Indemnification Provisions are similar to other indemnification provisions that have been approved by bankruptcy courts elsewhere. See, e.g.; In re Comdisco, Inc., No 02-C-1174 (N.D.Ill. September 23, 2002) (affirming order authorizing indemnification of Lazard Freres & Co. LLC and Rothschild, Inc. by debtors and official committee of unsecured creditors); In re Joan & David Halpern., Inc., 248 B.R. 43 (Bankr. S.D.N.Y. 2000), aff’d, 2000 WL 1800690 (S.D.N.Y. Dec. 6, 2000). 26. The terms and conditions of the Engagement Letter, including the indemnification provisions contained therein, were negotiated by the Debtors and Miller Buckfire at arm’s length and in good faith. The Debtors respectfully submit that the indemnification provisions contained in the Engagement Letter, viewed in conjunction with the other terms of Miller Buckfire’s proposed retention, are reasonable and in the best interests of the Debtors, their estates and creditors in light of the fact that the Debtors need Miller Buckfire’s services to successfully reorganize. Accordingly, as part of this application, the Debtors request that the Court approve the Indemnification Provisions as modified by the proposed retention order attached as Exhibit A. BASIS FOR RELIEF 27. The Debtors seek approval of the Fee Structure and Engagement Letter pursuant to section 328(a) of the Bankruptcy Code, which provides, in relevant part, that the Debtors “with the court’s approval, may employ or authorize the employment of a professional person under section 327 . . . on any reasonable terms and conditions of employment, including on a retainer, on an hourly

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basis, on a fixed or percentage fee basis, or on a contingency fee basis.. . .” 11 U.S.C. § 328(a). Section 328 of the Bankruptcy Code permits the compensation of professionals, including investment bankers, on more flexible terms that reflect the nature of their services and market conditions, which is a significant departure from prior bankruptcy practice relating to the compensation of professionals. As the United States Court of Appeals for the Fifth Circuit recognized in In re National Gypsum Co., 123 F.3d 861, 862 (5th Cir. 1997) (citations omitted): Prior to 1978, the most able professionals were often unwilling to work for bankruptcy estates where their compensation would be subject to the uncertainties of what a judge thought the work was worth after it had been done. The uncertainty continues under the present § 330 of the Bankruptcy Code, which provides that the court award to professional consultants reasonable compensation based on relevant factors of time and comparable costs, etc. Under present § 328 the professionals may avoid that uncertainty by obtaining court approval of compensation agreed to with the trustee (or debtor or committee).

Id. at 862. Owing to this inherent uncertainty, courts have approved similar arrangements that contain reasonable terms and conditions under section 328 of the Bankruptcy Code. See., e.g., In re J.L. French Automotive Castings, Inc., No. 06-10119 (MFW) (Bankr. D.Del. March 24, 2006). 28. The Fee Structure appropriately reflects the nature and scope of services to be provided by Miller Buckfire, Miller Buckfire’s substantial experience with respect to investment banking services, and the fee structures typically utilized by Miller Buckfire and other leading investment bankers, who do not bill their clients on an hourly basis. 29. Similar fixed and contingency fee arrangements have been approved and implemented by courts in other large chapter 11 cases in this circuit and in other circuits. In re FLYi, Inc., No. 05-20011 (MFW) (Bankr. D. Del, January 17, 2006) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Foamex International, Inc., No. 05-12685 (PJW) (Bankr. D. Del, October 17, 2005) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Oakwood Homes Corporation, No. 02-13396 (PJW) (Bankr, D. Del, July 21, 2003) (order authorizing retention of Miller Buckfire on similar terms); In re Kaiser Aluminum Corporation, et.al., No. 02-10429 (JKF) (Bankr, D. Del, March 19, 2002) (authorizing retention of Lazard Freres & Co. LLC and subjecting compensation to same standard of review); In re Trans World Airlines, Inc., No. 01-0056 (PJW) (Bankr, D. Del, Jan. 26, 2001) (authorizing retention of Rothschild, Inc., as financial advisors for debtors, under sections 327(a) and 328(a) of the Bankruptcy Code); In re Covad Communications Group, Inc., No. 01-10167 (JJF) (Bankr, D. Del, November 21, 2001) (authorizing retention of Houlihan Lokey with compensation subject to standard of review set forth in section 328(a)); In re Harnischfeger Industries, et al., No. 99-02171 (PJW) (Bankr, D. Del, Feb. 8, 2000) (authorizing retention of The Blackstone Group L.P. as investment bankers to debtors); In re Casual Male Corp., No. 01-41404 (REG) (Bankr. S.D.N.Y. March 18, 2001) (authorizing retention of Robertson Stephens, Inc., subject to section 328(a) standard of review). Furthermore, under the recently enacted Bankruptcy Abuse Prevention

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and Consumer Protection Act of 2005 a chance was made to Section 328(a) which is highlighted in bold below: The trustee, or a committee appointed under Section 1102 of this title, with the court’s approval, may employ or authorize the employment of a professional person under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed percentage fee basis, or on a contingent fee basis.

This change makes clear the ability of the Debtors to retain, with Bankruptcy Court approval, a professional on a fixed fee basis such as the Fee and Expense structure with Miller Buckfire in this case. 30. Notwithstanding approval of its Engagement Letter under section 328 of the Bankruptcy Code, Miller Buckfire will apply to the Court for allowance of compensation and reimbursement of expenses in accordance with the procedures set forth in the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules and the Local Rules, as those procedures may be modified or supplemented by order of this Court. Consistent with its ordinary practice and the practice of investment bankers in other chapter 11 cases whose fee arrangements are typically not hours-based, Miller Buckfire does not ordinarily maintain contemporaneous time records in one-tenth hour (0.1) increments or provide or conform to a schedule of hourly rates for its professionals. Therefore, Miller Buckfire should be excused from compliance with such requirements and should be required only to maintain such time records in half hour (0.5) increments. DISINTERESTEDNESS 31. Miller Buckfire has informed the Debtors that, except as may be set forth in the Puntus Affidavit, Miller Buckfire (a) has no connection with the Debtors, their creditors, equity security holders, or other parties in interest, or their respective attorneys and accountants, the United States Trustee or any person employed in the office of the United States Trustee, in any matter related to the Debtors and their estates, (b) does not hold any interest adverse to the Debtors’ estates, and (c) believes it is a “disinterested person” as that term is defined in section 101(14) of the Bankruptcy Code. 32. Prior to the Commencement Date, the Debtors paid Miller Buckfire $2,600,000.00 for fees and an expense reimbursement of $25,061.29. Additionally, Miller Buckfire holds a retainer of $500,000 for fees and expenses. As of the Commencement Date, Miller Buckfire did not hold a prepetition claim against the Debtors for services rendered. 33. Miller Buckfire will conduct an ongoing review of its files to ensure that no conflicts or other disqualifying circumstances exist or arise. If any new material facts or relationships are discovered or arise, Miller Buckfire will inform the Court.

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NO BRIEFING SCHEDULE REQUIRED 34. The Debtors submit that this Motion does not present any novel issues of law requiring briefing. Therefore, pursuant to Rule 7.1.2 of the Local Rules of Civil Practice and Procedure for the United States District Court for the District of Delaware (the “Local District Rules”), incorporated by reference into Rule 1001-1(b) of the Local Rules of Practice and Procedure for the United States Bankruptcy Court for the District of Delaware, the Debtors respectfully request that the Court set aside the briefing schedule set forth in Rule 7.1.2(a) of the Local District Rules. NOTICE 35. No trustee, examiner or creditors’ committee has been appointed in the Reorganization Cases. The Debtors have provided notice of this Application to: (a) the United States Trustee for the District of Delaware; (b) those parties listed on the Consolidated List of Creditors Holding Largest Thirty Unsecured Claims Against the Debtors, as identified in their chapter 11 petitions; (c) counsel to the agent for the Debtors’ postpetition secured lenders; (d) counsel to the agent to the Debtors’ prepetition first lien secured lenders; (e) counsel to the agent to the Debtors’ prepetition second lien secured lenders; (f) counsel to the ad hoc committee of certain of the Debtors’ prepetition second lien lenders; (g) the indenture trustee for the Debtors’ 8.625% senior unsecured notes; (h) counsel to the ad hoc committee of certain holders of the Debtors’ 8.625% senior unsecured notes; (i) the indenture trustee for the Debtors’ 9.0% senior subordinated notes; (j) counsel to the ad hoc committee of certain holders of the Debtors’ 9.0% senior subordinated notes; and (k) the indenture trustee for the Debtors’ 7.5% convertible trust preferred notes. In light of the nature of the relief requested, the Debtors submit that no further notice is required. NO PRIOR REQUEST 36. No prior application for the relief requested herein has been made to this or any other Court. WHEREFORE, the Debtors respectfully request that the Court enter an Order, substantially in the form attached as Exhibit A, (i) authorizing the Debtors to employ and retain Miller Buckfire as their investment banker effective as of the Commencement Date; (ii) approving the terms of the Engagement Letter as modified by the proposed Order; and (iii) granting such other and further relief as the Court deems appropriate. Dated: October 30, 2006 Wilmington, Delaware Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada),

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Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C., Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc.

Keith Marchiando Chief Financial Officer Dura Automotive Systems, Inc.

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APPLICATION EXHIBIT A IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


) ) ) ) ) ) )


(

)


ORDER AUTHORIZING THE EMPLOYMENT AND RETENTION OF MILLER BUCKFIRE & CO., LLC, AS INVESTMENT BANKER TO THE DEBTORS AND DEBTORS-IN-POSSESSION Upon the application (the “Application”)2 of the Debtors for an order pursuant to sections 327 and 328 of the Bankruptcy Code, authorizing the employment and retention of Miller Buckfire & Co., LLC (“Miller Buckfire”) as the Debtors’ Investment Banker; and upon the Affidavit of Marc D. Puntus in support of the Application, and it appearing that due and adequate notice of the Application having been given and that no other notice need be given; and it appearing that Miller Buckfire neither holds nor represents any interest adverse to the Debtors’ estates with respect to the matters upon which they are to be engaged; and it appearing that Miller Buckfire is a “disinterested person,” as the term is defined in section 101(14) of the Bankruptcy Code; and it appearing that the relief requested in the Application is in the best interest of the Debtors’ estates and their creditors; and it appearing that this Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334; and it appearing that this proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2); and it appearing that venue of this proceeding and this Application in this District is proper pursuant to 29 U.S.C. §§ 1408 and 1409; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED, that the Application is hereby granted; and it is further 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C., Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC., Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 2 Capitalized terms used but not defined herein shall have the meaning set forth in the Application.

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ORDERED, that in accordance with section 327(a) and 328(a) of the Bankruptcy Code, the Debtors are authorized to employ and retain Miller Buckfire as of the Commencement Date as their investment banker on the terms set forth in the Engagement Letter as modified by this Order and to pay fees to Miller Buckfire on the terms and at the times specified in the Engagement Letter, and it is further ORDERED, Miller Buckfire will file fee applications for interim and final allowance of compensation and reimbursement of expenses pursuant to the procedures set forth in sections 330 and 331 of the Bankruptcy Code and such Bankruptcy Rules as may then be applicable, from time to time, and such procedures as may be fixed by order of this Court; and it is further ORDERED, that notwithstanding the prior paragraph, the fees payable to Miller Buckfire pursuant to the Engagement Letter shall be subject to review only pursuant to the standards set forth in section 328(a) of the Bankruptcy Code and shall not be subject to the standard of review set forth in section 330 of the Bankruptcy Code; and it is further ORDERED, that notwithstanding anything to the contrary in the Bankruptcy Code, the Bankruptcy Rules, and orders of this Court or any guidelines regarding submission and approval of fee applications, Miller Buckfire and its professionals (i) shall only be required to maintain time records for services rendered post-petition, in half-hour increments and (ii) shall not be required to provide or conform to any schedule of hourly rates; and it is further ORDERED, that the indemnification provisions of the Engagement Letter are approved, subject to the following modifications: (a) Subject to the provisions of subparagraphs (c) and (d) below, the Debtors are authorized to indemnify, and shall indemnify, Miller Buckfire, in accordance with the Engagement Letter, for any claim arising from, related to or in connection with Miller Buckfire’s performance of the services described in the Engagement Letter; (b) Miller Buckfire shall not be entitled to indemnification, contribution or reimbursement pursuant to the Engagement Letter for services other than the investment banking services provided under the Engagement Letter, unless such services and the indemnification, contribution, or reimbursement therefore are approved by the Court; (c) Notwithstanding anything to the contrary in the Engagement Letter, the Debtors shall have no obligation to indemnify any person, or provide contribution or reimbursement to any person, for any claim or expense to the extent that it is either (i) judicially determined (the determination having become final) to have arisen from that person’s gross negligence or willful misconduct, or (ii) settled prior to a judicial determination as to that person’s gross negligence or willful misconduct, but determined by this Court, after notice and a hearing, to be a claim or expense for which that person should not receive indemnity, contribution or reimbursement under the terms of the Engagement Letter as modified by this Order; and (d) If, before the earlier of (i) the entry confirming a chapter 11 plan in these cases (that order having become a final order no longer subject

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to appeal) and (ii) the entry of an order closing these Reorganization Cases, Miller Buckfire believes that it is entitled to the payment of any amounts by the Debtors on account of the Debtors’ indemnification, contribution and/or reimbursement obligations under the Engagement Letter (as modified by this Order), including without limitation the advancement of defense costs, Miller Buckfire must file an application before this Court, and the Debtors may not pay any such amounts to Miller Buckfire before the entry of an order by this Court approving the payment. This subparagraph (d) is intended only to specify the period of time under which the court shall have jurisdiction over any request for fees and expenses by Miller Buckfire for indemnification, contribution or reimbursement, and not a provision limiting the duration of the Debtors’ obligation to indemnify Miller Buckfire; and it is further ORDERED, that Paragraph 5 of the Engagement Letter shall be deleted and replaced with the following: “The Company agrees that none of Miller Buckfire, its affiliates or their respective directors, officers, members, managers, agents, employees and controlling persons, or any of their respective successors or assigns (“Covered Persons”) shall have any liability to the Company or any person asserting claims on behalf of the Company or in the Company’s right for or in connection with this engagement or any transactions or conduct in connection therewith except for losses, claims, damages, liabilities or expenses incurred by the Company which are finally judicially determined to have resulted from the gross negligence or willful misconduct of such Covered Person.” and it is further

ORDERED, that notwithstanding any provision of the Engagement Letter to the contrary, to the extent this Court has jurisdiction over any matters arising out of or related to the Engagement Letter, such matter shall be heard in this court; and it is further ORDERED, that to the extent this Order is inconsistent with any prior order or pleading with respect to the Application in these cases or the Engagement Letter, the terms of this Order shall govern; ORDERED, notwithstanding the possible applicability of Rules 6004(g), 7062, and 9014 of the Bankruptcy Rules, or otherwise, the terms and conditions of this Order shall be immediately effective and enforceable upon its entry; and it is further ORDERED, that this Court retains jurisdiction with respect to all matters arising from or related to the implementation of this Order. Dated:

, 2006 United States Bankruptcy Judge

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EXHIBIT B IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


) ) ) ) ) ) )

Chapter 11 (

Case No. 06-

)


AFFIDAVIT OF MARC D. PUNTUS IN SUPPORT OF DEBTORS’ APPLICATION TO EMPLOY AND RETAIN MILLER BUCKFIRE & CO., LLC AS INVESTMENT BANKER TO THE DEBTORS AND DEBTORS-IN-POSSESSION STATE OF NEW YORK COUNTY OF NEW YORK

) ) )

ss.

I, Marc D. Puntus, being duly sworn, hereby declare the following under penalty of perjury: 1. I am a Managing Director with Miller Buckfire & Co., LLC (“Miller Buckfire”), an investment banking services firm with its principal office located at 250 Park Avenue, New York, New York 10177. I am duly authorized to make this affidavit on behalf of Miller Buckfire. I submit this affidavit in support of the application (the “Application”) of the debtors and debtors-in-possession (collectively, the “Debtors”) in the above-captioned chapter 11 cases (the “Reorganization Cases”), for an order authorizing the employment and retention 1

The Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, LLC, Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont LLC, Dura Gladwin LLC, Dura Global Technologies, Inc., Dura G.P, Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C, Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc.

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of Miller Buckfire as investment banker to the Debtors under the terms of the engagement letter, dated August 2, 2006 (the “Engagement Letter”), attached as Exhibit C to the Application, as modified by the proposed retention order, attached as Exhibit A to the Application. Except as otherwise noted, I have personal knowledge of the matters set forth herein.

QUALIFICATION 2. Miller Buckfire commenced operating on July 16, 2002, as an independent firm providing strategic and financial advisory services in large-scale corporate restructuring transactions. Miller Buckfire is owned and controlled by Henry S. Miller and Kenneth A. Buckfire and by the employees of Miller Buckfire. Miller Buckfire currently has approximately 40 employees, many of whom were employees of the Financial Restructuring Group of Dresdner Kleinwort Wasserstein, Inc. before July 16, 2002. 3. Miller Buckfire’s professionals have extensive experience in providing financial advisory and investment banking services to financially distressed companies and to creditors, equity holders and other constituencies in reorganization proceedings and complex financial restructurings, both in- and out-of-court. For instance, Miller Buckfire’s professionals are providing or have provided financial advisory, investment banking, and other services in connection with the restructuring of Acterna Corporation; Aerovias Nacionales de Colombia S.A.; Allied Holdings, Inc.; Applied Extrusion Technologies, Inc.; AT&T Latin America; Aurora Foods Inc.; Avado Brands, Inc.; Birch Telecom, Inc.; Bruno’s Inc.; Burlington Industries; Cajun Electric Power Corporation; Calpine Corporation; Cambridge Industries; Caimike Cinemas; Celotex Corporation; Centerpoint Energy; Citation Corporation; CMS Energy Corporation; Criimi Mae, Inc.; CTC Communications; Dana Corporation; Delta Air Lines, Inc.; Dow Corning Corporation; Drypers, Inc.; EaglePicher Holdings Inc.; Exide Technologies; Favorite Brands International Inc.; FLYi, Inc.; Foamex International; Focal Communications Corporation; FPA Medical Management; Gate Gourmet; Grand Union Co.; Heartland Wireless; Horizon Natural Resources Company; Huntsman Corporation; ICG Communications; ICO Global Communication, Ltd.; IMPATH Inc.; Interstate Bakeries Corporation; J.L. French Automotive Castings; Kmart Corporation; Level (3) Communications; Loewen Group; McLeodUSA; Micro Warehouse; Mirant Corp.; Montgomery Ward & Co.; National Airlines; Oakwood Homes; Pacific Crossing Limited; Pathmark Stores, Inc.; Pegasus Satellite Communications; PennCorp Financial Group, Inc.; Pioneer Companies; PSINet; Polaroid Corporation; Polymer Group, Inc.; The Spiegel Group; Sunbeam Corporation; TECO Energy; Trans World Airlines; US Office Products; U.S. Generating Florida Partnerships; Vulcan, Inc. and Women First Healthcare, Inc. 4. On August 2, 2006, the Debtors retained Miller Buckfire to serve as their investment banker in connection with their restructuring efforts. Since that time, Miller Buckfire, among other things, has: (a) analyzed the Debtors’ current liquidity and projected cash flow; (b) assisted the Debtors in evaluating their restructuring alternatives; and (c) conducted a comprehensive process to secure

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debtor in possession financing (“DIP Financing”) for the Debtors on the most competitive terms and conditions available on behalf of the Debtors. 5. With respect to the DIP Financing, Miller Buckfire worked with the Debtors under an accelerated timeframe to identify potential lenders, including the Debtors’ prepetition secured lenders and other third party lenders, willing to provide DIP Financing in an amount sufficient to provide adequate liquidity for the Debtors during their Reorganization Cases. This process resulted in an agreement with Goldman Sachs Credit Partners, L.P., General Electric Capital Corporation, and Barclays Capital PLC (collectively, the “DIP Lenders”), to provide up to $300 million in postpetition financing to the Debtors.2 6. As a result of this prepetition work performed on behalf of the Debtors, Miller Buckfire acquired significant knowledge of the Debtors and their businesses and is now intimately familiar with the Debtors’ financial affairs, debt structure, operations and related matters. Likewise, in providing prepetition services to the Debtors, Miller Buckfire’s professionals have worked closely with the Debtors’ management and other professionals. Accordingly, Miller Buckfire has developed relevant experience and expertise regarding the Debtors that will assist it in providing effective and efficient services in these cases. The Debtors believe that Miller Buckfire is both well-qualified and uniquely able to represent them in their Reorganization Cases in a most efficient and timely manner. DISINTERESTEDNESS 7. The Debtors have numerous creditors, stakeholders and other parties with whom they maintain business relationships. In connection with its proposed retention by the Debtors in these cases, Miller Buckfire undertook to determine whether it had any conflicts or other relationships that might cause it not to be disinterested or to hold or represent an interest adverse to the Debtors. To check and clear potential conflicts of interest in these cases, Miller Buckfire reviewed its client relationships to determine whether it had any relationships with the following entities (collectively, the “Potential Parties in Interest”): (a) the Debtors and certain of their affiliates; (b) the Debtors’ present and former officers and directors; (c) the Debtors’ largest trade creditors; (d) significant secured lenders; (e) preferred stockholders and other stockholders; (f) counterparties to significant leases or executory contracts; (g) the attorneys and other professionals that the Debtors have identified for employment in these Reorganization Cases; (h) parties to significant litigation with the Debtors; and (i) other significant parties in interest. The identities of the Potential Parties in Interest were provided to Miller Buckfire by the Debtors. 2 Contemporaneously

with the filing of this Application, the Debtors have filed a motion seeking interim and final approval of this DIP Financing facility.

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8. A number of business executives are members of an informal strategic advisory committee (the “Strategic Committee”) of MBL Advisory Group, LLC, which is the parent company of Miller Buckfire. The Strategic Committee is an informal group of business executives who have agreed to consult with and advise Miller Buckfire’s parent generally on the strategic direction of the Miller Buckfire company group and future business trends. The members of the Strategic Committee have no direct financial stake in Miller Buckfire engagements and have no role in the management of Miller Buckfire, They have not been consulted concerning any matter relating to the Debtors’ Reorganization Cases, nor will they be so consulted in the future. Members of the Strategic Committee, and entities for whom they work, may have relationships with creditors or other parties in interest in these cases. However, in light of the limited role of the Strategic Committee (and the fact that its members play no role in these cases) Miller Buckfire is not collecting and providing detailed information regarding such possible relationships. 9. As part of its diverse practice, Miller Buckfire appears in numerous cases, proceedings and transactions involving many different attorneys, accountants, investment bankers and financial consultants, some of whom may represent claimants and parties in interest in the Reorganization Cases. Further, Miller Buckfire has in the past, and may in the future, be represented by several attorneys and law firms, some of whom may be involved in these proceedings. In addition, Miller Buckfire has been in the past, and likely will be in the future, engaged in matters unrelated to the Debtors or these Reorganization Cases in which it works with or against other professionals involved in these cases. Based on our current knowledge of the professionals involved in these Reorganization Cases, and to the best of my knowledge, none of these business relations constitute interests adverse to the Debtors. 10. To the best of my knowledge and belief, insofar as I have been able to ascertain after reasonable inquiry, neither I, nor Miller Buckfire nor any of its professional employees has any connection with the Debtors, their creditors, the U.S. Trustee or any other Potential Parties in Interest in these Reorganization Cases or their respective attorneys or accountants, except as follows: (a) Prior to the commencement of these cases, Miller Buckfire’s professionals performed professional services for the Debtors. (b) The Debtors have many creditors. From time to time, Miller Buckfire may perform or may have performed services for, or maintained other commercial or professional relationships with, certain creditors of the Debtors and various other parties that are adverse to the Debtors, in each case in matters unrelated to these cases. (c) Miller Buckfire has been in the past, and in some cases is currently, involved in unrelated matters with certain creditors of the Debtors, including, but not limited to, affiliates of JPMorgan Chase Bank, N.A., Citibank, N.A., Bank of America, N.A., Wells Fargo Foothill, LLC, Credit Suisse Group, among others. (d) Miller Buckfire is currently advising Dana Corporation on its chapter 11 cases, which were initiated in March 2006. The representation of Dana Corporation concerns matters unrelated to these chapter 11 cases.

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(e) Miller Buckfire currently employs T. Rowe Price Group Inc. as the administrator of 401(k) plans. The use of such services concerns matters unrelated to these chapter 11 cases. (f) Miller Buckfire has employed Towers Perrin in the past concerning matters unrelated to these chapter 11 cases. (g) Miller Buckfire currently maintains an ordinary course banking relationship with Citibank N.A., which is unrelated to these chapter 11 cases. (h) Miller Buckfire currently works with Intralinks Inc. on various matters that are unrelated to these chapter 11 cases. (i) An affiliate of XL Capital leases office space to Miller Buckfire, which lease has no relation to these chapter 11 cases. (j) Miller Buckfire advised a group of creditors in the EaglePicher chapter 11 cases (the “EaglePicher Committee”), including Angelo Gordon, JPMorgan and Wells Fargo. The representation of the EaglePicher Committee concerned matters unrelated to these chapter 11 cases. (k) Miller Buckfire advised a group of creditors in the Mirant Corporation chapter 11 case (the “Mirant Committee”), including Citigroup, Deutsche Bank and Wachovia. The representation of the Mirant Committee concerned matters unrelated to these chapter 11 cases. (l) Miller Buckfire advised Exide Technologies on various financial matters, which included an equity rights offering (“Exide Rights Offering”). The Exide Rights Offering involved a group of investors that included Tontine Capital Partners, L.P. The representation of Exide Technologies concerned matters unrelated to these chapter 11 cases. (m) Miller Buckfire is currently advising Foamex International, Inc. in its chapter 11 cases, which were initiated in September, 2005. As part of Foamex International, Inc.’s proposed plan of reorganization, a group of investors will participate in an equity rights offering (“Foamex Rights Offering”). The Foamex Rights Offering is expected to involve a group of investers including, but not limited to, affiliates of Goldman Sachs & Co. The representation of Foamex International, Inc. concerns matters unrelated to these chapter 11 cases. (n) Henry S. Miller’s daughter is employed by Kirkland & Ellis LLP on a part-time basis while she completes law school. (o) From time to time, Miller Buckfire also may have had dealings (either as co-advisors or in another capacity) on other unrelated matters with certain of the other professionals who are providing, or are expected to provide, services in these cases, including, without limitation: (i) Kirkland & Ellis LLP (the Debtors’ proposed counsel); and (ii) Glass & Associates, Inc. (the Debtors’ proposed turnaround consulting firm); (iii) Bingham McCutchen LLP (counsel to certain prepetition second lien lenders); (iv) Lazard Ltd. (advisors to counsel to certain prepetition second lien lenders); (v) The Blackstone Group (advisors to the senior noteholders); (vi) Fried Frank Harris Shriver & Jacobson LLP (counsel to the senior noteholders).

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11. To the best of my knowledge, information and belief, insofar as I have been to ascertain after reasonable inquiry, Miller Buckfire has not been retained to assist any entity or person other than the Debtors on matters relating to, or in direct connection with, these cases. If Miller Buckfire’s proposed retention by the Debtors is approved by the Court, Miller Buckfire will not accept any engagement or perform any service for any entity or person other than the Debtors in these cases. Miller Buckfire will, however, continue to provide professional services to entities or persons that may be creditors or equity security holders of the Debtors or parties-in-interest in these cases, provided that such services do not relate to, or have any direct connection with, these cases or the Debtors. 12. Insofar as I have been able to determine after reasonable inquiry, Miller Buckfire and the employees of Miller Buckfire that will work on this engagement do not hold or represent any interest adverse to the Debtors or their estates, and Miller Buckfire is a “disinterested person” as that term is defined in section 101(14) of the Bankruptcy Code, as modified by section 1107(b) of the Bankruptcy Code, in that Miller Buckfire, its professionals and employees: (a) are not creditors, equity security holders or insiders of the Debtors; (b) were not, within two years before the date of filing of the Debtors’ chapter 11 petitions, a director, officer, or employee of the Debtors; and (c) do not have an interest materially adverse to the Debtors, their respective estates, or any class of creditors or equity security holders by reason of any direct or indirect relationship to, connection with, or interest in the Debtors, or for any other reason. 13. I am not related or connected to and, to the best of my knowledge after reasonable inquiry, no other professional of Miller Buckfire who will work on this engagement is related or connected to, any United States Bankruptcy Judge for the District of Delaware, any of the District Judges for the District of Delaware who handle bankruptcy cases, the United States Trustee for this Region, or any employee in the Office of the United States Trustee for this Region. 14. If Miller Buckfire discovers any additional information that requires disclosure, Miller Buckfire will promptly file a supplemental Declaration with the Court. 15. To the best of my knowledge and belief, insofar as I have been able to ascertain after reasonable inquiry, none of the employees of Miller Buckfire working on this engagement on the Debtors’ behalf has had, or will have in the future, direct contact concerning these cases with the Debtors’ creditors, equity holders, other parties in interest, the U.S. Trustee, or anyone employed in the Office of the United States Trustee other than in connection with performing investment banking services on behalf of the Debtors.

SCOPE OF SERVICES 16. Pursuant to the Engagement Letter, at the request and direction of the Debtors, Miller Buckfire will provide the Debtors the investment banking services specified in the Engagement Letter, including:

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(a) advising and assisting the Debtors in structuring and effectuating the financial aspects of any restructuring or sale transaction or transactions proposed to be undertaken by the Debtors; (b) if applicable, identifying, soliciting and negotiating with potential lenders or investors in connection with any financing or potential acquirers in connection with any sale; (c) providing financial advice and assistance to the Debtors in developing and seeking approval of a restructuring plan, including participating in negotiations with entities or groups affected by the plan; and (d) participating in hearings before the Court with respect to the matters upon which Miller Buckfire has provided advice, including, as relevant, coordinating, with the Debtors’ counsel with respect to testimony in connection therewith. 17. The services that Miller Buckfire will provide to the Debtors are necessary to enable the Debtors to maximize the value of their estates. I believe that these services will not duplicate the services that other professionals will be providing to the Debtors in these chapter 11 Cases. PROFESSIONAL COMPENSATION 18. The terms of Miller Buckfire’s proposed compensation are fully set forth in the Engagement Letter (the “Fee Structure”), and I respectfully refer this Court to the Engagement Letter for a full recitation of its terms. In summary, under the terms of the Engagement Letter and subject to the Court’s approval, Miller Buckfire will receive: (a) Monthly Advisory Fee: a Monthly Advisory Fee of $200,000 for each month during the term of this engagement, provided that 50% of the amount of any Monthly Advisory Fee in excess of $800,000 (four months of Monthly Advisory Fees) paid to Miller Buckfire will be credited to the extent actually paid against any Restructuring Transaction Fee payable to Miller Buckfire; (b) Restructuring Transaction Fee: If the Debtors consummate a Restructuring Transaction, a Restructuring Transaction Fee of $6,700,000 (after taking account of a credit for 50% of the DIP Financing Fee paid to Miller Buckfire prior to the filing of these Reorganization Cases); (c) Sale Transaction Fee: If the Debtors consummate a Sale Transaction, a Sale Transaction Fee of 1.0% of the Aggregate Consideration of any such Sale; (d) Financing Fee: If the Debtors consummate any Financing Transaction(s), the Debtors will pay Miller Buckfire a Financing Fee of: (i) 3.0% of the gross proceeds of any indebtedness issued that is unsecured or subordinated, and (ii) 5.0% of the gross proceeds of any equity or equity-linked securities or obligations issued. (e) In addition to the fees described above, and regardless of whether any transaction occurs, the Debtors shall promptly reimburse Miller Buckfire for all reasonable out-of-pocket expenses (including travel and lodging, data processing and communications charges, courier services, fees and expenses of legal counsel and other necessary expenses).

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(f) In addition to the foregoing, the Debtors have agreed to the indemnification provisions contained in the Engagement Letter subject to the modifications contained in the proposed retention order, which are standard for this District. 19. The overall compensation structure described above is consistent with Miller Buckfire’s normal and customary billing practices for cases of this size and complexity, reflects the difficulty of the extensive assignments Miller Buckfire expects to undertake and is performance based. I believe that the foregoing compensation arrangements are (a) reasonable; (b) market-based; (c) well within the range of comparable transactions; and (d) merited by Miller Buckfire’s restructuring expertise, capital markets knowledge, financing skills and mergers and acquisitions capabilities. 20. Prior to the Commencement Date, the Debtors paid Miller Buckfire $2,600,000 for fees and an expense reimbursement of $25,061,29. Additionally, Miller Buckfire holds a retainer of $500,000 for fees and expenses. The source of the foregoing payments was the Debtors’ operating cash. As of the Commencement Date, Miller Buckfire did not hold a prepetition claim against the Debtors for services rendered. 21. To the best of my knowledge, Miller Buckfire has no agreement with any other entity to share with such entity any compensation received by Miller Buckfire in connection with these Reorganization Cases other than as permitted by section 504 of the Bankruptcy Code.

OTHER 22. The Engagement Letter further provides that the Debtors will indemnify, hold harmless, and defend Miller Buckfire and its affiliates and their respective directors, officers, members, managers, shareholders, employees, agents, and controlling persons and their respective successors and assigns (collectively, the “Indemnified Parties”) under certain circumstances (such indemnification obligation being referred to as the “Indemnification Provisions”) attached to and made a part of the Engagement Letter. These are standard provisions, both in chapter 11 cases and outside chapter 11 and, as modified by the proposed retention order, reflect the qualifications and limits on the indemnification provisions that are customary in other Bankruptcy Courts. Miller Buckfire believes that the Indemnification Provisions are customary and reasonable for investment banking engagements, both out-of-court and in chapter 11 proceedings. 23. I believe the services to be performed by Miller Buckfire are necessary to enable the Debtors to maximize the value of their estates and to reorganize successfully. Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true and correct. , 2006. Executed on By: Name: Marc D. Puntus

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Title: Managing Director Sworn to before me this day of , 2006 Notary Public My Commission Expires: [

Nov 1, 2008

MICHELLE NUNNS Notary Public, State of New York No.01NU6117939 Qualified in New York County Commission Expires November 1, 2008

]

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APPLICATION EXHIBIT C Miller Buckfire & Co., LLC 250 Park Avenue, 19th Floor New York, New York 10177 www.millerbuckfire.com MILLER BUCKFIRE August 2, 2006 DURA Automotive Systems, Inc. 2791 Research Drive Rochester Hills, MI 48309-3575 Attention: Larry A. Denton Chairman and CEO Dear Mr. Denton: This letter agreement confirms the terms under which DURA Automotive Systems, Inc. (the “Company”) has engaged Miller Buckfire & Co., LLC (“Miller Buckfire”) as its financial advisor and investment banker with respect to a possible Restructuring, Financing and/or Sale (each as defined below) and with respect to such other financial matters as to which the Company and Miller Buckfire may agree in writing during the term of this engagement. For purposes hereof, the term “Company” includes affiliates of the Company and any entity that the Company or its affiliates may form or invest in to consummate a Restructuring, Financing and/or Sale, and shall also include any successor to or assignee of all or a portion of the assets and/or businesses of the Company whether pursuant to a Plan (as defined below) or otherwise. 1. Miller Buckfire, as financial advisor and investment banker to the Company, will perform the following financial advisory and investment banking services: a. General Financial Advisory and Investment Banking Services. Miller Buckfire will: i. to the extent it deems necessary, appropriate and feasible, familiarize itself with the business, operations, properties, financial condition and prospects of the Company, and ii. if the Company determines to undertake a Restructuring, Financing and/or Sale advise and assist the Company in structuring and effecting the financial aspects of such a transaction or transactions, subject to the terms and conditions of this agreement b. Restructuring Services. If the Company pursues a Restructuring, Miller Buckfire will: i. provide financial advice and assistance to the Company in developing and seeking approval of a Restructuring plan (as the same may be modified from time to time, a “Plan”), which may be a plan under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq. (the “Bankruptcy Code”), including but

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iii.

iv.

v.

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not limited to, reviewing the Company’s business plan and financial projections, and preparing an analysis of the estimated range of the going concern enterprise value of the reorganized Company; if requested by the Company, in connection therewith, provide financial advice and assistance to the Company in structuring any new securities to be issued under the Plan; if requested by the Company, assist the Company and/or participate in negotiations with entities or groups affected by the Plan; if requested by the Company, participate in hearings before the bankruptcy court with respect to the matters upon which Miller Buckfire has provided advice, including, as relevant, coordinating with the Company’s counsel with respect to testimony in connection therewith; if requested by the Company, provide financial advice and assistance to the Company in structuring and effecting any debtor-inpossession financing (a “DIP Financing”) and exit financing in connection with a Plan (an “Exit Financing”), identify potential lenders and, at the Company’s request, contact such lenders; and if requested by the Company, assist the Company and/or participate in negotiations with potential lenders.

For purposes of this agreement, the term “Restructuring” shall mean any recapitalization or restructuring (including, without limitation, through any exchange, conversion, cancellation, forgiveness, retirement and/or a material modification or amendment to the terms, conditions or covenants thereof) of the Company’s preferred equity and/or debt securities and/or other indebtedness, obligations or liabilities (including preferred stock, partnership interests, lease obligations, trade credit facilities and/or contract or tort obligations), including pursuant to a repurchase or an exchange transaction, a Plan or a solicitation of consents, waivers, acceptances or authorizations. c. Financing Services. If the Company pursues a Financing, Miller Buckfire will: i. provide financial advice and assistance to the Company in structuring and effecting a Financing, identify potential Investors (as defined below) and, at the Company’s request, contact such Investors; ii. if Miller Buckfire and the Company deem it advisable, assist the Company in developing and preparing a memorandum (with any amendments or supplements thereto, the “Financing Offering Memorandum”) to be used in soliciting potential Investors, it being agreed that (A) the Financing Offering Memorandum shall be based entirely upon information supplied by the Company, (B) the Company shall be solely responsible for the accuracy and completeness of the Financing Offering Memorandum, and (C) other than as contemplated by this subparagraph (c)(ii), the Financing Offering Memorandum shall not be used, reproduced,

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disseminated, quoted or referred to at any time in any way, except with Miller Buckfire’s prior written consent; and iii. if requested by the Company, assist the Company and/or participate in negotiations with potential Investors. For purposes of this agreement, the term “Financing” shall mean a private issuance, sale or placement of the equity, equity-linked or debt securities, instruments or obligations of the Company with one or more lenders and/or investors, except to the extent issued to existing security holders of the Company in exchange for their existing securities, or any loan or other financing, including any DIP Financing or Exit Financing in connection with a case under the Bankruptcy Code or a rights offering (each such lender or investor, an “Investor”). It is understood and agreed that nothing contained herein shall constitute an expressed or implied commitment by Miller Buckfire to act in any capacity or to underwrite, place or purchase any financing or securities, which commitment shall only be set forth in a separate underwriting, placement agency or other appropriate agreement relating to the Financing. d. Sale Services. If the Company pursues a Sale, Miller Buckfire will: i. provide financial advice and assistance to the Company in connection with a Sale, identify potential acquirors and, at the Company’s request, contact such potential acquirors; ii. at the Company’s request, assist the Company in preparing a memorandum (with any amendments or supplements thereto, the “Sale Memorandum”) to be used in soliciting potential acquirors, it being agreed that (A) the Sale Memorandum shall be based entirely upon information supplied by the Company, (B) the Company shall be solely responsible for the accuracy and completeness of the Sale Memorandum, and (C) other than as contemplated by this subparagraph (d)(ii), the Sale Memorandum shall not be used, reproduced, disseminated, quoted or referred to at any time in any way, except with Miller Buckfire’s prior written consent; and iii. if requested by the Company, assist the Company and/or participate in negotiations with potential acquirors. For purposes of this agreement, the term “Sale” shall mean the disposition to one or more third parties in one or a series of related transactions of (x) all or a significant portion of the equity securities of the Company by the security holders of the Company or (y) all or a significant portion of the assets (including the assignment of any executory contracts) or businesses of the Company or its subsidiaries, in either case, including through a sale or exchange of capital stock, options or assets, a lease of assets with or without a purchase option, a merger, consolidation or other business combination, an exchange or tender offer, a recapitalization, the formation of a joint venture, partnership or similar entity, or any similar transaction. Notwithstanding the foregoing, any potential transactions for which W.Y. Campbell & Company is currently engaged shall not constitute a Sale for purposes of this agreement.

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In rendering its services to the Company hereunder, Miller Buckfire is not assuming any responsibility for the Company’s underlying business decision to pursue or not to pursue any business strategy or to effect or not to effect any Restructuring, Financing, and/or Sale or other transaction. The Company agrees that Miller Buckfire shall not have any obligation or responsibility to provide accounting, audit, “crisis management,” or business consultant services for the Company and shall have no responsibility for designing or implementing operating, organizational, administrative, cash management or liquidity improvements, or to provide any fairness or valuation opinions or any advice or opinions with respect to solvency in connection with any transaction. The Company confirms that it will rely on its own counsel, accountants and similar expert advisors for legal, accounting, tax and other similar advice. In order to coordinate effectively the Company’s and Miller Buckfire’s activities to effect a Restructuring, Financing or Sale, the Company will promptly inform Miller Buckfire of any discussions, negotiations or inquiries regarding a possible Restructuring, Financing or Sale (including any such discussions, negotiations or inquiries that have occurred in the six month period prior to the date of this agreement). The Company shall make available to Miller Buckfire all information concerning the business, assets, operations, financial condition and prospects of the Company that Miller Buckfire reasonably requests in connection with the services to be performed for the Company hereunder and shall provide Miller Buckfire with reasonable access to the Company’s officers, directors, employees, independent accountants and other advisors and agents as Miller Buckfire shall deem appropriate. The Company represents that all information furnished by it or on its behalf to Miller Buckfire (including information contained in any Financing Offering Memorandum and/or Sale Memorandum) will be accurate and complete in all material respects. The Company recognizes and confirms that in advising the Company and completing its engagement hereunder, Miller Buckfire will be using and relying on publicly available information and on data, material and other information furnished to Miller Buckfire by the Company and other parties. It is understood that in performing under this engagement Miller Buckfire may assume and rely upon the accuracy and completeness of, and is not assuming any responsibility for independent verification of, such publicly available information and the other information so furnished. 2. Miller Buckfire’s compensation for services rendered under this agreement will consist of the following cash fees: a. A financial advisory fee of $200,000, which shall be due and paid by the Company upon the execution of this agreement (the “Initial Fee”). b. A monthly financial advisory fee of $200,000 (the “Monthly Advisory Fee”), which shall be due and paid by the Company beginning September 1, 2006 and thereafter on each monthly anniversary thereof during the term of this engagement: provided that 50% of the total amount of all Monthly Advisory Fees paid in excess of $800,000 (four months of Monthly Advisory Fees) shall be credited, to the

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extent actually paid, against the Restructuring Transaction Fee (as defined below). c. If at any time during the term of this engagement or within the eighteen full months following the termination of this engagement (including the term of this engagement, the “Fee Period”), (x) any Restructuring is consummated or (y)(1) an agreement in principle, definitive agreement or Plan to effect a Restructuring is entered into and (2) concurrently therewith or at any time thereafter (including following the expiration of the Fee Period), any Restructuring is consummated, Miller Buckfire shall be entitled to receive a transaction fee (a “Restructuring Transaction Fee”), contingent upon the consummation of a Restructuring and payable at the closing thereof, equal to $7,700,000. Notwithstanding anything to the contrary in this agreement, in connection with any Restructuring that is intended to be effected, in whole or in part, as a prepackaged plan of reorganization (a “Prepackaged Plan”) or a prearranged plan of reorganization (a “Prearranged Plan”) anticipated to involve the solicitation of acceptances of such plan in compliance with the Bankruptcy Code, by or on behalf of the Company, from holders of any class of the Company’s securities, indebtedness or obligations (a “Prepackaged Plan”) the Restructuring Transaction Fee shall be payable (x)(i) in the case of a Prepackaged Plan, 75% upon receipt of votes from the Company’s creditors necessary to confirm such Prepackaged Plan or (ii) in the case of a Prearranged Plan, 50% upon obtaining indications of support from the Company’s creditors that in the good faith judgment of the Board of Directors of the Company are sufficient to justify filing such Prearranged Plan, and (y) the balance shall be payable upon consummation of such Restructuring. d. If at any time during the Fee Period, (x) any Sale is consummated or (y)(1) an agreement in principle or definitive agreement to effect a Sale is entered into, and (2) concurrently therewith or at any time thereafter (including following the expiration of the Fee Period) any Sale is consummated, Miller Buckfire shall be entitled to receive a transaction fee (a “Sale Transaction Fee”), contingent upon the consummation of a Sale and payable at the closing thereof, which shall be equal to 1% of the Aggregate Consideration (as defined below); provided, however, that the Company shall pay to Miller Buckfire either the Sale Transaction Fee, in the case of consummation of a Sale or shall pay to Miller Buckfire the Restructuring Transaction Fee in the case of a Restructuring, and shall, in no event, pay more than one such fee. For purposes of this agreement, the term “Aggregate Consideration” shall mean the total amount of cash and the fair market value (on the date of payment and as determined by Miller Buckfire in good faith) of all securities and other property paid or payable, directly or indirectly, by the acquiring party (the “Acquiror”) to the acquired party or the seller of the acquired business (in either case, the “Acquired”), or to the Acquired’s contract parties, claim

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holders, security holders and employees, or by the Acquired to the Acquired’s contract parties, claim holders, security holders and employees, in connection with a Sale or a transaction related thereto (including, without limitation, the face amount of any indebtedness, securities or other property “credit bid” in any Sale and amounts paid by the Acquiror (i) pursuant to covenants not to compete, employment contracts, employee benefit plans or other similar arrangements of the Acquired and (ii) to holders of any warrants, stock purchase rights, convertible securities or similar rights of the Acquired and to holders of any options or stock appreciation rights issued by the Acquired, whether or not vested. Aggregate Consideration shall also include the value of any liabilities (including obligations relating to any capitalized leases and the principal amount of any indebtedness for borrowed money) (x) existing on the Acquired’s balance sheet at the time of a Sale or repaid or retired in anticipation of a Sale (if such Sale takes the form of a merger or sale or exchange of stock) or (y) assumed directly or indirectly by the Acquiror in connection with a Sale (if such Sale takes the form of a sale or exchange of assets). Aggregate Consideration shall also include (i) the value of any current assets not sold to the Acquiror minus (ii) the value of any current liabilities not assumed by the Acquiror, each such value as of the closing date of the Sale and as determined by Miller Buckfire in good faith. If a Sale takes the form of a recapitalization of the Company (including, without limitation, an extraordinary dividend, a spin-off, split-off or similar transaction), Aggregate Consideration shall also include the fair market value (on the closing date of the Sale and as determined by Miller Buckfire in good faith) of (i) the equity securities of the Company retained by the Company’s security holders and/or creditors following the consummation of such transaction and (ii) any cash, securities (including securities of subsidiaries) or other consideration received by the Company’s security holders and/or creditors in exchange for or in respect of securities of and/or claims against the Company in connection with such transaction (all such cash, securities and/or claims against other consideration received by such security holders and/or creditors being deemed to have been paid to such security holders and/or creditors in such transaction). In the event that any part of the consideration in connection with any Sale will be payable (whether in one payment or a series of two or more payments) at any time following the consummation thereof, the term Aggregate Consideration shall include the present value of such future payment or payments, as determined by Miller Buckfire in good faith. As used in this agreement, the terms “payment,” “paid” or “payable” shall be deemed to include, as applicable, the issuance or delivery of securities or other property other than cash. e. If at any time during the Fee Period, the Company (x) consummates any Financing or (y)(1) the Company receives and accepts written commitments for one or more Financings (the execution by a potential financing source and the Company of a commitment letter or securities purchase agreement or other definitive documentation shall be deemed to be the receipt and acceptance of such written commitment) and (2) concurrently therewith or at any time thereafter (including following the expiration of the Fee Period) any Financing is consummated, the Company will pay to Miller Buckfire

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the following (either as underwriting discounts, placement fees or other compensation): i. 3.0% of the gross proceeds of any indebtedness issued that (x) is unsecured and/or (y) is subordinated, provided that a Financing Fee shall not be due and payable to the extent proceeds from any (x) unsecured and/or (y) subordinated indebtedness are generated from existing security holders; ii. 5.0% of the gross proceeds of any equity or equity-linked securities or obligations issued, provided that a Financing Fee shall not be due and payable to the extent proceeds from any equity or equity-link securities are generated from existing security holders; iii. with respect to any other securities or indebtedness issued, such underwriting discounts, placement fees or other compensation as shall be customary under the circumstances and mutually agreed by the Company and Miller Buckfire; and iv. notwithstanding anything to the contrary in this letter agreement, if at any time during the Fee Period, the Company obtains a written commitment for a DIP Financing and/or an Exit Financing, a DIP Financing fee or an Exit Financing Fee of $2,000,000 (a “DIP Financing Fee” or an “Exit Financing Fee”), which shall be due and paid by the Company upon obtaining the first of such written commitments, provided that 50% of any DIP Financing Fee or Exit Financing Fee shall be credited, to the extent actually paid, against the Restructuring Transaction Fee. For purposes of clarity, Miller Buckfire shall receive only one of the DIP Financing Fee and Exit Financing Fee even if both a DIP Financing and an Exit Financing are consummated. It is understood and agreed that, if the proceeds of any such Financing are to be funded in more than one stage, the aggregate proceeds to be raised in all stages of such Financing shall be deemed to have been received, and Miller Buckfire shall be entitled to the applicable compensation hereunder calculated based on such aggregate proceeds, upon the closing date of the first stage thereof. In connection with any Financing, DIP Financing or Exit Financing undertaken within the Fee Period, Miller Buckfire shall be offered the right of first refusal to act as lead arranger, lead managing underwriter or exclusive placement agent, as the case may be. In the event that Miller Buckfire does act for the Company in any of the foregoing or similar capacities, then if requested by Miller Buckfire, the Company and Miller Buckfire shall enter into a separate agreement or other appropriate documentation for such transaction, containing customary representations, warranties, covenants, conditions and indemnities, and providing for the underwriting discounts or placement fees, as the case may be, set forth above; provided that in the absence of any such agreement, the terms of this agreement (including the Indemnification Provisions referred to below) shall govern. In no event, however, shall the economic terms of any such agreement be any less favorable to Miller Buckfire than the economic terms afforded to any other arranger, underwriter, initial purchaser or placement agent, if any, participating in any such Financing.

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The Company acknowledges and agrees that the fees payable to Miller Buckfire hereunder are reasonable. The Company and Miller Buckfire acknowledge and agree that (a) the hours worked, the results achieved and the ultimate benefit to the Company of the work performed, in each case, in connection with this engagement, may be variable, and that the Company and Miller Buckfire have taken this into account in setting the fees hereunder, and (b) more than one fee may be payable to Miller Buckfire under subparagraphs 2(c), 2(d) and/or 2(e) hereof in connection with any single transaction or a series of transactions, it being understood and agreed that (i) if more than one fee becomes so payable to Miller Buckfire in connection with a series of transactions, each such fee shall be paid to Miller Buckfire and (ii) if more than one fee becomes so payable to Miller Buckfire in connection with a single transaction, the highest of such fees shall be paid to Miller Buckfire. 3. In addition to any fees payable by the Company to Miller Buckfire hereunder, the Company shall, whether or not any transaction contemplated by this agreement shall be proposed or consummated, reimburse Miller Buckfire on a monthly basis for its travel and other reasonable out-ofpocket expenses (including all fees, disbursements and other charges of counsel to be retained by Miller Buckfire, and of other consultants and advisors retained by Miller Buckfire with the Company’s consent) incurred in connection with, or arising out of Miller Buckfire’s activities under or contemplated by this engagement. The Company shall also reimburse Miller Buckfire, at such times as Miller Buckfire shall request, for any sales, use or similar taxes (including additions to such taxes, if any) arising in connection with any matter referred to or contemplated by, this engagement. Such reimbursements shall be made promptly upon submission by Miller Buckfire of statements for such expenses. 4. The Company agrees to indemnify Miller Buckfire and certain related persons in accordance with the indemnification provisions (“Indemnification Provisions”) attached to this agreement. Such Indemnification Provisions are an integral part of this agreement, and the terms thereof are incorporated by reference herein. Such Indemnification Provisions shall survive any termination or completion of Miller Buckfire’s engagement hereunder. 5. The Company agrees that none of Miller Buckfire, its affiliates or their respective directors, officers, members, managers, agents, employees and controlling persons, or any of their respective successors or assigns (“Covered Persons”) shall have any liability to the Company or any person asserting claims on behalf of the Company or in the Company’s right for or in connection with this engagement or any transactions or conduct in connection therewith except for losses, claims, damages, liabilities or expenses incurred by the Company which are finally judicially determined to have resulted primarily from the gross negligence or willful misconduct (including bad faith and self-dealing) of such Covered Person; provided, however, that in no event shall the Covered Persons’ aggregate liability to the Company or any person asserting claims on behalf of the Company or in the Company’s right exceed the fees Miller

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Buckfire actually receives from the Company pursuant to its engagement hereunder, unless there is a final judicial determination of willful misconduct specified in this sentence. This agreement and Miller Buckfire’s engagement hereunder may be terminated by either the Company or Miller Buckfire at any time, upon prior written notice thereof to the other party; provided, however, that (a) termination of Miller Buckfire’s engagement hereunder shall not affect the Company’s continuing obligation to indemnify Miller Buckfire and certain related persons as provided for in this agreement, and its continuing obligations and agreements under paragraphs 5 and 7 hereof, (b) notwithstanding any such termination, Miller Buckfire shall be entitled to the full fees in the amounts and at the times provided for in paragraph 2 hereof and (c) any termination of Miller Buckfire’s engagement hereunder shall not affect the Company’s obligation to reimburse expenses accruing prior to such termination to the extent provided in paragraph 3 hereof. Miller Buckfire has been retained under this agreement as an independent contractor with no fiduciary or agency relationship to the Company or to any other party. The advice (oral or written) rendered by Miller Buckfire pursuant to this agreement is intended solely for the benefit and use of the Board of Directors of the Company in considering the matters to which this agreement relates, and the Company agrees that such advice may not be relied upon by any other person or entity, used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner for any purpose, nor shall any public references to Miller Buckfire be made by the Company, without the prior written consent of Miller Buckfire. The Company agrees that Miller Buckfire shall have the right to place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder, provided that Miller Buckfire will submit a copy of any such advertisement to the Company for its approval, which approval shall not be unreasonably withheld or delayed. This agreement shall be deemed to be made in New York. This agreement and all controversies arising from or relating to performance of this agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to such state’s rules concerning conflicts of laws that might provide for any other choice of law. The Company hereby irrevocably consents to personal jurisdiction in the Supreme Court of the State of New York in New York County, Commercial Part, or any Federal court sitting in the Southern District of New York, or, during the pendency of any chapter 11 case, the Bankruptcy Court (as defined below in section 11), for the purposes of any suit, action or other proceeding arising out of this agreement or any of the agreements or transactions contemplated hereby, which is brought by or against the Company. Each of the Company and Miller Buckfire hereby waive any objection to venue with respect thereto, and

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hereby agrees that all claims in respect of any such suit, action or proceeding shall be heard and determined in any such court, and that such courts shall have exclusive jurisdiction over any claims arising out of or relating to such agreements or transactions. The Company hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Company at its address set forth above, such service to become effective ten (10) days after such mailing. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT OR CONDUCT IN CONNECTION WITH MILLER BUCKFIRE’S ENGAGEMENT IS HEREBY WAIVED. 10. This agreement may be executed in counterparts, each of which together shall be considered a single document. This agreement shall be binding upon Miller Buckfire and the Company and their respective successors and assigns (including, in the case of the Company, any successor to all or a portion of the assets and/or the businesses of the Company under a Plan). This agreement is not intended to confer any rights upon any shareholder, creditor, owner or partner of the Company, or any other person or entity not a party hereto other than the indemnified persons referenced in the Indemnification Provisions contained herein and the Covered Persons referenced above. 11. In the event that the Company becomes a debtor under chapter 11 of the Bankruptcy Code, the Company shall apply promptly to the bankruptcy court having jurisdiction over the chapter 11 case or cases (the “Bankruptcy Court”) for the approval pursuant to sections 327(a) and 328(a) of the Bankruptcy Code of this agreement and Miller Buckfire’s retention by the Company under the terms of this agreement, subject only to the standard of review provided for in Section 328(a) of the Bankruptcy Code, and not subject to the standard of review under section 330 of the Bankruptcy Code or any other standard of review, and shall use its best efforts to obtain Bankruptcy Court authorization thereof. The Company shall supply Miller Buckfire and its counsel with a draft of such application and the proposed order authorizing Miller Buckfire’s retention that is proposed to be submitted to the Bankruptcy Court sufficiently in advance of the filing of such application or the submission of such order, as the case may be, to enable Miller Buckfire and its counsel to review and comment thereon. Miller Buckfire shall have no obligation to provide any services under this agreement in the event that the Company becomes a debtor under the Bankruptcy Code unless Miller Buckfire’s retention under the terms of this agreement is approved under Section 328(a) of the Bankruptcy Code by a final order of the Bankruptcy Court no longer subject to appeal, rehearing, reconsideration or petition for certiorari, and which order is acceptable to Miller Buckfire in all respects. Miller Buckfire acknowledges that in the event that the Bankruptcy Court approves its retention by the Company pursuant to the application process described in this paragraph 12, payment of Miller

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Buckfire’s fees and expenses shall be subject to (i) the jurisdiction and approval of the Bankruptcy Court under Section 328(a) of the Bankruptcy Code and any order approving Miller Buckfire’s retention, (ii) any applicable fee and expense guidelines and/or orders and (iii) any requirements governing interim and final fee applications. In the event that the Company becomes a debtor under the Bankruptcy Code and Miller Buckfire’s engagement hereunder is approved by the Bankruptcy Court, the Company shall pay all fees and expenses of Miller Buckfire hereunder as promptly as practicable in accordance with the terms hereof. In so agreeing to seek Miller Buckfire’s retention under Section 328(a) of the Bankruptcy Code, the Company acknowledges that it believes that Miller Buckfire’s experience and expertise, its knowledge of the industry in which the Company operates and the capital markets and its other capabilities will inure to the benefit of the Company, that the value to the Company of Miller Buckfire’s services hereunder derives in substantial part from that expertise and experience and that, accordingly, the structure and amount of the fees payable to Miller Buckfire hereunder are reasonable regardless of the number of hours to be expended by Miller Buckfire’s professionals in performance of the services to be provided hereunder. Prior to commencing a chapter 11 case, the Company shall pay all undisputed amounts theretofore due and payable to Miller Buckfire in cash. We are pleased to accept this engagement and look forward to working with the Company. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this letter, which shall thereupon constitute a binding agreement between Miller Buckfire and the Company.

Very truly yours, MILLER BUCKFIRE & CO., LLC By:

Name: Marc D. Puntus Title: Managing Director By:

Name: Durc A. Savini Title: Managing Director

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Accepted and Agreed to: DURA Automative Systems, Inc. By:

Name: Keith Marchiando Title: Vice President and Chief Financial Officer

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INDEMNIFICATION PROVISIONS In connection with the engagement of Miller Buckfire & Co., LLC (“Miller Buckfire”) as financial advisor to DURA Automotive Systems, Inc., the Company hereby agrees to indemnify and hold harmless Miller Buckfire and its affiliates, their respective directors, officers, members, managers, agents, employees and controlling persons, and each of their respective successors and assigns (collectively, the “indemnified persons”), to the full extent lawful, from and against all losses, claims, damages, liabilities and expenses incurred by them which (A) are related to or arise out of (i) actions or alleged actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company or (ii) actions or alleged actions taken or omitted to be taken by an indemnified person with the Company’s consent or in conformity with the Company’s actions or omissions or (B) are otherwise related to or arise out of Miller Buckfire’s activities under Miller Buckfire’s engagement. The Company will not be responsible, however, for any losses, claims, damages, liabilities or expenses pursuant to clause (B) of the preceding sentence which are finally judicially determined to have resulted primarily from the gross negligence or willful misconduct (including bad faith and self-dealing) of the person seeking indemnification hereunder. For purposes of these indemnification provisions, the term the “Company” has the meaning set forth in the engagement letter, dated as of August 3, 2006, between Miller Buckfire and DURA Automotive Systems, Inc. of which these indemnification provisions are an integral part. After receipt by an indemnified person of notice of any complaint or the commencement of any action or proceeding with respect to which indemnification is being sought hereunder, such person will notify the Company in writing of such complaint or of the commencement of such action or proceeding, but failure so to notify the Company will relieve the Company from any liability which the Company may have hereunder only if, and to the extent that such failure results in the forfeiture by the Company of substantial rights and defenses, and will not in any event relieve the Company from any other obligation or liability that the Company may have to any indemnified person otherwise than under these indemnification provisions. If the Company so elects or is requested by such indemnified person, the Company will assume the defense of such action or proceeding, including the employment of counsel reasonably satisfactory to Miller Buckfire and the payment of the fees and disbursements of such counsel. In the event, however, such indemnified person reasonably determines in its judgment that having common counsel would present such counsel with a conflict of interest or if the defendants in, or targets of, any such action or proceeding include both an indemnified person and the Company, and such indemnified person reasonably concludes that there may be legal defenses available to it or other indemnified persons that are different from or in addition to those available to the Company, or if the Company fails to assume the defense of the action or proceeding or to employ counsel reasonably satisfactory to such indemnified person, in either case in a timely manner, then such indemnified person may employ separate counsel to represent or defend it in any such action or proceeding and the Company will pay the fees and disbursements of such counsel; provided, however, that the Company will not

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be required to pay the fees and disbursements of more than one separate counsel (in addition to local counsel) for all indemnified persons in any jurisdiction in any single action or proceeding. In any action or proceeding the defense of which the Company assumes, the indemnified person will have the right to participate in such litigation and to retain its own counsel at such indemnified person’s own expense. The Company further agrees that it will not, without the prior written consent of Miller Buckfire, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Miller Buckfire or any other indemnified person is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Miller Buckfire and each other indemnified person hereunder from all liability arising out of such claim, action, suit or proceeding. The Company agrees that if any indemnification sought by an indemnified person pursuant to these indemnification provisions is held by a court to be unavailable for any reason other than as specified in the second sentence of the first paragraph of these indemnification provisions, then (whether or not Miller Buckfire is the indemnified person), the Company and Miller Buckfire will contribute to the losses, claims, damages, liabilities and expenses for which such indemnification is held unavailable (i) in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and Miller Buckfire, on the other hand, in connection with Miller Buckfire’s engagement referred to above, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i), but also the relative fault of the Company, on the one hand, and Miller Buckfire, on the other hand, as well as any other relevant equitable considerations; provided however, that in any event the aggregate contribution of all indemnified persons, including Miller Buckfire, to all losses, claims, damages, liabilities and expenses with respect to which contribution is available hereunder will not exceed the amount of fees actually received by Miller Buckfire from the Company pursuant to Miller Buckfire’s engagement referred to above. It is hereby agreed that for purposes of this paragraph, the relative benefits to the Company, on the one hand, and Miller Buckfire, on the other hand, with respect to Miller Buckfire’s engagement shall be deemed to be in the same proportion as (i) the total value paid or proposed to be paid or received by the Company or the Company’s stockholders, claims holders or contract parties, as the case may be, pursuant to the transaction, whether or not consummated, for which Miller Buckfire is engaged to render financial advisory services, bears to (ii) the fee paid or proposed to be paid to Miller Buckfire in connection with such engagement. It is agreed that it would not be just and equitable if contribution pursuant to this paragraph were determined by pro rata allocation or by any other method which does not take into account the considerations referred to in this paragraph. The Company further agrees that it will promptly reimburse Miller Buckfire and any other indemnified person hereunder for all expenses (including fees and disbursements of counsel) as they are incurred by Miller Buckfire or such other indemnified person in connection with investigating, preparing for or defending, or providing evidence in, any pending or threatened action, claim,

7.5


477

suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Miller Buckfire or any other indemnified person is a party) and in enforcing these indemnification provisions. The Company’s indemnity, contribution, reimbursement and other obligations under these indemnification provisions shall be in addition to any liability that the Company may otherwise have, at common law or otherwise, and shall be binding on the Company’s successors and assigns; provided, however, that during the pendency of any chapter 11 case, the Company shall have no obligation under these indemnification provisions to indemnify any person, or provide contribution or reimbursement to any person, for any claim or expense under these indemnification provisions to the extent that it is either: (i) judicially determined (the determination having become final) by the bankruptcy court having jurisdiction over any chapter 11 case or cases in which the Company is a debtor (the “Bankruptcy Court”) to have arisen from that person’s gross negligence or willful misconduct (including bad faith and self-dealing); or (ii) settled prior to a judicial determination as to that person’s gross negligence or willful misconduct (including bad faith and self-dealing), but determined by the Bankruptcy Court, after notice and a hearing, to be a claim or expense for which that person should not receive indemnity, contribution or reimbursement under the terms of the letter agreement to which these indemnification provisions are attached, as modified by any order of the Bankruptcy Court retaining Miller Buckfire pursuant to sections 327 and 328(a) of the Bankruptcy Code (a “Retention Order”). Solely for purposes of enforcing these indemnification provisions, the Company hereby consents to personal jurisdiction, service and venue in any court in which any claim or proceeding which is subject to, or which may give rise to a claim for indemnification or contribution under, these indemnification provisions is brought against Miller Buckfire or any other indemnified person; provided, however, that the Bankruptcy Court shall have exclusive jurisdiction over enforcement of these indemnification provisions during the pendency of any chapter 11 case or cases in which the Company is a debtor; and provided further that during the pendency of any such chapter 11 case or cases in which the Company is a debtor, if Miller Buckfire believes that it is entitled to the payment of any amounts by the Company pursuant to these indemnification provisions (as they may be modified by any Retention Order) including without limitation the advancement of defense costs, Miller Buckfire must file an application before the Bankruptcy Court, and the Company may not pay any such amounts to Miller Buckfire before the entry of an order by the Bankruptcy Court approving any such payment. These indemnification provisions shall apply to the above-mentioned engagement, activities relating to the engagement occurring prior to the date hereof, and any subsequent modification of or amendment to such engagement, and shall remain in full force and effect following the completion or termination of Miller Buckfire’s engagement

478


7.6 Debtors’ Application for Retention of Financial Advisor to Provide Fresh Start Reporting and Valuation Services Objective. Section 7.9 of Volume 1 describes the nature of the application for retention prepared by the party requesting the retention of the financial advisor. This document filed in the Delta Air Lines case requesting retention of Michael Sullivan illustrates how an application for retention of a financial advisor to perform special functions for the debtor might be constructed. Objection Deadline: January 11, 2007 at 4:00 p.m. (prevailing Eastern Time) Hearing Date: January 18, 2007 at 2:00 p.m. (prevailing Eastern Time) DAVIS POLK & WARDWELL 450 Lexington Avenue New York, New York 10017 Telephone: (212) 450-4000 Facsimile: (212) 450-6539 John Fouhey (JF 9006) Marshall S. Huebner (MH 7800) Benjamin S. Kaminetzky (BK 7741) Timothy Graulich (TG 0046) Damian S. Schaible (DS 7427) Attorneys for Debtors and Debtors in Possession

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re: DELTA AIR LINES, INC., et al., Debtors.

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Chapter 11 Case No. 05-17923 (ASH) (Jointly Administered)

7.6

Debtors’ Application for Retention of Financial Advisor

479

APPLICATION OF THE DEBTORS FOR ENTRY OF AN ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 2014(a) FOR AUTHORITY TO EMPLOY AND RETAIN HURON CONSULTING SERVICES LLC (PRACTICING AS HURON CONSULTING GROUP) TO PROVIDE FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS NUNC PRO TUNC TO DECEMBER 1, 2006 Delta Air Lines, Inc. (“Delta”) and those of its subsidiaries that are debtors and debtors in possession in these proceedings (collectively, the “Debtors”),1 respectfully represent: Background 1. On September 14, 2005 (the “Petition Date”), each Debtor commenced with this Court a voluntary case under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). The Debtors are authorized to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Debtors’ cases are being jointly administered. Jurisdiction 2. This Court has subject matter jurisdiction to consider this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and may be determined by the Bankruptcy Court. Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Relief Requested 3. By this application (the “Application”), the Debtors seek court approval, pursuant to sections 327(a) and 328(a) of the Bankruptcy Code and Rule 2014(a) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), to retain and employ Huron to provide Fresh-Start Reporting (as defined below) and valuation services to the Debtors. The declaration of Michael C. Sullivan, a Managing Director of Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”) (the “Sullivan Declaration”), attached hereto as Exhibit A, is submitted herewith in support of this application. The Debtors request that the Court approve the employment of Huron in accordance with the terms and conditions set forth in this Application and that certain professional services agreement entered into between Huron and the Debtors, dated December 1, 2006 (the “December 2006 Professional Services Agreement”), a copy of which is annexed hereto as Exhibit B. 4. Huron is a multi-disciplined consulting firm with practices in areas including bankruptcy, financial restructuring advisory, valuation and 1 The

Debtors are the following entities: Delta Air Lines, Inc.; ASA Holdings, Inc.; Comair, Inc.; Comair Holdings, LLC; Comair Services, Inc.; Crown Rooms, Inc.; DAL Aircraft Trading, Inc.; DAL Global Services, LLC; DAL Moscow, Inc.; Delta AirElite Business Jets, Inc.; Delta Benefits Management, Inc.; Delta Connection Academy, Inc.; Delta Corporate Identity, Inc.; Delta Loyalty Management Services, LLC; Delta Technology, LLC; Delta Ventures III, LLC; Epsilon Trading, LLC; Kappa Capital Management, Inc.; Song, LLC.

480


litigation-related services for public and private companies, lenders, creditors, equity holders and impartial constituents (such as examiners or trustees). Huron maintains an office in New York City and has offices in other locations throughout the United States. 5. Huron’s typical engagements include: providing valuation, corporate finance, restructuring and turnaround services to companies and lenders; performing financial investigations, litigation analysis, expert testimony and forensic accounting for attorneys; and providing strategic planning, operational consulting, strategic sourcing and organizational and technology assessments in a variety of industries, including transportation, manufacturing, healthcare, higher education, legal, consumer products and energy. 6. For over 25 years, professionals in Huron’s employ have served as advisors to management, to creditors and to trustees or examiners, and Huron has assisted in bringing numerous companies successfully through the complexities of chapter 11 bankruptcy. Huron’s expertise in management, finance and accounting, combined with its understanding of the complex interests of stakeholders in a bankruptcy proceeding, allow Huron’s professionals to provide the insight stakeholders need to weigh the risks and benefits of various actions in a bankruptcy setting. 7. Upon emerging from chapter 11, in order to prepare and present its financial statements in accordance with generally accepted accounting principles in the United States, the Debtors must comply with SOP 90–7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code issued by the Accounting Standards Board of the American Institute of Certified Public Accountants (“SOP 90–7”), which requires, among other things, that the Debtors (a) record the effects of their plan of reorganization, (b) revalue their assets and liabilities in their books of entry, (c) develop an emergence balance sheet and (d) early adopt any new accounting pronouncements (collectively, “Fresh-Start Reporting”). The Debtors propose to engage Huron to provide the services described in the December 2006 Professional Services Agreement to ensure that the Debtors are able to comply with the requirements of FreshStart Reporting. None of the Debtors’ other professionals have been retained to provide Fresh-Start Reporting services. 8. Huron has substantial experience in providing similar services to other companies, including airlines, in chapter 11. Most recently, Huron has provided Fresh-Start Reporting services to UAL Corporation and ATA Holdings Corp. 9. The Debtors hereby seek to have Huron retained to provide Fresh-Start Reporting services and valuation services because of Huron’s extensive experience and qualifications in providing such services to its clients and because of Huron’s familiarity with the Debtors’ industry, businesses and financial affairs. The Debtors believe that Huron is well qualified and able to represent the Debtors in a cost-effective, efficient and timely manner. Huron has indicated a willingness to act on behalf of the Debtors, to subject itself to the jurisdiction and supervision of the Court and to provide the services described below in paragraph 14 to the Debtors on the terms and conditions set forth in the December 2006 Professional Services Agreement.

7.6


481

10. In the ordinary course of the Debtors’ businesses,2 and pursuant to that certain professional services agreement entered into between Huron and the Debtors, dated January 26, 2006 (the “January 2006 Professional Services Agreement”), Huron has provided, and may in the future provide and be compensated for, certain non-legal ordinary course services to the Debtors, as set forth more fully in the Sullivan Declaration. Pursuant to the January 2006 Professional Services Agreement, the scope of such services includes assisting management with financial reporting integral to day-to-day matters, specifically advisory assistance in the interpretation and application of generally accepted accounting principles for companies in chapter 11, and assisting in year-end goodwill impairment analysis. Through November 2006, total fees for services provided by Huron under the January 2006 Professional Services Agreement in the aggregate were $347,421. The Debtors understand that Huron will seek to be paid any unpaid amounts for such post-petition services in the ordinary course of the Debtors’ businesses and pursuant to footnote 3 of the Debtors’ OCP Motion. 11. Recently, Delta requested that Huron expand the scope of its work to include those items detailed in the December 2006 Professional Services Agreement. Delta discussed the expansion of Huron’s scope of work with the Office of the United States Trustee (the “U.S. Trustee”), and based upon such discussion, Huron is seeking Bankruptcy Court approval as a retained professional. 12. The Debtors and Huron have worked diligently to finalize the December 2006 Professional Services Agreement, and Huron has also worked diligently to determine its connections to the parties in interest in these chapter 11 cases as discussed in more detail in the Sullivan Declaration. With respect to services provided by Huron under the December 2006 Professional Services Agreement, Huron will apply to the Court for payment of compensation and reimbursement of expenses in accordance with applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Bankruptcy Rules for the Southern District of New York (the “Local Rules”) and the December 2006 Professional Services Agreement, and pursuant to any additional procedures that may be established by the Court in these cases. Scope of Services 13. The services of Huron are appropriate and necessary to enable the Debtors to execute their duties as debtors and debtors in possession faithfully and to implement the restructuring and reorganization of the Debtors. Subject to further order of this Court, it is proposed that Huron be employed to render such services as requested by the Debtors and agreed to by Huron pursuant to the terms of the December 2006 Professional Services Agreement. Such services fall into two discrete work streams: Fresh-Start Consulting and Valuation Consulting, each as set forth below: 2 The

Debtors’ retention of non-legal professionals in the ordinary course of their businesses comports with the order granting the Debtors’ Motion Pursuant to Sections 105(a), 327(e), 328 and 330 of the Bankruptcy Code and Bankruptcy Rule 2014(a) Authorizing the Debtors to Employ Ordinary Course Professionals, dated September 14, 2005 (the “OCP Motion”). In the OCP Motion, the Debtors made clear (in footnote 3) that the employment of Additional Professional Persons (as defined in the OCP Motion) would not be subject to the Ordinary Course Professional Fee Caps or the De Minimis Ordinary Course Professional Fee Caps (each as defined in the OCP Motion).

482


Fresh-Start Consulting a) Assistance with Disclosure Statement and Financial Projections i. Assist management in applying Fresh-Start adjustments to and disclosures for the projected financial information b) Preparation and substantiation of Fresh-Start Balance Sheet under SOP 90-7 i. Assist management in the development of an implementation approach for Fresh-Start Reporting, culminating in a strategy and work plan for the project ii. Assist management in connection with its recording of adjustments to reflect the impact of the discharge of debt and other plan of reorganization requirements, including related tax implications iii. Assist management in connection with its recording of adjustments to assets and liabilities in accordance with SFAS 141 as required by SOP 90-7 iv. Assist management with its preparation of analyses supporting adjustments v. Assist management with respect to responses to requests from Delta’s external auditors with respect to Fresh-Start Reporting c) Posting of Fresh-Start entries back to books of entry i. Assist management in connection with its determination of reorganization related and revaluation adjustments necessary to record these items to the books of entry of the appropriate legal entities, including, if necessary, preparation of supporting materials ii. Work with accounting, legal and tax advisors to assist management in determining the allocation of the earnings impact to separate legal entities within the Delta structure in accordance with statutory requirements iii. Assist management in connection with its estimating of recoveries to claimants for accrual accounting purposes, including comparison with Delta’s claims database to estimate liabilities related to contingent, unliquidated and disputed claims iv. Assist management in allocation of reorganization value to Delta’s legal entities d) Assistance with Financial Reporting i. Assist management in preparing supporting accounting information for timely record keeping matters and financial reporting requirements ii. Assist management in preparing accounting information and disclosures in support of public financial filings such as 10K’s or 10Q’s iii. Assist management with regard to valuation matters that impact financial reporting iv. Assist management with memoranda supporting accounting positions

7.6


483

Valuation Consulting a) Assistance and valuation work at Delta per Fresh-Start under SOP 90-7 for both Disclosure Statement and Fresh-Start Balance Sheet purposes i. Assist management in the identification of tangible and intangible assets ii. Assist management with its estimate of the fair value of specific assets and liabilities, including performing valuations of certain assets and liabilities, as agreed to with management iii. Assist with assignment of values to reporting units, as required iv. Discuss valuation methodology and results with Delta’s external auditors v. Assist Delta and its advisors with asset and liability valuation adjustments 14. The Debtors have retained The Blackstone Group L.P. (“Blackstone”) and Giuliani Capital Advisors LLC (“GCA”) as financial advisors during these chapter 11 cases. Huron will work closely with the Debtors and each of the Debtors’ retained professionals to clearly delineate each professional’s respective duties so as to prevent unnecessary duplication of services whenever possible. Blackstone is advising the Debtors on their capital raising efforts and certain valuation matters related specifically to the equity of the Debtors. GCA is advising the Debtors with respect to restructuring initiatives, assisting in cash flow and liquidity forecasting and reporting and in communicating with the various constituencies in chapter 11. Huron’s scope of work with respect to Fresh-Start Reporting is not and will not be duplicative of the services provided by the Debtors’ other retained professionals. Compensation 15. Huron has agreed to provide the services set forth in paragraph 14 to the Debtors and to charge fees and seek reimbursement of expenses as summarized below and as set forth more fully in the Sullivan Declaration and the December 2006 Professional Services Agreement. 16. Subject to Court approval and in accordance with the terms and conditions of the December 2006 Professional Services Agreement, Huron intends to charge for the professional services rendered to the Debtors in these chapter 11 cases as follows: r A monthly advisory fee (the “Monthly Advisory Fee”) of $290,000, of which $165,000 shall be for Fresh-Start Consulting and $125,000 shall be for Valuation Consulting. Delta and Huron shall meet and confer from time to time, review the amount of the Monthly Advisory Fee and make adjustments when appropriate. Upon the termination of the December 2006 Professional Services Agreement, Huron shall return a prorated portion of the Monthly Advisory Fee to Delta, to adjust for any partial month period in the month of such termination. r In addition to the fees that are or may be payable to Huron under the December 2006 Professional Services Agreement, Huron’s reasonable outof-pocket expenses incurred in connection with its activities will be payable by Delta on a monthly basis. Such expenses will include, but not be limited to travel, accommodations and meals, overnight delivery,

484


database access charges, telephone, facsimile, postage, printing and duplication, documentation materials and similar items. Monthly expenses are payable by Delta upon its receipt of an invoice for expenses from Huron. 17. Except as provided in paragraph 11 above, all payments rendered pursuant to the December 2006 Professional Services Agreement must be approved by an Order of this Court and based upon the filing by Huron of appropriate interim and final applications for allowance of compensation and reimbursement of expenses. 18. Huron will seek to have payment of such compensation and reimbursement of expenses approved in accordance with the terms of the December 2006 Professional Services Agreement and in accordance with the Bankruptcy Code, the Bankruptcy Rules, and the Local Rules, and any applicable fee and expense guidelines established by the U.S. Trustee and any applicable orders of this Court. 19. The Debtors believe that the aforementioned fees and expense reimbursement policy are fair and reasonable in light of (a) industry practice; (b) market rates charged for comparable services both in and out of the chapter 11 context; and (c) Huron’s experience with respect to these services. 20. Except as otherwise provided herein and in the Sullivan Declaration, all of Huron’s fees and expenses in these chapter 11 cases will be subject to approval of the Court upon proper application by Huron in accordance with sections 330 and 331 of the Bankruptcy Code, Bankruptcy Rule 2016(a), the fee and expense guidelines established by the U.S. Trustee and any other applicable requirements.3 21. No commitments have been made or received by Huron, nor any member thereof, as to compensation or payment in connection with these cases other than in accordance with the provisions of the Bankruptcy Code and orders of this Court. Further, Huron has no agreement with any other entity to share with such entity any compensation received by Huron in connection with these chapter 11 cases. Huron’s Disinterestedness 22. To the best of the Debtors’ knowledge, and except as disclosed in the Sullivan Declaration, (a) Huron is a “disinterested person” within the meaning of section 101(14) of the Bankruptcy Code, as modified by section 1107(b) of the Bankruptcy Code, and as required by section 327(a) and referenced by section 328(c) of the Bankruptcy Code, and neither holds nor represents an interest adverse to the Debtors and their estates, and (b) Huron has no connection to the Debtors, their significant creditors or to certain other parties-in-interest in these chapter 11 cases whose names were supplied by the Debtors to Huron. 23. The Debtors have been informed that Huron will conduct an ongoing review of its files to ensure that no disqualifying circumstances arise, and if

3 The

procedures by which Huron will be compensated on an interim basis are set forth in the Debtors’ Motion Pursuant to Sections 105(a) and 331 of the Bankruptcy Code and Bankruptcy Rule 2016(a) to Establish Procedures for Interim Monthly Compensation and Reimbursement of Expenses of Professionals, filed on September 14, 2005 and the Order entered on October 6, 2005 with respect thereto.

7.6

485


any new relevant facts or relationships are discovered, Huron will supplement its disclosure to the Court. Notice 24. The Debtors will serve notice of this Motion on those parties and in the manner required by the Court’s Order Approving Notice, Case Management and Administrative Procedures, dated October 6, 2005 (the “Case Management Order”). Pursuant to the Case Management Order, the relief requested herein may be granted without a hearing if no objections are timely filed and served in accordance with the Case Management Order. 25. No previous request for the relief sought herein has been made by the Debtors to this or any other court. WHEREFORE the Debtors respectfully request the Court grant the Debtors the relief requested herein and such other and further relief as is just and proper. Dated: New York, New York January 4, 2007 By: /s/ Edward H. Bastian Title: Executive Vice President and Chief Financial Officer Delta Air Lines, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK


x : : : : : : : x

Chapter 11 Case No. 05–17923 (ASH) (Jointly Administered)

ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 2014(a) AUTHORIZING THE EMPLOYMENT AND RETENTION OF HURON CONSULTING SERVICES LLC (PRACTICING AS HURON CONSULTING GROUP) TO PROVIDE FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS NUNC PRO TUNC TO DECEMBER 1, 2006

486


Upon the application dated January 4, 2007 (the “Application”)1 of Delta Air Lines, Inc. and those of its subsidiaries that are debtors and debtors in possession in these proceedings (collectively, the “Debtors”),2 pursuant to sections 327(a) and 328(a) of the Bankruptcy Code and Bankruptcy Rule 2014(a) for authority to employ and retain Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”) to provide Fresh-Start Reporting and valuation services to the Debtors, pursuant to the terms of the December 2006 Professional Services Agreement annexed to the Application, all as more fully set forth in the Application; and upon the Declaration of Michael C. Sullivan, a Managing Director of Huron, filed in support of the Application, annexed to the Application (the “Sullivan Declaration”); and the Court being satisfied, based on the representations made in the Application and the Sullivan Declaration, that Huron is “disinterested” as such term is defined in section 101(14) of the Bankruptcy Code, as modified by section 1107(b) of the Bankruptcy Code, and represents no interest adverse to the Debtors’ estates with respect to the matters upon which it is to be engaged; and the Court having jurisdiction to consider the Application and the relief requested therein pursuant to 28 U.S.C. § 1334 and the Standing Order of Referral of Cases to Bankruptcy Court Judges of the District Court for the Southern District of New York, dated July 19, 1984 (Ward, Acting C.J.); and consideration of the Application and the requested relief being a core proceeding the Bankruptcy Court can determine pursuant to 28 U.S.C. § 157(b)(2); and venue being proper before this Court pursuant to 28 U.S.C. § § 1408 and 1409; and due and proper notice of the Application having been provided in accordance with this Court’s Case Management Order, and it appearing that no other or further notice need be provided; and the relief requested in the Application being in the best interests of the Debtors and their estates and creditors; and the Court having reviewed the Application and having held a hearing with appearances of parties in interest noted in the transcript thereof (the “Hearing”); and the Court having determined that the legal and factual bases set forth in the Application and at the Hearing establish just cause for the relief granted herein; and upon all of the proceedings had before the Court and after due deliberation and sufficient cause appearing therefor, it is ORDERED that the Application is approved; and it is further ORDERED that the Debtors are hereby authorized to employ and retain Huron to provide Fresh-Start Reporting and valuation services in the Debtors’ Chapter 11 cases, nunc pro tunc to December 1, 2006, all as contemplated by the Application and on the terms provided in the December 2006 Professional Services Agreement; and it is further ORDERED that Huron shall be compensated for its services and reimbursed for any related expenses in accordance with the Sullivan Declaration, the 1 Unless

otherwise defined herein, all capitalized terms shall have the meaning ascribed to them in the Application. 2 The Debtors are the following entities: Delta Air Lines, Inc.; ASA Holdings, Inc.; Comair, Inc.; Comair Holdings, LLC; Comair Services, Inc.; Crown Rooms, Inc.; DAL Aircraft Trading, Inc.; DAL Global Services, LLC; DAL Moscow, Inc.; Delta AirElite Business Jets, Inc.; Delta Benefits Management, Inc.; Delta Connection Academy, Inc.; Delta Corporate Identity, Inc.; Delta Loyalty Management Services, LLC; Delta Technology, LLC; Delta Ventures III, LLC; Epsilon Trading, LLC; Kappa Capital Management, Inc.; Song, LLC.

7.6


487

December 2006 Professional Services Agreement, applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules and any other applicable orders of this Court; and it is further ORDERED that except as otherwise set forth in the Sullivan Declaration, Huron shall apply for compensation and reimbursement in accordance with the procedures set forth in sections 330 and 331 of the Bankruptcy Code, applicable Bankruptcy Rules, Local Rules and orders of the Court, guidelines established by the U.S. Trustee, and such other procedures as may be fixed by order of this Court, including the Order Pursuant to Sections 105(a) and 331 of the Bankruptcy Code and Bankruptcy Rule 2016(a) to Establish Procedures for Interim Monthly Compensation and Reimbursement of Expenses of Professionals; and it is further ORDERED that to the extent that there may be any inconsistency between the terms of the Application and this Order, the terms of this Order shall govern, and it is further ORDERED that the requirement pursuant to Rule 9013-1(b) of the Local Rules that the Debtors file a memorandum of law in support of the Application is hereby waived. Dated:

, 2007 White Plains, New York

UNITED STATES BANKRUPTCY JUDGE

488


7.7 Application by Debtors for Authorization to Retain Financial Advisor Objective. Section 7.9 of Volume 1 describes the nature of the application for retention prepared by the party requesting the retention of the financial advisor. This document filed in the Vertis Holdings case requesting authorization to engage Alvarez & Marsal illustrates how an application for retention of financial advisor for the debtor might be constructed. IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE


Debtors.

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()


AFFIDAVIT OF JEFFERY J. STEGENGA PURSUANT TO FEDERAL RULE OF BANKRUPTCY PROCEDURE 2014 IN SUPPORT OF DEBTORS’ APPLICATION PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND RULE 2014 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE FOR AUTHORIZATION TO EMPLOY AND RETAIN ALVAREZ & MARSAL NORTH AMERICA, LLC AS RESTRUCTURING ADVISORS TO THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE STATE OF MARYLAND COUNTY OF BALTIMORE

) ) ss.: )

Jeffery J. Stegenga, being duly sworn, hereby deposes and says as follows: 1. I am a Managing Director with Alvarez and Marsal North America, LLC (together with its wholly owned subsidiaries, agents, independent contractors and employees, “A&M”), a restructuring advisory services firm with numerous offices throughout the country. I submit this affidavit on behalf of A&M (the “Affidavit”) in support of the application (the “Application”)1 of the debtors (the “Debtors”)2 in the above-captioned chapter 11 cases for an order authorizing the employment of A&M as restructuring advisors under the terms and 1 Capitalized

terms not otherwise defined herein shall have the meanings ascribed to such terms in the Application. 2 The Debtors in these cases are Vertis Holdings, Inc., Vertis, Inc., Webcraft, LLC, Webcraft Chemicals, LLC, Enteron Group, LLC, Vertis Mailing LLC, and USA Direct, LLC.

7.7

Application by Debtors for Authorization to Retain Financial Advisor

489

conditions set forth in the Application. Except as otherwise noted,3 I have personal knowledge of the matters set forth herein. Disinterestedness and Eligibility 2. In connection with the preparation of this Affidavit, A&M conducted a review of its contacts with the Debtors, their non-debtor affiliates, and certain entities holding large claims against or interests in the Debtors that were made reasonably known to A&M. A listing of the parties reviewed is reflected in Schedule “A” to this Affidavit. A&M’s review, completed under my supervision, consisted of a query of the Schedule “A” parties in a database containing the names of individuals and entities that are represented by A&M. A summary of such relationships that A&M identified during this process is set forth in Schedule “B” hereto. 3. Based on the results of its review, except as discussed below, A&M does not have an active relationship with any of the parties listed in Schedule “A” in matters related to these proceedings. In the course of its review, A&M learned that one of its employees who is working on these cases has a sibling at General Electric Antares Capital. 4. In addition, A&M has provided and could reasonably be expected to continue to provide services unrelated to the Debtors’ cases for the various entities shown on Schedule “B.” A&M’s assistance to these parties has been related to providing various financial restructuring, litigation support, business consulting and/or tax services. To the best of my knowledge, no services have been provided to these parties-in-interest which involve their rights in the Debtors’ cases, nor does A&M’s involvement in this case compromise its ability to continue such consulting services. 5. Further, as part of its diverse practice, A&M appears in numerous cases, proceedings, and participates in transactions that involve many different professionals, including attorneys, accountants, and financial consultants, who represent claimants and parties-in-interest in the Debtors’ chapter 11 cases. Further, A&M has performed in the past, and may perform in the future, advisory consulting services for various attorneys and law firms, and has been represented by several attorneys and law firms, some of whom may be involved in these proceedings. Based on our current knowledge of the professionals involved, and to the best of my knowledge, none of these relationships create interests materially adverse to the Debtors in matters upon which A&M is to be employed, and none are in connection with these cases. 6. A&M does not believe it is a “creditor” of any of the Debtors within the meaning of section 101(10) of the Bankruptcy Code. Further, neither I nor any member of the A&M engagement team serving the Debtors, to the best of my knowledge, is a holder of any of the Debtors’ debt or equity securities. 7. To the best of my knowledge, no employee of A&M is a relative of, or has been connected with, any judge of the bankruptcy court for this district, the United States Trustee in this district or any employee of the office of the United States Trustee in this district. 3 Certain

of the disclosures herein relate to matters within the personal knowledge of other professionals at A&M and are based on information provided by them.

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8. To the best of my knowledge, A&M is a “disinterested person” as that term is defined in section 101(14) of the Bankruptcy Code, in that A&M: a. is not a creditor, equity security holder, or insider of the Debtors; b. was not, within two years before the date of filing of the Debtors’ chapter 11 petitions, a director, officer, or employee of the Debtors; and c. does not have an interest materially adverse to the interest of the Debtors’ estates or of any class of creditors or equity security holders. 9. In addition, to the best of my knowledge and based upon the results of the relationship search described above and disclosed herein, A&M neither holds nor represents an interest adverse to the Debtors. 10. It is A&M’s policy and intent to update and expand its ongoing relationship search for additional parties in interest in an expedient manner. If any new material relevant facts or relationships are discovered or arise, A&M will promptly file a supplemental affidavit pursuant to Rule 2014(a) of the Bankruptcy Rules. Professional Compensation 11. Subject to Court approval and in accordance with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, applicable United States Trustee guidelines, and the local rules of this Court, A&M will seek payment for compensation on an hourly basis, plus reimbursement of actual and necessary expenses incurred by A&M. A&M’s customary hourly rates as charged in bankruptcy and non-bankruptcy matters of this type by the professionals assigned to this engagement are outlined in the Application. These hourly rates are adjusted annually. 12. According to A&M’s books and records, during the ninety day period prior to the Petition Date, A&M received approximately $1.7 million from the Debtors for professional services performed and expenses incurred. Further, A&M’s current estimate is that it has received unapplied advance payments from the Debtors in excess of prepetition billings in the amount of $175,000. The Debtors and A&M have agreed that any portion of the advance payments not used to compensate A&M for its prepetition services and expenses will be held and applied against its final postpetition billing and will not be placed in a separate account. 13. To the best of my knowledge, (a) no commitments have been made or received by A&M with respect to compensation or payment in connection with these cases other than in accordance with applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, and (b) A&M has no agreement with any other entity to share with such entity any compensation received by A&M in connection with these chapter 11 cases. Dated this 14th day of July 2008 By: Jeffery J. Stegenga Managing Director Sworn to and subscribed before me this 14th day of July, 2008 Notary Public

7.7

Application by Debtors for Authorization to Retain Financial Advisor

491

EXHIBIT C Dispute Resolution Procedures Dispute Resolution Procedures The following procedures shall be used to resolve any controversy or claim (“dispute”) as provided in this Agreement. If any of these provisions are determined to be invalid or unenforceable, the remaining provisions shall remain in effect and binding on the parties to the fullest extent permitted by law. Mediation A dispute shall be submitted to mediation by written notice to the other party or parties. In the mediation process, the parties will try to resolve their differences voluntarily with the aid of an impartial mediator, who will attempt to facilitate negotiations. The mediator will be selected by agreement of the parties. If the parties cannot agree on a mediator, a mediator will be designated by the American Arbitration Association (“AAA”) or JAMS/Endispute at the request of a party. Any mediator so designated must be acceptable to all parties. The mediation will be conducted as specified by the mediator and agreed upon by the parties. The parties agree to discuss their differences in good faith and to attempt, with the assistance of the mediator, to reach an amicable resolution of the dispute. The mediation will be treated as a settlement discussion and therefore will be confidential. The mediator may not testify for either party in any later proceeding relating to the dispute. No recording or transcript shall be made of the mediation proceedings. Each party will bear its own costs in the mediation. The fees and expenses of the mediator will be shared equally by the parties. Arbitration If a dispute has not been resolved within 90 days after the written notice beginning the mediation process (or a longer period, if the parties agree to extend the mediation), the mediation shall terminate and the dispute will be settled by arbitration and judgment on the award rendered by the arbitration may be entered in any court having jurisdiction thereof. The arbitration will be conducted in accordance with the procedures in this document and the Arbitration Rules for Professional Accounting and Related Services Disputes of the AAA (“AAA Rules”).

492


7.8 Application for Order Authorizing Retention of Accountants and Financial Advisors for Trustee Objective. Section 7.9 of Volume 1 of Bankruptcy and Insolvency Accounting describes the content of the application for retention that is submitted by the debtor, although often prepared by the accountant or financial advisor. Below in (a) is an example of sample application along with the Affidavit that may be used for an order to retain accountants and financial advisors for the trustee. In (b) is an application filed by the trustee to retain his firm as Accountants in the Middle District of Florida. (a) Sample Affidavit of Financial Advisor and Application to Retain Trustee’s Firm as Accounts and Financial Advisors UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA FORT LAUDERDALE DIVISION In Re:

Case No. Chapter 7 Debtor./

AFFIDAVIT OF ACCOUNTANT STATE OF FLORIDA COUNTY OF BROWARD

) )

SONEET R. KAPILA, being duly sworn, states: 1. I am a duly licensed certified public accountant in the State of Florida and a shareholder of the independent public accounting firm of Kapila & Company (“Kapila”), 1000 South Federal Highway, Suite 200, Fort Lauderdale, FL 33316. I am familiar with the matters set forth herein and make this affidavit in support of the application for approval of Kapila as accountants for the Trustee. for the reasons stated 2. The Trustee has requested Kapila to represent in the said application. 3. While employed by the Trustee, Kapila will not represent any other entity having an adverse interest in connection with the case and we are disinterested persons as required by 11 U.S.C. 327(a). To the best of my knowledge, Kapila does not have nor has it had any connection with the Debtors, their affiliates, creditors and any of their attorneys or accountants in matters related to this case or with any person employed in the office of the U.S. Trustee, as required by Fed. R. Bank, ¶2014. Soneet R. Kapila is a member of the chapter 7 Panel of Trustees in the Southern District of Florida. Should I or the firm become notified of any conflicts asserted by a party with which the firm has a relationship, I will notify this Court immediately. 4. Kapila is otherwise well-qualified to serve as accountants for the Trustee for the purpose required. Kapila has been retained as accountants and financial consultants to render professional services to trustees, debtors, creditors,

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Application for Order Authorizing Retention of Accountants and Financial Advisors

493

creditors’ committees, and others in numerous bankruptcy matters. Soneet R. Kapila is also a Certified Insolvency & Restructuring Advisor (CIRA), a Certified Fraud Examiner (CFE) and Certified in Financial Forensics (CFF). FURTHER AFFIANT SAYETH NAUGHT. SONEET R. KAPILA, C.P.A. The foregoing instrument was acknowledged before me this 2009, by Soneet R. Kapila who is personally known to me.

day of October,

Signature of Notary Public My Commission Expires: UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA FORT LAUDERDALE DIVISION In Re:


APPLICATION OF TRUSTEE FOR EMPLOYMENT OF SONEET R. KAPILA, CPA AND KAPILA & COMPANY AS ACCOUNTANTS , 2009 NUNC PRO TUNC TO , as Trustee for the estate of the above-captioned Debtor (the “Trustee”), applies to the court for authorization and approval of the employment of Soneet R. Kapila, CPA and the accounting firm of Kapila & Company, Certified Public Accountants (“Kapila”) as accountants for the , 2009, and respectfully represents: Trustee, nunc pro tunc to 1. The undersigned is the duly appointed, qualified and acting Trustee in this case. duties in this case, it 2. In order for the Trustee to properly discharge employ accountants to assist in tax compliance filings is essential that and other financial matters. The Trustee has selected Kapila because of its extensive experience and expertise in bankruptcy and related matters. 3. The Trustee seeks to employ Kapila to render the following professional services to the Trustee: (a) review of all financial information prepared by the Debtor or its accountants, including but not limited to a review of the Debtor’s financial information as of the date of the filing of the petition, its assets and liabilities, and its secured and unsecured creditors; (b) review and analysis of the organizational structure of and financial interrelationships among the Debtor and its affiliates and insiders, including a review of the books of such companies or persons as may be requested; (c) review and analysis of transfers to and from the Debtor to third parties, both pre-petition and post-petition;

494


(d) attendance at meetings with the Debtor, its creditors, the attorneys of such parties, and with federal, state, and local tax authorities, if requested; (e) review of the books and records of the Debtor for potential preference payments, fraudulent transfers, or any other matters that the Trustee may request; (f) the rendering of such other assistance in the nature of accounting services, financial consulting, valuation issues, or other financial projects as the Trustee may deem necessary. (g) preparation of estate tax returns. 4. Kapila neither holds nor represents any interest adverse to the estate in the matters upon which it is to be employed, is a “disinterested person” as that term is defined by 11 U.S.C. §§101 (14) and 327 (a) and (d), and its employment would be in the best interest of the estate and its creditors. An affidavit in support of this application is attached hereto as Exhibit A. 5. Kapila has agreed to perform the foregoing services at the ordinary and usual hourly billing rates of its members who will perform services in this matter. Kapila will incur out-of-pocket disbursements in the rendition of the services for which it shall seek reimbursement. Kapila recognizes that its compensation is subject to approval and adjustment by the Court in accordance with 11 U.S.C. §330. WHEREFORE, the Trustee respectfully requests that this Court enter an order approving the selection and employment by the Trustee of Kapila as accountants to perform the services set forth in this Application, upon the terms and conditions set forth herein. DATED this

day of October, 2009. , as Trustee for the Estate of By:

(b) Application to Retain Trustee’s Firm as Accountants UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION In Re:

Case No. 6:07-bk-00761-ABB Chapter 11

LOUIS J. PEARLMAN, Debtor./

APPLICATION OF SONEET R. KAPILA, AS CHAPTER 11 TRUSTEE, FOR AN ORDER AUTHORIZING THE EMPLOYMENT OF SONEET R. KAPILA AND THE ACCOUNTING FIRM OF KAPILLA & COMPANY AS ACCOUNTANTS The Chapter 11 Trustee, Soneet R. Kapila (the “Trustee”) hereby submits his application (the “Application”) seeking an order pursuant to Sections 327 and 330 of the Bankruptcy Code and Rule 2014 of the Federal Rules of Bankruptcy

7.8


495

Procedure, authorizing the employment and retention of Soneet R. Kapila and the accounting firm of Kapila & Company, Certified Public Accountants (collectively, “KC”), as accountants for the Trustee nunc pro tunc to March 27, 2007. In support thereof, the Trustee respectfully represents as follows: Jurisdiction and Venue 1. This Court has jurisdiction over this Application pursuant to 28 U.S.C. §§ 157 and 1334. Venue of these proceedings is proper in this Judicial District pursuant to 28 U.S.C. § 1408. Sections 327 and 330 of the Bankruptcy Code and Fed. R. Bankr. P. 2014 are the statutory predicates for the relief sought by this Application. Background 2. On March 1, 2007. Tatonka Capital Corporation, Integra Bank, National Association, American Bank of St. Paul, and First National Bank & Trust Company of Williston (collectively, the “Petitioning Creditors”) initiated this proceeding by filing against Louis J. Pearlman (“Pearlman”) an involuntary petition under Chapter 11 of the United States Bankruptcy Code. 3. On March 8, 2007, the Petitioning Creditors filed an emergency motion for appointment of a Chapter 11 trustee (Dkt. No. 5; the “Emergency Motion”). As set forth in the Emergency Motion, upon information and belief, Pearlman has been involved in one of the largest “Ponzi” schemes in the State of Florida. 4. Subsequently, on March 16, 2007, this Court entered its Order Directing the Appointment of Chapter 11 Trustee (Dkt. No. 24). 5. On March 27, 2007, the United States Trustee filed its Appointment of Chapter 11 Trustee (Dkt. No. 39), pursuant to which the Trustee was appointed as the Chapter 11 Trustee in this proceeding. 6. After reviewing the facts and legal issues in this case, the Trustee concluded that the assistance of an accountant is necessary to enable him to discharge his statutory duties and powers. 7. Pursuant to, inter alia, Section 327 of the Bankruptcy Code, the Trustee seeks this Court’s approval of the retention of KC as accountants for the Trustee, effective nunc pro tunc to March 27, 2007, the date on which the Trustee was appointed. Relief Requested 8. The Trustee seeks to employ KC, which maintains an accounting office at 1000 South Federal Highway, Suite 200, Fort Lauderdale, Florida 33316, as his accountants in this case. 9. The Trustee has selected KC because the partners and associates of KC have considerable expertise in the fields of bankruptcy, insolvency, reorganizations, liquidations, debt restructuring and corporate reorganizations. Accordingly, the Trustee believes that KC is well-qualified to provide accounting services on his behalf in this case. 10. Soneet R. Kapila, Lesley J. Johnson, Melissa Murchison, Mary M. McMickle, and Carol L. Fox will be primarily responsible for providing accounting services to the Trustee in this matter. Attached hereto as Composite Exhibit A are the biographies of Soneet R. Kapila, Lesley J. Johnson, Melissa

496


Murchison, Mary M. McMickle, and Carol L. Fox, which provide additional details regarding their backgrounds and experience. 11. The Trustee believes that KC is qualified to serve as accountants in this case in a most cost-effective, efficient and timely manner. Subject to the control and further order of this Court, the accounting services that KC will render to the Trustee shall include, but shall not be limited to, the following: a. to review and analyze all financial information prepared by Pearlman or his accountants, including, but not limited to, Pearlman’s financial information as of the date of the filing of the petition, Pearlman’s financial reports, assets and liabilities, and his secured and unsecured creditors; b. to assist and advise the Trustee in analyzing Pearlman’s assets and liabilities and investigating the manner in which Pearlman’s affairs were conducted; c. to review and analyze the organizational structure of and financial interrelationships among Pearlman and his affiliates and insiders, including a review of the books of such companies or persons as may be requested; d. to review and analyze transfers to and from Pearlman to third parties, both pre-petition and post-petition; e. to attend meetings with Pearlman, his creditors, the attorneys of such parties, and with federal, state, and local tax authorities, if requested; f. to review Pearlman’s financial information for potential preference payments, fraudulent transfers, or any other matters that the Trustee may request; g. to prepare any on-going accounting documents, including tax returns and post-appointment financial statements; and h. to render such other assistance in the nature of accounting services, financial consulting, valuation issues, or other financial projects as the Trustee may deem necessary. 12. KC intends to work closely with the Trustee, and any other professionals the Trustee may retain in this case, to ensure that there is no unnecessary duplication of services performed on behalf of the Trustee. 13. KC has indicated a willingness to act on behalf of the Trustee and render the necessary services as accountants for the Trustee. 14. Subject to this Court’s approval, KC will charge for its accounting services on an hourly basis in accordance with its ordinary and customary hourly rates for services of this type and nature, and for this type of matter, in effect on the date such services are rendered, and for its actual, reasonable and necessary out-of-pocket disbursements incurred in connection therewith, as set forth more fully in Affidavit of Soneet R. Kapila (the “Kapila Affidavit”) attached hereto as Exhibit B. 15. KC has agreed to be compensated in accordance with the provisions set forth in Section 330 of the Bankruptcy Code and will apply to the Court for allowance of compensation and reimbursement of expenses in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the Local Bankruptcy Rules and orders of this Court. Compensation will be payable to KC subject to order of this Court, on an hourly basis, plus reimbursement of actual, necessary expenses incurred by KC.

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497

16. To the best of the Trustee’s knowledge, as disclosed in the Kapila Affidavit and in this Application, KC and its respective accountants have no connections with Pearlman, the Petitioning Creditors, other creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, or any person employed in the office of the United States Trustee. 17. To the best of the Trustee’s knowledge, as disclosed in the Kapila Affidavit and this Application, (i) KC and its accountants are “disinterested persons” as that phrase is defined in Section 101(14) of the Bankruptcy Code, and (ii) KC neither represents nor holds an interest adverse to the interest of the estate with respect to the matter on which KC is to be employed. 18. The Trustee believes that the retention of KC is in the best interests of Pearlman, the estate and creditors. 19. No prior application has been made for the relief requested herein to this or any other Court. Notice 20. Notice of this Application has been given to the United States Trustee for the Middle District of Florida, Pearlman, the Petitioning Creditors, those parties included on the mailing matrix, and all parties that have filed notices of appearance. WHEREFORE, the Trustee respectfully requests that this Court (i) approve the retention of KC as accountants to the Trustee under the terms set forth herein effective as of March 27, 2007, (ii) enter the proposed order authorizing the Trustee to retain KC as accountants to the Trustee, and (iii) grant such other and further relief as the Court deems just and proper. Respectfully submitted, Dated: April 3rd, 2007

SONEET R. KAPILA, AS CHAPTER 11 TRUSTEE FOR TRANS CONTINENTAL AIRLINES, INC. By: Soneet R. Kapila Kapila & Company 1000 S. Federal Highway, Suite 200 Fort Lauderdale, FL 33316 Telephone: (954) 761-1011 Facsimile: (954) 761-1033 Email: [email protected]

CERTIFICATE OF SERVICE I hereby certify that on this 4th day of April, 2007, I caused the foregoing Application to be served electronically or by United States Mail, postage prepaid, on: (a) Louis J. Pearlman, Chaine du Lac, 12488 Park Avenue, Windermere, FL 34786; (b) the United States Trustee, 135 W. Central Blvd., Suite 620, Orlando, FL 32801; (c) First National Bank and Trust Co. of Williston c/o Raymond V.

498


Miller, Esquire, Gunster Yoakley & Stewart, P.A., 2 South Biscayne Boulevard, Suite 3400, Miami, FL 33131; (d) Tatonka Capital Corporation c/o Derek F. Meek, Esquire, Robert B. Rubin, Esquire, and Marc P. Solomon, Esquire, Burr & Forman LLP, 3100 South Trust Tower, 420 North 20th Street, Birmingham, AL 35203 and Richard B. Webber, II, Esquire, Zimmerman Kiser & Sutcliffe, P.A., 315 East Robinson Street, Suite 600, Orlando, FL 32801; (e) American Bank of St. Paul c/o William P. Wassweiler, Esquire, Rider Bennett LLP, 33 South Sixth Street, Suite 4900, Minneapolis, MN 55402; (f) Integra Bank c/o Lawrence E. Rifken, Esquire, McGuire Woods LLP, 1750 Tysons Blvd., Suite 1800, McLean, VA 22102; and (g) those parties listed on the mailing matrix. /s/ Denise D. Dell-Powell Denise D. Dell-Powell UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION In Re: LOUIS J. PEARLMAN,

Case No.: 6:07-bk-00761 Chapter 11

Debtor./

ORDER GRANTING APPLICATION OF SONEET R. KAPILA, AS CHAPTER 11 TRUSTEE, FOR AN ORDER AUTHORIZING THE EMPLOYMENT OF SONEET R. KAPILA AND THE ACCOUNTING FIRM OF KAPILA & COMPANY AS ACCOUNTANTS THIS CASE came on for consideration on May 7, 2007 upon the Application of Soneet R. Kapila, as Chapter 11 Trustee (“Trustee”), for an Order Authorizing the Employment of Soneet R. Kapila and the Accounting Firm of Kapila & Company as Accountants (Dkt. No. 56). After due consideration, it is hereby ORDERED AND ADJUDGED that: 1. The Application is hereby approved and the Trustee is hereby authorized to employ the accounting firm of Kapila & Company (“KC”), nunc pro tunc to March 27, 2007, as accountants to render professional accounting services to the Trustee in this case pursuant to § 327(a) of the Bankruptcy Code. 2. Subject to this Court’s approval, KC will charge for its accounting services on an hourly basis in accordance with its ordinary and customary hourly rates for services of this type and nature, and for this type of matter, in effect on the date such services are rendered, and for its actual, reasonable and necessary out-of-pocket disbursements incurred in connection therewith.

7.8


499

3. Compensation will be awarded to KC upon application and a hearing consistent with the requirements of 11 U.S.C. §§ 330 and 331. DONE and ORDERED in Orlando, Florida, this 11th day of May, 2007 Arthur B. Briskman United States Bankruptcy Judge Copy furnished to: Denise D. Dell-Powell, Esq. Akerman Senterfitt P.O. Box 231 Orlando, FL 32802

500


7.9 Application Retaining Financial Advisor for Unsecured Credit Committee Objective. Section 7.9 of Volume 1 of Bankruptcy and Insolvency Accounting describes the content of the application for retention that is submitted by financial advisors including investment bankers. Included in 7.9(a) is an application submitted by Miller Buckfire to advise and assist the debtor in structuring and effectuating the financial aspect of a restructuring or sale transaction and to perform other investing banking services. Included in 7.9(b) is an application for retention of account for unsecured creditors’ committee. (a) Application to Employ and Retain Investment Banker IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re DURA AUTOMOTIVE SYSTEMS, INC., et al.,1 Debtors.

) ) ) ) ) ) )


(

)


DEBTORS’ APPLICATION TO EMPLOY AND RETAIN MILLER BUCKFIRE & CO., LLC AS INVESTMENT BANKER TO THE DEBTORS AND DEBTORS-IN-POSSESSION The above-captioned debtors and debtors-in-possession (collectively, the “Debtors”) hereby file this application (the “Application”) for entry of an order, authorizing the employment and retention of Miller Buckfire & Co., LLC (“Miller Buckfire”) as investment banker to the Debtors in the above-captioned cases.2 In support of this Application, the Debtors rely on the Affidavit of Marc D. Puntus, a managing director of Miller Buckfire (the “Puntus Affidavit”), 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, LLC, Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont LLC, Dura Gladwin LLC, Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 2 A copy of the proposed order (the “Order”) is attached hereto as Exhibit A

7.9

Application Retaining Financial Advisor for Unsecured Credit Committee

501

a copy of which is attached hereto as Exhibit B. In further support of this Application, the Debtors respectfully state as follows:3 JURISDICTION 1. This Court has jurisdiction over this Application under 28 U.S.C. § § 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue of this proceeding and this Application in this District is proper under 28 U.S.C. § § 1408 and 1409. 2. The statutory bases for the relief requested herein are sections 327(a) and 328(a) of title 11 of the United States Code, 11 U.S.C. § § 101–1330, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Bankruptcy Code”) and Rules 2014(a), 2016 and 5002 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). BACKGROUND 3. On October 30, 2006 (the “Commencement Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (the “Reorganization Cases”). The Debtors are operating their businesses and managing their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or statutory committee has yet been appointed in these Reorganization Cases. RELIEF REQUESTED 4. By this Application, the Debtors seek entry of an order pursuant to sections 327(a) and 328(a) of the Bankruptcy Code and Rules 2014(a), 2016, and 5002 of the Bankruptcy Rules, (a) authorizing the employment and retention of Miller Buckfire as investment banker to the Debtors in these Reorganization Cases upon the terms and conditions contained in the Engagement Letter (the “Engagement Letter”), dated as of August 2, 2006, a copy of which is attached hereto as Exhibit C, and incorporated by reference herein, as modified by the proposed Order; (b) approving the terms of Miller Buckfire’s employment, including the proposed fee structure and the indemnification provisions, set forth in the Engagement Letter, as modified by the proposed Order; and (c) granting such other and further relief as the Court deems appropriate. 5. Debtors further request that, for judicial economy and administrative convenience, the relief requested herein apply to any of the Debtors’ affiliates and their respective estates that subsequently commence chapter 11 cases without the need for any further requests or motions. MILLER BUCKFIRE’S QUALIFICATIONS 6. Miller Buckfire commenced operating on July 16, 2002, as an independent firm providing strategic and financial advisory services in large-scale corporate restructuring transactions. Miller Buckfire is owned and controlled by Henry S. Miller and Kenneth A. Buckfire and by the employees of Miller Buckfire. 3 The

facts and circumstances supporting this Application are further set forth in the Affidavit of Keith Marchiando, Chief Financial Officer of Dura Automotive Systems, Inc., in Support of First Day Motions (the “First Day Affidavit”), filed contemporaneously herewith.

502


Miller Buckfire currently has approximately 45 employees, many of whom were employees of the Financial Restructuring Group of Dresdner Kleinwort Wasserstein, Inc. before July 16, 2002. 7. Miller Buckfire’s professionals have extensive experience in providing financial advisory and investment banking services to financially distressed companies and to creditors, equity holders and other constituencies in reorganization proceedings and complex financial restructurings, both in- and out-of-court. For instance, Miller Buckfire’s professionals are providing or have provided financial advisory, investment banking, and other services in connection with the restructuring of Acterna Corporation; Aerovias Nacionales de Colombia S.A.; Allied Holdings, Inc.; Applied Extrusion Technologies, Inc.; AT&T Latin America; Aurora Foods Inc.; Avado Brands, Inc.; Birch Telecom, Inc.; Bruno’s Inc.; Burlington Industries; Cajun Electric Power Corporation; Calpine Corporation; Cambridge Industries; Carmike Cinemas; Celotex Corporation; Centerpoint Energy; Citation Corporation; CMS Energy Corporation; Criimi Mae, Inc.; CTC Communications; Dana Corporation; Delta Air Lines, Inc.; Dow Corning Corporation; Drypers, Inc.; EaglePicher Holdings Inc.; Exide Technologies; Favorite Brands International Inc.; FLYi, Inc.; Foamex International; Focal Communications Corporation; FPA Medical Management; Gate Gourmet; Grand Union Co.; Heartland Wireless; Horizon Natural Resources Company; Huntsman Corporation; ICG Communications; ICO Global Communication, Ltd.; IMPATH Inc.; Interstate Bakeries Corporation; J.L. French Automotive Castings; Kmart Corporation; Level (3) Communications; Loewen Group; McLeodUSA; Micro Warehouse; Mirant Corp.; Montgomery Ward & Co.; National Airlines; Oakwood Homes; Pacific Crossing Limited; Pathmark Stores, Inc.; Pegasus Satellite Communications; PennCorp Financial Group, Inc.; Pioneer Companies; PSINet; Polaroid Corporation; Polymer Group, Inc.; The Spiegel Group; Sunbeam Corporation; TECO Energy; Trans World Airlines; US Office Products; U.S. Generating Florida Partnerships; Vulcan, Inc. and Women First Healthcare, Inc. 8. On August 2, 2006, the Debtors retained Miller Buckfire to serve as their investment banker in connection with their restructuring efforts. Since that time, Miller Buckfire, among other things, has: (a) analyzed the Debtors’ current liquidity and projected cash flow; (b) assisted the Debtors in evaluating their restructuring alternatives; and (c) conducted a comprehensive process to secure debtor in possession financing (“DIP Financing”) for the Debtors on the most competitive terms and conditions available on behalf of the Debtors. 9. With respect to the DIP Financing, Miller Buckfire worked with the Debtors under an accelerated timeframe to identify potential lenders, including the Debtors’ prepetition secured lenders and other third party lenders, willing to provide DIP Financing in an amount sufficient to provide adequate liquidity for the Debtors during their chapter 11 cases. This process resulted in an agreement with Goldman Sachs Credit Partners, L.P., General Electric Capital Corporation and Barclays Capital PLC (collectively, the “DIP Lenders”) to provide up to $300 million in postpetition financing to the Debtors.4 4 Contemporaneously


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10. As a result of this prepetition work performed on behalf of the Debtors, Miller Buckfire acquired significant knowledge of the Debtors and their businesses and is now intimately familiar with the Debtors’ financial affairs, debt structure, operations and related matters. Likewise, in providing prepetition services to the Debtors, Miller Buckfire’s professionals have worked closely with the Debtors’ management and other professionals. Accordingly, Miller Buckfire has developed relevant experience and expertise regarding the Debtors that will assist it in providing effective and efficient services in these cases. The Debtors believe that Miller Buckfire is both well-qualified and uniquely able to represent them in their Reorganization Cases in a most efficient and timely manner. SCOPE OF SERVICES 11. Pursuant to the Engagement Letter, at the request and direction of the Debtors, Miller Buckfire will provide the Debtors investment banking services specified in the Engagement Letter, including:5 (a) advising and assisting the Debtors in structuring and effectuating the financial aspects of any restructuring or sale transaction or transactions proposed to be undertaken by the Debtors; (b) if applicable, identifying, soliciting and negotiating with potential lenders or investors in connection with any financing or potential acquirers in connection with any sale; (c) providing financial advice and assistance to the Debtors in developing and seeking approval of a restructuring plan, including participating in negotiations with entities or groups affected by the plan; and (d) participating in hearings before the Court with respect to the matters upon which Miller Buckfire has provided advice, including, as relevant, coordinating, with the Debtors’ counsel with respect to testimony in connection therewith. 12. The Debtors require Miller Buckfire’s advice and services in order to maximize the value of their estates. The Debtors believe that these services will not duplicate the services that other professionals will be providing the Debtors in these Reorganization Cases. Although the Debtors also wish to retain Glass & Associates, Inc. (“Glass”) as financial advisors, the two firms will each be performing unique services for the Debtors. Miller Buckfire will focus on structuring, evaluating, and assisting the consummation of a financial restructuring and any related financing(s) and/or sale transaction(s), while Glass will focus on evaluating, overseeing, and assisting the Debtors in the financial aspects of its operational restructuring. In short, Miller Buckfire will carry out distinct functions and will use reasonable efforts to coordinate with the Debtors’ other retained professionals to avoid the unnecessary duplication of services.

5 The description of the Engagement Letter in this Application is a summary. To the extent that this

Application and the terms of the Engagement Letter are inconsistent, the terms of the Engagement Letter control.

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COMPENSATION 13. The terms of Miller Buckfire’s proposed compensation are fully set forth in the Engagement Letter (the “Fee Structure”), and the Debtors respectfully refer this Court to the Engagement Letter for a full recitation of its terms. In summary, under the terms of the Engagement Letter and subject to the Court’s approval, Miller Buckfire will receive:6 (a) Monthly Advisory Fee: a Monthly Advisory Fee of $200,000 for each month during the term of this engagement, provided that 50% of the amount of any Monthly Advisory Fee in excess of $800,000 (four months of Monthly Advisory Fees) paid to Miller Buckfire will be credited to the extent actually paid against any Restructuring Transaction Fee payable to Miller Buckfire; (b) Restructuring Transaction Fee: If the Debtors consummate a Restructuring Transaction, a Restructuring Transaction Fee of $6,700,000 (after taking account for a credit for 50% of the DIP Financing Fee paid to Miller Buckfire prior to the filing of these Reorganization Cases); (c) Sale Transaction Fee: If the Debtors consummate a Sale Transaction, a Sale Transaction Fee of 1.0% of the Aggregate Consideration of any such Sale; (d) Financing Fee: If the Debtors consummate any Financing Transaction(s), the Debtors will pay Miller Buckfire a Financing Fee of: (i) 3.0% of the gross proceeds of any indebtedness issued that is unsecured or subordinated, and (ii) 5.0% of the gross proceeds of any equity or equity-linked securities or obligations issued. (e) In addition to the fees described above, and regardless of whether any transaction occurs, the Debtors shall promptly reimburse Miller Buckfire for all reasonable out-of-pocket expenses (including travel and lodging, data processing and communications charges, courier services, fees and expenses of legal counsel and other necessary expenses). (f) In addition to the foregoing, the Debtors have agreed to the indemnification provisions contained in the Engagement Letter subject to the modifications contained in the proposed retention order, which are standard modified for this District. 14. The Fee Structure is consistent with Miller Buckfire’s normal and customary billing practices for comparably sized and complex cases, both in- and out-of-court, involving the services to be provided in these cases. 15. Miller Buckfire and the Debtors believe that the foregoing compensation arrangements are both reasonable and market-based. In determining the level of compensation to be paid to Miller Buckfire and its reasonableness, the Debtors compared Miller Buckfire’s fee proposal to the other proposals received by the Debtors in the investment banking selection process. The Debtors also compared Miller Buckfire’s proposed fees with the range of investment banking fees in other large and complex chapter 11 cases. In both instances, the Debtors 6 Terms

used in this summary without definitions have the meanings set forth in the Engagement Letter. To the extent that this Application and the terms of the Engagement Letter are inconsistent, the terms of the Engagement Letter control, subject to the modifications in the proposed retention order.

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found Miller Buckfire’s proposed fees to be reasonable and within the range of other comparable transactions. 16. To induce Miller Buckfire to do business with the Debtors in bankruptcy, the compensation structure described above was established to reflect the difficulty of the extensive assignments Miller Buckfire expects to undertake and the potential for failure. 17. Miller Buckfire will file interim and final fee applications for the allowance of compensation for services rendered and reimbursement of expenses incurred in accordance with applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, Local Rules of Bankruptcy Practice and Procedure for the United States Bankruptcy Court for the District of Delaware, and any applicable orders of the Court. 18. Although Miller Buckfire does not charge for its services on an hourly basis, Miller Buckfire nevertheless will maintain records of time spent by its professionals in connection with the rendering of services for the Debtors by category and nature of the services rendered; provided, however, that Miller Buckfire seeks approval to maintain time records in half-hour increments. 19. The Debtors acknowledge and agree that Miller Buckfire’s strategic and financial expertise as well as its capital markets knowledge, financing skills, restructuring capabilities and mergers and acquisitions expertise, some or all of which may be required by the Debtors during the term of Miller Buckfire’s engagement hereunder, were important factors in determining the Fee Structure and that the ultimate benefit to the Debtors of Miller Buckfire’s services hereunder could not be measured by reference to the number of hours to be expended by Miller Buckfire’s professionals in the performance of such services. 20. The Debtors also acknowledge and agree that the Fee Structure has been agreed upon by the parties in anticipation that a substantial commitment of professional time and effort will be required of Miller Buckfire and its professionals hereunder, and in light of the fact that such commitment may foreclose other opportunities for Miller Buckfire and that the actual time and commitment required of Miller Buckfire and its professionals to perform its services hereunder may vary substantially from week to week or month to month. 21. In sum, in light of the foregoing and given the numerous issues which Miller Buckfire may be required to address in the performance of its services hereunder, Miller Buckfire’s commitment to the variable level of time and effort necessary to address all such issues as they arise, and the market prices for Miller Buckfire’s services for engagements of this nature both out-of-court and in a chapter 11 context, the Debtors believe that the Fee Structure is market-based and fair and reasonable under the standards set forth in section 328(a) of the Bankruptcy Code. 22. All compensation will be sought in accordance with section 328(a) of the Bankruptcy Code, as incorporated in sections 329 and 331 of the Bankruptcy Code, the Bankruptcy Rules, and orders of the Court, and shall not be subject to the standard of review in section 330 of the Bankruptcy Code. 23. As set forth in the Puntus Affidavit, Miller Buckfire has not shared or agreed to share any of its compensation from the Debtors with any other person, other than as permitted by section 504 of the Bankruptcy Code.

506


INDEMNIFICATION PROVISIONS 24. The Engagement Letter further provides that the Debtors will indemnify, hold harmless and defend Miller Buckfire and its affiliates and its respective directors, officers, members, managers, shareholders, employees, agents and controlling persons and its respective successors and assigns (collectively, the “Indemnified Parties”) under certain circumstances (such indemnification obligation being referred to as the “Indemnification Provisions”), which provisions are attached to and made a part of the Engagement Letter. These are standard provisions, both in chapter 11 cases and outside chapter 11 and, as modified by the proposed retention order, reflect the qualifications and limits on the indemnification provisions that are customary in Delaware and other jurisdictions. 25. The Debtors and Miller Buckfire believe that the Indemnification Provisions are customary and reasonable for financial advisory and investment banking engagements, both out-of-court and in chapter 11 cases. See, e.g., In re FLYi, Inc., No. 05-20011(MFW) (Bankr. D. Del. January 17, 2006) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Foamex International, Inc., No. 05-12685 (PJW) (Bankr. D. Del. October 17, 2005) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Oakwood Homes Corporation, No. 02-13396 (PJW) (Bankr. D. Del. July 21, 2003) (order authorizing retention of Miller Buckfire on similar terms); In re United Artists Theatre Company, No. 00-3514-SLR (Bankr. D. Del. Dec. 1, 2000) (order authorizing indemnification of Houlihan, Lokey by debtors). The Indemnification Provisions are similar to other indemnification provisions that have been approved by bankruptcy courts elsewhere. See, e.g., In re Comdisco, Inc., No 02-C-1174 (N.D.Ill. September 23, 2002) (affirming order authorizing indemnification of Lazard Freres & Co. LLC and Rothschild, Inc. by debtors and official committee of unsecured creditors); In re Joan & David Halpern, Inc., 248 B.R. 43 (Bankr. S.D.N.Y. 2000), aff’d, 2000 WL 1800690 (S.D.N.Y. Dec. 6, 2000). 26. The terms and conditions of the Engagement Letter, including the indemnification provisions contained therein, were negotiated by the Debtors and Miller Buckfire at arm’s length and in good faith. The Debtors respectfully submit that the indemnification provisions contained in the Engagement Letter, viewed in conjunction with the other terms of Miller Buckfire’s proposed retention, are reasonable and in the best interests of the Debtors, their estates and creditors in light of the fact that the Debtors need Miller Buckfire’s services to successfully reorganize. Accordingly, as part of this application, the Debtors request that the Court approve the Indemnification Provisions as modified by the proposed retention order attached as Exhibit A. BASIS FOR RELIEF 27. The Debtors seek approval of the Fee Structure and Engagement Letter pursuant to section 328(a) of the Bankruptcy Code, which provides, in relevant part, that the Debtors “with the court’s approval, may employ or authorize the employment of a professional person under section 327. . .on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingency fee basis. . ..” 11 U.S.C. § 328(a). Section 328 of the Bankruptcy Code permits the compensation

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of professionals, including investment bankers, on more flexible terms that reflect the nature of their services and market conditions, which is a significant departure from prior bankruptcy practice relating to the compensation of professionals. As the United States Court of Appeals for the Fifth Circuit recognized in In re National Gypsum Co., 123 F.3d 861, 862 (5th Cir. 1997) (citations omitted): Prior to 1978, the most able professionals were often unwilling to work for bankruptcy estates where their compensation would be subject to the uncertainties of what a judge thought the work was worth after it had been done. The uncertainty continues under the present § 330 of the Bankruptcy Code, which provides that the court award to professional consultants reasonable compensation based on relevant factors of time and comparable costs, etc. Under present § 328 the professionals may avoid that uncertainty by obtaining court approval of compensation agreed to with the trustee (or debtor or committee).

Id. at 862. Owing to this inherent uncertainty, courts have approved similar arrangements that contain reasonable terms and conditions under section 328 of the Bankruptcy Code. See., e.g., In re J.L. French Automotive Castings. Inc., No. 06-10119 (MFW) (Bankr, D.Del, March 24, 2006). 28. The Fee Structure appropriately reflects the nature and scope of services to be provided by Miller Buckfire, Miller Buckfire’s substantial experience with respect to investment banking services, and the fee structures typically utilized by Miller Buckfire and other leading investment bankers, who do not bill their clients on an hourly basis. 29. Similar fixed and contingency fee arrangements have been approved and implemented by courts in other large chapter 11 cases in this circuit and in other circuits. In re FLYi, Inc., No. 05-20011 (MFW) (Bankr, D. Del, January 17, 2006) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Foamex International, Inc., No. 05-12685 (PJW) (Bankr, D. Del, October 17, 2005) (order authorizing retention of Miller Buckfire on substantially the same terms); In re Oakwood Homes Corporation, No. 02-13396 (PJW) (Bankr, D. Del, July 21, 2003) (order authorizing retention of Miller Buckfire on similar terms); In re Kaiser Aluminum Corporation, et al., No. 02-10429 (JKF) (Bankr, D. Del, March 19, 2002) (authorizing retention of Lazard Freres & Co. LLC and subjecting compensation to same standard of review); In re Trans World Airlines, Inc., No. 01-0056 (PJW) (Bankr, D. Del, Jan. 26, 2001) (authorizing retention of Rothschild, Inc., as financial advisors for debtors, under sections 327(a) and 328(a) of the Bankruptcy Code); In re Covad Communications Group, Inc., No. 01-10167 (JJF) (Bankr, D. Del, November 21, 2001) (authorizing retention of Houlihan Lokey with compensation subject to standard of review set forth in section 328(a)); In re Harnischfeger Industries, et al., No. 99-02171 (PJW) (Bankr, D. Del, Feb. 8, 2000) (authorizing retention of The Blackstone Group L.P. as investment bankers to debtors); In re Casual Male Corp., No. 01-41404 (REG) (Bankr, S.D.N.Y. March 18, 2001) (authorizing retention of Robertson Stephens, Inc., subject to section 328(a) standard of review). Furthermore, under the recently enacted Bankruptcy Abuse Prevention

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and Consumer Protection Act of 2005 a change was made to Section 328(a) which is highlighted in bold below: The trustee, or a committee appointed under Section 1102 of this title, with the court’s approval, may employ or authorize the employment of a professional person under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed percentage fee basis, or on a contingent fee basis.

This change makes clear the ability of the Debtors to retain, with Bankruptcy Court approval, a professional on a fixed fee basis such as the Fee and Expense structure with Miller Buckfire in this case. 30. Notwithstanding approval of its Engagement Letter under section 328 of the Bankruptcy Code, Miller Buckfire will apply to the Court for allowance of compensation and reimbursement of expenses in accordance with the procedures set forth in the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules and the Local Rules, as those procedures may be modified or supplemented by order of this Court. Consistent with its ordinary practice and the practice of investment bankers in other chapter 11 cases whose fee arrangements are typically not hours-based, Miller Buckfire does not ordinarily maintain contemporaneous time records in one-tenth hour (0.1) increments or provide or conform to a schedule of hourly rates for its professionals. Therefore, Miller Buckfire should be excused from compliance with such requirements and should be required only to maintain such time records in half hour (0.5) increments. DISINTERESTEDNESS 31. Miller Buckfire has informed the Debtors that, except as may be set forth in the Puntus Affidavit, Miller Buckfire (a) has no connection with the Debtors, their creditors, equity security holders, or other parties in interest, or their respective attorneys and accountants, the United States Trustee or any person employed in the office of the United States Trustee, in any matter related to the Debtors and their estates, (b) does not hold any interest adverse to the Debtors’ estates, and (c) believes it is a “disinterested person” as that term is defined in section 101(14) of the Bankruptcy Code. 32. Prior to the Commencement Date, the Debtors paid Miller Buckfire $2,600,000.00 for fees and an expense reimbursement of $25,061.29. Additionally, Miller Buckfire holds a retainer of $500,000 for fees and expenses. As of the Commencement Date, Miller Buckfire did not hold a prepetition claim against the Debtors for services rendered. 33. Miller Buckfire will conduct an ongoing review of its files to ensure that no conflicts or other disqualifying circumstances exist or arise. If any new material facts or relationships are discovered or arise, Miller Buckfire will inform the Court. NO BRIEFING SCHEDULE REQUIRED 34. The Debtors submit that this Motion does not present any novel issues of law requiring briefing. Therefore, pursuant to Rule 7.1.2 of the Local Rules

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of Civil Practice and Procedure for the United States District Court for the District of Delaware (the “Local District Rules”), incorporated by reference into Rule 1001-1(b) of the Local Rules of Practice and Procedure for the United States Bankruptcy Court for the District of Delaware, the Debtors respectfully request that the Court set aside the briefing schedule set forth in Rule 7.1.2(a) of the Local District Rules. NOTICE 35. No trustee, examiner or creditors’ committee has been appointed in the Reorganization Cases. The Debtors have provided notice of this Application to: (a) the United States Trustee for the District of Delaware; (b) those parties listed on the Consolidated List of Creditors Holding Largest Thirty Unsecured Claims Against the Debtors, as identified in their chapter 11 petitions; (c) counsel to the agent for the Debtors’ postpetition secured lenders; (d) counsel to the agent to the Debtors’ prepetition first lien secured lenders; (e) counsel to the agent to the Debtors’ prepetition second lien secured lenders; (f) counsel to the ad hoc committee of certain of the Debtors’ prepetition second lien lenders; (g) the indenture trustee for the Debtors’ 8.625% senior unsecured notes; (h) counsel to the ad hoc committee of certain holders of the Debtors’ 8.625% senior unsecured notes; (i) the indenture trustee for the Debtors’ 9.0% senior subordinated notes; (j) counsel to the ad hoc committee of certain holders of the Debtors’ 9.0% senior subordinated notes; and (k) the indenture trustee for the Debtors’ 7.5% convertible trust preferred notes. In light of the nature of the relief requested, the Debtors submit that no further notice is required. NO PRIOR REQUEST 36. No prior application for the relief requested herein has been made to this or any other Court. WHEREFORE, the Debtors respectfully request that the Court enter an Order, substantially in the form attached as Exhibit A, (i) authorizing the Debtors to employ and retain Miller Buckfire as their investment banker effective as of the Commencement Date; (ii) approving the terms of the Engagement Letter as modified by the proposed Order; and (iii) granting such other and further relief as the Court deems appropriate. Dated: October 30, 2006 Wilmington, Delaware Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C., Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP,

510


Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc.

Keith Marchiando Chief Financial Officer Dura Automotive Systems, Inc.

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APPLICATION EXHIBIT A IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


) ) ) ) ) ) )


(

)


ORDER AUTHORIZING THE EMPLOYMENT AND RETENTION OF MILLER BUCKFIRE & CO., LLC, AS INVESTMENT BANKER TO THE DEBTORS AND DEBTORS-IN-POSSESSION Upon the application (the “Application”)2 of the Debtors for an order pursuant to section 327 and 328 of the Bankruptcy Code, authorizing the employment and retention of Miller Buckfire & Co., LLC (“Miller Buckfire”) as the Debtors’ Investment Banker; and upon the Affidavit of Marc D. Puntus in support of the Application, and it appearing that due and adequate notice of the Application have been given and that no other notice need be given; and it appearing that Miller Buckfire neither holds nor represents any interest adverse to the Debtors’ estates with respect to the matters upon which they are to be engaged; and it appearing that Miller Buckfire is a “disinterested person,” as the term is defined in section 101(14) of the Bankruptcy Code; and it appearing that the relief requested in the Application is in the best interest of the Debtors’ estates and their creditors; and it appearing that this Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334; and it appearing that this proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2); and it appearing that venue of this proceeding and this Application in this District is proper pursuant to 29 U.S.C. §§ 1408 and 1409; and after due deliberation and sufficient cause appearing therefore, it is hereby ORDERED, that the Application is hereby granted; and it is further 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, L.L.C., Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont L.L.C., Dura Gladwin L.L.C., Dura Global Technologies, Inc., Dura G.P., Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C., Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC., Mark I Molded Plastics of Tennessee, Inc., Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc. 2 Capitalized terms used but not defined herein shall have the meaning set forth in the Application.

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ORDERED, that in accordance with sections 327(a) and 328(a) of the Bankruptcy Code, the Debtors are authorized to employ and retain Miller Buckfire as of the Commencement Date as their investment banker on the terms set forth in the Engagement Letter as modified by this Order and to pay fees to Miller Buckfire on the terms and at the times specified in the Engagement Letter, and it is further ORDERED, Miller Buckfire will file fee applications for interim and final allowance of compensation and reimbursement of expenses pursuant to the procedures set forth in sections 330 and 331 of the Bankruptcy Code and such Bankruptcy Rules as may then be applicable, from time to time, and such procedures as may be fixed by order of this Court; and it is further ORDERED, that notwithstanding the prior paragraph, the fees payable to Miller Buckfire pursuant to the Engagement Letter shall be subject to review only pursuant to the standards set forth in section 328(a) of the Bankruptcy Code and shall not be subject to the standard of review set forth in section 330 of the Bankruptcy Code; and it is further ORDERED, that notwithstanding anything to the contrary in the Bankruptcy Code, the Bankruptcy Rules, and orders of this Court or any guidelines regarding submission and approval of fee applications, Miller Buckfire and its professionals (i) shall only be required to maintain time records for services rendered post-petition, in half-hour increments and (ii) shall not be required to provide or conform to any schedule of hourly rates; and it is further ORDERED, that the indemnification provisions of the Engagement Letter are approved, subject to the following modifications: (a) Subject to the provisions of subparagraphs (c) and (d) below, the Debtors are authorized to indemnify, and shall indemnify, Miller Buckfire, in accordance with the Engagement Letter, for any claim arising from, related to or in connection with Miller Buckfire’s performance of the services described in the Engagement Letter; (b) Miller Buckfire shall not be entitled to indemnification, contribution or reimbursement pursuant to the Engagement Letter for services other than the investment banking services provided under the Engagement Letter, unless such services and the indemnification, contribution, or reimbursement therefore are approved by the Court; (c) Notwithstanding anything to the contrary in the Engagement Letter, the Debtors shall have no obligation to indemnify any person, or provide contribution or reimbursement to any person, for any claim or expense to the extent that it is either (i) judicially determined (the determination having become final) to have arisen from that person’s gross negligence or willful misconduct, or (ii) settled prior to a judicial determination as to that person’s gross negligence or willful misconduct, but determined by this Court, after notice and a hearing, to be a claim or expense for which that person should not receive indemnity, contribution or reimbursement under the terms of the Engagement Letter as modified by this Order; and (d) If, before the earlier of (i) the entry confirming a chapter 11 plan in these cases (that order having become a final order no longer subject to appeal)

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and (ii) the entry of an order closing these Reorganization Cases, Miller Buckfire believes that it is entitled to the payment of any amounts by the Debtors on account of the Debtors’ indemnification, contribution and/or reimbursement obligations under the Engagement Letter (as modified by this Order), including without limitation the advancement of defense costs, Miller Buckfire must file an application before this Court, and the Debtors may not pay any such amounts to Miller Buckfire before the entry of an order by this Court approving the payment. This subparagraph (d) is intended only to specify the period of time under which the court shall have jurisdiction over any request for fees and expenses by Miller Buckfire for indemnification, contribution or reimbursement, and not a provision limiting the duration of the Debtors’ obligation to indemnify Miller Buckfire; and it is further ORDERED, that Paragraph 5 of the Engagement Letter shall be deleted and replaced with the following: “The Company agrees that none of Miller Buckfire, its affiliates or their respective directors, officers, members, managers, agents, employees and controlling persons, or any of their respective successors or assigns (“Covered Persons”) shall have any liability to the Company or any person asserting claims on behalf of the Company or in the Company’s right for or in connection with this engagement or any transactions or conduct in connection therewith except for losses, claims, damages, liabilities or expenses incurred by the Company which are finally judicially determined to have resulted from the gross negligence or willful misconduct of such Covered Person.”

and it is further ORDERED, that notwithstanding any provision of the Engagement Letter to the contrary, to the extent this Court has jurisdiction over any matters arising out of or related to the Engagement Letter, such matter shall be heard in this court; and it is further ORDERED, that to the extent this Order is inconsistent with any prior order or pleading with respect to the Application in these cases or the Engagement Letter, the terms of this Order shall govern; and it is further. ORDERED, notwithstanding the possible applicability of Rules 6004(g), 7062, and 9014 of the Bankruptcy Rules, or otherwise, the terms and conditions of this Order shall be immediately effective and enforceable upon its entry; and it is further ORDERED, that this Court retains jurisdiction with respect to all matters arising from or related to the implementation of this Order. Dated:

2006 United States Bankruptcy Judge

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EXHIBIT B IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


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AFFIDAVIT OF MARC D. PUNTUS IN SUPPORT OF DEBTORS’ APPLICATION TO EMPLOY AND RETAIN MILLER BUCKFIRE & CO., LLC AS INVESTMENT BANKER TO THE DEBTORS AND DEBTORS-IN-POSSESSION STATE OF NEW YORK COUNTY OF NEW YORK

) ) ss. )

I, Marc D. Puntus, being duly sworn, hereby declare the following under penalty of perjury: 1. I am a Managing Director with Miller Buckfire & Co., LLC (“Miller Buckfire”), an investment banking services firm with its principal office located at 250 Park Avenue, New York, New York 10177. I am duly authorized to make this affidavit on behalf of Miller Buckfire. I submit this affidavit in support of the application (the “Application”) of the debtors and debtors-in-possession (collectively, the “Debtors”) in the above-captioned chapter 11 cases (the “Reorganization Cases”), for an order authorizing the employment and retention of Miller Buckfire as investment banker to the Debtors under the terms of the engagement letter, dated August 2, 2006 (the “Engagement Letter”), attached as Exhibit C to the Application, as modified by the proposed retention order, attached as Exhibit A to the Application. Except as otherwise noted, I have personal knowledge of the matters set forth herein. 1 The

Debtors in these proceedings are: Adwest Electronics Inc., Atwood Automotive, Inc., Atwood Mobile Products, Inc., Automotive Aviation Partners, LLC, Creation Group Holdings, Inc., Creation Group Transportation, Inc., Creation Group, Inc., Creation Windows, Inc., Creation Windows, LLC, Dura Aircraft Operating Company, LLC, Dura Automotive Canada ULC, Dura Automotive Systems (Canada), Ltd., Dura Automotive Systems Cable Operations, Inc., Dura Automotive Systems of Indiana, Inc., Dura Automotive Systems, Inc., Dura Brake Systems, LLC, Dura Cables North LLC, Dura Cables South LLC, Dura Canada LP, Dura Fremont LLC, Dura Gladwin LLC, Dura Global Technologies, Inc., Dura G.P, Dura Holdings Canada LP, Dura Holdings ULC, Dura Mancelona L.L.C, Dura Ontario, Inc., Dura Operating Canada LP, Dura Operating Corp., Dura Services L.L.C., Dura Shifter L.L.C., Dura Spicebright, Inc., Kemberly, Inc., Kemberly, LLC, Mark I Molded Plastics of Tennessee, Inc, Patent Licensing Clearinghouse L.L.C., Spec-Temp, Inc., Trident Automotive Canada Co., Trident Automotive, L.L.C., Trident Automotive, L.P., Trident Automotive Limited, and Universal Tool & Stamping Company, Inc.

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QUALIFICATION 2. Miller Buckfire commenced operating on July 16, 2002, as an independent firm providing strategic and financial advisory services in large-scale corporate restructuring transactions. Miller Buckfire is owned and controlled by Henry S. Miller and Kenneth A. Buckfire and by the employees of Miller Buckfire. Miller Buckfire currently has approximately 40 employees, many of whom were employees of the Financial Restructuring Group of Dresdner Kleinwort Wasserstein, Inc. before July 16, 2002. 3. Miller Buckfire’s professionals have extensive experience in providing financial advisory and investment banking services to financially distressed companies and to creditors, equity holders and other constituencies in reorganization proceedings and complex financial restructurings, both in- and out-of-court. For instance, Miller Buckfire’s professionals are providing or have provided financial advisory, investment banking, and other services in connection with the restructuring of Acterna Corporation; Aerovias Nacionales de Colombia S.A.; Allied Holdings, Inc.; Applied Extrusion Technologies, Inc.; AT&T Latin America; Aurora Foods Inc.; Avado Brands, Inc.; Birch Telecom, Inc.; Bruno’s Inc.; Burlington Industries; Cajun Electric Power Corporation; Calpine Corporation; Cambridge Industries; Caimike Cinemas; Celotex Corporation; Centerpoint Energy; Citation Corporation; CMS Energy Corporation; Criimi Mae, Inc.; CTC Communications; Dana Corporation; Delta Air Lines, Inc.; Dow Corning Corporation; Drypers, Inc.; EaglePicher Holdings Inc.; Exide Technologies; Favorite Brands International Inc.; FLYi, Inc.; Foamex International; Focal Communications Corporation; FPA Medical Management; Gate Gourmet; Grand Union Co.; Heartland Wireless; Horizon Natural Resources Company; Huntsman Corporation; ICG Communications; ICO Global Communication, Ltd.; IMPATH Inc.; Interstate Bakeries Corporation; J.L. French Automotive Castings; Kmart Corporation; Level (3) Communications; Loewen Group; McLeodUSA; Micro Warehouse; Mirant Corp.; Montgomery Ward & Co.; National Airlines; Oakwood Homes; Pacific Crossing Limited; Pathmark Stores, Inc.; Pegasus Satellite Communications; PennCorp Financial Group, Inc.; Pioneer Companies; PSINet; Polaroid Corporation; Polymer Group, Inc.; The Spiegel Group; Sunbeam Corporation; TECO Energy; Trans World Airlines; US Office Products; U.S. Generating Florida Partnerships; Vulcan, Inc. and Women First Healthcare, Inc. 4. On August 2, 2006, the Debtors retained Miller Buckfire to serve as their investment banker in connection with their restructuring efforts. Since that time, Miller Buckfire, among other things, has: (a) analyzed the Debtors’ current liquidity and projected cash flow; (b) assisted the Debtors in evaluating their restructuring alternatives; and (c) conducted a comprehensive process to secure debtor in possession financing (“DIP Financing”) for the Debtors on the most competitive terms and conditions available on behalf of the Debtors. 5. With respect to the DIP Financing, Miller Buckfire worked with the Debtors under an accelerated timeframe to identify potential lenders, including the Debtors’ prepetition secured lenders and other third party lenders, willing to provide DIP Financing in an amount sufficient to provide adequate liquidity for the Debtors during their Reorganization Cases. This process resulted in an agreement with Goldman Sachs Credit Partners, L.P., General Electric Capital

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Corporation, and Barclays Capital PLC (collectively, the “DIP Lenders”), to provide up to $300 million in postpetition financing to the Debtors.2 6. As a result of this prepetition work performed on behalf of the Debtors, Miller Buckfire acquired significant knowledge of the Debtors and their businesses and is now intimately familiar with the Debtors’ financial affairs, debt structure, operations and related matters. Likewise, in providing prepetition services to the Debtors, Miller Buckfire’s professionals have worked closely with the Debtors’ management and other professionals. Accordingly, Miller Buckfire has developed relevant experience and expertise regarding the Debtors that will assist it in providing effective and efficient services in these cases. The Debtors believe that Miller Buckfire is both well-qualified and uniquely able to represent them in their Reorganization Cases in a most efficient and timely manner. DISINTERESTEDNESS 7. The Debtors have numerous creditors, stakeholders and other parties with whom they maintain business relationships. In connection with its proposed retention by the Debtors in these cases, Miller Buckfire undertook to determine whether it had any conflicts or other relationships that might cause it not to be disinterested or to hold or represent an interest adverse to the Debtors. To check and clear potential conflicts of interest in these cases, Miller Buckfire reviewed its client relationships to determine whether it had any relationships with the following entities (collectively, the “Potential Parties in Interest”): (a) the Debtors and certain of their affiliates; (b) the Debtors’ present and former officers and directors; (c) the Debtors’ largest trade creditors; (d) significant secured lenders; (e) preferred stockholders and other stockholders; (f) counterparties to significant leases or executory contracts; (g) the attorneys and other professionals that the Debtors have identified for employment in these Reorganization Cases; (h) parties to significant litigation with the Debtors; and (i) other significant parties in interest. The identities of the Potential Parties in Interest were provided to Miller Buckfire by the Debtors. 8. A number of business executives are members of an informal strategic advisory committee (the “Strategic Committee”) of MBL Advisory Group, LLC, which is the parent company of Miller Buckfire. The Strategic Committee is an informal group of business executives who have agreed to consult with and advise Miller Buckfire’s parent generally on the strategic direction of the Miller Buckfire company group and future business trends. The members of the Strategic Committee have no direct financial stake in Miller Buckfire engagements and have no role in the management of Miller Buckfire. They have not been consulted concerning any matter relating to the Debtors’ Reorganization Cases, nor will they be so consulted in the future. Members of the Strategic Committee, and entities for whom they work, may have relationships with 2 Contemporaneously


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creditors or other parties in interest in these cases. However, in light of the limited role of the Strategic Committee (and the fact that its members play no role in these cases) Miller Buckfire is not collecting and providing detailed information regarding such possible relationships. 9. As part of its diverse practice, Miller Buckfire appears in numerous cases, proceedings and transactions involving many different attorneys, accountants, investment bankers and financial consultants, some of whom may represent claimants and parties in interest in the Reorganization Cases. Further, Miller Buckfire has in the past, and may in the future, be represented by several attorneys and law firms, some of whom may be involved in these proceedings. In addition, Miller Buckfire has been in the past, and likely will be in the future, engaged in matters unrelated to the Debtors or these Reorganization Cases in which it works with or against other professionals involved in these cases. Based on our current knowledge of the professionals involved in these Reorganization Cases, and to the best of my knowledge, none of these business relations constitute interests adverse to the Debtors. 10. To the best of my knowledge and belief, insofar as I have been able to ascertain after reasonable inquiry, neither I, nor Miller Buckfire nor any of its professional employees has any connection with the Debtors, their creditors, the U.S. Trustee or any other Potential Parties in Interest in these Reorganization Cases or their respective attorneys or accountants, except as follows: (a) Prior to the commencement of these cases, Miller Buckfire’s professionals performed professional services for the Debtors. (b) The Debtors have many creditors. From time to time, Miller Buckfire may perform or may have performed services for, or maintained other commercial or professional relationships with, certain creditors of the Debtors and various other parties that are adverse to the Debtors, in each case in matters unrelated to these cases. (c) Miller Buckfire has been in the past, and in some cases is currently, involved in unrelated matters with certain creditors of the Debtors, including, but not limited to, affiliates of JPMorgan Chase Bank, N.A., Citibank, N.A., Bank of America, N.A., Wells Fargo Foothill, LLC, Credit Suisse Group, among others. (d) Miller Buckfire is currently advising Dana Corporation on its chapter 11 cases, which were initiated in March 2006. The representation of Dana Corporation concerns matters unrelated to these chapter 11 cases. (e) Miller Buckfire currently employs T. Rowe Price Group Inc. as the administrator of 401(k) plans. The use of such services concerns matters unrelated to these chapter 11 cases. (f) Miller Buckfire has employed Towers Perrin in the past concerning matters unrelated to these chapter 11 cases. (g) Miller Buckfire currently maintains an ordinary course banking relationship with Citibank N.A., which is unrelated to these chapter 11 cases. (h) Miller Buckfire currently works with Intralinks Inc. on various matters that are unrelated to these chapter 11 cases. (i) An affiliate of XL Capital leases office space to Miller Buckfire, which lease has no relation to these chapter 11 cases. (j) Miller Buckfire advised a group of creditors in the EaglePicher chapter 11 cases (the “EaglePicher Committee”), including Angelo Gordon,

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JPMorgan and Wells Fargo. The representation of the EaglePicher Committee concerned matters unrelated to these chapter 11 cases. (k) Miller Buckfire advised a group of creditors in the Mirant Corporation chapter 11 case (the “Mirant Committee”), including Citigroup, Deutsche Bank and Wachovia. The representation of the Mirant Committee concerned matters unrelated to these chapter 11 cases. (l) Miller Buckfire advised Exide Technologies on various financial matters, which included an equity rights offering (“Exide Rights Offering”). The Exide Rights Offering involved a group of investors that included Tontine Capital Partners, L.P. The representation of Exide Technologies concerned matters unrelated to these chapter 11 cases. (m) Miller Buckfire is currenting advising Foamex International, Inc. in its chapter 11 cases, which were initiated in September, 2005. As part of Foamex International, Inc.’s proposed plan of reorganization, a group of investors will participate in an equity rights offering (“Foamex Rights Offering”). The Foamex Rights Offering is expected to involve a group of investors including, but not limited to, affiliates of Goldman Sachs & Co. The representation of Foamex International, Inc. concerns matters unrelated to these chapter 11 cases. (n) Henry S. Miller’s daughter is employed by Kirkland & Ellis LLP on a part-time basis while she completes law school. (o) From time to time, Miller Buckfire also may have had dealings (either as co-advisers or in another capacity) on other unrelated matters with certain of the other professionals who are providing, or are expected to provide, services in these cases, including, without limitation: (i) Kirkland & Ellis LLP (the Debtors’ proposed counsel); and (ii) Glass & Associates, Inc. (the Debtors’ proposed turnaround consulting firm); (iii) Bingham McCutchen LLP (counsel to certain prepetition second lien lenders); (iv) Lazard Ltd. (advisors to counsel to certain prepetition second lien lenders); (v) The Blackstone Group (advisors to the senior noteholders); (vi) Fried Frank Harris Shriver & Jacobson LLP (counsel to the senior noteholders). 11. To the best of my knowledge, information and belief, insofar as I have been to ascertain after reasonable inquiry, Miller Buckfire has not been retained to assist any entity or person other than the Debtors on matters relating to, or in direct connection with, these cases. If Miller Buckfire’s proposed retention by the Debtors is approved by the Court, Miller Buckfire will not accept any engagement or perform any service for any entity or person other than the Debtors in these cases. Miller Buckfire will, however, continue to provide professional services to entities or persons that may be creditors or equity security holders of the Debtors or parties-in-interest in these cases, provided that such services do not relate to, or have any direct connection with, these cases or the Debtors. 12. Insofar as I have been able to determine after reasonable inquiry, Miller Buckfire and the employees of Miller Buckfire that will work on this engagement do not hold or represent any interest adverse to the Debtors or their

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estates, and Miller Buckfire is a “disinterested person” as that term is defined in section 101(14) of the Bankruptcy Code, as modified by section 1107(b) of the Bankruptcy Code, in that Miller Buckfire, its professionals and employees: (a) are not creditors, equity security holders or insiders of the Debtors; (b) were not, within two years before the date of filing of the Debtors’ chapter 11 petitions, a director, officer, or employee of the Debtors; and (c) do not have an interest materially adverse to the Debtors, their respective estates, or any class of creditors or equity security holders by reason of any direct or indirect relationship to, connection with, or interest in the Debtors, or for any other reason. 13. I am not related or connected to and, to the best of my knowledge after reasonable inquiry, no other professional of Miller Buckfire who will work on this engagement is related or connected to, any United States Bankruptcy Judge for the District of Delaware, any of the District Judges for the District of Delaware who handle bankruptcy cases, the United States Trustee for this Region, or any employee in the Office of the United States Trustee for this Region. 14. If Miller Buckfire discovers any additional information that requires disclosure, Miller Buckfire will promptly file a supplemental Declaration with the Court. 15. To the best of my knowledge and belief, insofar as I have been able to ascertain after reasonable inquiry, none of the employees of Miller Buckfire working on this engagement on the Debtors’ behalf has had, or will have in the future, direct contact concerning these cases with the Debtors’ creditors, equity holders, other parties in interest, the U.S. Trustee, or anyone employed in the Office of the United States Trustee other than in connection with performing investment banking services on behalf of the Debtors. SCOPE OF SERVICES 16. Pursuant to the Engagement Letter, at the request and direction of the Debtors, Miller Buckfire will provide the Debtors the investment banking services specified in the Engagement Letter, including: (a) advising and assisting the Debtors in structuring and effectuating the financial aspects of any restructuring or sale transaction or transactions proposed to be undertaken by the Debtors; (b) if applicable, identifying, soliciting and negotiating with potential lenders or investors in connection with any financing or potential acquirers in connection with any sale; (c) providing financial advice and assistance to the Debtors in developing and seeking approval of a restructuring plan, including participating in negotiations with entities or groups affected by the plan; and (d) participating in hearings before the Court with respect to the matters upon which Miller Buckfire has provided advice, including, as relevant, coordinating, with the Debtors’ counsel with respect to testimony in connection therewith. 17. The services that Miller Buckfire will provide to the Debtors are necessary to enable the Debtors to maximize the value of their estates. I believe that these services will not duplicate the services that other professionals will be providing to the Debtors in these chapter 11 cases.

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PROFESSIONAL COMPENSATION 18. The terms of Miller Buckfire’s proposed compensation are fully set forth in the Engagement Letter (the “Fee Structure”), and I respectfully refer this Court to the Engagement Letter for a full recitation of its terms. In summary, under the terms of the Engagement Letter and subject to the Court’s approval, Miller Buckfire will receive: (a) Monthly Advisory Fee: a Monthly Advisory Fee of $200,000 for each month during the term of this engagement, provided that 50% of the amount of any Monthly Advisory Fee in excess of $800,000 (four months of Monthly Advisory Fees) paid to Miller Buckfire will be credited to the extent actually paid against any Restructuring Transaction Fee payable to Miller Buckfire; (b) Restructuring Transaction Fee: If the Debtors consummate a Restructuring Transaction, a Restructuring Transaction Fee of $6,700,000 (after taking account of a credit for 50% of the DIP Financing Fee paid to Miller Buckfire prior to the filing of these Reorganization Cases); (c) Sale Transaction Fee: If the Debtors consummate a Sale Transaction, a Sale Transaction Fee of 1.0% of the Aggregate Consideration of any such Sale; (d) Financing Fee: If the Debtors consummate any Financing Transaction(s), the Debtors will pay Miller Buckfire a Financing Fee of: (i) 3.0% of the gross proceeds of any indebtedness issued that is unsecured or subordinated, and (ii) 5.0% of the gross proceeds of any equity or equity-linked securities or obligations issued. (e) In addition to the fees described above, and regardless of whether any transaction occurs, the Debtors shall promptly reimburse Miller Buckfire for all reasonable out-of-pocket expenses (including travel and lodging, data processing and communications charges, courier services, fees and expenses of legal counsel and other necessary expenses). (f) In addition to the foregoing, the Debtors have agreed to the indemnification provisions contained in the Engagement Letter subject to the modifications contained in the proposed retention order, which are standard for this District. 19. The overall compensation structure described above is consistent with Miller Buckfire’s normal and customary billing practices for cases of this size and complexity, reflects the difficulty of the extensive assignments Miller Buckfire expects to undertake and is performance based. I believe that the foregoing compensation arrangements are (a) reasonable; (b) market-based; (c) well within the range of comparable transactions; and (d) merited by Miller Buckfire’s restructuring expertise, capital markets knowledge, financing skills and mergers and acquisitions capabilities. 20. Prior to the Commencement Date, the Debtors paid Miller Buckfire $2,600,000 for fees and an expense reimbursement of $25,061,29. Additionally, Miller Buckfire holds a retainer of $500,000 for fees and expenses. The source of the foregoing payments was the Debtors’ operating cash. As of the Commencement Date, Miller Buckfire did not hold a prepetition claim against the Debtors for services rendered.

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21. To the best of my knowledge, Miller Buckfire has no agreement with any other entity to share with such entity any compensation received by Miller Buckfire in connection with these Reorganization Cases other than as permitted by section 504 of the Bankruptcy Code. OTHER 22. The Engagement Letter further provides that the Debtors will indemnify, hold harmless, and defend Miller Buckfire and its affiliates and their respective directors, officers, members, managers, shareholders, employees, agents, and controlling persons and their respective successors and assigns (collectively, the “Indemnified Parties”) under certain circumstances (such indemnification obligation being referred to as the “Indemnification Provisions”) attached to and made a part of the Engagement Letter. These are standard provisions, both in chapter 11 cases and outside chapter 11 and, as modified by the proposed retention order, reflect the qualifications and limits on the indemnification provisions that are customary in other Bankruptcy Courts. Miller Buckfire believes that the Indemnification Provisions are customary and reasonable for investment banking engagements, both out-of-court and in chapter 11 proceedings. 23. I believe the services to be performed by Miller Buckfire are necessary to enable the Debtors to maximize the value of their estates and to reorganize successfully. Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true and correct. Executed on

2006.

By: Name: Marc D. Puntus Title: Managing Director Sworn to before me this day of

, 2006

Notary Public My Commission Expires: [ Nov 1 2008 MICHELLE NUNNS Notary Public, State of New York No.01NU6117939 Qualified in New York County Commission Expires November 1, 2008

]

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APPLICATION EXHIBIT C Miller Buckfire & Co., LLC 250 Park Avenue, 19th Floor New York, New York 10177 www.millerbuckfire.com MILLER BUCKFIRE August 2, 2006 DURA Automotive Systems, Inc. 2791 Research Drive Rochester Hills, MI 48309-3575 Attention:

Larry A. Denton Chairman and CEO

Dear Mr. Denton: This letter agreement confirms the terms under which DURA Automotive Systems, Inc. (the “Company”) has engaged Miller Buckfire & Co., LLC (“Miller Buckfire”) as its financial advisor and investment banker with respect to a possible Restructuring, Financing and/or Sale (each as defined below) and with respect to such other financial matters as to which the Company and Miller Buckfire may agree in writing during the term of this engagement. For purposes hereof, the term “Company” includes affiliates of the Company and any entity that the Company or its affiliates may form or invest in to consummate a Restructuring, Financing and/or Sale, and shall also include any successor to or assignee of all or a portion of the assets and/or businesses of the Company whether pursuant to a Plan (as defined below) or otherwise. 1. Miller Buckfire, as financial advisor and investment banker to the Company, will perform the following financial advisory and investment banking services: a. General Financial Advisory and Investment Banking Services. Miller Buckfire will: i. to the extent it deems necessary, appropriate and feasible, familiarize itself with the business, operations, properties, financial condition and prospects of the Company, and ii. if the Company determines to undertake a Restructuring, Financing and/or Sale advise and assist the Company in structuring and effecting the financial aspects of such a transaction or transactions, subject to the terms and conditions of this agreement b. Restructuring Services. If the Company pursues a Restructuring, Miller Buckfire will: i. provide financial advice and assistance to the Company in developing and seeking approval of a Restructuring plan (as the same

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may be modified from time to time, a “Plan”), which may be a plan under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq. (the “Bankruptcy Code”), including but not limited to, reviewing the Company’s business plan and financial projections, and preparing an analysis of the estimated range of the going concern enterprise value of the reorganized Company; ii. if requested by the Company, in connection therewith, provide financial advice and assistance to the Company in structuring any new securities to be issued under the Plan; iii. if requested by the Company, assist the Company and/or participate in negotiations with entities or groups affected by the Plan; iv. if requested by the Company, participate in hearings before the bankruptcy court with respect to the matters upon which Miller Buckfire has provided advice, including, as relevant, coordinating with the Company’s counsel with respect to testimony in connection therewith; v. if requested by the Company, provide financial advice and assistance to the Company in structuring and effecting any debtor-inpossession financing (a “DIP Financing”) and exit financing in connection with a Plan (an “Exit Financing”), identify potential lenders and, at the Company’s request, contact such lenders; and vi. if requested by the Company, assist the Company and/or participate in negotiations with potential lenders. For purposes of this agreement, the term “Restructuring” shall mean any recapitalization or restructuring (including, without limitation, through any exchange, conversion, cancellation, forgiveness, retirement and/or a material modification or amendment to the terms, conditions or covenants thereof) of the Company’s preferred equity and/or debt securities and/or other indebtedness, obligations or liabilities (including preferred stock, partnership interests, lease obligations, trade credit facilities and/or contract or tort obligations), including pursuant to a repurchase or an exchange transaction, a Plan or a solicitation of consents, waivers, acceptances or authorizations. c. Financing Services. If the Company pursues a Financing, Miller Buckfire will: i. provide financial advice and assistance to the Company in structuring and effecting a Financing, identify potential Investors (as defined below) and, at the Company’s request, contact such Investors; ii. if Miller Buckfire and the Company deem it advisable, assist the Company in developing and preparing a memorandum (with any amendments or supplements thereto, the “Financing Offering Memorandum”) to be used in soliciting potential Investors, it being agreed that (A) the Financing Offering Memorandum shall be based entirely upon information supplied by the Company, (B) the Company shall be solely responsible for the accuracy and completeness of the Financing Offering Memorandum, and (C) other than as contemplated by this subparagraph (c)(ii), the Financing

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Offering Memorandum shall not be used, reproduced, disseminated, quoted or referred to at any time in any way, except with Miller Buckfire’s prior written consent; and iii. if requested by the Company, assist the Company and/or participate in negotiations with potential Investors. For purposes of this agreement, the term “Financing” shall mean a private issuance, sale or placement of the equity, equity-linked or debt securities, instruments or obligations of the Company with one or more lenders and/or investors, except to the extent issued to existing security holders of the Company in exchange for their existing securities, or any loan or other financing, including any DIP Financing or Exit Financing in connection with a case under the Bankruptcy Code or a rights offering (each such lender or investor, an “Investor”). It is understood and agreed that nothing contained herein shall constitute an expressed or implied commitment by Miller Buckfire to act in any capacity or to underwrite, place or purchase any financing or securities, which commitment shall only be set forth in a separate underwriting, placement agency or other appropriate agreement relating to the Financing. d. Sale Services. If the Company pursues a Sale, Miller Buckfire will: i. provide financial advice and assistance to the Company in connection with a Sale, identify potential acquirors and, at the Company’s request, contact such potential acquirors; ii. at the Company’s request, assist the Company in preparing a memorandum (with any amendments or supplements thereto, the “Sale Memorandum”) to be used in soliciting potential acquirors, it being agreed that (A) the Sale Memorandum shall be based entirely upon information supplied by the Company, (B) the Company shall be solely responsible for the accuracy and completeness of the Sale Memorandum, and (C) other than as contemplated by this subparagraph (d)(ii), the Sale Memorandum shall not be used, reproduced, disseminated, quoted or referred to at any time in any way, except with Miller Buckfire’s prior written consent; and iii. if requested by the Company, assist the Company and/or participate in negotiations with potential acquirors. For purposes of this agreement, the term “Sale” shall mean the disposition to one or more third parties in one or a series of related transactions of (x) all or a significant portion of the equity securities of the Company by the security holders of the Company or (y) all or a significant portion of the assets (including the assignment of any executory contracts) or businesses of the Company or its subsidiaries, in either case, including through a sale or exchange of capital stock, options or assets, a lease of assets with or without a purchase option, a merger, consolidation or other business combination, an exchange or tender offer, a recapitalization, the formation of a joint venture, partnership or similar entity, or any similar transaction. Notwithstanding the foregoing, any potential transactions for which W.Y. Campbell & Company is currently engaged shall not constitute a Sale for purposes of this agreement. In rendering its services to the Company hereunder, Miller Buckfire is not assuming any responsibility for the Company’s underlying business decision to

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pursue or not to pursue any business strategy or to effect or not to effect any Restructuring, Financing, and/or Sale or other transaction. The Company agrees that Miller Buckfire shall not have any obligation or responsibility to provide accounting, audit, “crisis management,” or business consultant services for the Company and shall have no responsibility for designing or implementing operating, organizational, administrative, cash management or liquidity improvements, or to provide any fairness or valuation opinions or any advice or opinions with respect to solvency in connection with any transaction. The Company confirms that it will rely on its own counsel, accountants and similar expert advisors for legal, accounting, tax and other similar advice. In order to coordinate effectively the Company’s and Miller Buckfire’s activities to effect a Restructuring, Financing or Sale, the Company will promptly inform Miller Buckfire of any discussions, negotiations or inquiries regarding a possible Restructuring, Financing or Sale (including any such discussions, negotiations or inquiries that have occurred in the six month period prior to the date of this agreement). The Company shall make available to Miller Buckfire all information concerning the business, assets, operations, financial condition and prospects of the Company that Miller Buckfire reasonably requests in connection with the services to be performed for the Company hereunder and shall provide Miller Buckfire with reasonable access to the Company’s officers, directors, employees, independent accountants and other advisors and agents as Miller Buckfire shall deem appropriate. The Company represents that all information furnished by it or on its behalf to Miller Buckfire (including information contained in any Financing Offering Memorandum and/or Sale Memorandum) will be accurate and complete in all material respects. The Company recognizes and confirms that in advising the Company and completing its engagement hereunder, Miller Buckfire will be using and relying on publicly available information and on data, material and other information furnished to Miller Buckfire by the Company and other parties. It is understood that in performing under this engagement Miller Buckfire may assume and rely upon the accuracy and completeness of, and is not assuming any responsibility for independent verification of, such publicly available information and the other information so furnished. 2. Miller Buckfire’s compensation for services rendered under this agreement will consist of the following cash fees: a. A financial advisory fee of $200,000, which shall be due and paid by the Company upon the execution of this agreement (the “Initial Fee”). b. A monthly financial advisory fee of $200,000 (the “Monthly Advisory Fee”), which shall be due and paid by the Company beginning September 1, 2006 and thereafter on each monthly anniversary thereof during the term of this engagement: provided that 50% of the total amount of all Monthly Advisory Fees paid in excess of $800,000 (four months of Monthly Advisory Fees) shall be credited, to the extent actually paid, against the Restructuring Transaction Fee (as defined below). c. If at any time during the term of this engagement or within the eighteen full months following the termination of this engagement

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(including the term of this engagement, the “Fee Period”), (x) any Restructuring is consummated or (y)(1) an agreement in principle, definitive agreement or Plan to effect a Restructuring is entered into and (2) concurrently therewith or at any time thereafter (including following the expiration of the Fee Period), any Restructuring is consummated, Miller Buckfire shall be entitled to receive a transaction fee (a “Restructuring Transaction Fee”), contingent upon the consummation of a Restructuring and payable at the closing thereof, equal to $7,700,000. Notwithstanding anything to the contrary in this agreement, in connection with any Restructuring that is intended to be effected, in whole or in part, as a prepackaged plan of reorganization (a “Prepackaged Plan”) or a prearranged plan of reorganization (a “Prearranged Plan”) anticipated to involve the solicitation of acceptances of such plan in compliance with the Bankruptcy Code, by or on behalf of the Company, from holders of any class of the Company’s securities, indebtedness or obligations (a “Prepackaged Plan”) the Restructuring Transaction Fee shall be payable (x)(i) in the case of a Prepackaged Plan, 75% upon receipt of votes from the Company’s creditors necessary to confirm such Prepackaged Plan or (ii) in the case of a Prearranged Plan, 50% upon obtaining indications of support from the Company’s creditors that in the good faith judgment of the Board of Directors of the Company are sufficient to justify filing such Prearranged Plan, and (y) the balance shall be payable upon consummation of such Restructuring. d. If at any time during the Fee Period, (x) any Sale is consummated or (y)(1) an agreement in principle or definitive agreement to effect a Sale is entered into, and (2) concurrently therewith or at any time thereafter (including following the expiration of the Fee Period) any Sale is consummated, Miller Buckfire shall be entitled to receive a transaction fee (a “Sale Transaction Fee”), contingent upon the consummation of a Sale and payable at the closing thereof, which shall be equal to 1% of the Aggregate Consideration (as defined below); provided, however, that the Company shall pay to Miller Buckfire either the Sale Transaction Fee, in the case of consummation of a Sale or shall pay to Miller Buckfire the Restructuring Transaction Fee in the case of a Restructuring, and shall, in no event, pay more than one such fee. For purposes of this agreement, the term “Aggregate Consideration” shall mean the total amount of cash and the fair market value (on the date of payment and as determined by Miller Buckfire in good faith) of all securities and other property paid or payable, directly or indirectly, by the acquiring party (the “Acquiror”) to the acquired party or the seller of the acquired business (in either case, the “Acquired”), or to the Acquired’s contract parties, claim holders, security holders and employees, or by the Acquired to the Acquired’s contract parties, claim holders, security holders and employees, in connection with a Sale or a transaction related thereto (including, without limitation, the face amount of any indebtedness, securities or other property “credit bid” in any Sale and amounts paid by the Acquiror (i) pursuant to covenants not to compete, employment contracts, employee benefit plans or other similar

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arrangements of the Acquired and (ii) to holders of any warrants, stock purchase rights, convertible securities or similar rights of the Acquired and to holders of any options or stock appreciation rights issued by the Acquired, whether or not vested). Aggregate Consideration shall also include the value of any liabilities (including obligations relating to any capitalized leases and the principal amount of any indebtedness for borrowed money) (x) existing on the Acquired’s balance sheet at the time of a Sale or repaid or retired in anticipation of a Sale (if such Sale takes the form of a merger or sale or exchange of stock) or (y) assumed directly or indirectly by the Acquiror in connection with a Sale (if such Sale takes the form of a sale or exchange of assets). Aggregate Consideration shall also include (i) the value of any current assets not sold to the Acquiror minus (ii) the value of any current liabilities not assumed by the Acquiror, each such value as of the closing date of the Sale and as determined by Miller Buckfire in good faith. If a Sale takes the form of a recapitalization of the Company (including, without limitation, an extraordinary dividend, a spin-off, split-off or similar transaction), Aggregate Consideration shall also include the fair market value (on the closing date of the Sale and as determined by Miller Buckfire in good faith) of (i) the equity securities of the Company retained by the Company’s security holders and/or creditors following the consummation of such transaction and (ii) any cash, securities (including securities of subsidiaries) or other consideration received by the Company’s security holders and/or creditors in exchange for or in respect of securities of and/or claims against the Company in connection with such transaction (all such cash, securities or and/or claims against other consideration received by such security holders and/or creditors being deemed to have been paid to such security holders and/or creditors in such transaction). In the event that any part of the consideration in connection with any Sale will be payable (whether in one payment or a series of two or more payments) at any time following the consummation thereof, the term Aggregate Consideration shall include the present value of such future payment or payments, as determined by Miller Buckfire in good faith. As used in this agreement, the terms “payment,” “paid” or “payable” shall be deemed to include, as applicable, the issuance or delivery of securities or other property other than cash. e. If at any time during the Fee Period, the Company (x) consummates any Financing or (y)(1) the Company receives and accepts written commitments for one or more Financings (the execution by a potential financing source and the Company of a commitment letter or securities purchase agreement or other definitive documentation shall be deemed to be the receipt and acceptance of such written commitment) and (2) concurrently therewith or at any time thereafter (including following the expiration of the Fee Period) any Financing is consummated, the Company will pay to Miller Buckfire the following (either as underwriting discounts, placement fees or other compensation): i. 3.0% of the gross proceeds of any indebtedness issued that (x) is unsecured and/or (y) is subordinated, provided that a Financing Fee shall not be due and payable to the extent proceeds from any (x) unsecured and/or (y) subordinated indebtedness are generated from existing security holders;

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ii. 5.0% of the gross proceeds of any equity or equity-linked securities or obligations issued, provided that a Financing Fee shall not be due and payable to the extent proceeds from any equity or equity-link securities are generated from existing security holders; iii. with respect to any other securities or indebtedness issued, such underwriting discounts, placement fees or other compensation as shall be customary under the circumstances and mutually agreed by the Company and Miller Buckfire; and iv. notwithstanding anything to the contrary in this letter agreement, if at any time during the Fee Period, the Company obtains a written commitment for a DIP Financing and/or an Exit Financing, a DIP Financing fee or an Exit Financing Fee of $2,000,000 (a “DIP Financing Fee” or an “Exit Financing Fee”), which shall be due and paid by the Company upon obtaining the first of such written commitments, provided that 50% of any DIP Financing Fee or Exit Financing Fee shall be credited, to the extent actually paid, against the Restructuring Transaction Fee. For purposes of clarity, Miller Buckfire shall receive only one of the DIP Financing Fee and Exit Financing Fee even if both a DIP Financing and an Exit Financing are consummated. It is understood and agreed that, if the proceeds of any such Financing are to be funded in more than one stage, the aggregate proceeds to be raised in all stages of such Financing shall be deemed to have been received, and Miller Buckfire shall be entitled to the applicable compensation hereunder calculated based on such aggregate proceeds, upon the closing date of the first stage thereof. In connection with any Financing, DIP Financing or Exit Financing undertaken within the Fee Period, Miller Buckfire shall be offered the right of first refusal to act as lead arranger, lead managing underwriter or exclusive placement agent, as the case may be. In the event that Miller Buckfire does act for the Company in any of the foregoing or similar capacities, then if requested by Miller Buckfire, the Company and Miller Buckfire shall enter into a separate agreement or other appropriate documentation for such transaction, containing customary representations, warranties, covenants, conditions and indemnities, and providing for the underwriting discounts or placement fees, as the case may be, set forth above; provided that in the absence of any such agreement, the terms of this agreement (including the Indemnification Provisions referred to below) shall govern. In no event, however, shall the economic terms of any such agreement be any less favorable to Miller Buckfire than the economic terms afforded to any other arranger, underwriter, initial purchaser or placement agent, if any, participating in any such Financing. The Company acknowledges and agrees that the fees payable to Miller Buckfire hereunder are reasonable. The Company and Miller Buckfire acknowledge and agree that (a) the hours worked, the results achieved and the ultimate benefit to the Company of the work performed, in each case, in connection with this engagement, may be variable, and that the Company and Miller Buckfire have taken this into account in setting the fees hereunder, and (b) more than one fee may be payable to Miller Buckfire under subparagraphs 2(c), 2(d) and/or 2(e) hereof in connection with any single transaction or a series of transactions,

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it being understood and agreed that (i) if more than one fee becomes so payable to Miller Buckfire in connection with a series of transactions, each such fee shall be paid to Miller Buckfire and (ii) if more than one fee becomes so payable to Miller Buckfire in connection with a single transaction, the highest of such fees shall be paid to Miller Buckfire. 3. In addition to any fees payable by the Company to Miller Buckfire hereunder, the Company shall, whether or not any transaction contemplated by this agreement shall be proposed or consummated, reimburse Miller Buckfire on a monthly basis for its travel and other reasonable out-ofpocket expenses (including all fees, disbursements and other charges of counsel to be retained by Miller Buckfire, and of other consultants and advisors retained by Miller Buckfire with the Company’s consent) incurred in connection with, or arising out of Miller Buckfire’s activities under or contemplated by this engagement. The Company shall also reimburse Miller Buckfire, at such times as Miller Buckfire shall request, for any sales, use or similar taxes (including additions to such taxes, if any) arising in connection with any matter referred to or contemplated by, this engagement. Such reimbursements shall be made promptly upon submission by Miller Buckfire of statements for such expenses. 4. The Company agrees to indemnify Miller Buckfire and certain related persons in accordance with the indemnification provisions (“Indemnification Provisions”) attached to this agreement. Such Indemnification Provisions are an integral part of this agreement, and the terms thereof are incorporated by reference herein. Such Indemnification Provisions shall survive any termination or completion of Miller Buckfire’s engagement hereunder. 5. The Company agrees that none of Miller Buckfire, its affiliates or their respective directors, officers, members, managers, agents, employees and controlling persons, or any of their respective successors or assigns (“Covered Persons”) shall have any liability to the Company or any person asserting claims on behalf of the Company or in the Company’s right for or in connection with this engagement or any transactions or conduct in connection therewith except for losses, claims, damages, liabilities or expenses incurred by the Company which are finally judicially determined to have resulted primarily from the gross negligence or willful misconduct (including bad faith and self-dealing) of such Covered Person; provided, however, that in no event shall the Covered Persons’ aggregate liability to the Company or any person asserting claims on behalf of the Company or in the Company’s right exceed the fees Miller Buckfire actually receives from the Company pursuant to its engagement hereunder, unless there is a final judicial determination of willful misconduct specified in this sentence. 6. This agreement and Miller Buckfire’s engagement hereunder may be terminated by either the Company or Miller Buckfire at any time, upon prior written notice thereof to the other party; provided, however, that (a) termination of Miller Buckfire’s engagement hereunder shall not affect the Company’s continuing obligation to indemnify Miller Buckfire and certain related persons as provided for in this agreement, and its

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continuing obligations and agreements under paragraphs 5 and 7 hereof, (b) notwithstanding any such termination, Miller Buckfire shall be entitled to the full fees in the amounts and at the times provided for in paragraph 2 hereof and (c) any termination of Miller Buckfire’s engagement hereunder shall not affect the Company’s obligation to reimburse expenses accruing prior to such termination to the extent provided in paragraph 3 hereof. 7. Miller Buckfire has been retained under this agreement as an independent contractor with no fiduciary or agency relationship to the Company or to any other party. The advice (oral or written) rendered by Miller Buckfire pursuant to this agreement is intended solely for the benefit and use of the Board of Directors of the Company in considering the matters to which this agreement relates, and the Company agrees that such advice may not be relied upon by any other person or entity, used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner for any purpose, nor shall any public references to Miller Buckfire be made by the Company, without the prior written consent of Miller Buckfire. 8. The Company agrees that Miller Buckfire shall have the right to place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder, provided that Miller Buckfire will submit a copy of any such advertisement to the Company for its approval, which approval shall not be unreasonably withheld or delayed. 9. This agreement shall be deemed to be made in New York. This agreement and all controversies arising from or relating to performance of this agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to such state’s rules concerning conflicts of laws that might provide for any other choice of law. The Company hereby irrevocably consents to personal jurisdiction in the Supreme Court of the State of New York in New York County, Commercial Part, or any Federal court sitting in the Southern District of New York, or, during the pendency of any chapter 11 case, the Bankruptcy Court (as defined below in section 11), for the purposes of any suit, action or other proceeding arising out of this agreement or any of the agreements or transactions contemplated hereby, which is brought by or against the Company. Each of the Company and Miller Buckfire hereby waive any objection to venue with respect thereto, and hereby agree that all claims in respect of any such suit, action or proceeding shall be heard and determined in any such court, and that such courts shall have exclusive jurisdiction over any claims arising out of or relating to such agreements or transactions. The Company hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Company at its address set forth above, such service to become effective ten (10) days after such mailing. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT

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OR CONDUCT IN CONNECTION WITH MILLER BUCKFIRE’S ENGAGEMENT IS HEREBY WAIVED. 10. This agreement may be executed in counterparts, each of which together shall be considered a single document. This agreement shall be binding upon Miller Buckfire and the Company and their respective successors and assigns (including, in the case of the Company, any successor to all or a portion of the assets and/or the businesses of the Company under a Plan). This agreement is not intended to confer any rights upon any shareholder, creditor, owner or partner of the Company, or any other person or entity not a party hereto other than the indemnified persons referenced in the Indemnification Provisions contained herein and the Covered Persons referenced above. 11. In the event that the Company becomes a debtor under chapter 11 of the Bankruptcy Code, the Company shall apply promptly to the bankruptcy court having jurisdiction over the chapter 11 case or cases (the “Bankruptcy Court”) for the approval pursuant to sections 327(a) and 328(a) of the Bankruptcy Code of this agreement and Miller Buckfire’s retention by the Company under the terms of this agreement, subject only to the standard of review provided for in Section 328(a) of the Bankruptcy Code, and not subject to the standard of review under section 330 of the Bankruptcy Code or any other standard of review, and shall use its best efforts to obtain Bankruptcy Court authorization thereof. The Company shall supply Miller Buckfire and its counsel with a draft of such application and the proposed order authorizing Miller Buckfire’s retention that is proposed to be submitted to the Bankruptcy Court sufficiently in advance of the filing of such application or the submission of such order, as the case may be, to enable Miller Buckfire and its counsel to review and comment thereon. Miller Buckfire shall have no obligation to provide any services under this agreement in the event that the Company becomes a debtor under the Bankruptcy Code unless Miller Buckfire’s retention under the terms of this agreement is approved under Section 328(a) of the Bankruptcy Code by a final order of the Bankruptcy Court no longer subject to appeal, rehearing, reconsideration or petition for certiorari, and which order is acceptable to Miller Buckfire in all respects. Miller Buckfire acknowledges that in the event that the Bankruptcy Court approves its retention by the Company pursuant to the application process described in this paragraph 12, payment of Miller Buckfire’s fees and expenses shall be subject to (i) the jurisdiction and approval of the Bankruptcy Court under Section 328(a) of the Bankruptcy Code and any order approving Miller Buckfire’s retention, (ii) any applicable fee and expense guidelines and/or orders and (iii) any requirements governing interim and final fee applications. In the event that the Company becomes a debtor under the Bankruptcy Code and Miller Buckfire’s engagement hereunder is approved by the Bankruptcy Court, the Company shall pay all fees and expenses of Miller Buckfire hereunder as promptly as practicable in accordance with the terms hereof. In so agreeing to seek Miller Buckfire’s retention under Section 328(a) of the Bankruptcy Code, the Company acknowledges that it believes that Miller Buckfire’s

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experience and expertise, its knowledge of the industry in which the Company operates and the capital markets and its other capabilities will inure to the benefit of the Company, that the value to the Company of Miller Buckfire’s services hereunder derives in substantial part from that expertise and experience and that, accordingly, the structure and amount of the fees payable to Miller Buckfire hereunder are reasonable regardless of the number of hours to be expended by Miller Buckfire’s professionals in performance of the services to be provided hereunder. Prior to commencing a chapter 11 case, the Company shall pay all undisputed amounts theretofore due and payable to Miller Buckfire in cash. We are pleased to accept this engagement and look forward to working with the Company. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this letter, which shall thereupon constitute a binding agreement between Miller Buckfire and the Company. Very truly yours, MILLER BUCKFIRE & CO., LLC By: Name: Marc D. Puntus Title: Managing Director By: Name: Durc A. Savini Title: Managing Director Accepted and Agreed to: DURA Automotive Systems, Inc. By: Name: Keith Marchiando Title: Vice President and Chief Financial Officer

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INDEMNIFICATION PROVISIONS In connection with the engagement of Miller Buckfire & Co., LLC (“Miller Buckfire”) as financial advisor to DURA Automotive Systems, Inc., the Company hereby agrees to indemnify and hold harmless Miller Buckfire and its affiliates, their respective directors, officers, members, managers, agents, employees and controlling persons, and each of their respective successors and assigns (collectively, the “indemnified persons”), to the full extent lawful, from and against all losses, claims, damages, liabilities and expenses incurred by them which (A) are related to or arise out of (i) actions or alleged actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company or (ii) actions or alleged actions taken or omitted to be taken by an indemnified person with the Company’s consent or in conformity with the Company’s actions or omissions or (B) are otherwise related to or arise out of Miller Buckfire’s activities under Miller Buckfire’s engagement. The Company will not be responsible, however, for any losses, claims, damages, liabilities or expenses pursuant to clause (B) of the preceding sentence which are finally judicially determined to have resulted primarily from the gross negligence or willful misconduct (including bad faith and self-dealing) of the person seeking indemnification hereunder. For purposes of these indemnification provisions, the term the “Company” has the meaning set forth in the engagement letter, dated as of August 3, 2006, between Miller Buckfire and DURA Automotive Systems, Inc. of which these indemnification provisions are an integral part. After receipt by an indemnified person of notice of any complaint or the commencement of any action or proceeding with respect to which indemnification is being sought hereunder, such person will notify the Company in writing of such complaint or of the commencement of such action or proceeding, but failure so to notify the Company will relieve the Company from any liability which the Company may have hereunder only if, and to the extent that such failure results in the forfeiture by the Company of substantial rights and defenses, and will not in any event relieve the Company from any other obligation or liability that the Company may have to any indemnified person otherwise than under these indemnification provisions. If the Company so elects or is requested by such indemnified person, the Company will assume the defense of such action or proceeding, including the employment of counsel reasonably satisfactory to Miller Buckfire and the payment of the fees and disbursements of such counsel. In the event, however, such indemnified person reasonably determines in its judgment that having common counsel would present such counsel with a conflict of interest or if the defendants in, or targets of, any such action or proceeding include both an indemnified person and the Company, and such indemnified person reasonably concludes that there may be legal defenses available to it or other indemnified persons that are different from or in addition to those available to the Company, or if the Company fails to assume the defense of the action or proceeding or to employ counsel reasonably satisfactory to such indemnified person, in either case in a timely manner, then such indemnified person may employ separate counsel to represent or defend it in any such action or proceeding and the Company will pay the fees and disbursements of such counsel; provided, however, that the Company will not

534


be required to pay the fees and disbursements of more than one separate counsel (in addition to local counsel) for all indemnified persons in any jurisdiction in any single action or proceeding. In any action or proceeding the defense of which the Company assumes, the indemnified person will have the right to participate in such litigation and to retain its own counsel at such indemnified person’s own expense. The Company further agrees that it will not, without the prior written consent of Miller Buckfire, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Miller Buckfire or any other indemnified person is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Miller Buckfire and each other indemnified person hereunder from all liability arising out of such claim, action, suit or proceeding. The Company agrees that if any indemnification sought by an indemnified person pursuant to these indemnification provisions is held by a court to be unavailable for any reason other than as specified in the second sentence of the first paragraph of these indemnification provisions, then (whether or not Miller Buckfire is the indemnified person), the Company and Miller Buckfire will contribute to the losses, claims, damages, liabilities and expenses for which such indemnification is held unavailable (i) in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and Miller Buckfire, on the other hand, in connection with Miller Buckfire’s engagement referred to above, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i), but also the relative fault of the Company, on the one hand, and Miller Buckfire, on the other hand, as well as any other relevant equitable considerations; provided however, that in any event the aggregate contribution of all indemnified persons, including Miller Buckfire, to all losses, claims, damages, liabilities and expenses with respect to which contribution is available hereunder will not exceed the amount of fees actually received by Miller Buckfire from the Company pursuant to Miller Buckfire’s engagement referred to above. It is hereby agreed that for purposes of this paragraph, the relative benefits to the Company, on the one hand, and Miller Buckfire, on the other hand, with respect to Miller Buckfire’s engagement shall be deemed to be in the same proportion as (i) the total value paid or proposed to be paid or received by the Company or the Company’s stockholders, claims holders or contract parties, as the case may be, pursuant to the transaction, whether or not consummated, for which Miller Buckfire is engaged to render financial advisory services, bears to (ii) the fee paid or proposed to be paid to Miller Buckfire in connection with such engagement. It is agreed that it would not be just and equitable if contribution pursuant to this paragraph were determined by pro rata allocation or by any other method which does not take into account the considerations referred to in this paragraph. The Company further agrees that it will promptly reimburse Miller Buckfire and any other indemnified person hereunder for all expenses (including fees and disbursements of counsel) as they are incurred by Miller Buckfire or such other indemnified person in connection with investigating, preparing for or defending, or providing evidence in, any pending or threatened action, claim,

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suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Miller Buckfire or any other indemnified person is a party) and in enforcing these indemnification provisions. The Company’s indemnity, contribution, reimbursement and other obligations under these indemnification provisions shall be in addition to any liability that the Company may otherwise have, at common law or otherwise, and shall be binding on the Company’s successors and assigns; provided, however, that during the pendency of any chapter 11 case, the Company shall have no obligation under these indemnification provisions to indemnify any person, or provide contribution or reimbursement to any person, for any claim or expense under these indemnification provisions to the extent that it is either: (i) judicially determined (the determination having become final) by the bankruptcy court having jurisdiction over any chapter 11 case or cases in which the Company is a debtor (the “Bankruptcy Court”) to have arisen from that person’s gross negligence or willful misconduct (including bad faith and self-dealing); or (ii) settled prior to a judicial determination as to that person’s gross negligence or willful misconduct (including bad faith and self-dealing), but determined by the Bankruptcy Court, after notice and a hearing, to be a claim or expense for which that person should not receive indemnity, contribution or reimbursement under the terms of the letter agreement to which these indemnification provisions are attached, as modified by any order of the Bankruptcy Court retaining Miller Buckfire pursuant to sections 327 and 328(a) of the Bankruptcy Code (a “Retention Order”). Solely for purposes of enforcing these indemnification provisions, the Company hereby consents to personal jurisdiction, service and venue in any court in which any claim or proceeding which is subject to, or which may give rise to a claim for indemnification or contribution under, these indemnification provisions is brought against Miller Buckfire or any other indemnified person; provided, however, that the Bankruptcy Court shall have exclusive jurisdiction over enforcement of these indemnification provisions during the pendency of any chapter 11 case or cases in which the Company is a debtor; and provided further that during the pendency of any such chapter 11 case or cases in which the Company is a debtor, if Miller Buckfire believes that it is entitled to the payment of any amounts by the Company pursuant to these indemnification provisions (as they may be modified by any Retention Order) including without limitation the advancement of defense costs, Miller Buckfire must file an application before the Bankruptcy Court, and the Company may not pay any such amounts to Miller Buckfire before the entry of an order by the Bankruptcy Court approving any such payment. These indemnification provisions shall apply to the above-mentioned engagement, activities relating to the engagement occurring prior to the date hereof, and any subsequent modification of or amendment to such engagement, and shall remain in full force and effect following the completion or termination of Miller Buckfire’s engagement

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(b) Application for Retention of Accountant for Unsecured Creditors’ Committee UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA FORT LAUDERDALE DIVISION In Re:


APPLICATION OF TRUSTEE FOR EMPLOYMENT OF SONEET R. KAPILA, CPA AND KAPILA & COMPANY AS ACCOUNTANTS , 2009 NUNC PRO TUNC TO , as Trustee for the estate of the above-captioned Debtor (the “Trustee”), applies to the court for authorization and approval of the employment of Soneet R. Kapila, CPA and the accounting firm of Kapila & Company, Certified Public Accountants (“Kapila”) as accountants for the Trustee, nunc , 2009, and respectfully represents: pro tunc to 1. The undersigned is the duly appointed, qualified and acting Trustee in this case. duties in this case, it 2. In order for the Trustee to properly discharge employ accountants to assist in tax compliance filings is essential that and other financial matters. The Trustee has selected Kapila because of its extensive experience and expertise in bankruptcy and related matters. 3. The Trustee seeks to employ Kapila to render the following professional services to the Trustee: (a) review of all financial information prepared by the Debtor or its accountants, including but not limited to a review of the Debtor’s financial information as of the date of the filing of the petition, its assets and liabilities, and its secured and unsecured creditors; (b) review and analysis of the organizational structure of and financial interrelationships among the Debtor and its affiliates and insiders, including a review of the books of such companies or persons as may be requested; (c) review and analysis of transfers to and from the Debtor to third parties, both pre-petition and post-petition; (d) attendance at meetings with the Debtor, its creditors, the attorneys of such parties, and with federal, state, and local tax authorities, if requested; (e) review of the books and records of the Debtor for potential preference payments, fraudulent transfers, or any other matters that the Trustee may request; (f) the rendering of such other assistance in the nature of accounting services, financial consulting, valuation issues, or other financial projects as the Trustee may deem necessary. (g) preparation of estate tax returns. 4. Kapila neither holds nor represents any interest adverse to the estate in the matters upon which it is to be employed, is a “disinterested person” as that

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term is defined by 11 U.S.C. §§ 101(14) and 327 (a) and (d), and its employment would be in the best interest of the estate and its creditors. An affidavit in support of this application is attached hereto as Exhibit A. 5. Kapila has agreed to perform the foregoing services at the ordinary and usual hourly billing rates of its members who will perform services in this matter. Kapila will incur out-of-pocket disbursements in the rendition of the services for which it shall seek reimbursement. Kapila recognizes that its compensation is subject to approval and adjustment by the Court in accordance with 11 U.S.C. § 330. WHEREFORE, the Trustee respectfully requests that this Court enter an order approving the selection and employment by the Trustee of Kapila as accountants to perform the services set forth in this Application, upon the terms and conditions set forth herein. DATED this

day of October, 2009. , as Trustee for the Estate of By:

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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: LOEWEN GROUP INTERNATIONAL, INC., a Delaware Corporation, et al., Debtors

Jointly Administered Case No. 99-1244 (PJW) Chapter 11

APPLICATION FOR ORDER APPROVING RETENTION OF PRICEWATERHOUSECOOPERS LLP AS ACCOUNTANTS FOR THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO THE HONORABLE PETER J. WALSH, UNITED STATES BANKRUPTCY JUDGE: The Official Committee of Unsecured Creditors (the “Committee”) of the above-captioned debtors and debtors-in-possession (collectively, the “Debtors”), by and through its undersigned co-chairs, hereby submits this application (the “Application”) for an Order pursuant to Section 1103(a) of Title 11 of the United States Code (the “Bankruptcy Code”) and Rule 2014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), authorizing the Committee to retain and employ PricewaterhouseCoopers LLP (“PwC”), as accountants for the Committee in the Debtors’ Chapter 11 cases. In support of this Application, the Committee relies on the affidavit of Dewey Imhoff attached hereto as Exhibit A (the “Imhoff Affidavit”). In further support of this Application, the Committee respectfully represents as follows: BACKGROUND 1. On June 1, 1999 (the “Petition Date”), the Debtors filed with this Court their respective voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Debtor Loewen Group International, Inc., a Delaware corporation (“LGII”), is a wholly owned subsidiary of Debtor The Loewen Group Inc., a British Columbia corporation (“TLGI”, and together with LGII, “Loewen” or the “Company”). The other Debtors are either direct or indirect subsidiaries or affiliates of LGII. TLGI and certain of the Debtors’ Canadian affiliates (the “Canadian Debtors”) commenced insolvency proceedings (the “Canadian Proceedings”) under the Canadian Companies’ Creditors Arrangement Act in the Ontario Superior Court of Justice in Toronto, Ontario on the Petition Date. 2. Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, the Debtors are continuing to operate their businesses and manage their property and assets as debtors-in-possession. No trustee or examiner has been appointed in the Debtors’ Chapter 11 cases. 3. Venue of these cases and the Application in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The statutory predicate for the relief sought herein is Section 1103(a) of the Bankruptcy Code.

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4. On June 11, 1999 the United States Trustee’s Office appointed the Committee (the “Committee Appointment Date”) pursuant to Section 1102(a)(1) of the Bankruptcy Code.1 5. Section 1103(a) of the Bankruptcy Code authorizes the Committee to employ accountants with the Court’s approval. RELIEF REQUESTED 6. The Committee respectfully requests the entry of an Order pursuant to Section 1103(a) of the Bankruptcy Code authorizing it to employ and retain PwC as its accountants to perform accounting and other financial services that will be necessary during these Chapter 11 cases. PwC’s Qualifications 7. The members of the Committee based the selection of PwC as Committee accountants on said firm’s knowledge of the background to these cases and extensive experience and knowledge in the field of accounting and related financial services. The Committee believes that PwC is well qualified to advise it in connection with this case. Services to Be Provided by PwC 8. The professional services that PwC will render to the Committee include the following: (a) advise and assist the Committee in its examination, analysis and monitoring of the Debtors’ historical, current and projected financial affairs, including without limitation, schedules of assets and liabilities, statements of financial affairs, periodic operating reports, analyses of cash receipts and disbursements, analyses of cash flow forecasts, analyses of trust accounting, analyses of various asset and liability accounts, analyses of cost-reduction programs, analyses of any unusual or significant transactions between the Debtor and any other entities, and analyses of proposed restructuring transactions; (b) advise and assist the Committee in its review of the Debtors’ existing and proposed systems and controls, including but not limited to organizational structure, cash management and management information and reporting systems; (c) advise and assist the Committee in developing and negotiating any plan of reorganization scenarios including, as necessary, certain information to be included in the disclosure statement; (d) advise and assist the Committee in preparing or reviewing strategic options, business plans and financial projections; (e) advise and assist the Committee in reviewing executory contracts and provide recommendations to assume or reject; (f) advise and assist the committee in its assessment of the management team, including a review of the bonus, incentive and retention plans; 1 The

Committee members comprise Teachers Insurance and Annuity Association of America (co-chair), UBS AG (co-chair), State Street Bank & Trust Company, Norwest BankMinn., N.A., Wachovia Bank, N.A., Magten Asset Management Corporation, Allied Capital, Deutsche Bank AG New York, and CalPERS.

540


(g) advise and assist the Committee to review and evaluate the claims process; (h) advise and assist the Committee regarding various reorganization tax issues, including calculating net operating loss carryforwards, and the tax consequences of any proposed plans of reorganization; (i) attend Committee meetings and court hearings as may be required in their role as accountants to the Committee; (j) render expert testimony and litigation support services, as requested from time to time by the Committee and its counsel, regarding valuations, appraisals and/or the feasibility of a plan of reorganization and other matters; (k) advise and assist the Committee in identifying or reviewing debtor-inpossession financing; (l) advise and assist the Committee in identifying and/or reviewing preference payments, fraudulent conveyances and other causes of action; (m) advise and assist the Committee in reviewing any proposed sales of assets or business units; (n) assist with such other accounting and financial advisory services as may be requested by the Committee and its counsel. Payment of Fees and Expenses 9. PwC intends to apply to this Court for allowance of compensation and reimbursement of expenses in accordance with applicable provisions of the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of this Court. Subject to Court approval, and in accordance with Sections 330 and 331 of the Bankruptcy Code, PwC will seek to be compensated at rates set forth in the Imhoff Affidavit, and submits that such rates are reasonable. 10. The hourly rates set forth in the Imhoff Affidavit are the firm’s standard hourly rates for work of this nature. These rates are set at a level designated to compensate the firm fairly for the work of its professionals and does not cover fixed and routine overhead expenses. It is the firm’s policy to charge its clients in all areas of practice for all expenses incurred in connection with the client’s case. The expenses charged to clients may include, among other things, goods and services tax as required by applicable law, telephone and other charges, mail and express mail charges, special or hand delivery charges, document processing, photocopying charges, travel expenses, expenses for “working meals,” computerized research, as well as non-ordinary overhead expenses such as secretarial and other overtime. 11. Prior to the Petition Date, on or about May 21, 1999, PwC was retained as accountants by Hebb & Gitlin, a Professional Corporation (“Hebb & Gitlin”) in their capacity as counsel to an ad hoc committee of senior secured debtholders who hold, as of the Petition Date, more than $1.3 billion of Loewen’s approximately $1.7 billion of public and private debt securities (the “Ad Hoc Committee”). As part of PwC’s representation of the Ad Hoc Committee, Loewen paid PwC a retainer in the amount of $75,000 (the “Retainer”), which was not refreshed. 12. During the period between May 21, 1999 and the day prior to the Petition Date, the Company did not pay PwC any amounts for (i) fees and expenses incurred by PwC as accountants to the Ad Hoc Committee, or (ii) as reimbursement of expenses incurred by PwC in connection with such services.

7.9


541

13. On or before May 31, 1999, PwC applied the Retainer against $68,665 in fees and expenses incurred for the period through and including May 31, 1999. Accordingly, as of the Petition Date, PwC holds the balance of the retainer in trust (non-interest bearing) for the Debtors. PwC will not apply any portion of the Retainer to fees and expenses incurred from and after the Petition Date unless and until authorized to do so by a further order of this Court. Disclosure Concerning Potential Conflicts of Interest 14. To the best of applicant’s knowledge, except for PwC’s representation of the Ad Hoc Committee and any other parties disclosed in the Imhoff Affidavit, PwC has not represented the Debtors, their creditors, equity security holders, or any other parties in interest, or their respective attorneys and accountants, the United States Trustee for the District of Delaware, or any person employed in the office of the United States Trustee for the District of Delaware, in any matters relating to the Debtors or their estates. 15. To check and clear potential conflicts of interest in these cases, PwC researched its client databases to determine whether it had any relationships with the following entities (collectively, the “Interested Parties”) included as Schedule 2 to the Imhoff Affidavit: (a) the Debtors and their nondebtor affiliates; (b) the Debtors’ directors and officers and certain of their major business affiliations, as disclosed to PwC by the Debtors; (c) the Debtors’ 100 largest unsecured creditors on a consolidated basis, as identified in their chapter 11 petitions; (d) other material trade creditors as disclosed to PwC by the Debtors; (e) parties to significant litigation with the Debtors, as disclosed to PwC by the Debtors; (f) the attorneys and other professionals that the Debtors have employed or identified for employment in these chapter 11 cases in applications filed on the Petition Date or anticipated to be filed in the future; (g) the attorneys and other professionals that the Committee has employed or identified for employment in these chapter 11 cases in applications filed or anticipated to be filed in the future; (h) the Debtors’ material secured lenders, as disclosed to PwC by the Debtors; (i) the Debtors’ proposed postpetition lender; and (j) the Debtors’ material unsecured bank and noteholder lenders, as disclosed to PwC by the Debtors. To the extent that PwC’s research of its relationships with the Interested Parties indicates that PwC has represented or currently represents any of these Interested Parties in matters unrelated to these Chapter 11 cases, the identities of the entities and, for current clients, a brief description of the type of work performed by PwC is set forth on Schedule 1 to the Imhoff Affidavit. 16. Despite the efforts described above to identify and disclose PwC’s connections with parties in interest in these cases in a timely fashion, and because PwC is an international accounting firm with more than 8,700 partners and over 99,000 professional staff in offices worldwide, and the Debtors are a multinational enterprise with thousands of creditors and other relationships, PwC is unable to state with certainty that every client representation or other

542


connection with parties in interest in these cases has been disclosed. If PwC discovers additional information that requires disclosure, PwC will file a supplemental disclosure with the Court as promptly as possible. 17. To the best of the Committee’s knowledge, PwC is a “disinterested person” as that phrase is defined in Section 101(14) of the Bankruptcy Code, and PwC’s employment is necessary and in the best interests of the Committee and the Debtors’ estates. 18. PwC has advised the Committee that no agreement exists between PwC and any other person for the sharing of compensation to be received by PwC in connection with services rendered, or to be rendered in this case, save amongst the PwC partners. Nunc Pro Tunc Relief 19. The success of the Debtors’ reorganization effort depends in large part on the cooperation of its creditors, consumers and the various state regulators in all 50 states in the United States. Given the sensitive nature of Loewen’s business, as well as the large number of individual debtors, it was crucial to the Debtors to secure the support of its major creditors represented by the Ad Hoc Committee. This was the primary reason for Loewen requesting and supporting the formation of the Ad Hoc Committee in the first place, and working closely with Hebb & Gitlin and PwC as professionals to the Ad Hoc Committee leading up to the Petition Date. 20. Since the Petition Date, PwC has continued to work with Hebb & Gitlin to, among other things, review and analyze the legal and financial consequences of the various first-day motions and applications which have been filed, and in particular the debtor-in-possession financing relief. 21. The services rendered by PwC following the Petition Date have materially benefited all unsecured creditors of the Debtors’ various estates, and served to protect their rights until an official unsecured committee was appointed. At this time however, the Committee requests that PwC’s retention only be approved, nunc pro tunc, effective as of the Committee Appointment Date. NOTICE 22. Notice of this Application has been given to the Debtors, the Debtors’ counsel, the Office of the United States Trustee for the District of Delaware and all other parties who have requested service of pleadings. The Committee submits that, given the nature of the relief requested, no further notice is necessary. 23. PwC intends to apply to the Court for payment of compensation and reimbursement of expenses in accordance with the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of this Court, and pursuant to any additional procedures that may be established by the Court in these cases. 24. No previous application for the relief sought herein has been made by the Committee to this or any other Court. WHEREFORE, the Committee respectfully requests entry of the annexed Order authorizing the Committee to employ and retain PwC nunc pro tunc to

7.9


543

the Committee Appointment Date and for such other and further relief as the Court may deem just and proper. Dated: August 6, 1999

Respectfully submitted, /s/ Roi Chandy Roi Chandy Co-Chair THE OFFICIAL UNSECURED CREDITORS’ COMMITTEE

WHEREFORE, the Committee respectfully requests entry of the annexed Order authorizing the Committee to employ and retain PwC nunc pro tunc to the Committee Appointment Date and for such other and further relief as the Court may deem just and proper. Dated: July 30, 1999

Respectfully submitted, /s/ Mark B. Cohen Mark B. Cohen Co-Chair THE OFFICIAL UNSECURED CREDITORS’ COMMITTEE

544 7.10


Declaration of Subsequent Connections

Objective. Sections 7.7 through 7.10 deal with the affidavit and application for retention of the financial advisors. Included must be a listing of all potential conflicts and connections. However, it is not only necessary to complete the check at the beginning of the case but to notify the court of any subject changes in the original application. Included in (a) is a declaration of the financial advisor regarding any connections. Subsequent to the retention, Huron Consulting was engaged by the law firm represent its client as consultants. Included in (b) is a supplemental declaration disclosing this fact to the bankruptcy court. Subsequent to the supplemental declaration, Huron was engaged by the insurance company that provided insurance to the client. A second supplemental declaration (c) notifies the court of the nature of the services rendered to the insurance company.


In re: THE DELACO COMPANY, Debtors.

x : : : : : : : x


)

DECLARATION OF JAMES M. LUKENDA IN SUPPORT OF APPLICATION FOR ORDER UNDER 11 U.S.C. §§ 105(a) AND 363(b) AUTHORIZING CONTINUED EMPLOYMENT OF HURON CONSULTING GROUP AS RESTRUCTURING CONSULTANTS TO DEBTOR-IN-POSSESSION I, James M. Lukenda, hereby declare that the following is true to the best of my knowledge, information and belief: 1. I am a Managing Director of Huron Consulting Group LLC (“Huron”), a multi-disciplined consulting firm with practices in areas such as bankruptcy, financial restructuring (including interim management) and litigation-related services and numerous offices throughout the country. I submit this declaration (the “Declaration”) on behalf of Huron in support of the Application for Order Under 11 U.S.C. §§ 105(a) and 363(b) and Fed. R. Bankr. P. 2014 and 2016 Authorizing Continued Employment of Huron Consulting Group LLC as

7.10


545

Restructuring Consultants to Debtor-in-Possession (the “Application”), filed contemporaneously herewith by The Delaco Company (“Delaco”), debtor and debtor-in-possession in the above-captioned case (“the Debtor”). Except as otherwise noted, I have personal knowledge of the matters set forth herein and if called as a witness, would testify competently thereto.1 Professional Qualifications 2. Huron. Huron is a firm specializing in the provision of turnaround, crisis management and restructuring services for public and private companies, lenders, equity holders and impartial constituents (such as examiners or trustees). Working closely with client management, Huron develops and implements comprehensive turnaround programs that increase value through improving operations and asset performance, refocusing business models and restructuring debt. 3. Huron’s typical assignments involve: providing valuation, corporate finance, restructuring and turnaround services to companies and lenders; performing financial investigations, litigation analysis, expert testimony and forensic accounting for attorneys; and providing strategic planning, operational consulting, strategic sourcing and organizational and technology assessments in a variety of industries, including manufacturing, healthcare, higher education, legal, transportation, consumer products and energy. 4. For over 25 years, professionals in Huron’s employ have served as advisors to management, as chapter 11 trustees and as creditor trustees, and Huron has brought numerous companies successfully through the complexities of chapter 11 bankruptcy. Huron’s expertise in management, finance and accounting, combined with its understanding of the complex interests of stakeholders in a bankruptcy proceeding, allow it to provide the insight stakeholders need to weigh the risks and benefits of bankruptcy filing. Huron offers knowledgeable, practical solutions for every phase of the restructuring process and its valuation services are critical in resolving the competing claims of management, banks, creditors and equity stakeholders in the event of a bankruptcy. 5. Huron’s reorganization services include, but are not limited to: advising management on a strategy to maximize value; designing and implementing turnarounds and reorganizations; leading refinancing and debt restructuring negotiations and, when a consensual plan cannot be achieved, implementing a chapter 11 strategy to achieve a viable outcome; negotiating with all classes of constituents; communication of a turnaround or recovery plan; development of consensus to implement the optimal strategy; and evaluation of proposed asset sales, debtor-in-possession financing and retention bonuses. 6. James M. Lukenda. Prior to serving as a Corporate Advisory Services Managing Director with Huron, I was a partner in Arthur Andersen LLP’s New York corporate restructuring practice specializing in financial consulting, largely in corporate turnaround, loan workouts and bankruptcy situations. 7. I have provided assistance to clients with troubled debt restructurings, mergers, acquisitions and dispositions; litigation and claims analysis; fraud 1 Certain

of the disclosures herein relate to matters within the knowledge of other professionals at Huron and are based on information provided by them.

546


investigations; and other financial consulting and bankruptcy assignments. My experience spans numerous industries, including heavy manufacturing, retailing, electronics, consumer products and distribution, construction and contracting, communications and publishing, real estate and hospitality. 8. My extensive bankruptcy and restructuring experience includes: preparation for and providing expert testimony on issues of business plans, liquidations, avoidance actions, substantive consolidation and other reorganization and bankruptcy issues; development and evaluation of strategic business plans on behalf of debtors and creditors, including the evaluation of customer and product profitability, store plant profitability, overhead structure and industry viability; analysis for providing expert testimony on business performance, lost profits and underlying claims for damages; preparation and evaluation of valuation reports, including enterprise value and liquidation analyses; negotiation and evaluation of terms of plans of reorganization and underlying post-confirmation documents and covenants; negotiation and evaluation of out-of-court debt restructuring proposals; negotiation and evaluation of asset and going concern business sales in connection with representation of nonU.S. administrators and receivers; evaluation of alternative liquidation plans for cessation of business of non-U.S. business entities; serving as a court directed examiner over debtor distributions and disbursements; providing technical and operational support for liquidation and creditor distribution trustees in handling proofs of claim, reserve requirements, taxes and distribution; serving as technical advisor to engagement teams on financial and accounting issues regarding “fresh start” reporting and postpetition and post-confirmation accounting; analysis and formulation of operating and financial process improvements; and serving as a teller or inspector of elections.

Services to Be Provided 9. On January 5, 2004, the Debtor and Huron entered into the Employment Agreement, a copy of which is attached hereto as Exhibit C, whereby Huron agreed to provide professionals to serve as temporary staff (“Temporary Staff”) to assist the Debtor in its restructuring process. Specifically, Huron and the Debtor agreed that I would serve as the Debtor’s Chief Restructuring Officer (“CRO”), with the assistance, on an as-needed basis, of the Temporary Staff. Additionally, Huron agreed to provide the services of additional professionals and paraprofessionals on an as-needed basis at the request of the Debtor. 10. In accordance with the Employment Agreement, I am the principal Huron consultant responsible for the provision of services to the Debtor, will be available on a full-time basis and will be focused on all aspects of the Debtor’s operational issues. I will act under the direction, control and guidance of the Board of Directors of Delaco (the “Board”) and serve at the Board’s pleasure. 11. The terms of the Employment Agreement provide that Huron’s restructuring consulting services, through my appointment as CRO and the assistance of the Temporary Staff, will include, but not be limited to, the following: (a) assistance with the performance of pre-chapter 11 filing preparation for purposes of surfacing necessary information to complete required documents for the chapter 11 filing;

7.10


547

(b) assistance to counsel with the preparation of necessary information in support of first-day motions for a chapter 11 filing; (c) assistance with the preparation of creditor lists, the statement of financial affairs and schedules of assets and liabilities; (d) support for preparing financial and informational filings for the bankruptcy or other courts; (e) assistance as may be required for maintaining listings of creditors and claims, reconciling such items and resolving related disputes; (f) assistance in connection with insurance claims settlements and action to support marshalling of insurance recoveries and other assets; and (g) support of the development of the plan of reorganization and related disclosure statement. Disclosure of Relationships with Parties in Interest 12. In connection with the preparation of this Declaration, Huron conducted a relationship search of its contacts with (a) Delaco; (b) the Debtor’s largest unsecured creditors; (c) the Debtor’s most significant stockholders; (d) the Debtor’s directors and officers; (e) the Debtor’s professionals; (f) the Debtor’s major litigation parties; (g) the Debtor’s insurance carriers; (h) parties to material contracts; (i) the Debtor’s landlords and tenants; and (j) certain other significant parties identified by the Debtor. A listing of the parties reviewed is reflected on Exhibit A hereto. Huron’s review, completed under my supervision, consisted of a query of the Exhibit A parties within an internal computer database containing names of individuals and entities that are present or recent former clients of Huron. 13. Based on the results of such review, Huron does not have any connection with any of the parties on Exhibit A in matters related to these proceedings, other than Huron’s prepetition engagement as restructuring consultants of the Debtor and my service as the Debtor’s Chief Restructuring Officer. Huron has provided and likely will continue to provide services unrelated to the Debtor’s case for various creditors or equity security holders of the Debtor, including those parties listed on Exhibit B. Huron’s assistance to these parties has been related to providing various business consulting services. To the best of my knowledge, no services have been provided to these parties which involve their rights in the Debtor’s case, nor does Huron’s involvement in this case compromise its ability to continue such consulting services. Huron may in the future provide services unrelated to the Debtor’s case for other creditors, equity security holders or parties in interest in this case. 14. As part of its diverse practice, Huron appears in numerous cases, proceedings and transactions involving many different professionals, including attorneys, accountants and financial advisors, some of whom may represent claimants and parties in interest in the Debtor’s chapter 11 case. Also, Huron has performed in the past, and may perform in the future, consulting services for various attorneys and law firms, and has been represented and may in the future be represented by attorneys and law firms, some of whom may be involved in these proceedings. In addition, Huron has in the past and will likely in the future be working with or against other professionals involved in this case in matters unrelated to the Debtor and this case. Based on Huron’s current knowledge of the professionals involved, and to the best of my knowledge,

548


none of these relationships is in connection with this case or causes Huron to hold or represent an interest adverse to the Debtor or its estate with respect to the matters on which Huron is to be employed. 15. Huron is not a “Creditor” of the Debtor within the meaning of section 101(10) of Chapter 11 of Title 11 of the United States Code (as amended, the “Bankruptcy Code”). Further, neither I, nor any member of Huron, to the best of my knowledge, is a holder of any shares of the Debtor’s stock. 16. Further, to the best of my knowledge, neither I, nor any member of Huron, have any connection with the United States Trustee or any person employed in the Office of the United States Trustee in this District. In addition, to the best of my knowledge and based upon the results of the relationship search described above and disclosed herein, Huron neither holds nor represents an interest adverse to the Debtor or its estate with respect to the matters on which Huron is to be employed. I am serving on a part-time basis as Chief Restructuring Officer of the Debtor and other Huron employees may from timeto-time provide interim management services on a part-time basis; however, there are no simultaneous or prospective engagements existing which would constitute an interest adverse to the Debtor or its estate with respect to the matters on which Huron is to be employed. 17. It is Huron’s intent to update and expand its relationship search for additional parties in interest as directed by the Debtor in an expedient manner. If any new relevant facts or relationships are discovered or arise which require further disclosure, Huron will promptly file a supplemental declaration. Employment Terms and Compensation 18. Huron’s retention is subject to the Court’s approval of Huron’s Employment Agreement attached hereto as Exhibit C. Huron will seek payment for compensation on an hourly basis, plus reimbursement of actual, necessary expenses incurred by Huron and indemnification as more fully described in Exhibit C. Huron’s professionals use the same hourly rates when they are serving in bankruptcy cases and non-bankruptcy cases, and these hourly rates are adjusted periodically with such adjustments disclosed to the Court and the Debtor. The hourly rates currently charged by Huron are: Title

Hourly Rate

Managing Director Director Manager Associate Analyst

$600.00 $450.00 $350.00 $275.00 $175.00

19. In addition to the hourly compensation described above, the Debtor will pay one or more success fees or bonuses upon receipt of a statement requesting payment of and certifying entitlement to such success fees or bonuses as follows:

7.10


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r Seventy-five thousand dollars ($75,000) shall be payable upon the completion of documents necessary for the Debtor to file for chapter 11 bankruptcy protection; r Seventy-five thousand dollars ($75,000) shall be payable upon the confirmation of a plan or reorganization. 20. Because Huron is not being employed as a professional under section 327 of the Bankruptcy Code, the Debtor has requested that Huron not be required to file formal monthly fee statements or interim/final fee applications pursuant to sections 330 and 331 of the Bankruptcy Code. Nonetheless, Huron agrees that within fifteen (15) days after the end of each calendar month, or as soon as practicable thereafter, it will provide the Debtor, the United States Trustee and counsel to any committee(s) appointed in this case, a detailed statement setting forth the services provided, compensation earned (by professionals and paraprofessionals) and expenses incurred by Huron during the prior month. 21. Should any of the listed parties object to the requested fees and/or expenses by informing Huron and the Debtor of the same within twenty (20) days of the date of the submission of such statement, the Debtor shall pay Huron only the uncontested portion of the monthly statement, with the objected amount to be withheld until Huron and the objecting party either reach agreement or, in the event that agreement cannot be reached, present such monthly statement and related objection to the Court for disposition. 22. Since its retention, Huron has submitted invoices to the Debtor for its fees and expenses, including estimated unposted professional fees and expenses through the Petition Date, on a semi-monthly basis. The Debtor has provided timely and prompt payment of such invoices. According to Huron’s books and records, during the ninety-day period prior to the commencement of this case, Huron received approximately $340,355.24 from the Debtor for professional services performed and expenses incurred. 23. In accordance with the Employment Agreement, the Debtor paid a retainer of $250,000 to Huron before the commencement of Huron’s work. Notwithstanding anything to the contrary in the Employment Agreement, as promptly as practicable after all fees and expenses accrued prior to the Petition Date have been calculated, Huron will issue a final invoice for the actual and necessary fees, charges and disbursements incurred for the period prior to the Petition Date, and such amounts shall be paid from the remaining amount available from the retainer. The Debtor and Huron have agreed that any portion of the retainer not used to compensate Huron for its prepetition services and expenses will be held and applied to its final bill for services rendered with any excess amounts refunded to the Debtor. Huron will not place such retainer in a separate account. 24. To the best of my knowledge, (a) no commitments have been made or received by Huron, nor any member thereof, as to compensation or payment in connection with this case other than in accordance with the provisions of the Bankruptcy Code and (b) Huron has no agreement with any other entity to share with such entity any compensation received by Huron in connection with this chapter 11 case. 25. Finally, based on prior discussions and agreements between Huron and the Office of United States Trustee, Huron anticipates having discussions with

550


the Office of United States Trustee and proposing that any Order approving Huron’s employment contain the following modifications to the terms in Huron’s Employment Agreement: a. The Employment Agreement is hereby revised, for the avoidance of doubt, to provide that Huron employees serving as officers of the Debtor shall be entitled to receive only whatever indemnities are made available, during the term of Huron’s engagement, to other non-Huron affiliated officers of the Debtor, whether under the Debtor’s by-laws, certificate of incorporation, applicable corporation laws, or contractual agreements of general applicability to the Debtor; b. The provision in the Employment Agreement’s General Business Terms relating to arbitration in the event a dispute arises between the Debtor and Huron is hereby revised to provide that the arbitration provision shall apply only to the extent that the United States Bankruptcy Court, or the United States District Court if the reference is withdrawn, does not retain jurisdiction over a controversy or claim. c. Paragraph 2 of the General Business Terms of the Employment Agreement is modified as follows: the heading “Independent Contractor” is hereby replaced with the heading “No Agency” and the phrase “an independent contractor and” is hereby deleted from the first sentence of that paragraph. d. All requests of Huron for payment of indemnity pursuant to the Employment Agreement shall be made by means of an application (interim or final as the case may be) and shall be subject to review by the Court to ensure that payment of such indemnity conforms to the terms of the Employment Agreement and is reasonable based upon the circumstances of the litigation or settlement in respect of which indemnity is sought; provided, however, that in no event shall Huron be indemnified in the case of its own bad faith, self-dealing, breach of fiduciary duty (if any), gross negligence or willful misconduct. e. In no event shall Huron be indemnified if the Debtor or a representative of the estate asserts a claim for, and a court determines by final order that such claim arose out of, Huron’s own bad faith, self-dealing, breach of fiduciary duty (if any), gross negligence, or willful misconduct. f. In the event that Huron seeks reimbursement for attorneys’ fees from the Debtor pursuant to the Employment Agreement, the invoices and supporting time records from such attorneys shall be included in Huron’s own monthly fee statement and shall be subject to the same payment procedures outlined in paragraphs 20 and 21, above. g. Paragraph 8 of the Employment Agreement’s General Business Terms shall apply solely to claims of Huron and the Debtor against each other, and shall not apply if the Debtor or a representative of the estate asserts a claim for, and a court determines by final order that such claim arose out of, Huron’s own bad faith, self-dealing, breach of fiduciary duty (if any), gross negligence, or willful misconduct. Additionally, the phrase “for the portion of the engagement giving rise to liability” is deleted from this paragraph. h. To the extent this Order is inconsistent with the Employment Agreement, this Order shall govern.

7.10

551


I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief. Dated: New York, New York February 12, 2004 HURON CONSULTING GROUP LLC /s/ James M. Lukenda James M. Lukenda, CIRA Managing Director

552


Exhibit A Huron Consulting Group The Delaco Company Parties Reviewed 122 East 42nd Street, LLC 981 Stop A.H. Robins A.H. Robins Company, Inc AAC CONSULTING GROUP ACC CONSULTING GROUP ACCOUNTEMPS Adalgize Arias ADAMS COOGLER WATSON MERKEL BARRY & KELLNER, P.A. ADP, INC. Advocare International, Inc. Advocare International, LLC Afassco, Inc. Afassco, Inc. AFFILIATED FOODS AHOLD FINANCIAL SERVICES Albert Jordan Albert Noud Albertson’s Albertson’s Pharmacy Albertson’s, Inc. ALBERTSONS-PONCA CITY SUNDRIES Alex Steenkist Aleyda Bardales Alfred I. Garcia Alice Foree Alice Garrett Alicia Rivers Alisa Lott Allegheny Pharmaceutical Corporation Alma Rucker Alma Tanner Alpharma, Inc. Alps Pharmaceutical Ind. Co., Ltd. Alton Lewis Alva-Amco Pharmacal Companies, Inc. Alverta Hills American Drug Stores, Inc. American Drug Stores, Inc. d/b/a Osco Drug Inc. American Drug Stores, Inc., a Illinois Corp. American Home Products American Home Products Corporation American Home Products Inc. American Kaylor Amy George Amy Etolye Boum

Amy Williams Andrea Morton Andres Bardales Andrew Joseph Billings Andrew Siemer ANDRX Corporation Andrx Laboratories, Inc. ANDRX Pharmaceuticals ANDRX Pharmaceuticals, Inc. Angela Lea Angela Louise Busby Angela Louise Hunt Angela Louise Joubert Angelina Pitts Angelita Dille Anita Stam Anna Brown Anna Faye Miller Anna Faye Ochoa Anna M. Martinez Anne S. Maxwell Annette Brown Annette Kazebee Annie Saxon Annie Faye McClendon Annie Lizzie Brown Annie o/b/o Tolliver, Frank Tolliver Anthony Drewwwery Anthony Slocum Antoinette Mellia Apothecon, Inc., a wholly owned subsidiary of Bristol-Meyers Squibb, Inc. Ariel Morton Arthur Drug Stores, Inc. AT&T AT&T WIRELESS SERVICES Aubrey Richardson Aundrea Marvel Aundrea Miller Averion Inc. Bankston Drugs, LLC Barbara Wilcox Barbara Ann Walker Barbara J. Whaley Barbara R. Gleich Barbara Ames Barbara Elkehan Barnes & Associates Barry Baxter


553

Bayer A.G. Bayer Consumer Care, a division of Bayer Corporation Bayer Corporation Beatrice Allison Beemon Drugs, Inc. d/b/a Beemon Drugs BELL SOUTH Ben Johnson Benjamin Benemon Benjamin Brooks Benjamin Wells Benjamin Sutton Bergen Brunswig Company, Inc. Bergen Brunswig Drug Company Bernadette Hoovler Bessie Campbell Bettie Carmichael Betty Mays Betty Powell Betty C. Coaxum Betty C. Rosemond Betty Jo Kingston Betty Lacey Betty Ladell Betty Rainley Betty Truly Beverly Wilson Bill Fitzmaurice Bill Rushing Billie Hall Billie Reinninger Bill’s Dollar Store, Inc. Billy H. Murphy Biostatistical Services, Inc. Blairex Laboratories, Inc. Block Drug Company Block Drug Company, Inc. Block Drug Corp. Blue Diamond Realty, L.L.C. Bo Drax Shandy Bobbens, Inc. Bobbie Brooks Bobby Smith Bodell, Bove, Grace & Van Horn, P.C. Body Dynamics, Inc. Bolton Discount Drugs Bonnie Banks Boots Pharmaceutical, Inc. Boudreaux’s Family Pharmacy, Inc. BOWNE DECISION QUEST BRACEWELL & PATTERSON, L.L.P. Brad Trehern

BRANDON SMITH REPORTING SERVICE, LLC Brenda Cook Brenda Joseph Brenda Keller Brenda Tate Brenda Thompson Brent’s Drugs, Inc. Brian S. Masumoto Bridges Kwik Way Bridget Hartig Bristol-Meyers Production Division Bristol-Myers Products, Inc. Bristol-Myers Squibb Bristol-Myers Squibb Company Bristol-Myers Squibb Corporation Brock Sutton Brooks Pharmacy Inc. Brookshire Brothers Ltd. Brookshire Grocery Co. Bruce Blanchard Bruce Schwartzberg Brumfield Oil Company, Inc. d/b/a BP Oil; Bryant Donald BUCHALTER, NEMER, FIELDS & YOUNGER Bulldog Corner, Inc. d/b/a Starkville Discount Drugs Burkette’s Corner BURR & FORMAN LLP BURR PEASE & KURTZ C & F Inc. d/b/a Cook and Fortenberry Valu-Rite Pharmacy Callcote Grocery & Tire, Inc. Candy Coats Joslyn CAPCO FINANCIAL CORPORATION Carl Johnson Carl Neidhart Carl Powers Carla Reeves Carlo Senatore Carol A. Porter Carol Ann Mennenga Carol Jean Bolian Carol Jean Rontenot Carol Adams Carol Gasper Carol Hand Carol Moody Carolyn Bourgeois Carolyn Davidson Carolyn Sangster

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554 Carrie J. faver Carrie Preyer Cassie Elaine Covington Williams Catherine Pearl Baratelli Catherine Benjamin catherine McKinney Catherine Mitchell Catletha Brooks Catron Oil, Inc. D/B/A Texaco Food Mart #4 CCA Industries, Incorporated Century Cherry Lawn Pharmacy, Inc. CGLIC Charles Cole d/b/a Cross Truck Shop and Supply CHARLES H. HENNEKENS, MD Charles Henry Best d/b/a Fred’s Dollar Store f/k/a Martin’s Drug Store Charles o/b/o D’mino, Thelma D’mino Charles T. Noonan Charles Bishop Charles Black Charles Forrest Charles Harper Charles Jackson Charles Jackson Charlie P. Yazell Charlie Williams Charlotte Young CHASE ENGLAND Chattem, Inc. Chattem, Inc. and Signal Investment & Management Co. Cheryl Romo Cheryl Zarkin Chesebrough-Pond’s, Inc. Chesebrough-Pond’s, Inc. Chief Judge Stuart M. Bernstein Chrerise Collings Christina Trahan Christine Hedrick Johnson Christine Jackson Christopher Siemer Ciba Consumer Pharmaceuticals Ciba-Geigy Corporation Ciba-Geigy Specialities Corp. CIGNA Circle K Safeway, Inc. Circle K Stores, Inc. Circle K Stores, Inc. Clara Iee Clarence Jackson


Clarie o/b/o Bickham, Eddie Bickham Clark Oil Company, Inc. d/b/a Clark Exxon #6 Clayton Drug Store, Inc. Clifford Woods Clotee Dolphus Coastal Mart Coleman Pharmacy Colin Barrilleaux Colin’s spouse Barrilleaux Collie Brent COLLIERS ABR, INC. CONANT CORPORATION Condon’s, Inc. d/b/a Condon PD Drug Store Connie Guess Connie Bowman Constance Harrison Consuelo Tavarez Consumer Healthcare Products Association Cooley Drug, Inc. d/b/a Cooley Drugs COREFACTS Cornelius Howard Cortney Arso Costco Wholesale Corporation Costco Wholesale Intenational, Inc. COSTELLO SHEA & GAFFNEY LLP Cox’s Tringle, Inc. D/b/a Cox’s Triangle Mini Mart Craig Riley CROSS GUNTER WITHERSPOON & GALCHUS, P.C. Crowson Grocery CT CORPORATION SYSTEM CUB FOODS Curley Shealey Curtis, Mallet-Prevost, Colt & Mosle LLP CVS CVS Corporation CVS Mamaroneck Ferndale, L.L.C. CVS Pharmacy, Inc. c/o CT Corp Systems Cynthia Hill Cynthia Young Cytodyne Technologies, Inc. D&K HEALTHCARE RESOURCES, INC. D.A. Freedman Daffney Miller Daisey Booker Date Allen Damita Little Redmond Daniel Mendenhall

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Daniel Otis Daniel Rushton Daniel Horwitz (Horwitz termination later) Daniel N. Horwitz Daniel Rodgers Danny A. Choy Danny Robinson Danny Williams Danza Honeyblue Darin L. Mobley Darlene Blacklidge Darlene Wright Darry Allison DATICON Dave Brown DAVID A. FREEDMAN DAVID B. ROSENFELD, M.D. DAVID MCFARLING, MD DAVID SHERMAN, MD David T. Lowenthat, MD, PhD David Wallace d/b/a Wallace Texaco David Denitzio David Dobbs David Fleming DAVIS & GILBERT LLP Deann Fetzer Debbie Gaylord Debbie Harrison Debbie Miller Debbie Roberson Deborah Culbertson-Williams Deborah Gwin Deborah Harris Debra Austin Debra Cook Debra Davis Debra Keith Debra McKinney Debra Robinson Debra Simmons Deer Park Pharmacy Deer, Richard, Individually and as owner of Minithins Deirdre A. Martini DELAWARE SECRETARY OF STATE DELAWARE CORPORATE MANAGEMENT, INC Delbert Lowry Della Rogers Della Tysan Delores Rosebud

555 Delores Earline Edwards Delores Lord Demetrius S Hill Denis Wilborn Denise D. Campbell-Anen Denise D. Galvan Denise D. Joseph DENNIS W. CHOI, M.D., PH.D. Dennis Essary Derek Cook Desda Witcher Desiree Crawford Dewitt Harvey, Jr. Diamondhead Discount Drugs, Inc. Diana J. Pharo Diane Beauvais Diane Giles Diane Kell Diane Sopala Dicey Ware Dickie McCarty DICKINSON WRIGHT, PLLC Dierberg’s Markets, Inc. DJ Pharma Inc. DJ Pharma Inc. Dobbins Drugs, Inc. Don McDaniel Donald G. Holmes Donald Dobrowolsky Donald Holder DONOVAN, ROSE, NESTER & JOLEY, PC. Dora Williams Doris Carson o/b/o Carsen, Ella Simon Doris Carson o/b/o Carsen, James Simon Doris Bonds Dorothy Feazelle Washington Dorothy Antoine Dorothy Bryant Dorothy Crenshaw Dorothy Mitchell Dorothy Thomas Dorothy Wilson Dorothy Wilson Dorris Gean Cooper Dorthy Pilato DR. ANDREW WOO Dr. Aviva Must DR. BRIAN HOFFMAN DR. BRYCE WEIR DR. CARL PHILLIPS DR. CHARLES HENNEKENS

556 Dr. David Freedman DR. HOLLY WYATT Dr. Irwin J. Kropin DR. JANET DALING DR. JOEL FREIMAN DR. KIP VISCUSI DR. LEON GORDIS DR. PHILIP STARK DR. PHILIP WOLF DR. RICHARD STARK DR. ROBERT MARLIN Dr. Shalini Bansil DR. THOMAS MICHEL Duketta Dixie Earl Campbell Earl Redmond Earnestine Johnson East Heights Pharmacy, Inc. Eckerd Corporation Eckerd Corporation d/b/a Eckerd Drugs Eckerd Drugs Eckerd Holdings II, Inc. Eckerds Drugs of Georgia, Inc. Economy Drug of Greenwood, Inc. d/b/a Economy Discount Drug Eddie I. Ellison Eddie Bullock Eddie Butler Eddie Leclair Eddie Rainey EDGAR J. KENTON III, M.D. Edgar Wright Edith McCook Edward Cole Edward Gray Elaine Starks Elan Pharmaceuticals, Inc. Elan Pharmaceuticals, Inc. (individually and as successor-in-interest to Dura Pharmceuticals, Inc.) Elcat Company Elcat, Inc. Eleanor Cunningham Eliot Lauer Elizabeth C. Dub Elizabeth Gary Elizabeth Ingram Elizabeth Jinks Elkins Wholesale, Inc. Ella Stevenson Ellen Swartz Elliot Ames


Ellis Pharmacy, Inc. ELMORE & WALL, P.A. Elnora Davis Elvira Blanchard Emma Ree Kitchens Emmer Lewis Endo Pharmaceuticals, Inc. Enterprise Management Solutions (subsidiary of SDA Enterprises) Eon Era Rowell Ercilia A. Mendoza Ereckia Thompson Erica Joseph Ericka Sanders Ernestine Hammond Ernestine Hunt Essie Harris Estella Morgan Estelle S. Smith Ethel May Cade Ethel May Mosley Ethen Woodward Ethex Corporation Eugene Joubert Evelyn McCann Ever Hinojosa Everitt Discount Drugs Evie Sue Clark FATHER & SON MOVING & STORAGE Fayette Supermarket, Inc. FEDERAL EXPRESS Fidelity Investments Fiesta Mart, Inc. d/b/a Fiesta Firth’s Quick stop Fitzgerald Schorr Barmettler & Brennan, PC, LLO Fleming & Company Fleming & Company FLORIDA ACQUISITION FUND, LTD. Fox Pharmacal Frances Laporte Franzine Curry FRED HUTCHINSON CANCER RESEARCH CENTER Fred’s of Aberdeen Fred’s of Marks & Lambert, Inc. Fred’s of Pearl Fred’s, Inc. d/b/a Fred’s Xpress Pharmacy French’s Pharmacy, Inc. FULBRIGHT & JAWORSKI L.L.P. -TX Furr’s Supermarkets, Inc.

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Gail Forrest Gary Gene Roe Gary Odom Gary Schlegel General Nutrition Companies, Inc. a/k/a GNC Geneva Benton genice Davis Genovese Drug Stores, Inc. George Anen George Defnall Gerald Lilly Geraldine Patrick Gerland’s Food Fair Gilbert Harrison Gilbert Rodriquez Glaxo SmithKline Glaxo Wellcome, Inc. Glaxosmithkline Consumer Healthcare, L.P. Glaxosmithkline, Inc. Glaxosmithkline, individually and as successor in interest to Beecham Products Glaxosmithkline, L.L.C. GlaxoSmithKline, PLC Glenbrook Laboratories, a division of Sterling Drug, Inc. Glimore Carter Gloria Bames Gloria Cage Gloria Esquerra Gloria Jackson Gloria Johnson Gloria Johnson Gloria Medrano Gloria Porter Glyna R. Bell Glynn Smith GORDON MUIR & FOLEY, LLP Gordon Turman Grace Draper Gracie West Gray York & Duffy LLP Greg M. Zipes Guindell D. Hogan H.E. Butt Grocery Co. H.E. Butt Grocery Co. D/B/A H.E.B. H.E.B. H.E.B. Central Market H.E.B. d/b/a RX Express H.E.B. Food Stores H.E.B. Marketplace

557 H.E.B., Inc. H.I. SILVERMAN, D.Sc. Hall Stree HANGLEY ARONCHICK SEGAL & PUDLIN Harco, Inc. Harco, Inc. Harold Draper Harold May Harry Minor Harry L. o/b/o Anderson, Isiah Anderson Harvey W. Evans Harvill, William A. Harvill HATI H. DAYAL, PH.D. HAYS, McCONN, RICE & PICKERING Health and Nutrition Systems International Inc. Health International Systems, Inc. Hector Soto HEIDI M. JOLSON, M.D., M.P.H. Helen Vaughn Henry A. Hentges Henry A. Keys HENRY I. MILLER, M.D. Henry o/b/o Large, Charlotte Large Heritage Consumer Products, LLC Herman Pembrook Hiram Marcum Hi-Tech Parmacal, Co. Hogil Pharmaceutical Corporation Hollie T. Elkins Holmes Discount Drugs, Inc. Hood Grocery Store Hope Haynes Hope Reynolds Huron Consulting Group IBM CORPORATION Ida D. Bridgeman Ida Jones Ida Miller IKON IKON OFFICE SOLUTIONS Inell Thomas Ingrid Lamb INSURANCE CONSULTING ASSOCIATES Irene Erwin IRON MOUNTAIN Isabel Finnel IVAX Pharmaceuticals, Inc., f/k/a Zenith Goldline Laboratories, f/k/a Goldline Laboratories Ivy’s Discount Drugs, Inc.

558 Ivystien Cousin J.T. Blanchard Jackie C. Shivers Jackie Parrish Jackson Butler Jacqueline Coleman Jacqueline Kinney Jacqueline Young James A. Miller James A. Scales James Henry Morgan James M. Lukenda JAMES M. PASCUITI, MA James Carter James Fields James Kitchens James Newsome James Stemen James Tate JANET DARLING, PH.D. Janet Elaine Evans Janet Elaine Sportsman Janet S. Gregory Janet Marcum Janet Schwartzberg Janey Hudkins Janice Davis JANICE GREEN DOUGLAS. M.D. Janice H. Catlin Janice Hayles Janna Craig Jarzine Gatlin Jay Miller Jay Charleston Jeanette Drain Jeanne Goodman Jeannet Henson Jeannette Faucette Jeff Tullow Jeffery Lynn Aidt JEFFREY WINKLER Jeffrey Hagan Jerome Begay Jerry Bates Jerry White Jesse Cannion Jesse Scruggs Jessie Joseph Sparks Jeweline Bennet Jill Klucka Jim Blaylock Jimmy D. Goward Jo Hill


Joan A. Stemen Joan Lindsey Jocelyn Erbes Joe C. Finnel Joe Roberson John Mobley John Park John Baines Walker John C. Delahoussye John F. Hagan John Fletcher d/b/a Super Saver John H. Grier John Martin Bass John Roberts d/b/a Roberts Grocery John Segreto Johnnie Huggins Johnnie Lockett Jonell Whitehorn Jordan Herzberg Jose Esquerra Jose Tavarez Joseph Ester Joseph Mellia Joseph Stam Josia Joseph Josie Blackwelder Josie Craft Joyce Ashton Joyce Carlee Joyce Duplissis Joyce Hrynyk Joyce Waterman-Reynolds Juan Medrano Juanita D. Young Juanita Parker Judge Adlai S. Hardin Judge Allan L. Gropper Judge Arthur J. Gonzalez Judge Burton R. Lifland Judge Cecelia G. Morris Judge Cornelius Blackshear Judge Prudence C. Beatty Judge Robert D. Drain Judge Robert E. Gerber Judith De Lisle Judith Strckley Judith E. Crothers Judith Ford Judith Pastella Judy Marie Jackson Judy Wray Julia D. Washingtonm Julia Wasler


559

Juliette James June Rhodes Junior McKinney Justin Russell Justin Worth Griffin Justine McCray K&B Louisiana Corporation d/b/a Right Aid Pharmacy K&B Of Louisiana Corporation (d/b/a “Rite Aid”) Kahlil Ames KAHN KLEINMAN YANOWITZ & ARNSON CO., L.P.A. Kametha Small Kamren Lemon Karen James Karen Lee Karen Lundgren Karen Thompson Katherine Lippe Moore Katherine Hutto Katherine Ladmirault Kathleen Hollingsworth Kathleen Lashawn Banks Kathleen Krause Kathleen Lilly Kathleen Privitera Kathryn Anne Cervas-Meyer Kathy Lowery Kathy Renai Donegan Katie Moffett Kay Goodman KAYE SCHOLER LLP KEAN MILLER HAWTHORNE DARMOND MCCOWAN & JARMAN, LLP Keidra Ames Kelly R. Logsdon Kelly Fetzer Ken Lemon Kenneth Ambrose Kenneth Cain Kenneth o/b/o Ambrose, Angela Ambrose Kerr Drug Inc. Keva o/b/o Dexter, Henry Alford Kevin Smith Kimberly Chapman Kitt Roebuck K-Mart Corporation K-Mart Corporation (d/b/a “K-Mart”) K-Mart Stores, Inc.

Knoll Pharma Manufacturing, Inc. Knoll, Inc. Kountry Market Kraig Magnussen Kristi Sutton Kristin Gogburn Kroger Company Kroger Texas, L.P. L. Wendell Chapman Lakisher Brice LANDELS RIPLEY & DIAMOND LLP LANE POWELL SPEARS LUBERSKY LLP Larry Bourn Larry Riley Latonya Slocum Laura L. Burns Lauren L. Landsbaum Lauren Baxter Laurence Pagel Leigh Strong Leiner Health Products, Inc. Lelinda Stanton Lenise M. Heroy Lenrea Moss Hill Leola Johnson Leslie M. o/b/o Dawkins, Helen Dawkins Leslie Mergen Lessie Hales LEWIS H. KULLER, MD, DrPH Lilian Warhul Lillian Keys Lillie Ringer Linda Hannah Linda Faye Write Linda Gayle Stamey Linda Gayle Teixeira Linda Marie o/b/o Jones Linda Allen Linda Dewoody Linda Guenther Linda Holmes Linda Mayberry Linda Ordonez Linda Scruggs Linda Soland Lindsey Weathersby Lisa Hamblin Lisa Garcia Lisa A. Blaylock Lisa A. Burchfield Lisa Yoland Owens

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560 LITIGATION MANAGEMENT INC. Litigation Support Services Lois Sutton Loisteen Bowie Loisteen Hall Lola Whitehead Longs Drug Stores Califorina, Inc. Long’s Drug Stores Corporation Long’s Drug Stores, Inc. Lorenzo Walker Loretta Carpenter Loretta Cook Lori Cornfield Lori Rouse Louis Salazar Louise Bryan LOUISIANA PRESS ASSOCIATION Lovelace Drug Store, Inc. Lovell Carter Love’s LP Gas Service, Inc. Lucky Stores, Inc. Lula Sewell Lydia Dyson LYNCH MARTIN LYNDA F. VOIGHT, PH.D. Lynne Charleston Lynne Grant Madeline J. Baumgartner Maebelle George Maggie M. England Major Aaron England Majoriette Williams Mallie Campbell Manthei, Rudy R., PC, LTD, a Nevada Corp. Marcy Albertoni Margaret Bradley Margaret Hall Margaret Robinson Margate Ponthieux Margie A. Anzalone Maria Catapano Mariana Weavers Marie Brookman Marie Felps Marilyn Felton Marilyn Fitzmaurice Marilyn Schaal Marion Rose Marion Rose Leone II Marival Rodriquez Marjorie McQuirter MARK M. MISHKIN, MD, FACR


Mark Chapman Mark Compton Mark Young MARKS GRAY MARSH USA, INC. Martha Frowner Martha Ward MARTIN BISCHOFF TEMPLETON LANGSLET & HOFFMAN Marty Busby Marvin Hall Mary Andino Mary E. Frances Mary E. Milligan-Nichols Mary Elizabeth Tom MARY FERREIRA AND MADNICK MILSTEIN MASON WEBER FARNSWORTH & CALLZAO Mary Jane Schooley Mary Lorraine Pagel Mary Louise Moore Mary o/b/o Welch, Grant Welch Mary Sue Couch Mary V. Moroney Mary Delucia Mary Downing Mary Lott Mary Mayfield Mary McDonald Mary Pierce Mary Ray Mary Whitehurst Mary Williams MASLON EDELMAN BORMAN & BRAND Maverick Market, Inc. MAXI DRUG, INC. Maxie Mays McCarter & English, LLP Mcguffee Drugs, Inc. d/b/a Mcguffee Drugs McKesson Corporation MCKESSON DRUG MCKESSON HBOC McNeil Consumer Products Mcneil-PPC Inc. Mead & Johnson Company MEDIACOM Medisave d/b/a Super Discount Drugs, Inc. Melissa Ardoin Melvin Cousin Melvin Smith

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Menley & James Laboratories Metabolife International, Inc. Metabolife, Inc. MIAMI-LUKEN, INC. Michael Klucka Michael S. Mattison Michael Barnes Michael Bernard Michael Clark Michael Davis Michael Delucia Michael Hale Michael Liuzza Michael Ward Michelle L. Bardlett Michelle L. Magnussen Miguel Valverde Mike Braxton Mike Bretz Mike Bailey Mike Tedesco Mildred Mood Mildred Schlegel Miles Laboratories Miles Laboratories, Inc. Miles, Inc. MILLER & MARTIN MILLS MYERS SWARTLING Mina Slappery MINTZ GIRGAN & BRIGHTLY, INC. Mission Insurance Company Mitchell Upton Mittie Raby Modell Campbell Mois McMillon Moises E. Perea Monica Christine Barnes MORRIS PICKERING & SANNER Mory o/b/o Russell, Justin Russell Murray Swartz Musa Doh Myong Cha Howell Myrna R. Fields Myrtle o/b/o Cunningham, Lilly Watson Nadine Jackson Nadkarni Joseph Nancy Murray Narold E. Puterbaugh Nathaniel Gatlin Nathaniel Ivey Nathaniel Thompson Nell Ridings

561 NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. Neurologic Consultations M.D., P.C. Nob Hill Foods Nona Daniels Nora Rountree Norma Minor Norman Zarkin Nortex Drug Distributors, Inc. d/b/a Drug Emporium North River Insurance Company Novartis AG Novartis Consumer Group, Inc. Novartis Consumer Health, Inc. Novartis Consumer Health, Inc., Individually And As Successors In Interest to CIBA-GEIGY Corp. Novartis Consumer Healthcare, L.P. Novartis Corporation Novartis Corporation; (previously known as Ciba-Geigy Corporation) Novartis Pharma Schweiz A.G. Novartis Pharmaceuticals Company Novartis Pharmaceuticals Corp. individually and as successor in interest to Ciba Consumer Pharma. Novartis Pharmaceuticals Corp. individually and as successor in interest to Dorsey Laboratories Novartis Pharmaceuticals Corporation o/b/o Huff, Hazel o/b/o Huff o/b/o Jackson, Joann o/b/o Jackson Oakley Chapman Odell Marshall OGLETREE DEAKINS Ollie Mae Harper Ora Mae Pittman Ora Jackson Ora Long Oralia Rodriquez ORGANIZATION SERVICES, INC. P&G Pam Holdings, Inc. (DE) Pam Holdings, Inc. a New Jersey Corporation Pam Holdings, Inc. f/k/a Sobel Holdings, Inc. Pamaula Campbell Pamela J. Lustrin Pamela Griffin Pamela Hagan Pamela Walker

562 PAMIDA INC. Parke Davis (a division of Warner-Lambert) Pathmark Stores, Inc. Patricia Carter Lovejoy Patricia Gail Moore Patricia Molina Patricia Salazar Patricia Simpson Patricia Valverde Patricia Wilson Patsy Forrest Patsy Jackson Patty L Zaerr Paul Baratelli Paul K. Schwartzberg Paul Weavers Paula Hagan Payless Drug Stores Peggie Routon Peggy Bourgeois Peggy Lyn Goleman Peggy Lynn Morris Peoples Drug Store, L.L.C. Perez, Lino d/b/a Lino’s Pharmacy PERI COHEN Perrigo Perrigo Company Perrigo Cumberland Swan, Inc. PEYTONS INC. Pfizer, Inc. Pfizer, Inc. Phalandew F. Williams Pharmacia & Upjohn Company f/k/a The Upjohn Company PHILIP B. STARK, PH.D. Phillip Brown PHILLIPS LYTLE HITCHCOCK BLAINE & HUBER LLP Piggly Wiggly Carolina Company Inc. Pliva d.d. Pliva Prague PLIVA, Inc Plivaa D.D. Price Costco International, Inc. PRICEWATERHOUSECOOPERS LLP Priscilla D. Chambers Proctor & Gamble Proctor & Gamble Pharmaceuticals, Inc. Qualitest Products Inc. Qualitest, LLC Qualitest USA, LC


Quality Food Mart, Inc. QUARLES & BRADY, LLP R&M Foods, Inc. d/b/a Sunflower Market RABBITT, PITZER & SNODGRASS. P.C. Rachelle Spellman Raley’s Drugstores, Inc. Ralphs Grocery Company RALPHS GROCERY COMPANY, INC. Ramco, Inc. d/b/a Mini Mart Randalls Food Market Raymond Johnson Rebecca o/b/o Williams, Fannie Mae Williams Rebecca Fern Rebecca Lott RECORDTRAK, INC. REED WEITKAMP SCHELL & VICE PLLC Regina Bell Regina Evans Reginald Young Renee Anita Renee Donohue Rexall Consumer Products Rexall Sundown, Inc. Rhodes & Robby Drugs, Inc. Richard Nail Richard C. Morrissey RICHARD I. KATZ, M.D. Richard M. Zweifler, MD Richard Hartig Richard Moore Richardson Rickey Brannon Ricuardo Rodriquez Right Aid Pharmacy Rita J. Fair Rite Aid Corporation Rite Aid Corporation Rite Aid Corporation d/b/a Rite Aid Pharmacy Rite Aid Headquarters Corporation Rite Aid of New York, Inc. Rite Aid of Pennsylvania, Inc. Rite-Aid of Pennsylvania Robert Patino Robert C. Metzger Robert Lilly Robert Tanner Robert Thomas Robert Todd Robert Viera

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Roberta Bishop Roberts Pharmaceutical Corporation Roberts Pharmaceutical Corporation, a wholly owned subsidiary of Shire Pharmaceuticals Group PL Robin C. Mosley Robin Elizabeth Shivers Robin O’Brian Mulcahy Robina Martinovich Robina Martinovich Rochelle Bowey Rodessa Kenebrew Roger Dale Atwood Ronald Hyde Ronald Molina Ronald Schaal Roosevelt Harris Rosa Jackson Rosa L Roberts Rosalyn Metzger Rose M. Hughley Rosemary Packer Rosie Thurmond Rosie A. o/b/o Smith, Joanne L. Smith Rosie Mae Norris ROTH ASSOCIATES, INC. Roy Wayne Crawford Roy Wayne Morris Roy Brown Roy Noonburg Rucker Pharmacal, Co., Inc. Rufus Reddick Rufus Robinson Rugy Jones Russell McCook S. Daniel Abraham Safeway Stores, Inc. Safeway, Inc. d/b/a Randall’s Food Market Samuel Privitera Sanders Pharmacy Sandoz Consumer Health Care Group Sandoz Consumer Health, Inc. Sandoz Pharmaceutical Corporation Sandra Britton Sandra Caton Sandra Decker Sandra Harper Sandra Mailhes Sandy Foods, Inc. Sara Franlin Sara Mulcahy Sara Williams

563 Save-on Drug Stores, Inc. Sav-On Drug Stores Savon Drug Stores, Inc. Sav-On Drug Stores, Inc. Sav-Rite Drugs of Port Gibson, MS, Inc. d/b/a Save Right Grocery. Schering-Plough Corporation Schering-Plough Healthcare Corporation Schering-Plough Healthcare Products, Inc. Schering-Plough Healthcare, Inc. Schnuck Markets, Inc. Scolari’s Warehouse Market, Inc. SDA Enterprises, Inc. (consulting agreement) Selia Luz Rodriquez Sharie Ealy Sharon Diane Harden Sharon Lemon Shelby Drugs Co., Inc. d/b/a Haire Drug Center Shelia Carlson Sherry Buivids Shieila Marie McColley Shirley A. Sewell Shirley Ann Clark Shirley M. Otis, M.D. Shirley Breite Shirley Drayton Shirley Rushing Shirley Taylor Shonda Brice Shopezy, Inc. Sidmak Laboratories, Inc. Signal Investment & Management Simonson Associates, Inc. Skadden, Arps, Slate, Meagher & Flom LLP SL FINANCIAL SERVICES CORP SLIM FAST FOODS COMPANY SMITH GIACOMETTI & CHIKOWSKI, LLC SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, LLP SmithKiline Beecham Pharmaceuticals, Inc. SmithKiline Beecham, Inc. SmithKline Beecham Consumer Healthcare Group SmithKline Beecham Consumer Healthcare, L.P.

564 Smithkline Beecham Consumer, a division of Smithkline Beecham Corporation Smithkline Beecham Corp. a subsidiary of Smithkline Beecham Holdings Corp. SmithKline Beecham Corporation SmithKline Beecham Corporation d/b/a Glaxo SmithKline SmithKline Beecham Corporation D/B/A Glaxosmithkline AHPC and Whitehall-Robins Health Care Smithkline Consumer Healthcare L.P. Sobel NV Soprano’s Supermarket, LLC Spaceway Oil Company, Inc. d/b/a Spaceway Stacey Young Stacy Parker STATE OF ISRAEL State of New Jersey - Division of Taxation - Corporate Tax State of New York - New York State Corporation Tax STATER BROS. MARKETS Stella Ross Stephen Wilson STERLING COMMERCE Steve Weiss & Co., Inc. Steven Brisco Steven Carlee Steven Matthew Peterson Stewart Sparks Stop & Shop, Inc. Strickland’s Cash and Save Discount Pharmacy, Inc. Sue Sparks Sumrall Drug Store, Inc. SunTrust Bank SUPERVALU Susan Schuster Susan H. Petett Susan M. Doherty Susan Blanchard Suzanne Dobrowolsky Sylvester Sharp TAFT STETTINUS & HOLLISTER Tama Forth Tamanique Smith Tammy Compton Tammy Tedesco Tanella McCoy TANSEY FANNING HAGERTY KELLY CONVERY & TRACY


Tanya Rae Moore Tanya McKinley Target Corporation, Inc. Target Pharmacy TAX COLLECTOR, PALM BEACH COUNTY Teena Tate Teresa Hinojosa Teri Peterson Teri Jean Peterson Terrigene Schmidt Terry McAlmont Teva Pharmaceuticals Teva Pharmaceuticals USA Thana Derigo THE CENTER FOR FORENSIC ECONOMIC STUDIES The Chemins Company The Gillette Company, individually and as successor in interest to The Gillette Company USA, Inc. The Kroger Co. d/b/a Krogers The Kroger Co. d/b/a Krogers The Kroger Company THE MOORE LAW FIRM The Pantry Inc. d/b/a Fast Lane The Procter & Gamble Distributing Company The Procter & Gamble Manufacturing Company THE SUPERIOR GROUP THE UNIVERSITY OF TEXAS-HOUSTON, DEPT. OF NEUROLOGY Thelma Baynes Thelma Jackson Thelma Marshall Thelma Pendleton Theresa Mapp-Grier Theresa Noud Theresa Ward Thoma Willis THOMAS MICHEL, M.D., PH.D. THOMAS SWIRSKY SACCHETTI, PHD Thomas Reynolds Thrifty Drug Stores Thrifty-Payless, Inc. Timi Siemer Tirsa Vazquez Tom Goodman Tom Jones Tommy Trahan Toni Walker

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Tonni Lankford Tony Ray Lampkin Tony Ray Pastella TOTAL LOGISTIC CONTROL, LLC Tracy Hope Davis Tracy Russell Troy Alexander Twin Laboratories, Inc. Upjohn Manufacturing Corporation Upjohn Pharmaceutical, Ltd Value-Rx Drugs, Inc. Vanessa Sterling Velacorp Pharmacists, Inc. d/b/a Lee’s Pharmacy Vera Jackson VERION, INC. VERIZON Veronica Ann Miller Vickie Childress Victoria Coachman Vincent Siemer Vinni o/b/o Rutledge, Lucindy Royster Viola L. Pitt Violet Joy Virginia Railey Vitafree Vivian Smith Voncile Rodgers W.J. Turner Wal Mart Stores, Inc. (d/b/a “Wal Mart”) Walgreen Co. Walgreen Co. d/b/a Walgreens Walgreen Co. d/b/a Walgreens Fiesta Mart d/b/a Fiesta Walgreen Co., an Illinois Corporation Walgreen Company Walgreen Corporation Walgreen Drug Stores. Inc Walgreen Eastern Co., Inc. Walgreen Louisiana Co., Inc. Walgreen Louisiana Co., Inc. (d/b/a “Walgreens”) Walgreens Co. D/B/A Walgreens WALKER BRYANT TIPPS & MALONE Wallace Drug Co., Inc. d/b/a Wallace Drugs Wallace Ziens Wallace Craft Wal-Mart Wal-Mart Associaties, Inc Walmart Stores Wal-Mart Stores East, Inc. Wal-Mart Stores, Inc.

565 WALSTON WELLS ANDERSON & BAINS Walter Logan WALTON P. DAVIS MOVING & STORAGE CO., INC. Wanda Atkinson Wanda Hill Warner-Lambert Company Warner-Lambert Consumer Group Warner-Lambert Consumer Healthcare Products Warren Hoovler Washington Research Trust Wayne Robinson Wayne Schlosser We Pharmaceuticals, Inc. Webb Zschunke Miller & Dikeman LLP Wells Discount Drugs, Inc. d/b/a Wells Pharmacy Whitehall Robbins Healthcare an unincorporated division of American Home Products Whitehall Robins Healthcare, Inc. Whitehall-Robbins Healthcare Whitehall-Robbins Healthcare Corporation Whitehall-Robins Whitehall-Robins Company Whitehall-Robins Healthcare Whitehall-Robins Healthcare, a division of American Home Products Corporation Whitehall-Robins Healthcare, Individually and as a Successor in Interest to A.H. Robins Consumer F Whites Discount Drug WHITFIELD & EDDY P.L.C. Wilcox Pharmacy, Inc. d/b/a Wilcox Pharmacy Wiletta Owens WILEY REIN & FIELDING LLP Willa Brown Williaim Clymer William Allen William Hyde William Miller William Roebuck William Sawyer WILLIAM I. ROSENBLUM, M.D. William R. Murtaugh William Griffin Willam Huff Willie Mae Moton

566 Willie Carmichael Willie Lewis Willie Mack Willie Madison Willie Taylor Willie Wallace WILMINGTON TRUST SP SERVICES (DELAWARE), INC. Winn Enterprise-Pharmacy Consulting Division, Inc. d/b/a Winn Pharmacy Winn-Dixie Louisiana, Inc. (d/b/a “Winn-Dixie”) Winn-Dixie Stores, Inc. WISE CARTER CHILD & CARAWAY Wyeth Consumer Healthcare, a division of Wyeth Wyeth Consumer Healthcare, f/k/a Whitehall-Robins Healthcare Wyeth Corporation Wyeth d/b/a Wyeth Inc. f/k/a American Home Products Corporation


Wyeth f/k/a American Home Products Corporation Wyeth f/k/a American Home Products Corporation f/k/a Whitehall-Robins Healthcare Wyeth f/k/a Whitehall-Robins Healthcare Wyeth-Ayerst International Inc. Wyeth-Ayerst Laboratories Wyeth-Ayerst Laboratories Division Wyeth-Ayerst Laboratories Division of American Home Products Corp. Wyeth-Ayerst Pharmaceuticals, Inc. Yolanda Trevino Yolanda Wright Zackery Striedel Zee Medical, Inc. Zenaida Johnson Zenith Goldline Pharmaceuticals Zulema Trevino Zulema Trevino

Exhibit B Huron Consulting Group The Delaco Company Parties to Which Huron Provides Services AT&T Bayer Corporation Bracewell and Patterson, LLP CIGNA Costco Wholesale Corporation Curtis, Mallet-Prevost, Colt & Mosle LLP CVS Pharmacy, Inc. Eckerd Drugs Fleming Fullbright & Jaworski LLP General Nutrition Companies, Inc. H.E. Butt Grocery Co. IBM IVAX Pharmaceuticals, Inc. Kaye Scholer LLP Lane Powell Spears Lubersky, LLP McKesson HBOC P&G

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567


Pfizer PriceWaterhouseCoopers Rite Aid Schering-Plough Corporation Skadden, Arps, Slate, Meagher & Flom LLP SmithKline Beecham Corporation Target Corporation, Inc. Verizon Wilmington Trust Wyeth Zenith Goldline Pharmaceuticals The following parties listed on Exhibit A have current or prior business dealings with Huron Consulting Group LLC. Huron’s assistance to these parties has been limited to providing various business consulting services in matters that are unrelated to The Delaco Company or its chapter 11 filing. To the best of my knowledge, no services have been provided to these parties which involve their rights in the Debtor’s case, nor does Huron’s involvement in this case compromise it’s ability to continue consulting services to these parties to the extent that such services are continuing. In no event will Huron undertake any assignment for these parties or any other creditor or party-in-interest if such assignment is related to The Delaco Company’s bankruptcy case. Huron CONSULTING GROUP December 9, 2003 (646) 277-2207 [email protected] Eliot Lauer The Delaco Company 122 East 42nd Street, Suite 1510 New York, NY 10168 Dear Mr. Lauer: In your capacity as an officer and authorized representative of The Delaco Company I am pleased to confirm to you, on behalf of Huron Consulting Group LLC (“Huron,” “we,” “us”, or “our”), our engagement to provide The Delaco Company (“you,” “your,” or “the Company”) certain temporary personnel services related to your restructuring efforts. Objectives and Scope We will provide Huron professionals to serve as temporary staff (“Temporary Staff”) to assist with your restructuring efforts, including James M. Lukenda, a Huron Managing Director, who will serve as your Chief Restructuring Officer. Mr. Lukenda will report to and be subject to the direct supervision of the

568


Company’s Board of Directors. He will work collaboratively with your Board of Directors and legal counsel to guide the Company through the restructuring process. Given our understanding of the scope of the work, we anticipate that Darrin Wald, a Huron Manager, and two associates will provide support to Mr. Lukenda. Additional Temporary Staff will not be added without the Company’s consent and concurrence that such additional resources do not duplicate the activities of others. Our Services In addition to the customary duties of the Chief Restructuring Officer, the Temporary Staff roles will include working with you and your team to provide such assistance as Mr. Lukenda and you require to prepare for, operate within, and emerge from chapter 11 bankruptcy protection. The support work the Temporary Staff will provide is expected to include but not be limited to the following:

r Assistance with the performance of pre-chapter 11 filing preparation for r r r r r r

purposes of surfacing necessary information to complete required documents for the aforementioned chapter 11 filing; Assistance to counsel with the preparation of necessary information in support of “First Day” motions for a chapter 11 filing; Assistance with the preparation of creditor lists, statement of financial affairs, and schedules of assets and liabilities; Support for preparing financial and informational filings for the bankruptcy or other courts; Assistance as may be required for maintaining listings of creditors and claims, reconciling such items and resolving related disputes; Assistance in connection with insurance claims settlements and action to support marshalling of insurance recoveries and other assets; Support of the development of the plan of reorganization and related disclosure statement

We will not be auditing any financial statements or performing attest procedures (as those procedures are generally construed by certified public accountants) with respect to information in conjunction with this engagement. Our services are not designed, nor should they be relied upon, to disclose weaknesses in internal controls, financial statement errors, irregularities, illegal acts or disclosure deficiencies. Huron will be responsible for overall management, hiring, and compensation of the Temporary Staff, and the Temporary Staff will not be considered your employees with respect to benefits and other employment matters. Neither Huron nor the Temporary Staff will be entitled to receive from the Company any vacation pay, sick leave, retirement, pension, social security benefits, workers’ compensation, disability, unemployment insurance benefits, health or life insurance, or any other employee benefits. Huron will be responsible for all employment, withholding, and income taxes incurred in connection with the operation of Huron’s business.

7.10

569


Your Responsibilities You agree that within ten days after your signing of this engagement letter, James M. Lukenda will be appointed by the Board of Directors of the Company to be the Company’s Chief Restructuring Officer, and a copy of the applicable Board resolution will be provided to Huron. Mr. Lukenda will receive the most favorable indemnities provided by the Company to its officers and directors, whether under the Company’s by-laws, certificate of incorporation, by contract or otherwise. This indemnification is in addition to the indemnification afforded to Huron under the attached General Business Terms. In the event that other Temporary Staff become officers of the Company, such individuals will be entitled to receive the same indemnification described above with respect to Mr. Lukenda. Upon the filing of a chapter 11 bankruptcy petition, the Company agrees to promptly seek approval of the employment of Huron in accordance with the terms of this engagement letter and the attached General Business Terms or on terms otherwise acceptable to us. Conflicts and Business Relationships We confirm that Huron, its employees, and its affiliates do not have any financial interest or business connection with the Company other than as contemplated by this agreement. We know of no fact or situation that would represent a conflict of interest for us with regard to the Company. It is possible that Huron or its employees or its affiliates may have rendered services to other entities that have relationships with the Company, including creditors of the Company. Huron, its employees, and its affiliates have not and will not perform services for, or have business connections with, any of these entities in any matter involving the Company without the Company’s express prior consent. Fees and Expenses We will bill on an hourly basis based on the actual hours worked and the following hourly billing rates (these rates are current through the first quarter of 2004 and may be adjusted during 2004 in conjunction with Huron’s normal procedures):

Title Managing Director Director Manager Associate Analyst

Hourly Rate $600 $450 $350 $275 $175

570


Out of pocket expenses (including reasonable matter related legal fees as may be required and which will be discussed with the company in advance, transportation, lodging, meals, communications, supplies, copying, etc.) will be billed at the actual amounts incurred. We will bill on a semi-monthly basis. Our invoices are due upon presentation. Success Fees or Bonuses In addition to the hourly compensation described above, the Company will pay one or more success fees or bonuses upon receipt of a statement requesting payment of and certifying entitlement to such success fees or bonuses as described below:

r Seventy-five thousand dollars ($75,000) shall be payable upon the completion of documents to file for chapter 11 bankruptcy protection;

r Seventy-five thousand dollars ($75,000) shall be payable upon the confirmation of a plan of reorganization. Retainer We will require a retainer of $250,000 before we can commence work. The retainer will either be applied to our final invoice to you at the conclusion of the engagement or will be refunded to you at that time. Business Terms The attached General Business Terms apply to this engagement. As you requested, we agree that this agreement is governed by and construed in accordance with the laws of the state of New York. ∗ ∗ ∗ ∗ ∗ ∗

Please indicate your agreement with these terms by signing and returning to me the enclosed copy of this letter. We appreciate the opportunity to be of service to you and look forward to working with you on this engagement. Very truly yours, HURON CONSULTING GROUP LLC By. James M. Lukenda Attachments: General Business Terms Acknowledged and Accepted: The Delaco Company By: Title: Date:

7.10


571

Huron CONSULTING GROUP Attachment to Engagement Letter dated December 9, 2003 with The Delaco Company GENERAL BUSINESS TERMS 1. Our Services We will provide the services and furnish the deliverables as described in our engagement letter and any attachments thereto, as may be modified from time to time by mutual consent. 2. Independent Contractor We are an independent contractor and not your employee, agent, joint venturer or partner, and will determine the method, details and means of performing our services. We assume full and sole responsibility for the payment of all compensation and expenses of our employees and for all of their state and federal income tax, unemployment insurance, Social Security and other applicable employee withholdings. 3. Fees, Expenses Our fees and payment terms are set out in our engagement letter. Those fees do not include taxes. You will be responsible for and pay all applicable sales, use, excise, value added and other taxes associated with the provision or receipt of the services and deliverables, excluding taxes on our income generally. We reserve the right to suspend services if invoices are not timely paid, in which event we will not be liable for any resulting loss, damage or expense connected with such suspension. 4. Confidentiality With respect to any information supplied in connection with this engagement and designated by either of us as confidential, or which the other should reasonably believe is confidential based on its subject matter or the circumstances of its disclosure, the other agrees to protect the confidential information in a reasonable and appropriate manner, and use confidential information only to perform its obligations under this engagement and for no other purpose. This will not apply to information which is: (i) publicly known, (ii) already known to the recipient, (iii) lawfully disclosed by a third party, (iv) independently developed or (v) disclosed pursuant to legal requirement or order. We may also mention your name and provide a general description of the engagement in our client lists or marketing materials. 5. Our Deliverables and Your License Upon full payment of all amounts due us in connection with this engagement, all right, title and interest in the deliverables set out in our engagement letter will become your sole and exclusive property, except as set forth below. We will retain sole and exclusive ownership of all right, title and interest in our work papers, proprietary information, processes, methodologies, know how and software (“Huron Property”), including such information as existed prior to the delivery of our services and, to the extent such information is of general application, anything which we may discover, create or develop during our provision of services for you. To the extent our deliverables to you contain Huron Property, we grant you a nonexclusive, non-assignable, royalty-free license to use it in connection with the deliverables and the subject of the engagement and for no other or further use without our express, prior written consent. If our deliverables are subject to any third party rights in software or intellectual property, we will notify you of such rights.

572


6. Our Warranty We warrant that our services will be performed with reasonable care in a diligent and competent manner. Our sole obligation will be to correct any nonconformance with this warranty, provided that you give us written notice within a reasonable period after the services are performed or, if applicable, deliverables are delivered. The notice will specify and detail the non-conformance and we will have a reasonable amount of time, based on its severity and complexity, to correct the non-conformance. We do not warrant and are not responsible for any third party products or services. Your sole and exclusive rights and remedies with respect to any third party products or services are against the third party vendor and not against us. THIS WARRANTY IS OUR ONLY WARRANTY CONCERNING THE SERVICES AND ANY DELIVERABLE, AND IS MADE EXPRESSLY IN LIEU OF ALL OTHER WARRANTIES AND REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR OTHERWISE, ALL OF WHICH ARE HEREBY DISCLAIMED. 7. Liability and Indemnification (a) We will, to the extent allowable by law, indemnify you, your owners, employees, contractors and agents against all costs, fees, expenses, damages and liabilities (including reasonable attorneys’ fees and costs) relating to intellectual property infringement, bodily injury or death of any person, or damage to real or tangible personal property incurred while we are performing the services and to the extent caused by the negligent or willful acts or omissions of our employees, contractors or agents in performing the services as finally adjudicated by a court of law. (b) You will, to the extent allowable by law, indemnify us, our owners, employees, contractors and agents against all costs, fees, expenses, damages and liabilities (including reasonable attorneys’ fees and costs) associated with any third party claim relating to or arising as a result of the services or your use of the deliverables except to the extent (i) we are obligated to indemnify you pursuant to Section 7(a) or (ii) the liability was caused by the grossly negligent or willful acts or omissions of our employees, contractors or agents in performing the services as finally adjudicated by a court of law. (c) Neither of us will be liable for any delays or failures in performance due to circumstances beyond our reasonable control. 8. Limitation of Liability; No Consequential Damages Except with respect to any obligations pursuant to Section 7 or your compensation obligations set forth in the engagement letter, neither of us will have liability relating to this engagement in an amount that exceeds the fees we receive from you for the portion of the engagement giving rise to liability or for any special, consequential, incidental or exemplary damages or loss (nor any lost profits, savings or business opportunity). 9. Non-Solicitation During the term of this engagement, and for a period of one year following its expiration or termination, you will not actively solicit, employ or otherwise engage any of our employees (including former employees) who were involved in the engagement. 10. Termination (a) You may terminate our engagement for convenience at any time on 15 days’ written notice. (b) We may terminate this engagement if, within 15 days’ notice, you fail to cure a material breach of our engagement terms or without notice in the event of nonpayment of amounts due us.

7.10

573


(c) You will pay us for all services rendered, expenses incurred or commitments made by us to the effective date of termination, any contingent fees as described in the engagement letter and all reasonable costs associated with any termination. 11. General (a) These General Business Terms, together with the engagement letter, including all its attachments, constitute the entire understanding and agreement between us with respect to the services and deliverables described in the engagement letter, supersede all prior oral and written communications between us, and may be amended, modified or changed only in writing when signed by both parties. If there is a conflict between these General Business Terms and the terms of the engagement letter, these General Business Terms will govern. (b) No term of this agreement will be deemed waived, and no breach of this agreement excused, unless the waiver or consent is in writing signed by the party granting such waiver or consent. (c) The terms of this agreement which by their nature are to survive this agreement will survive its expiration or termination. (d) We each acknowledge that we may correspond or convey documentation via Internet e-mail and that neither party has control over the performance, reliability, availability, or security of Internet e-mail. Therefore, neither party will be liable for any loss, damage, expense, harm or inconvenience resulting from the loss, delay, interception, corruption, or alteration of any Internet email due to any reason beyond our reasonable control. (e) We each agree that any dispute or claim arising out of or relating to this agreement or the services shall be determined by arbitration before a sole arbitrator, administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, and judgment on the award may be entered in any court having jurisdiction. If we initiate the arbitration, it will be held in the JAMS office nearest to your principal place of business. If you initiate the arbitration, it will be held in Chicago, Illinois. ∗ ∗ ∗

V51903 RP6



x : : : : : : : x

Chapter 11 Case No. 04-10899 (CB) Related to Docket No. 10

574


FIRST SUPPLEMENTAL DECLARATION OF JAMES M. LUKENDA IN SUPPORT OF APPLICATION FOR ORDER UNDER 11 U.S.C. §§ 105(a) AND 363(b) AUTHORIZING CONTINUED EMPLOYMENT OF HURON CONSULTING GROUP AS RESTRUCTURING CONSULTANTS TO DEBTOR-IN-POSSESSION I, James M. Lukenda, hereby declare that the following is true to the best of my knowledge, information and belief: 1. I am a Managing Director of Huron Consulting Group LLC (“Huron”), a multi-disciplined consulting firm with practices in areas such as bankruptcy, financial restructuring (including interim management) and litigation-related services and numerous offices throughout the country. I submit this First Supplemental Declaration (the “Declaration”) on behalf of Huron in support of the Application for Order Under 11 U.S.C. §§ 105(a) and 363(b) and Fed. R. Bankr. P. 2014 and 2016 Authorizing Continued Employment of Huron Consulting Group LLC as Restructuring Consultants to Debtor-in-Possession (the “Application”), filed on February 12, 2004 (Docket No. 10) by The Delaco Company (“Delaco”), debtor and debtor-in-possession in the above-captioned case (“the Debtor”) and approved by the Court on March 3, 2004 (Docket No.48). Except as otherwise noted, I have personal knowledge of the matters set forth herein and if called as a witness, would testify competently thereto.1

Bankruptcy Professionals 2. Skadden, Arps, Slate, Meagher & Flom LLP. Subsequent to the commencement of The Delaco Company’s chapter 11 case, Skadden, Arps, Slate, Meagher, & Flom LLP (Skadden, Arps), the Debtor’s bankruptcy counsel, retained Huron as a consultant to advise Skadden Arps in reducing the cost of procuring overnight courier services. Such advice is wholly unrelated to the Debtor or its chapter 11 case. The Huron personnel advising Skadden, Arps in connection with the courier services project are separate from those working on the Debtor’s chapter 11 case. 3. Huron believes its services to Skadden, Arps, which are wholly unrelated to the Debtor or this case, have not and will not affect Huron’s assistance to the Debtor in this case.

Additional Disclosure 4. Huron will promptly file further supplemental declarations should any further inquiries reveal material facts not previously disclosed. I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief.

1 Certain


7.10

575


Dated: New York, New York May 25, 2004 HURON CONSULTING GROUP LLC /s/ James M. Lukenda James M. Lukenda, CIRA Managing Director UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK


x : : : : : : : x

Chapter 11 Case No. 04–10899 (CB) Related to Docket No. 10

SECOND SUPPLEMENTAL DECLARATION OF JAMES M. LUKENDA IN SUPPORT OF APPLICATION FOR ORDER UNDER 11 U.S.C. §§ 105(a) AND 363(b) AUTHORIZING CONTINUED EMPLOYMENT OF HURON CONSULTING GROUP AS RESTRUCTURING CONSULTANTS TO DEBTOR-IN-POSSESSION I, James M. Lukenda, hereby declare that the following is true to the best of my knowledge, information and belief: 1. I am a Managing Director of Huron Consulting Group (“Huron”), a multidisciplined consulting firm with practices in areas such as bankruptcy, financial restructuring (including interim management) and litigation-related services and numerous offices throughout the country. I submit this Second Supplemental Declaration (the “Declaration”) on behalf of Huron in support of the Application for Order Under 11 U.S.C. §§ 105(a) and 363(b) and Fed. R. Bankr. P. 2014 and 2016 Authorizing Continued Employment of Huron Consulting Group LLC as Restructuring Consultants to Debtor-in-Possession (the “Application”), filed on February 12, 2004 (Docket No. 10) by The Delaco Company (“Delaco”), debtor and debtor-in-possession in the above-captioned case (“the Debtor”) and approved by the Court on March 3, 2004 (Docket No.48). Except as otherwise noted, I have personal knowledge of the matters set forth herein and if called as a witness, would testify competently thereto.1

1 Certain


576


Adversaries 2. American International Group, Inc. (AIG)/National Union Fire Insurance Company of Pittsburgh, Pa. (National Union) Delaco is presently in litigation/mediation with a number of insurance companies who provided product liability coverage to Delaco’s predecessor Thompson Medical Company. One of those insurers is AIG’s insurance company, National Union. Huron personnel in Huron’s Business Dispute practice have been engaged by counsel to AIG Trading Group, Inc. (Trading) and AIG Financial Products Corp. (FPC) in connection with a dispute with a former employee over the computation of the former employee’s bonus. Trading and FPC, while AIG affiliates, are separate from AIG’s insurance businesses. The Huron personnel advising Trading and FPC’s counsel have not been involved with the Delaco engagement and are part of a separate practice group within Huron from those individuals who have assisted me with Delaco matters. 3. Huron believes its services to Trading and FPC, which are wholly unrelated to the Debtor or this case, have not and will not affect Huron’s assistance to the Debtor in this case. Additional Disclosure 4. Huron will promptly file further supplemental declarations should any further inquiries reveal material facts not previously disclosed. I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information and belief. Dated: New York, New York January 31, 2005 HURON CONSULTING GROUP James M. Lukenda, CIRA Managing Director

7.11

Order Authorizing Retention of Financial Advisor to Provide Fresh Start Reporting

577

7.11 Order Authorizing Retention of Financial Advisor to Provide Fresh Start Reporting and Valuation Services to Debtors Objective. Section 7.1 of Volume 1 of Bankruptcy and Insolvency Accounting describes the content of the order issued by the Bankruptcy Court to retain accountants or financial advisors. Shown below is an example from the Delta Air Lines case showing the court order authorizing employment and retention of Huron Consulting as financial advisor to the debtor.



x : : : : : : : x

Chapter 11 Case No. 05-17923 (ASH) (Jointly Administered)

ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 2014(a) AUTHORIZING THE EMPLOYMENT AND RETENTION OF HURON CONSULTING SERVICES LLC (PRACTICING AS HURON CONSULTING GROUP) TO PROVIDE FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS NUNC PRO TUNC TO DECEMBER 1, 2006 Upon the application dated January 4, 2007 (the “Application”)1 of Delta Air Lines, Inc. and those of its subsidiaries that are debtors and debtors in possession in these proceedings (collectively, the “Debtors”),2 pursuant to sections 327(a) and 328(a) of the Bankruptcy Code and Bankruptcy Rule 2014(a) for authority to employ and retain Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”) to provide Fresh-Start Reporting and valuation services to the Debtors, pursuant to the terms of the December 2006 1 Unless

otherwise defined herein, all capitalized terms shall have the meaning ascribed to them in the Application. 2 The Debtors are the following entities: Delta Air Lines, Inc.; ASA Holdings, Inc.; Comair, Inc.; Comair Holdings, LLC; Comair Services, Inc.; Crown Rooms, Inc.; DAL Aircraft Trading, Inc.; DAL Global Services, LLC; DAL Moscow, Inc.; Delta AirElite Business Jets, Inc.; Delta Benefits Management, Inc.; Delta Connection Academy, Inc.; Delta Corporate Identity, Inc.; Delta Loyalty Management Services, LLC; Delta Technology, LLC; Delta Ventures III, LLC; Epsilon Trading, LLC; Kappa Capital Management, Inc.; Song, LLC.

578


Professional Services Agreement annexed to the Application, all as more fully set forth in the Application; and upon the Declaration of Michael C. Sullivan, a Managing Director of Huron, filed in support of the Application, annexed to the Application (the “Sullivan Declaration”); and the Court being satisfied, based on the representations made in the Application and the Sullivan Declaration, that Huron is “disinterested” as such term is defined in section 101(14) of the Bankruptcy Code, as modified by section 1107(b) of the Bankruptcy Code, and represents no interest adverse to the Debtors’ estates with respect to the matters upon which it is to be engaged; and the Court having jurisdiction to consider the Application and the relief requested therein pursuant to 28 U.S.C. § 1334 and the Standing Order of Referral of Cases to Bankruptcy Court Judges of the District Court for the Southern District of New York, dated July 19, 1984 (Ward, Acting C.J.); and consideration of the Application and the requested relief being a core proceeding the Bankruptcy Court can determine pursuant to 28 U.S.C. § 157(b)(2); and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Application having been provided in accordance with this Court’s Case Management Order, and it appearing that no other or further notice need be provided; and the relief requested in the Application being in the best interests of the Debtors and their estates and creditors; and the Court having reviewed the Application and having held a hearing with appearances of parties in interest noted in the transcript thereof (the “Hearing”); and the Court having determined that the legal and factual bases set forth in the Application and at the Hearing establish just cause for the relief granted herein; and upon all of the proceedings had before the Court and after due deliberation and sufficient cause appearing therefor, it is ORDERED that the Application is approved; and it is further ORDERED that the Debtors are hereby authorized to employ and retain Huron to provide Fresh-Start Reporting and valuation services in the Debtors’ chapter 11 cases, nunc pro tunc to December 1, 2006, all as contemplated by the Application and on the terms provided in the December 2006 Professional Services Agreement; and it is further ORDERED that Huron shall be compensated for its services and reimbursed for any related expenses in accordance with the Sullivan Declaration, the December 2006 Professional Services Agreement, applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules and any other applicable orders of this Court; and it is further ORDERED that except as otherwise set forth in the Sullivan Declaration, Huron shall apply for compensation and reimbursement in accordance with the procedures set forth in sections 330 and 331 of the Bankruptcy Code, applicable Bankruptcy Rules, Local Rules and orders of the Court, guidelines established by the U.S. Trustee, and such other procedures as may be fixed by order of this Court, including the Order Pursuant to Sections 105(a) and 331 of the Bankruptcy Code and Bankruptcy Rule 2016(a) to Establish Procedures for Interim Monthly Compensation and Reimbursement of Expenses of Professionals; and it is further ORDERED that to the extent that there may be any inconsistency between the terms of the Application and this Order, the terms of this Order shall govern, and it is further

7.11

Order Authorizing Retention of Financial Advisor to Provide Fresh Start Reporting

579

ORDERED that the requirement pursuant to Rule 9013-1(b) of the Local Rules that the Debtors file a memorandum of law in support of the Application is hereby waived. , 2007 Dated: White Plains, New York UNITED STATES BANKRUPTCY JUDGE

580 7.12


Order for Retention of Financial Advisor for Debtors

Objective. Section 7.1 of Volume 1 of Bankruptcy and Insolvency Accounting describes the nature and content of the order issued by the Bankruptcy Court to retain accountants or financial advisors. Shown below is an example from the Vertis Holdings case showing the court order authorizing employment and retention of Alvarez & Marsal as “restructuring advisors” to the debtor. THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE


Debtors.

x : : : : : : : : x


()


ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AUTHORIZING THE EMPLOYMENT AND RETENTION OF ALVAREZ & MARSAL NORTH AMERICA, LLC AS RESTRUCTURING ADVISORS FOR THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE Upon the application (the “Application”)1 of Vertis Holdings, Inc. and certain of its direct and indirect subsidiaries, as above-captioned debtors and debtors in possession (collectively, the “Debtors”),2 pursuant to sections 327(a) and 328(a) of title 11 of the United States Code (the “Bankruptcy Code”) and rule 2014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for authorization to employ and retain Alvarez & Marsal North America, LLC, together with its wholly owned subsidiaries, agents, affiliates and independent contractors (collectively, “A&M”) to serve as restructuring advisors to the Debtors in these cases; and upon the affidavit of Jeffery J. Stegenga in support of the Application; and consideration of the Application and the relief requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b); and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Application having been provided to the Notice Parties, and it appearing that no other or further notice need be provided; and it appearing that A&M neither holds nor represents any interest adverse 1 Capitalized terms not defined herein shall have the meanings ascribed to them in the Application. 2 The

Debtors in these cases are Vertis Holdings, Inc., Vertis, Inc., Webcraft, LLC, Webcraft Chemicals, LLC, Enteron Group, LLC, Vertis Mailing LLC, and USA Direct, LLC.

7.12

Order for Retention of Financial Advisor for Debtors

581

to the Debtors’ estates; and it appearing that A&M is “disinterested,” as that term is defined in section 101(14) of the Bankruptcy Code; and it appearing that the relief requested in the Application is in the best interest of the Debtors’ estates and their creditors; after due deliberation and sufficient cause appearing therefore, it is hereby ORDERED, that the Application is hereby granted; and it is further ORDERED, that in accordance with sections 327(a) and 328(a) of the Bankruptcy Code, Bankruptcy Rule and rule 2014-1 of the Local Rules for the United States Bankruptcy Court for the District of Delaware (the “Local Rules”), the Debtors are authorized to employ and retain A&M as of the Commencement Date as their restructuring advisors on the terms set forth in the Application; and it is further ORDERED, that A&M shall be compensated in accordance with the procedures set forth in sections 330 and 331 of the Bankruptcy Code and any applicable local or federal rules of bankruptcy procedure, and such procedures as may be fixed by order of this Court; and it is further ORDERED, that the indemnification obligations of the Debtors set forth in the Engagement Letter are approved, subject during the pendency of these chapter 11 cases to the following: a. A&M shall not be entitled to indemnification, contribution or reimbursement pursuant to the Engagement Letter for services, unless such services and the indemnification, contribution or reimbursement therefor are approved by the Court; b. The Debtors shall have no obligation to indemnify A&M, or provide contribution or reimbursement to A&M, for any claim or expense that is either: (i) judicially determined (the determination having become final) to have arisen from A&M’s gross negligence, willful misconduct, breach of fiduciary duty, if any, bad faith or self-dealing; (ii) for a contractual dispute in which the Debtors allege the breach of A&M’s contractual obligations unless the Court determines that indemnification, contribution or reimbursement would be permissible pursuant to United Artists Theatre Co. et al. v. Walton (In re United Artists Theatre Co. et al.), 315 F.3d 217 (3d Cir. 2003); or (iii) settled prior to a judicial determination as to A&M’s gross negligence, willful misconduct, breach of fiduciary duty, or bad faith or self-dealing but determined by this Court, after notice and a hearing to be a claim or expense for which A&M should not receive indemnity, contribution or reimbursement under the terms of the Engagement Letter as modified by this Order; c. If, before the earlier of (i) the entry of an order confirming a chapter 11 plan in these cases (that order having become a final order no longer subject to appeal), and (ii) the entry of an order closing these chapter 11 cases, A&M believes that it is entitled to the payment of any amounts by the Debtors on account of the Debtors’ indemnification, contribution and/or reimbursement obligations under the Engagement Letter (as modified by this Order), including without limitation the advancement of defense costs, A&M must file an application therefor in this Court, and the Debtors may not pay any such amounts to A&M

582


before the entry of an order by this Court approving the payment. This subparagraph (c) is intended only to specify the period of time under which the Court shall have jurisdiction over any request for fees and expenses by A&M for indemnification, contribution or reimbursement, and not a provision limiting the duration of the Debtors’ obligation to indemnify A&M. All parties in interest shall retain the right to object to any demand by A&M for indemnification, contribution or reimbursement; and d. Any limitation on any amounts to be contributed by the parties to the Engagement Letter under the terms of the Engagement Letter shall be eliminated; and it is further ORDERED, that this Court shall retain jurisdiction with respect to all matters arising or related to the implementation and enforcement of this Order. ,2008 Dated: United States Bankruptcy Judge

7.13

Order Authorizing Retention of Accountants and Financial Advisors for Trustee

583

7.13 Order Authorizing Retention of Accountants and Financial Advisors for Trustee Objective. Section 7.10 of Volume 1 of Bankruptcy and Insolvency Accounting describes the content of the order for retention that is submitted by the debtor, although often prepared by the accountant or financial advisor. This document filed in the Southeast Banking Corporation case illustrates how an order that provides for a retention of accountants and financial advisors in a chapter 7 liquidation might be constructed. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA FORT LAUDERDALE DIVISION In Re:


ORDER APPROVING ENGAGEMENT OF ACCOUNTANT FOR CHAPTER 7 TRUSTEE (“Trustee”), for Upon the Application of the Chapter 7 Trustee, the appointment of an accounting firm, and the Court being satisfied that said accounting firm represents no interest adverse to the Trustee of the Estate in the matters upon which it is to be engaged, that its employment is necessary and would be in the best interest of this Estate, that the said case justifies an accountant for the purposes specified, and that no Notice of Hearing on said Application should be given, and no adverse interest being represented, it is ORDERED that Applicant is authorized to employ Kapila & Company, nunc , 2009, to prepare and file tax returns; to prepare pro tunc to tax projections and tax analysis; to represent the trustee as to other tax compliance matters, including dealing with the tax authorities, as deemed necessary; to serve as Trustee’s general accountant and to consult with the trustee and her counsel as to those matters for this estate at a fee subject to court approval. IT IS FURTHER ORDERED that Kapila & Company be empowered to act, through its officers and employees, for and on behalf of the trustee and/or the estate, to represent them before any taxing authority including the Internal Revenue Service and the Florida Department of Revenue, to receive confidential information, to make written or oral presentations of fact or argument, and to perform any and all acts on behalf of the trustee and the estate which the trustee is by law permitted, regarding any tax matter which may arise during the administration of the estate. It is further ORDERED that this Court reserves jurisdiction over the parties and the subject matter to award and/or approve fees and expenses of

584


said parties appointed herein, in accordance with the applicable statutes and procedures. ### Filed By: , Trustee, shall furnish a confirmed copy of this Order upon all parties listed below. Kapila & Company, 1000 S. Federal Highway, #200, Fort Lauderdale, FL 33316 United States Trustee’s Office, 51 SW 1st Avenue, Room 1204, Miami, FL 33130

7.14

585

Accountant for Debtor

7.14


Objective. Section 7.11 of Volume 1 indicates that the documents filed with a court may vary from one court to another and they may vary because of the nature of the debtor’s operations. All of the documents needed for retention to render services as accountant for a relatively small company are reproduced here. The set consists of the following: (a) (b) (c) (d)

Application for Authority to Retain Accountant Affidavit in Support of Application for Appointment of Accountant Engagement Letter Order Authorizing Debtor to Retain Accountant

(a) Application for Authority to Retain Accountant IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In the Matter of: HERCULES FENCE & SUPPLY CO., a Michigan corporation, Debtor.

Bankruptcy No. 87-05031-G Chapter 11

APPLICATION FOR AUTHORITY TO RETAIN RON OSSIPOVE AS ACCOUNTANT NOW COMES Debtor Hercules Fence & Supply Co., a Michigan corporation, by and through his attorney, ARNOLD SCHAFER of SCHAFER AND WEINER, P.C., and for its Application for Authority to Retain Ron Ossipove as Accountant for Debtor, states as follows: 1. That on August 19, 1987, the above-named Debtor filed its Chapter 11 petition with this Honorable Court. 2. That the Debtor is in need of accounting services to assist it in the performance of the following duties: (a) To properly review the books and records of the Debtor; (b) Compile the annual and interim balance sheets and related statements of income and retained earnings, and change in financial position, for the year ended March 31, 1987 and December 31, 1987; (c) Advise on how to report monthly cash statements of income and expenses; (d) General ledger work; (e) Preparation of annual income tax returns, Federal and State; (f) Preparation of all payroll tax returns and annual wage and tax statements; and (g) To perform various other functions in order for the proper maintenance of the company records.

586


3. That the Debtor has consulted with an accountant by the name of Ron Ossipove and he has indicated a willingness to serve as the accountant for the Debtor. 4. That the Debtor believes that it is essential that an accountant be appointed in this matter. Further, the Debtor is informed, and based upon such information, that Ron Ossipove is competent and qualified to perform the necessary accounting services outlined in this Application. 5. That attached hereto and made a part hereof as Exhibit “1” is an Affidavit of Ron Ossipove stating that (a) he, to the best of his knowledge, has no connection with the Debtor, its creditors or any other party in interest in this case; and (b) he, to the best of his knowledge, does not represent any interest adverse to that of the estate of the Debtor, its creditors or any other party in interest in this case in matters upon which Ron Ossipove is to be employed. Also, that he was the accountant for this Debtor in pre-Chapter 11 and as a result $1,500.00 is due and owing to him. 6. That attached hereto and made a part hereof of Exhibit “2” is a proposed engagement letter from Ron Ossipove outlining the services which he will perform on behalf of the Debtor and the accounting fees requested for said services. WHEREFORE, Debtor prays that this Honorable Court enter an Order authorizing Debtor to retain the accountant Ron Ossipove to perform various accounting services for the Debtor, as outlined in this Application and attached engagement letter. SCHAFER and WEINER, P.C. By: Arnold Schafer (P24694) Attorneys for Debtor 255 East Brown Street Suite 315 Birmingham, MI 48011 (313) 540-3340 DATED: (b) Affidavit in Support of Application for Appointment of Accountant IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In the Matter of: HERCULES FENCE & SUPPLY CO., a Michigan corporation, Debtor.


7.14

587


AFFIDAVIT IN SUPPORT OF APPLICATION FOR APPOINTMENT OF ACCOUNTANT FOR DEBTOR STATE OF MICHIGAN COUNTY OF OAKLAND

ss

RON OSSIPOVE, being first duly sworn, deposes and says as follows: 1. I am an accountant and have been authorized under applicable law to practice public accounting in the State of Michigan. 2. I practice my accounting services at 29226 Orchard Lake Road, Suite 150, Farmington Hills, Michigan. 3. I am familiar with Sections 101(13), 327 and 330 of the Bankruptcy Code and Rules 2014 and 5002 of the Bankruptcy Rules concerning the appointment of professional persons to perform services in a bankruptcy estate. 4. I, to the best of my knowledge, have no connection with the Debtor, its creditors or any other party in interest in this case. 5. I, to the best of my knowledge, do not represent any interest adverse to that of the estate of the Debtor, its creditors or any other party in interest in this case in matters upon which this accounting firm is to be employed. I have been the accountant for this Debtor in pre-Chapter 11 and as a result there is due and owing to me the sum of $1,500.00 6. Based upon the foregoing, I believe that I am eligible for the appointment as the accountant, and my appointment is in the best interest of this estate and is consistent with Sections 101(13), 327 and 330 of the Bankruptcy Code. Further, deponent sayeth not. RON OSSIPOVE Subscribed and sworn to before me, a Notary Public on this day of , 1987.

(c) Engagement Letter September 1, 1987 Mr. Bernard Conn President Hercules Fence & Supply Company 319 W. Eight Mile Road Detroit, Michigan 48203 Dear Mr. Conn: This letter is to confirm our understanding of the terms and objectives of our engagement and the limitations of the services I will provide. I will provide the following services: 1. I will compile, from information you provide, the annual and interim balance sheets and related statements of income and retained earnings,

588

2. 3. 4. 5. 6.


and change in financial position of Hercules Fence & Supply Company, for the year ended March 31, 1987 and December 31, 1987. We will not audit or review such financial statements. My report on the annual and interim financial statements of Hercules Fence & Supply Company is presently expected to read as follows: The accompanying balance sheet of Hercules Fence & Supply Company, as of March 31, 1987 and December 31, 1987 and the related statements of income, retained earnings, and changes in financial positions for the year then ended have been compiled by me. A compilation is limited to presenting in the form of financial statements, information that is representation of management. I have not audited or reviewed the accompanying financial statements, and accordingly, do not express an opinion or any other form of assurance on them. Advise your staff on how to report monthly cash statements of income and expenses. Make the necessary adjustments and posts to your General Ledger. Prepare annual income tax returns, Federal and State. Prepare all payroll tax returns and annual wage and tax statements. I will assist you in assembly of any information for preparation of required reports for filing in proceedings for reorganization under Chapter 11 of the Bankruptcy Code, as mutually agreed upon.

Dollars My fees for these services will be based on our normal hourly rate of ) per hour. ($ I will continue my services for future periods under the above terms of this engagement until such time as the terms are not suitable and upon notification of change or cancellation of such terms by you. If the foregoing is in accordance with your understanding, please sign the copy of this letter in the space provided and return it to me. Yours truly, Ron Ossipove Accountant Acknowledged: President Date

7.14

589


(d) Order Authorizing Debtor to Retain Accountant IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In the Matter of HERCULES FENCE & SUPPLY CO., a Michigan corporation, Debtor.


ORDER AUTHORIZING DEBTOR TO RETAIN RON OSSIPOVE AS ITS ACCOUNTANT At a session of said Court held in the United States Courthouse, City of . Detroit, Wayne County, Michigan, on PRESENT: HON. BANKRUPTCY JUDGE This matter having come to be heard on the Application of the Debtor, by and through its attorneys, Schafer and Weiner, P.C., seeking authority to retain the accountant Ron Ossipove to perform various accounting services outlined herein, and the Court being fully advised in the premises; IT IS HEREBY ORDERED that the Debtor is hereby authorized to retain Ron Ossipove as its accountant to (a) properly review the books and records of the Debtor; (b) compile the annual and interim balance sheets and related statements of income and retained earnings, and change in financial position, for the year ended March 31, 1987 and December 31, 1987; (c) advise on how to report monthly cash statements of income and expenses; (d) general ledger work; (e) preparation of annual income tax returns, Federal and State; (f) preparation of all payroll tax returns and annual wage and tax statements; and (g) to perform various other functions in order for the proper maintenance of the company records. BANKRUPTCY JUDGE

590


7.15 Accountant’s Affidavit Requesting Retention on a Retainer as Accountant for the Debtor Objective. Section 7.11 of Volume 1 describes the retention of the accountant on a retainer basis. The format used in New York, shown below, can be used when preparing an affidavit of the accountant seeking retention to render normal accounting services. UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK In re CORPORATION, Debtor

In proceedings for a Reorganization Case No. 85-16666 (NY)

AFFIDAVIT OF PROPOSED ACCOUNTANT FOR RETENTION AS ACCOUNTANT FOR THE DEBTOR-IN-POSSESSION State of New York County of New York

SS.:

JOHN X. DOE, JR., being duly sworn, deposes and says 1. He is a partner of the accounting firm of John X. Doe & Co., and he is duly authorized to make this affidavit for and on its behalf. 2. The business address of said firm includes its office at 90 Maple Street, New York, New York 10005. 3. John X. Doe & Co. is a firm of certified public accountants and has been in years. The Firm operates through offices located in existence for over cities in the United States and in a number of offices located overseas. John X. Doe, Jr., is a Certified Insolvency and Reorganization Accountant (CIRA) and has been a Certified Public Accountant (CPA), licensed under the laws years. His firm has been retained as of the State of New York, for over accountants in numerous matters to render services for debtors in bankruptcy court proceedings. 4. To the best of his knowledge, information, and belief, neither he nor the members of the firm of John X. Doe & Co. have any business association with nor are related to any attorney, creditor, debtor-in-possession, or any party to the proceedings. 5. He has made an examination of the books and records of the debtorin-possession and has discussed the services required with officers of the debtor, counsel for the debtor, and counsel for the Creditors’ Committee which consist of the following: (a) The preparation of monthly statements to be submitted to the court. (b) Review of the accounting records as deemed necessary.

7.15

Accountant’s Affidavit Requesting Retention on a Retainer

591

6. He estimates that the cost of the foregoing services will be Dollars ) per month payable upon completion of each monthly review. 7. WHEREFORE your deponent asks for the making of an appropriate order of employment.

($

JOHN X. DOE, JR. Sworn to before me this day of , 20XX

592


7.16 Procedures for Establishing Monthly Compensation and Reimbursement of Expenses of Professionals Objective. Sections 7.7 through 7.10 of Volume 1 discuss issues associated with retention of professionals. The Southern District of New York has established an order of procedures for monthly compensation and reimbursement of expenses of professionals. That order is reproduced below. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In the matter of: Order Establishing Procedures For Monthly Compensation and Reimbursement of Expenses of Professionals

) ) ) ) ) ) )

AMENDED GENERAL ORDER M-219 M-348

By resolution of the Board of Judges for the Southern District of New York, it is resolved that in order to provide professionals with clear and concise procedures for monthly compensation and reimbursement of expenses in chapter 11 cases (the “Monthly Fee Order”), and as amended to address the issue of foreign currency conversion to U.S. dollars, all Monthly Fee Orders filed in the bankruptcy court for the Southern District of New York shall conform substantially to the official Monthly Fee Order form annexed hereto. NOW, THEREFORE, IT IS ORDERED that the annexed official Monthly Fee Order be, and the same is adopted, effective immediately. Dated: New York, New York March 21, 2008 /s/ Stuart M. Bernstein Stuart M. Bernstein Chief Bankruptcy Judge UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re:

Debtors.

) ) ) ) ) )

Chapter 11 ( ) Case Nos.: -B( ) through -B(Jointly Administered)

7.16

Procedures for Establishing Monthly Compensation and Reimbursement

593

ORDER PURSUANT TO 11 U.S.C. §§ 105(a) AND 331 ESTABLISHING PROCEDURES FOR MONTHLY COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PROFESSIONALS [NAMES OF DEBTORS], debtors and debtors-in-possession (collectively, the , 20 (the “Motion”), for an “Debtors”), move, by a motion dated order, pursuant to §§ 105(a) and 331 of the United States Bankruptcy Code (the “Code”), establishing procedures for monthly compensation and reimbursement of expenses of professionals retained by order of this Court, and this Court having determined that the relief requested in the Motion is in the best interests of the Debtors, their estates, and creditors; and it appearing that proper and adequate notice has been given by service of the Motion on the Office of the United States Trustee, counsel to each official committee (If no committee is appointed, the 20 largest unsecured creditors.), counsel to all postpetition lenders (or counsel to their agent(s)), and all parties who filed a notice of appearance; and that no other or further notice is necessary; and upon the record of the hearing herein; and upon the representation of the Debtors that this estate is administratively solvent; and after due deliberation thereon; and good and sufficient cause appearing therefor, it is hereby ORDERED, that except as may otherwise be provided in Court orders authorizing the retention of specific professionals, all professionals in these cases may seek monthly compensation in accordance with the following procedure: (a) On or before the twentieth (20th) day of each month following the month for which compensation is sought, each professional seeking compensation under this Order will serve a monthly statement, by hand or , the officer designated by the Debtors overnight delivery on (i) to be responsible for such matters; (ii) counsel to the Debtors; (iii) counsel to all official committees; (iv) counsel for the Office of the United States Trustee, 33 Whitehall Street, 21st Floor, New York, New York , Esq.); (vi) counsel to all post-petition lenders or 10004 (Attn: (anyone else the Court may designate); their agent(s); and (v) (b) The monthly statement need not be filed with the Court and a courtesy copy need not be delivered to the presiding judge’s chambers since this Order is not intended to alter the fee application requirements outlined in §§ 330 and 331 of the Code and since professionals are still required to serve and file interim and final applications for approval of fees and expenses in accordance with the relevant provisions of the Code, the Federal Rules of Bankruptcy Procedure and the Local Rules for the United States Bankruptcy Court, Southern District of New York; (c) Each monthly fee statement must contain a list of the individuals and their respective titles (e.g. attorney, accountant, or paralegal) who provided services during the statement period, their respective billing rates, the aggregate hours spent by each individual, a reasonably detailed breakdown of the disbursements incurred (No professional should seek reimbursement of an expense which would otherwise not be allowed pursuant to the Court’s Administrative Orders dated June 24, 1991 and April 21, 1995 or the United States Trustee Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed under 11 U.S.C. § 330 dated January 30, 1996.), and contemporaneously

594

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(l)


maintained time entries for each individual in increments of tenths (1/10) of an hour; Each person receiving a statement will have at least fifteen (15) days after its receipt to review it and, in the event that he or she has an objection to the compensation or reimbursement sought in a particular statement, he or she shall, by no later than the thirty-fifth (35th) day following the month for which compensation is sought, serve upon the professional whose statement is objected to, and the other persons designated to receive statements in paragraph (a), a written “Notice Of Objection To Fee Statement,” setting forth the nature of the objection and the amount of fees or expenses at issue; At the expiration of the thirty-five (35) day period, the Debtors shall promptly pay eighty percent (80%) of the fees and one hundred percent (100%) of the expenses identified in each monthly statement to which no objection has been served in accordance with paragraph (d); If the Debtors receive an objection to a particular fee statement, they shall withhold payment of that portion of the fee statement to which the objection is directed and promptly pay the remainder of the fees and disbursements in the percentages set forth in paragraph (e); Similarly, if the parties to an objection are able to resolve their dispute following the service of a Notice Of Objection To Fee Statement and if the party whose statement was objected to serves on all of the parties listed in paragraph (a) a statement indicating that the objection is withdrawn and describing in detail the terms of the resolution, then the debtor shall promptly pay, in accordance with paragraph (e), that portion of the fee statement which is no longer subject to an objection; All objections that are not resolved by the parties, shall be preserved and presented to the Court at the next interim or final fee application hearing to be heard by the Court. See paragraph (j), below; The service of an objection in accordance with paragraph (d) shall not prejudice the objecting party’s right to object to any fee application made to the Court in accordance with the Code on any ground whether raised in the objection or not. Furthermore, the decision by any party not to object to a fee statement shall not be a waiver of any kind or prejudice that party’s right to object to any fee application subsequently made to the Court in accordance with the Code; Approximately every 120 days, but no more than every 150 days, each of the professionals shall serve and file with the Court an application for interim or final Court approval and allowance, pursuant to sections 330 and 331 of the Bankruptcy Code (as the case may be), of the compensation and reimbursement of expenses requested; Any professional who fails to file an application seeking approval of compensation and expenses previously paid under this Order when due shall (1) be ineligible to receive further monthly payments of fees or expenses as provided herein until further order of the Court and (2) may be required to disgorge any fees paid since retention or the last fee application, whichever is later; The pendency of an application or a Court order that payment of compensation or reimbursement of expenses was improper as to a particular

7.16

Procedures for Establishing Monthly Compensation and Reimbursement

595

statement shall not disqualify a professional from the future payment of compensation or reimbursement of expenses as set forth above, unless otherwise ordered by the Court; (m) Neither the payment of, nor the failure to pay, in whole or in part, monthly compensation and reimbursement as provided herein shall have any effect on this Court’s interim or final allowance of compensation and reimbursement of expenses of any professionals; (n) Counsel for each official committee may, in accordance with the foregoing procedure for monthly compensation and reimbursement of professionals, collect and submit statements of expenses, with supporting vouchers, from members of the committee he or she represents; provided, however, that such committee counsel ensures that these reimbursement requests comply with this Court’s Administrative Orders dated June 24, 1991 and April 21, 1995; and it is further ORDERED, that each professional may seek, in its first request for compensation and reimbursement of expenses pursuant to this Order, compensation for work performed and reimbursement for expenses incurred during the period , beginning on the date of the professional’s retention and ending on 20 ; and it is further ORDERED, that the amount of fees and disbursements sought be set out in U.S. dollars; [if the fees and disbursements are to be paid in foreign currency, the amount shall be set out in U.S. dollars and the conversion amount in the foreign currency, calculated at the time of the submission of the application;] and it is further ORDERED, that the Debtors shall include all payments to professionals on their monthly operating reports, detailed so as to state the amount paid to each of the professionals; and it is further ORDERED, that any party may object to requests for payments made pursuant to this Order on the grounds that the Debtors have not timely filed monthly operating reports, remained current with their administrative expenses and 28 U.S.C. § 1930 fees, or a manifest exigency exists by seeking a further order of this Court, otherwise, this Order shall continue and shall remain in effect during the pendency of this case; and it is further ORDERED, that all time periods set forth in this Order shall be calculated in accordance with Federal Rule of Bankruptcy Procedure 9006(a); and it is further ORDERED, that any and all other and further notice of the relief requested in the Motion shall be, and hereby is, dispensed with and waived; provided, however, that the Debtors must serve a copy of this Order on all entities specified in paragraph (a) hereof. Dated:

New York, New York ,20 UNITED STATES BANKRUPTCY JUDGE

596


7.17 Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Objective. A copy of the guidelines issued by the Executive Office for U.S. trustees in Washington, D.C., is reproduced below. These guidelines contain information that should be considered in preparing applications for compensation and expenses. The financial advisor also needs to consider these guidelines in order to properly prepare the application for retention. Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses under 11 U.S.C. Section 330. Effective January 30, 1996 (a) General Information. (1) The Bankruptcy Reform Act of 1994 amended the responsibilities of the United States trustees under 28 U.S.C. 586(a)(3)(A) to provide that, whenever they deem appropriate, United States trustees will review applications for compensation and reimbursement of expenses under section 330 of the Bankruptcy Code, 11 U.S.C. 101, et seq. (“Code”), in accordance with procedural guidelines (“Guidelines”) adopted by the Executive Office for United States trustees (“Executive Office”). The following Guidelines have been adopted by the Executive Office and are to be uniformly applied by the United States trustees except when circumstances warrant different treatment. (2) The United States trustees shall use these Guidelines in all cases commenced on or after October 22, 1994. (3) The Guidelines are not intended to supersede local rules of court, but should be read as complementing the procedures set forth in local rules. (4) Nothing in the Guidelines should be construed: (i) To limit the United States trustee’s discretion to request additional information necessary for the review of a particular application or type of application or to refer any information provided to the United States trustee to any investigatory or prosecutorial authority of the United States or a state; (ii) To limit the United States trustee’s discretion to determine whether to file comments or objections to applications; or (iii) To create any private right of action on the part of any person enforceable in litigation with the United States trustee or the United States. (5) Recognizing that the final authority to award compensation and reimbursement under section 330 of the Code is vested in the Court, the Guidelines focus on the disclosure of information relevant to a proper award under the law. In evaluating fees for professional services, it is relevant to consider various factors including the following: the time spent; the rates charged; whether the services were necessary to the administration of, or beneficial towards the completion of, the case at

7.17

Applications for Compensation and Reimbursement of Expenses

597

the time they were rendered; whether services were performed within a reasonable time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and whether compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in non-bankruptcy cases. The Guidelines thus reflect standards and procedures articulated in section 330 of the Code and Rule 2016 of the Federal Rules of Bankruptcy Procedure for awarding compensation to trustees and to professionals employed under section 327 or 1103. Applications that contain the information requested in these Guidelines will facilitate review by the Court, the parties, and the United States trustee. (6) Fee applications submitted by trustees are subject to the same standard of review as are applications of other professionals and will be evaluated according to the principles articulated in these Guidelines. Each United States trustee should establish whether and to what extent trustees can deviate from the format specified in these Guidelines without substantially affecting the ability of the United States trustee to review and comment on their fee applications in a manner consistent with the requirements of the law. (b) Contents of Applications for Compensation and Reimbursement of Expenses. All applications should include sufficient detail to demonstrate compliance with the standards set forth in 11 U.S.C. § 330. The fee application should also contain sufficient information about the case and the applicant so that the Court, the creditors, and the United States trustee can review it without searching for relevant information in other documents. The following will facilitate review of the application. (1) Information about the Applicant and the Application. The following information should be provided in every fee application: (i) Date the bankruptcy petition was filed, date of the order approving employment, identity of the party represented, date services commenced, and whether the applicant is seeking compensation under a provision of the Bankruptcy Code other than section 330. (ii) Terms and conditions of employment and compensation, source of compensation, existence and terms controlling use of a retainer, and any budgetary or other limitations on fees. (iii) Names and hourly rates of all applicant’s professionals and paraprofessionals who billed time, explanation of any changes in hourly rates from those previously charged, and statement of whether the compensation is based on the customary compensation charged by comparably skilled practitioners in cases other than cases under title 11. (iv) Whether the application is interim or final, and the dates of previous orders on interim compensation or reimbursement of expenses along with the amounts requested and the amounts allowed or

598


disallowed, amounts of all previous payments, and amount of any allowed I fees and expenses remaining unpaid. (v) Whether the person on whose behalf the applicant is employed has been given the opportunity to review the application and whether that person has approved the requested amount. (vi) When an application is filed less than 120 days after the order for relief or after a prior application to the Court, the date and terms of the order allowing leave to file at shortened intervals. (vii) Time period of the services or expenses covered by the application. (2) Case Status. The following information should be provided to the extent that it is known to or can be reasonably ascertained by the applicant: (i) In a chapter 7 case, a summary of the administration of the case including all moneys received and disbursed in the case, when the case is expected to close, and, if applicant is seeking an interim award, whether it is feasible to make an interim distribution to creditors without prejudicing the rights of any creditor holding a claim of equal or higher priority. (ii) In a chapter 11 case, whether a plan and disclosure statement have been filed and, if not yet filed, when the plan and disclosure statement are expected to be filed; whether all quarterly fees have been paid to the United States trustee; and whether all monthly operating reports have been filed. (iii) In every case, the amount of cash on hand or on deposit, the amount and nature of accrued unpaid administrative expenses, and the amount of unencumbered funds in the estate. (iv) Any material changes in the status of the case that occur after the filing of the fee application should be raised, orally or in writing, at the hearing on the application or, if a hearing is not required, prior to the expiration of the time period for objection. (3) Summary Sheet. All applications should contain a summary or cover sheet that provides a synopsis of the following information: (i) Total compensation and expenses requested and any amount(s) previously requested; (ii) Total compensation and expenses previously awarded by the court. (iii) Name and applicable billing rate for each person who billed time during the period, and date of bar admission for each attorney; (iv) Total hours billed and total amount of billing for each person who billed time during billing period; and (v) Computation of blended hourly rate for persons who billed time during period, excluding paralegal or other paraprofessional time. (4) Project Billing Format. (i) To facilitate effective review of the application, all time and service entries should be arranged by project categories. The project categories set forth in Exhibit A should be used to the extent applicable. A separate project category should be used for administrative matters and, if payment is requested, for fee application preparation.

7.17


599

(ii) The United States trustee has discretion to determine that the project billing format is not necessary in a particular case or in a particular class of cases. Applicants should be encouraged to consult with the United States trustee if there is a question as to the need for project billing in any particular case. (iii) Each project category should contain a narrative summary of the following information: (A) a description of the project, its necessity and benefit to the estate, and the status of the project including all pending litigation for which compensation and reimbursement are requested; (B) identification of each person providing services on the project; and (C) a statement of the number of hours spent and the amount of compensation requested for each professional and paraprofessional on the project. (iv) Time and service entries are to be reported in chronological order under the appropriate project category. (v) Time entries should be kept contemporaneously with the services rendered in time periods of tenths of an hour. Services should be noted in detail and not combined or “lumped” together, with each service showing a separate time entry; however, tasks performed in a project which total a de minimis amount of time can be combined or lumped together if they do not exceed .5 hours on a daily aggregate. Time entries + for telephone calls, letters, and other communications should give sufficient detail to identify the parties to and the nature of the communication. Time entries for court hearings and conferences should identify the subject of the hearing or conference. If more than one professional from the applicant firm attends a hearing or conference, the applicant should explain the need for multiple attendees. (5) Reimbursement for Actual Necessary Expenses. Any expense for which reimbursement is sought must be actual and necessary and supported by documentation as appropriate. Factors relevant to a determination that the expense is proper include the following: (i) Whether the expense is reasonable and economical. For example, first class and other luxurious travel mode or accommodations will normally be objectionable. (ii) Whether the requested expenses are customarily charged to nonbankruptcy clients of the applicant. (iii) Whether applicant has provided a detailed itemization of all expenses including the date incurred, description of expense (e.g., type of travel, type of fare, rate, destination), method of computation, and, where relevant, name of the person incurring the expense and purpose of the expense. Itemized expenses should be identified by their nature (e.g., long distance telephone, copy costs, messengers, computer research, air-line travel, etc.,) and by the month incurred. Unusual items require more detailed

600


(iv)

(v)

(vi)

(vii)

(viii)

explanations and should be allocated, where practicable, to specific projects. Whether applicant has prorated expenses where appropriate between the estate and other cases (e.g., travel expenses applicable to more than one case) and has adequately explained the basis for any such proration. Whether expenses incurred by the applicant to third parties are limited to the actual amounts billed to, or paid by, the applicant on behalf of the estate. Whether applicant can demonstrate that the amount requested for expenses incurred in-house reflects the actual cost of such expenses to the applicant. The United States trustee may establish an objection ceiling for any in-house expenses that are routinely incurred and for which the actual cost cannot easily be determined by most professionals (e.g., photocopies, facsimile charges, and mileage). Whether the expenses appear to be in the nature nonreimbursable overhead. Overhead consists of all continuous administrative or general costs incident to the operation of the applicant’s office and not particularly attributable to an individual client or cases. Overhead includes, but is not limited to, word processing, proofreading, secretarial and other clerical services, rent, utilities, office equipment and furnishings, insurance, taxes, local telephones and monthly car phone charges, lighting, heating and cooling, and library and publication charges. Whether applicant has adhered to allowable rates for expenses I as fixed by local rule or order of the Court. EXHIBIT A PROJECT CATEGORIES

Here is a list of suggested project categories for use in most bankruptcy cases. Only one category should be used for a given activity. Professionals should make their best effort to be consistent in their use of categories, whether within a particular firm or by different firms working on the same case. It would be appropriate for all professionals to discuss the categories in advance and agree generally on how activities will be categorized. This list is not exclusive. The application may contain additional categories as the case requires. They are generally more applicable to attorneys in chapter 7 and chapter 11, but may be used by all professionals as appropriate. ASSET ANALYSIS AND RECOVERY: Identification and review of potential assets including causes of action and non-litigation recoveries. ASSET DISPOSITION: Sales, leases (§ 365 matters), abandonment and related transaction work. BUSINESS OPERATIONS: Issues related to debtor-in-possession operating in chapter 11 such as employee, vendor, tenant issues and other similar problems.

7.17


601

CASE ADMINISTRATION: Coordination and compliance activities, including preparation of statement of financial affairs; schedules; list of contracts; United States trustee interim statements and operating reports; contacts with the United States trustee; general creditor inquiries. CLAIMS ADMINISTRATION AND OBJECTIONS: Specific claim inquiries; bar date motions; analyses, objections and allowances of claims. EMPLOYEE BENEFITS/PENSIONS: Review issues such as severance, retention, 401K coverage and continuance of pension plan. FEE/EMPLOYMENT APPLICANTS: Preparations of employment and fee I applications for self or others; motions to establish interim procedures. FEE/EMPLOYMENT OBJECTIONS: Review of and objections to the employment and fee applications of others. FINANCING: Matters under §§ 361, 363 and 364 including cash collateral and secured claims; loan document analysis. LITIGATION: There should be a separate category established for each matter (e.g., xyz Litigation). MEETINGS OF CREDITORS: Preparing for and attending the conference of creditors, the § 341(a) meeting and other creditors’ committee meetings. PLAN AND DISCLOSURE STATEMENT: Formulation, presentation and confirmation; compliance with the plan confirmation order, related orders and rules; disbursement and case closing activities, except those related to the allowance and objections to allowance of claims. RELIEF FROM STAY PROCEEDINGS: Matters relating to termination or continuation of automatic stay under § 362. The following categories are generally more applicable to accountants and financial advisors, but may be used by all professionals as appropriate. ACCOUNTING/AUDITING: Activities related to maintaining and auditing books of account, preparation of financial statements and account analysis. BUSINESS ANALYSIS: Preparation and review of company business plan; development and review of strategies; preparation and review of cash flow forecasts and feasibility studies. CORPORATE FINANCE: Review financial aspects of potential mergers, acquisitions and disposition of company or subsidiaries. DATA ANALYSIS: Management information systems review, installation and analysis, construction, maintenance and reporting of significant case financial data, lease rejection, claims, etc. LITIGATION CONSULTING: Providing consulting and expert witness services relating to various bankruptcy matters such as insolvency, feasibility, avoiding actions; forensic accounting, etc. RECONSTRUCTION ACCOUNTING: Reconstructing books and records from past transactions and bringing accounting current. TAX ISSUES: Analysis of tax issues and preparation of state and federal tax returns. VALUATION: Appraise or review appraisals of assets.

602


7.18 District of Delaware Local Rule 2016-2 Motion for Compensation and Reimbursement of Expenses Objective. Sections 7.24 and 7.26 of Volume 1 describe the type of records that should be maintained and the information that should be included in a petition for fees and expenses. The examples contained in Delaware Local Rule 2016-2 below are representative of the information required. 2016-2 Motion for Compensation and Reimbursement of Expenses. (a) Scope of Rule. This Local Rule applies to: (i) Any motion of a professional person employed under 11 U.S.C. § 327, 328 or 1103 requesting approval for compensation and/or reimbursement of expenses; and (ii) Any request of an entity for payment of an administrative expense under 11 U.S.C. § 503(b)(3) or 503(b)(4). (b) Effect of Rule. Any such motion or request for payment, in addition to complying with the Code and the Fed. R. Bankr. P. applicable to the filing and the contents of such a motion, shall comply with the information and certification requirements listed in Local Rule 2016-2(c)–(f). Any such motion not in compliance with these requirements will not be considered by the Court, unless a waiver is obtained under Local Rule 2016-2(g). (c) General Information Requirements. (i) The motion shall include, as its first page(s), Local Form 101 and the information requested therein (categories given are examples). (ii) Immediately thereafter, the motion shall include Local Form 102 and the information requested therein (categories given are examples). Where the applicant deems appropriate, the motion may also include a firm resume. (iii) The narrative portion of the motion shall inform the Court of circumstances that are not apparent from the activity descriptions or that the applicant wishes to bring to the attention of the Court, including special employment terms, billing policies, expense policies, voluntary reductions, reasons for the use of multiple professionals for a particular activity or reasons for substantial time billed relating to a specific activity. (d) Information Requirements Relating to Compensation Requests. Such motion shall include activity descriptions which shall be sufficiently detailed to allow the Court to determine whether all the time, or any portion thereof, is actual, reasonable and necessary and shall include the following: (i) All activity descriptions shall be divided into general project categories of time; (ii) All motions shall include complete and detailed activity descriptions; (iii) Each activity description shall include a time allotment; (iv) Activities shall be billed in tenths of an hour (six (6) minutes); (v) Each activity description shall include the type of activity (e.g., phone call, research);

7.18

(e)

(f)

(g)

(h) (i)

District of Delaware Local Rule 2016-2 Motion

603

(vi) Each activity description shall include the subject matter (e.g., exclusivity motion, section 341 meeting); (vii) Activity descriptions shall not be lumped—each activity shall have a separate description and a time allotment; (viii) Travel time during which no work is performed shall be separately described and may be billed at no more than 50% of regular hourly rates; (ix) The activity descriptions shall individually identify all meetings and hearings, each participant, the subject(s) of the meeting or hearing and the participant’s role; and (x) Activity descriptions shall be presented chronologically or chronologically within each project category. Information Requirements Relating to Expense Reimbursement Requests. (i) The motion shall contain an expense summary by category for the entire period of the request. Examples of such categories are computer-assisted legal research, photocopying, outgoing facsimile transmissions, airfare, meals and lodging. (ii) Following the summary, the motion shall itemize each expense within each category, including the date the expense was incurred, the charge and the individual incurring the expense, if available. (iii) The motion shall state the requested rate for copying charges (which shall not exceed $.10 per page), computer-assisted legal research charges (which shall not be more than the actual cost) and outgoing facsimile transmission charges (which shall not exceed $1.00 per page, with no charge for incoming facsimiles). (iv) Receipts or other support for each disbursement or expense item for which reimbursement is sought must be retained and be available on request. Certification Requirement. The motion shall also contain a statement that the professional person seeking approval of the motion has reviewed the requirements of this Local Rule and that the motion complies with this Local Rule. Waiver Procedure. An employed professional person or entity within the scope of this Local Rule may request that the Court waive, for cause, one or more of the information requirements of this Local Rule. Such a request should be made in the same motion in which the person seeks Court approval to be employed, or as soon as possible thereafter, and shall be served on debtor’s counsel, counsel to any official committee and the United States Trustee. The caption of any motion that contains a waiver request shall explicitly state that the person is seeking a waiver of one or more of the information requirements of this Local Rule. Form of Order. The form of order submitted to the Court shall specifically recite the amounts requested in fees and in expenses. Fee Examiners. The Court may, in its discretion or on motion of any party, appoint a fee examiner to review fee applications and make recommendations for approval.

604 7.19


Petition for Fee Allowance and Reimbursement of Expenses

Objectives. Section 7.26 of Volume 1 of Bankruptcy and Insolvency Accounting describes the procedures for filing a petition for fee allowance and reimbursement of expenses. Shown here is an application for fee allowance and reimbursement of expenses filed in the bankruptcy court in Western District of Kansas City in the Interstate Bakeries Corporation filing. The application is divided into the following sections:

r (a) First Interim Application for Allowance of Compensation and Reimbursement of Expenses of Huron Consulting Services (Includes attachments including Order Order Authorizing Retention of Huron Consulting Services and Exhibits) r (b) Motion and Order Establishing Procedures for Interim Compensation r (c) Billing for Interim Services for January 5, 2008 through February 28, 2008 (a) First Interim Application for Allowance of Compensation and Reimbursement of Expenses of Huron Consulting Services (Includes attachments including Order Order Authorizing Retention of Huron Consulting Services and Exhibits) IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MISSOURI KANSAS CITY DIVISION IN RE: INTERSTATE BAKERIES CORPORATION, et al., Debtors.

§ § § § §

CHAPTER 11 CASE NO. 04-45814 (JWV) (Jointly Administered)

COVER SHEET NAME OF APPLICANT: TIME PERIOD: ROLE IN THE CASE: DATE OF RETENTION: APPLICATION:

RETAINER: PRIOR APPLICATIONS:

Huron Consulting Services, LLC (“Huron”) January 17, 2008, through April 30, 2008 Fresh-Start Reporting And Valuation Services To The Debtors February 26, 2008 Fees Requested: 607,659.50 Expenses Requested: $64,851.82 Existing Holdback Requested (20%): $121,531.90 N/A None

7.19


605

IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MISSOURI KANSAS CITY DIVISION IN RE: INTERSTATE BAKERIES CORPORATION, et al., Debtors.

§ § § § §


FIRST INTERIM APPLICATION FOR ALLOWANCE OF COMPENSATION AND REIMBURSEMENT OF EXPENSES OF HURON CONSULTING SERVICES LLC PROVIDING FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS FOR THE PERIOD FROM JANUARY 17, 2008 THROUGH APRIL 30, 2008. TO THE HONORABLE JERRY W. VENTERS, U.S. BANKRUPTCY JUDGE: COMES NOW Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”), providing Interstate Bakeries Corporation, et al. (collectively, the “Debtors”) Fresh-Start Reporting and Valuation Services and hereby submits its First Interim Application pursuant to §§ 330 and 331 of Title 11 of the United States Code (the “Bankruptcy Code”) and Rules 2016 and 9013 of the Federal Rules of Bankruptcy Procedure for allowance of compensation for services rendered and for reimbursement of expenses incurred during the period January 17, 2008 through April 30, 2008 (the “First Application Period”), and respectfully represents as follows: INTRODUCTION 1. By this Application, Huron (the “Applicant”) seeks (i) interim allowance and award of compensation for the professional services rendered by it to provide fresh-start reporting and valuation services to the Debtors during the First Application Period in the amount of $607,659.50 and (ii) reimbursement of the actual and necessary expenses incurred by it in connection with the performance of such services in the amount of $64,851.82. 2. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 11 U.S.C. §§ 157(b)(2)(A). Venue of these cases and this matter is proper in this district pursuant to 28 U.S.C §§ 1408 and 1409. BACKGROUND 3. On September 22, 2004 (the “Petition Date”), eight of the Debtors each filed a voluntary petition in this Court for reorganization relief under chapter 11 of title 11 of the United States Code, 11 U.S.C §§ 101–1330, as amended (the “Bankruptcy Code”). Further, on January 14, 2006, the ninth debtor, Mrs. Cubbison’s Foods, Inc. also filed a voluntary petition in this Court for

606


reorganization relief under chapter 11 of the Bankruptcy Code. The Debtors continue to manage and operate their businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. 4. No trustee or examiner has been appointed in the Debtors’ chapter 11 cases. On September 24, 2004, and amended October 8, 2004, the United States Trustee appointed the official committee of unsecured creditors (the “Committee”) in these cases. Nine (9) members were appointed to the Committee by the United States Trustee, including certain noteholders, indenture trustees, labor union representatives, and trade creditors. On November 29, 2004, the United States Trustee appointed an official committee of equity security holders in these cases. 5. On February 6, 2008, the Debtors filed an Application for Employment of Huron Consulting Group to provide fresh-start reporting and valuation services to the Debtors (the “Employment Application”). On February 26, 2008, the Court entered an Order Authorizing the Employment of Huron Consulting Group to provide fresh-start reporting and valuation services to the Debtors (the “Employment Order”). 6. Pursuant to the Employment Order, the Debtors were authorized to retain Applicant, effective as of January 17, 2008. The Employment Order is attached hereto, as Exhibit A. SUMMARY OF SERVICES RENDERED 7. Since Huron’s retention to provide fresh-start reporting and valuation services and continuing to the date hereof, Huron has rendered requested professional services to the Debtors as necessary and appropriate. Huron has not received a retainer in connection with its retention to provide fresh-start reporting and valuation services to the Debtors. A summary of the monthly statements that were provided to the Debtors and to certain notice parties in accordance with guidelines set forth in the Order Pursuant to Sections 105(a) and 331 of the Bankruptcy Code and Bankruptcy Rule 2016(a) to Establish Procedures for Interim Compensation and Reimbursement of Expenses of Professionals follows:

Period January– February 2008 March 2008 April 2008 Total

Fees Requested

Expenses Requested

Fees Paid to Date

Expenses Paid to Date

Unpaid Amounts

$276,691.50

$38,304.89

$221,353.20

$38,304.89

$ 55,338.30

$203,810.50 $127,157.50 $607,659.50

$16,452.38 $10,094.55 $64,851.82

$163,048.40 $101,726.00 $486,127.60

$16,452.38 $10,094.55 $64,851.82

$ 40,762.10 $ 25,431.50 $121,531.90

8. Huron maintains written records of the time expended by its professionals in the rendering of their services to the Debtors. A summary of the compensation requested is attached hereto in Exhibit B. Additionally, a summary showing the name of each professional and the hours expended during the First Application Period is attached hereto in Exhibit C.

7.19


607

9. The following is a description of the work performed and the time expended by Huron during the First Application Period, by project code (“PC”). Huron expended a total of 1,520.7 hours for this application period. A summary description of services and the time expended in performing such services are set forth in Exhibit D. PC-1

PC-4

PC-6

PC-22

PC-24

PC-25

Meeting/Teleconference w/Debtor Mgmt, Board, or Counsel During the First Application Period, Huron conferred with various constituencies in these cases including: the Debtors’ management and personnel, the Debtors’ counsel and investment bankers, and other valuation professionals retained by the Debtors. Our meetings and teleconferences with such parties involved a wide range of financial, legal, managerial, valuation and other issues, largely related to the Debtors’ adoption of fresh start reporting upon emergence from bankruptcy. Court Hearings and Preparation During the First Application Period, Huron prepared for and participated in a hearing before the Court regarding Huron’s retention. Retention and Fee Applications During the First Application Period, Huron worked with counsel on the documentation related to becoming a retained professional in this case and followed the procedures set forth in the Professional Fees Motion, including creating monthly billing statements that were distributed to various notice parties. Appraisals/Valuation During the First Application Period, Huron worked on the valuation of specific intangible assets for the Debtors’ Fresh Start Balance Sheet. The valuation of the Debtors’ intangible assets included performing relevant research, building various excess earnings valuation models for specific assets, building royalty rate models, concluding on an appropriate weighted average cost of capital, and performing benchmarking analyses. General Case Administration During the First Application Period, Huron incurred time for general administrative matters related to the Debtors’ bankruptcy case. Given the nature of the engagement, such time was devoted to project documentation, work planning, and file management to ensure efficiency and to avoid redundancy. Fresh Start Reporting—Research Analysis During the First Application Period, Huron worked on performing research associated with the Debtors’ fresh start reporting requirements and related financial

252.1

0.9

55.2

453.7

82.0

249.7

608

PC-26

PC-27


statement disclosures. Such research was necessary as it relates to issues that are specific to the circumstances surrounding the Debtors’ business. Huron’s experience in the area of fresh start reporting permits an efficient resolution to the many accounting issues associated with the Debtors’ emergence from bankruptcy. However, time in this project code was expended in order to (i) cite specific accounting literature to support the Debtors’ positions on particular topic areas, (ii) ensure the Debtors’ treatment of a particular issue is appropriate in light of all guidance provided by generally accepted accounting principles, and (iii) begin the process of documenting white papers that are described more fully in PC-26 below. Fresh Start Reporting—White Papers/Documentation During the First Application Period, Huron worked on documenting certain white papers (or position papers) related to various applicable accounting rules and interpretations of same as they relate to the Debtors’ specific emergence circumstances. This documentation would ultimately be shared with the Debtors’ external auditor and, once finalized, would serve to supplement the Debtors’ requirements related to Sarbanes-Oxley compliance. Intangible Asset Impairment Testing During the First Application Period, Huron assisted Debtor management with performing its annual test of impairment related to certain non-amortizing intangible assets. This work is required by generally accepted accounting principles on at least an annual basis or whenever triggering events occur that indicate impairment may exist. This work also included the preparation of draft reports of the intangible asset impairment analysis for Debtor management and their external auditor.

52.4

374.7

10. Pursuant to Applicant’s approved fee arrangement in the Bankruptcy Case, Applicant’s fees have been determined based on actual hourly rates. Specifically, Applicant requests reimbursement of $276,691.50 for January and February 2008; $203,810.50 for March 2008, which includes a voluntary adjustment of $52.50 for the January and February fees; and $127,157.50 for April 2008, for a total of $607,659.50. 11. Huron also maintains records of all actual and necessary out-of-pocket expenses incurred in connection with the rendering of its professional services. A summary of the reasonable and necessary out-of-pocket expenses incurred on behalf of the Debtors, totaling $64,851.82, is attached hereto as Exhibit E. 12. The services rendered by Huron were necessary to the performance of its duties and the performance of the Debtors’ responsibilities. Huron’s efforts have assisted the Debtors in their progress toward a successful exit from

7.19


609

Chapter 11 and in maximizing value for the benefit of the Debtors’ creditors and estates. 13. Pursuant to the Order Pursuant to 11 U.S.C. §§ 105(a) and 331 Establishing Procedures for Interim Compensation and Reimbursement of Expenses of Professionals entered on October 25, 2004 (the “Interim Compensation Order”), Huron has received interim payment in connection with its representation of the Debtors in these cases and, pursuant to the terms of the Employment Order and the Interim Compensation Order, the source of previously received compensation and future compensation is the Debtors’ estate. No agreement or understanding exists between Huron and any other person for a sharing of compensation received or to be received for services rendered in or in connection with these Chapter 11 cases, nor has Huron shared or agreed to share the compensation paid or allowed for such services with any other person. THE COMPENSATION REQUESTED 14. In view of the foregoing, Huron respectfully requests that it be allowed reasonable interim compensation in the amount of $607,659.50 for services rendered in connection with these Chapter 11 cases. 15. Huron believes that the compensation requested herein is reasonable in light of the size and complexity of these Chapter 11 cases, the results obtained, the frequent demands for prompt action, the efficiency with which Huron’s services were performed and the uncertainties and risks of the engagement. Accordingly, Huron submits that its fees are reasonable and necessary and that its services conferred a substantial benefit to the Debtors’ estates. DISBURSEMENTS 16. The actual expenses incurred in providing professional services were absolutely necessary, reasonable and justified under the circumstances to serve the needs of the Debtors. Therefore, Huron requests reimbursement of expenses in the amount of $64,851.82 incurred during the First Application Period. WHEREFORE, Huron respectfully requests (i) an allowance of compensation for professional services rendered for the Debtors in the aggregate amount of $607,659.50 for fees for the period of January 17, 2008 through April 30, 2008; (ii) reimbursement of $64,851.82 of actual and necessary disbursements incurred by Huron for the period of January 17, 2008 through April 30, 2008; (iii) authorization for the Debtors to pay unpaid fees and disbursements relating to the First Application Period in the amount of $121,531.90. Respectfully submitted, HURON CONSULTING SERVICES LLC Michael C. Sullivan Huron Consulting Services LLC FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS And LENTZ & CLARK, P.A. /s/ Jeffrey A. Deines Local Counsel for Huron Consulting Services, LLC

610


CERTIFICATE OF COMPLIANCE This is to certify that I have read the foregoing Application, that to the best of my knowledge, information and belief, formed after reasonable inquiry, the compensation and reimbursement sought is in conformity with the Court’s Guidelines for Compensation and Expense Reimbursement of Professionals, and the compensation and expense reimbursement requested are billed at rates, in accordance with practices, no less favorable than those customarily employed by Huron Consulting Services LLC and generally accepted by its clients. By: /s/ Michael C. Sullivan Michael C. Sullivan Managing Director IN THE UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF MISSOURI KANSAS CITY DIVISION

In re: INTERSTATE BAKERIES CORPORATION, et al., Debtors.

x : : : : : : : x

Chapter 11 Case No. 04-45814 (JWV) (Jointly Administered)

ORDER PURSUANT TO SECTIONS 327(a) AND 328(a) OF THE BANKRUPTCY CODE AND FEDERAL RULES OF BANKRUPTCY PROCEDURE 2014(a) AND 2016 FOR AUTHORITY TO EMPLOY AND RETAIN HURON CONSULTING SERVICES LLC (PRACTICING AS HURON CONSULTING GROUP) TO PROVIDE FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS NUNC PRO TUNC TO JANUARY 17, 2008 (Relating to Docket No. 10157) This matter having come before the Court on the application (the “Application”)1 for an order pursuant to sections 327(a) and 328(a) of the Bankruptcy Code and Bankruptcy Rules 2014(a) and 2016 authorizing the Debtors to employ and retain Huron Consulting Services LLC (practicing as Huron Consulting Group) (“Huron”) to provide the Fresh-Start and Valuation Consulting Services to the Debtors, nunc pro tunc to January 17, 2008, pursuant to the terms of the Engagement Letter annexed to the Application, all as more fully 1 Capitalized

tion.

terms not otherwise defined herein have the meanings given to them in the Applica-

7.19


611

set forth in the Application; and upon the Declaration of Michael C. Sullivan, a Managing Director of Huron, filed in support of the Application, annexed to the Application (the “Sullivan Declaration”); and the Court being satisfied, based on the representations made in the Application and the Sullivan Declaration, that Huron is “disinterested” as such term is defined in section 101(14) of the Bankruptcy Code, as modified by section 1107(b) of the Bankruptcy Code, and represents no interest adverse to the Debtors’ estates with respect to the matters upon which it is to be engaged; and the Court having jurisdiction to consider the Application and the relief requested therein pursuant to 28 U.S.C. § 1334; and consideration of the Application and the requested relief being a core proceeding the Bankruptcy Court can determine pursuant to 28 U.S.C. § 157(b)(2); and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and it appearing that notice of the Application was good and sufficient and that no other or further notice need be given; and the relief requested in the Application being in the best interests of the Debtors and their estates and creditors; and the Court having reviewed the Application and having held a hearing with appearances of parties in interest noted in the transcript thereof (the “Hearing”); and the Court having determined that the legal and factual bases set forth in the Application and at the Hearing establish just cause for the relief granted herein; and upon all of the proceedings had before the Court and after due deliberation and sufficient cause appearing therefor, it is: ORDERED, ADJUDGED AND DECREED THAT: 1. The Application is GRANTED. 2. The Debtors are hereby authorized to employ and retain Huron to provide the Fresh-Start Reporting and Valuation Consulting Services in the Debtors’ chapter 11 cases, nunc pro tunc to January 17, 2008, all as contemplated by the Application and on the terms provided in the Engagement Letter. 3. Huron shall be compensated for its services and reimbursed for any related expenses in accordance with the Sullivan Declaration, the Engagement Letter, applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules and any other applicable orders of this Court. 4. Huron shall apply for compensation and reimbursement in accordance with the procedures set forth in sections 330 and 331 of the Bankruptcy Code, applicable Bankruptcy Rules, Local Rules and orders of the Court, guidelines established by the U.S. Trustee, and such other procedures as may be fixed by order of this Court, including the Order Pursuant to 11 U.S.C. §§ 105(a) and 331 Establishing Procedures for Interim Compensation and Reimbursement of Expenses of Professionals (Docket No. 409). 5. This Court shall retain jurisdiction over all matters arising from or related to the implementation of this Order. Dated: February 26, 2008 Kansas City, Missouri /s/ Jerry W. Venters US BANKRUPTCY JUDGE Attorney for Debtor to serve

612


EXHIBIT B INTERSTATE BAKERIES CORPORATION, et al. SUMMARY OF FIRST INTERIM FEE APPLICATION OF HURON CONSULTING GROUP PROVIDING FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS Name of Applicant: Authorized to Provide Professional Services to: Date of Retention: Period for which compensation and reimbursement are sought: Amount of compensation sought as Actual, reasonable, and necessary: Amount of expense reimbursement Sought as actual, reasonable, and necessary:

Huron Consulting Services LLC The Debtors Effective January 17, 2008 January 17, 2008 through April 30, 2008 $607,659.50 $64,851.82

7.19

613


EXHIBIT C INTERSTATE BAKERIES CORPORATION, et al. HURON CONSULTING GROUP SUMMARY OF HOURS AND FEES BY PROFESSIONAL FOR THE PERIOD JANUARY 17, 2008 THROUGH APRIL 30, 2008 Professional

Position

— — — — — — — — — — — — — — — — — — — — —

— — — — — — — — — — — — — — — — — — — — —

Grand Total

Hours

Rates

Fees

167.1 92.5 1.0 3.6 1.0 221.6 0.5 13.6 245.5 303.0 268.8 2.5 1.0 33.5 15.8 2.5 2.0 2.0 29.8 57.9 55.5

$— — — — — — — — — — — — — — — — — — — — —

$ 108,615.00 $ 60,060.00 $ 680.00 $ 2,448.00 $ 610.00 $ 116,340.00 $ 270.00 $ 5,984.00 $ 79,787.50 $ 96,960.00 $ 86,000.00 $ 800.00 $ 320.00 $ 10,720.00 $ 3,634.00 $ 575.00 $ 460.00 $ 460.00 $ 6,854.00 $ 13,317.00 $ 12,765.00

1,520.7

$—

$ 607,659.50

614


EXHIBIT D INTERSTATE BAKERIES CORPORATION, et al. HURON CONSULTING GROUP SUMMARY OF HOURS BY PROJECT CODE FOR THE PERIOD JANUARY 17, 2008 THROUGH APRIL 30, 2008 Project Code 01 04 06 22 24 25 26 27

Description

Hours

Meeting/Teleconference w/Debtor Mgmt, Board, or Counsel Court Hearings and Preparation Retention and Fee Applications Appraisals/Valuation General/Case Administration Fresh Start Reporting—Research Analysis Fresh Start Reporting—White Papers/Documentation Intangible Asset Impairment Testing Total

252.1 0.9 55.2 453.7 82.0 249.7 52.4 374.7 1,520.7

615

Grand Total

Professional

Meals

$ 265 157 902 1,444 122 120 99 — $ 3,109

Airfare

$ 4,978 3,981 10,048 9,559 2,501 3,271 — — $ 34,338

$ 872 — 630 1,575 240 228 — — $ 3,545

Ground

$ 2,128 1,212 6,095 5,845 1,221 1,505 — — $ 18,006

Lodging

$— 2 106 48 — — — — $ 156

Other

$— 34 136 288 — — — 23 $ 481

Telecom

$— — — — 300 — — — $ 300

Research

$— — — — — 11 — — $ 11

Printing

$— — — — — — — 58 $ 58

Postage

$— 97 189 287 — 20 — — $ 593

Parking

EXHIBIT E INTERSTATE BAKERIES CORPORATION, et al. HURON CONSULTING GROUP SUMMARY OF OUT-OF-POCKET EXPENSES FOR THE PERIOD JANUARY 17, 2008 THROUGH APRIL 30, 2008

$— 101 — — — — — — $ 101

Mileage

$ 251 — 1,237 1,713 473 480 — — $ 4,154

Rental Car

$ 8,494 5,584 19,343 20,759 4,857 5,635 99 81 $ 64,852

Grand Total

616


IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MISSOURI KANSAS CITY DIVISION IN RE: INTERSTATE BAKERIES CORPORATION, et al., Debtors.

§ § § § §


NOTICE OF HEARING AND NOTICE OF FILING OF THE FIRST INTERIM APPLICATION FOR ALLOWANCE OF COMPENSATION AND REIMBURSEMENT OF EXPENSES OF HURON CONSULTING SERVICES, LLC PROVIDING FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS FOR THE PERIOD FROM JANUARY 17, 2008 THROUGH APRIL 30, 2008. 1. On June 12, 2008, Huron Consulting Services, LLC (“Huron”), filed its First Interim Application Seeking Compensation and Reimbursement of Expenses for the Period from January 17, 2008, through April 30, 2008, and states as follows: A. Previous Interim Applications: 0 (number) B. First Interim Application for compensation seeks: $607,659.50 in fees, and $64,851.82 in expenses C. Fees paid to date: $486,127.60; Expenses paid to date: $64,851.82 D. Total outstanding fees representing the 20% holdback of professional services: $121,531.90 2. PLEASE TAKE NOTICE THAT the First Interim Application of Huron Consulting Services, LLC (the “Application”) is set for hearing on July 16, 2008, at 1:30 P.M., before Honorable Jerry W. Venters, United States Bankruptcy Judge, 400 East 9th Street, Kansas City, Missouri 64106, Courtroom 6A. The deadline for filing an objection to the Application is July 9, 2008, pursuant to that Certain Case Management Order under 11 U.S.C. §105 Establishing Monthly Omnibus Hearing and Certain Notice, Case Management and Administrative Procedures, entered on September 24, 2004. (Docket No. 80). If no objections are filed, the Court may enter its order without further notice. 3. The Application and accompanying exhibits are on file and available for inspection at the Clerk of the Court. The Application is also available for inspection in the office of Lentz & Clark, P.A., at the address listed below. Further, the Application can be accessed by PACER subscribers who can review the electronic case filed at http://ecf.mowb.uscourts.gov. Respectfully submitted, HURON CONSULTING SERVICES LLC Michael C. Sullivan Huron Consulting Services LLC

7.19

617


FRESH-START REPORTING AND VALUATION SERVICES TO THE DEBTORS And LENTZ & CLARK, P.A. /s/Jeffrey A. Deines Jeffrey A. Deines, MO # 53531 Local Counsel for Huron Consulting Services, LLC (b) Motion and Order Establishing Procedures for Interim Compensation IN THE UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF MISSOURI KANSAS CITY DIVISION


x : : : : : : : x


(

)

(Joint Administration Requested) Hearing Date:

MOTION FOR ORDER UNDER 11 U.S.C. §§ 105(a) AND 331 ESTABLISHING PROCEDURES FOR INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PROFESSIONALS Interstate Bakeries Corporation (“Interstate Bakeries” or the “Company”) and seven2 of its subsidiaries and affiliates, debtors and debtors-in-possession (collectively, the “Debtors”), submit this motion (the “Motion”) for an order under 11 U.S.C. §§ 105 and 331 establishing procedures for interim compensation and reimbursement of expenses of professionals. In support of this Motion, the Debtors rely on the Declaration of Ronald B. Hutchison in Support of Chapter 11 Petitions and First Day Orders (the “Hutchison Declaration”). In further support of this Motion, the Debtors represent as follows:

2 The

following subsidiaries and affiliates have filed petitions for relief under chapter 11 concurrently with Interstate Bakeries and have requested joint administration therewith: Armour & Main Redevelopment Corporation; Baker’s Inn Quality Baked Goods, LLC; IBC Sales Corporation; IBC Services, LLC; IBC Trucking LLC; Interstate Brands Corporation; and New England Bakery Distributors, LLC.

618


BACKGROUND A. The Chapter 11 Filings 1. On September 22, 2004 (the “Petition Date”), the Debtors each filed a voluntary petition in this Court for reorganization relief under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101–1330, as amended (the “Bankruptcy Code”). The Debtors continue to manage and operate their businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. 2. No trustee or examiner has been appointed in the Debtors’ chapter 11 cases, and no committees have been appointed or designated. 3. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). 4. The statutory predicate for the relief requested herein is Bankruptcy Rule 1015(b) and Rule 1015-1 of the Local Rules of Practice of the United States Bankruptcy Court for the Western District of Missouri (the “Local Rules”). B. The Debtors 5. Collectively, the Debtors are the largest wholesale baker and distributor of fresh baked bread and sweet goods in the United States. Debtors produce, market and distribute a wide range of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products under national brand names such as “Wonder R ” “Hostess R ,” “Baker’s Inn R ” and “Home Pride R ,” as well as re R R R ” and gional brand names such as “Butternut ,” “Dolly Madison ,” “Drake’s R R ” “Merita .” Based on independent, publicly available market data, “Wonder bread is the number one selling branded bread sold in the United States and “Home Pride R ” wheat bread is the number one selling wheat bread in the R R R ” products, including “Twinkies ,” “Ding Dongs ” United States. “Hostess R and “HoHos ,” are among the leading snack cake products sold in the United States. 6. The Debtors operate 54 bakeries and more than 1,000 distribution centers, from which the Debtors’ sales force delivers fresh baked goods on approximately 9,100 delivery routes to more than 200,000 food outlets. The Debtors’ strongest presence (as measured by sales, market share and number of facilities) is in Southern California, the upper Midwest, the Northeast, the mountain states, the middle Atlantic states and Florida. The Debtors also operate approximately 1,200 bakery outlets (known as “thrift stores”) located in markets throughout the United States. 7. The Debtors employ more than 32,000 people, approximately 81% of whom are covered by one of approximately 500 union contracts. Most of the Debtors’ union employees are members of either the International Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union. 8. The Debtors’ principal executive offices are located at 12 East Armour Boulevard in Kansas City, Missouri. 9. For the 52 weeks ending May 29, 2004, the Debtors generated net sales of $3.468 billion with a net loss of approximately $26 million. For that same period, the Debtors estimated assets of $1.626 billion, at book value, and current and long-term liabilities of $931 million and $391 million, respectively.

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10. The Debtors filed for reorganization under chapter 11 due to liquidity issues resulting from, among other factors, declining sales, a high fixed-cost structure, excess industry capacity, rising healthcare and pension costs, and higher costs for ingredients, packaging, and energy. The Debtors’ objectives in commencing this chapter 11 proceeding will be (1) to continue to implement their cost reduction program, called Program Soar, (2) to re-evaluate the breadth of their operations for opportunities to efficiently rationalize the Debtors’ business operations, and (3) to continue to alter their product mix to meet changing consumer tastes. Once the Debtors are able to make significant progress on attaining these objectives, the Debtors will formulate a plan of reorganization in consultation with affected constituencies and will emerge from chapter 11 protection with a stronger business better able to compete in the industry in which they operate. 11. More complete information regarding the Debtors, the Debtors’ businesses, the events leading to these chapter 11 cases, certain competitive initiatives undertaken by the Debtors, the financial deterioration experienced by the Debtors prior to these cases and the Debtors’ objectives in seeking relief under chapter 11 is set forth in the Hutchison Declaration, which is incorporated herein by this reference. RELIEF REQUESTED 12. Separately, the Debtors will seek to retain (a) Skadden, Arps, Slate, Meagher & Flom LLP as bankruptcy counsel, (b) Stinson Morrion Hecker LLP as local bankruptcy counsel, (c) Alvarez and Marsal LLC as restructuring advisors, (d) Miller Buckfire Lewis Ying & Co., LLC as financial advisor and investment banker and (e) Kurtzmann Carson Consultants LLC as claims and noticing and balloting agent. In addition, the Debtors may need to retain other professionals or special counsel, and any statutory committee of unsecured creditors (the “Committee”) that may be appointed in these cases will likely seek to retain counsel and other professionals to assist it. The Debtors have proposed a payment scheme for various ordinary course of business professionals whom the Debtors employed prior to their retention of restructuring professionals (the “OCB Professionals”) in a separate motion. Debtors request that the OCB Professionals not be subject to this Motion. 13. By this Motion, the Debtors request that the Court authorize and establish procedures for the compensation and reimbursement of court-approved professionals (the “Professionals”) on a monthly basis, on terms comparable to those procedures recently established in other large chapter 11 cases in this district. Such an order will streamline the professional compensation process and enable the Court and all other parties to monitor the professional fees incurred in these chapter 11 cases more effectively. Accordingly, authorizing the relief requested herein on an expedited basis is appropriate in these cases. BASIS FOR RELIEF 14. In short, the requested procedures will permit each Professional subject to these procedures to present to the Debtors and their counsel, the United States Trustee, the Debtors’ postpetition lenders and any committee (once appointed) a statement of services rendered and expenses incurred by the Professional for the prior month. If there is no timely objection, the Debtors will

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pay eighty-percent (80%) of the amount of fees incurred for the month, with a twenty percent (20%) holdback, and one hundred percent (100%) of disbursements for the month. These payments will be subject to the Court’s subsequent approval as part of the normal interim fee application process approximately every 120 days. 15. More specifically, the Debtors propose that the monthly payment of compensation and reimbursement of expenses of the Professionals be structured as follows: (a) On or before the last day of the month following the month for which compensation is sought (the “Monthly Statement Date”), each Professional will submit a monthly statement to: (i) the Debtors at Interstate Bakeries Corporation, 12 East Armour Boulevard, Kansas City, Missouri 64111 (Attn: Kent B. Magill); (ii) counsel to the Debtors, Skadden, Arps, Slate, Meagher & Flom LLP, 333 West Wacker Drive, Suite 2100, Chicago, Illinois 60606 (Attn: J. Eric Ivester, Samuel S. Ory); (iii) co-counsel to the Debtors, Stinson Morrion Hecker LLP, 1201 Walnut, Suite 2900, Kansas City, MO 64106-2150 (Attn: Paul Hoffmann); (iv) counsel to the agent for Debtors’ prepetition lenders, Simpson, Thatcher & Bartlett LLP, 425 Lexington Avenue, 27th Floor, New York, NY 10017-3954 (Attn: Kenneth Ziman), and Spencer Fane Britt & Browne LLP, 1000 Walnut Street, Suite 1400, Kansas City, MO 64106-2140, Attention: Scott J. Goldstein, counsel to the Prepetition Agent; (v) counsel to the agent for Debtors’ postpetition lenders, Bryan Cave LLP, One Metropolitan Square, 211 North Broadway, Suite 3600, St. Louis, MO 63102-2750 (Attn: Gregory D. Willard); (vi) counsel to any official committee appointed in these cases; and (vii) Office of the United States Trustee, 400 East 9th Street, Room 3440, Kansas City, MO 64106. Each such entity receiving such a statement will have ten (10) days after the Monthly Statement Date to review the statement. The first statement shall be submitted and served by each of the Professionals by November 30, 2004, and shall cover the period from the commencement of these cases through October 31, 2004. (b) At the expiration of the ten (10) day period, the Debtors will promptly pay eighty percent (80%) of the fees and one hundred percent (100%) of the disbursements requested in such statement, except such fees or disbursements as to which an objection has been served as provided in paragraph (c) below. Any Professional who fails to submit a monthly statement shall be ineligible to receive further payments of fees and expenses as provided herein until such time as the monthly statement is submitted. (c) In the event that any of the Debtors, the United States Trustee, the Debtors’ postpetition lenders or the Committee has an objection to the compensation or reimbursement sought in a particular statement, such party shall, within ten (10) days of the Monthly Statement Date, serve upon the respective professional and the other persons designated to receive monthly statements, a written “Notice of Objection to Fee Statement” setting forth the precise nature of the objection and the amount at issue. Thereafter, the objecting party and the Professional whose statement is objected to shall attempt to reach an agreement regarding the correct payment to be made. If the parties are unable to reach an

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agreement on the objection within ten (10) days after receipt of such objection, the objecting party may file its objection with the Court and serve such objection on the respective professional and the other parties designated to receive monthly statements listed above and the Court shall consider and dispose of the objection at the next interim fee application hearing. The Debtors will be required to pay promptly those fees and disbursements that are not the subject of a Notice of Objection to Fee Statement. (d) Approximately every four (4) months, each of the Professionals shall file with the Court and serve on the parties designated to receive monthly statements, on or before the 45th day following the last day of the compensation period for which compensation is sought, an application for interim Court approval and allowance, pursuant to section 331 of the Bankruptcy Code, of the compensation and reimbursement of expenses requested for the prior four (4) months. The first such application shall be filed on or before January 31, 2005 and shall cover the period from the commencement of these cases through December 31, 2004. Any Professional who fails to file an application when due shall be ineligible to receive further interim payments of fees or expenses as provided herein until such time as the application is submitted. (e) The pendency of an application for a Court order for compensation or reimbursement of expenses, and the pendency of any Notice of Objection to Fee Statement or other objection, shall not disqualify a Professional from the future payment of compensation or reimbursement of expenses as set forth above. Neither the payment of, nor the failure to pay, in whole or in part, monthly interim compensation and reimbursement as provided herein shall bind any party-in-interest or this Court with respect to the final allowance of applications for compensation and reimbursement of Professionals. 16. Except as otherwise ordered by the Court, all parties who have filed a notice of appearance with the Clerk of the Court shall receive notice of the fee application hearings. 17. The Debtors further request that each member of the Committee (if appointed) be permitted to submit statements of expenses and supporting vouchers to counsel for the Committee who will collect and file such requests for reimbursement in accordance with the foregoing procedure for monthly and interim compensation and reimbursement of Professionals. APPLICABLE AUTHORITY 18. Section 331 of the Bankruptcy Code provides, in relevant part, as follows: A trustee, an examiner, a debtor’s attorney, or any professional person employed under section 327 or 1103 of this title may apply to the Court not more than once every 120 days after an order for relief in a case under this title, or more often if the Court permits, for such compensation for services rendered before the date of such an application or reimbursement for expenses incurred before such date as is provided under section 330 of this title. . . .

—11 U.S.C. § 331.

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19. Section 105(a) of the Bankruptcy Code provides, in relevant part, as follows: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title . . . shall be construed to preclude the Court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules. . ..

—11 U.S.C. § 105(a). 20. Similar procedures for compensating and reimbursing court-approved professionals have been established in other large chapter 11 cases. See, e.g., In re Farmland Industries, Inc., Case No. 02-50557 (JWV) (Bank. W.D. Mo. July 11, 2002); In re Wire Rope Corporation of America, Incorporated, Case No. 02-50493 (JWV) (Bank. W.D. Mo. June 10, 2002); In re Union Acceptance Corporation, Case No. 02-19231 (BHL) (Bank. S.D. Ind. Dec. 20, 2002); In re Paul Harris Stores, Inc., et al., Case No. 00-12467 (BHL) (Bank. S.D. Ind. Nov. 9, 2000); In re Amerco, Case No. 03-52103 (GWZ) (Bankr. D. Nev. June 20, 2003); In re Conseco, Inc., et al., Case No. 02-49672 (CAD) (Bankr. N.D. Ill. Jan. 2, 2003); In re Kmart Corporation, et al., Case No. 02-02474 (SPS) (Bankr. N.D. Ill. Jan. 25, 2002); In re Comdisco, Inc., et al., Case No. 01-24795 (RB) (Bankr. N.D. Ill. July 18, 2001); In re Washington Group International, Inc., Case No. 01-31627 (GWZ) (Bankr. D. Nev. May 23, 2001). Such procedures are needed to avoid professionals funding the reorganization case. See In re Int’l. Horizons. Inc., 10 B.R. 895, 897 (Bankr. N.D. Ga. 1981) (court established procedures for monthly interim compensations). Appropriate factors to consider include “the size of [the] reorganization cases, the complexity of the issues included, and the time required on the part of the attorneys for the debtors in providing services necessary to achieve a successful reorganization of the debtors.” Id. at 897. The Debtors submit that the procedures sought herein are appropriate considering the above factors. 21. No previous request for the relief sought herein has been made to this Court or any other court. 22. Notice of hearing for this Motion has been served on the following entities and/or their counsel: (1) the Office of the United States Trustee; (2) the steering committee for the Debtors’ prepetition lenders and JPMorgan Chase Bank as agent for the prepetition lenders; (3) the agents for the Debtors’ proposed postpetition financing; (4) U.S. Bank National Association as Trustee for Interstate Bakeries Senior Subordinated Convertible Notes; (5) the Securities and Exchange Commission; (6) the Internal Revenue Service; and (7) holders of the Debtors’ 30 largest unsecured claims (collectively, the “Initial Master Service List”) via facsimile. In addition, the Debtors have served the notice of hearing for this Motion via facsimile to those creditors that the Debtors believe may be secured. Furthermore, this Motion has been served on the Initial Master Service List via overnight courier.

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WHEREFORE, the Debtors respectfully request that the Court enter an order (i) authorizing and establishing procedures for the compensation and reimbursement of court-approved professionals on a monthly basis as set forth above and (ii) granting such other and further relief as is just and proper.

Dated:

September 22, 2004 Kansas City, Missouri J. Eric Ivester Samuel S. Ory SKADDEN ARPS SLATE MEAGHER & FLOM LLP -andJ. Gregory Milmoe SKADDEN ARPS SLATE MEAGHER & FLOM LLP -and/s/Paul M. Hoffmann Paul M. Hoffmann STINSON MORRISON HECKER LLP Attorneys for the Debtors and Debtors-in-Possession

PROPOSED ORDER IN THE UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF MISSOURI KANSAS CITY DIVISION


x : : : : : : : x


(

)


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ORDER PURSUANT TO 11 U.S.C. §§ 105(a) AND 331 ESTABLISHING PROCEDURES FOR INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PROFESSIONALS This matter having come before the Court on the motion, dated September 22, 2004 (the “Motion”),3 of Interstate Bakeries Corporation (“Interstate Bakeries” or the “Company”) and seven4 of its subsidiaries and affiliates, debtors and debtors-in-possession (collectively, the “Debtors”), for an order under 11 U.S.C. §§ 105(a) and 331 establishing procedures for interim compensation and reimbursement of expenses of professionals retained by order of this Court (the “Professionals”); and the Court having reviewed the Motion and the Declaration of Ronald B. Hutchison in Support of Chapter 11 Petitions and First Day Orders; and the Court having determined that the relief requested in this Motion is in the best interests of the Debtors, their estates, their creditors and other parties-in-interest; and it appearing that notice of the Motion was good and sufficient under the particular circumstances and that no other or further notice need be given; and upon the record herein; and after due deliberation thereon; and good and sufficient cause appearing therefor, it is hereby ORDERED, ADJUDGED AND DECREED THAT: 1. The Motion is GRANTED. 2. Except as may otherwise be provided in Court orders authorizing the retention of specific professionals, all professionals in these cases may seek interim compensation in accordance with the following procedure: (a) On or before the last day of each month following the month for which compensation is sought (the “Monthly Statement Date”), each Professional will submit a monthly statement to: (i) the Debtors at Interstate Bakeries Corporation, 12 East Armour Boulevard, Kansas City, Missouri 64111 (Attn: Kent B. Magill); (ii) counsel to the Debtors, Skadden, Arps, Slate, Meagher & Flom LLP, 333 West Wacker Drive, Suite 2100, Chicago, Illinois 60606 (Attn: J. Eric Ivester, Samuel S. Ory); (iii) co-counsel to the Debtors, Stinson Morrion Hecker LLP, 1201 Walnut, Suite 2900, Kansas City, MO 64106-2150 (Attn: Paul Hoffmann); (iv) counsel to the agent for Debtors’ prepetition lenders, Simpson, Thatcher & Bartlett LLP, 425 Lexington Avenue, 27th Floor, New York, NY 10017-3954 (Attn: Kenneth Ziman), and Spencer Fane Britt & Browne LLP, 1000 Walnut Street, Suite 1400, Kansas City, MO 64106-2140, Attention: Scott J. Goldstein, counsel to the Prepetition Agent; (v) counsel to the agent for Debtors’ postpetition lenders, Bryan Cave LLP, One Metropolitan Square, 211 North Broadway, Suite 3600, St. Louis, MO 63102-2750 (Attn: Gregory D. Willard); (vi) counsel to any official committee appointed 3 Unless otherwise defined, capitalized terms used herein shall have the meanings ascribed to them

in the Motion. following subsidiaries and affiliates have filed petitions for relief under chapter 11 concurrently with Interstate Bakeries and have requested joint administration therewith: Armour and Main Redevelopment Corporation; Baker’s Inn Quality Baked Goods, LLC; IBC Sales Corporation; IBC Services, LLC; IBC Trucking LLC; Interstate Brands Corporation; and New England Bakery Distributors, LLC.

4 The

7.19

(b)

(c)

(d)

(e)


625

in these cases; and (vii) Office of the United States Trustee, 400 East 9th Street, Room 3440, Kansas City, MO 64106. Each such entity receiving such a statement will have ten (10) days after the Monthly Statement Date to review the statement. At the expiration of the ten (10) day period, the Debtors shall promptly pay eighty percent (80%) of the fees and one hundred percent (100%) of the disbursements identified in each monthly statement, except such fees or disbursements as to which an objection has been served as provided in paragraph (c) below. Any Professional who fails to submit a monthly statement shall be ineligible to receive further payment of fees and expenses as provided herein until such time as the monthly statement is submitted. The first statements shall be submitted and served by each of the Professionals by November 30, 2004 and shall cover the period from the commencement of this case through October 31, 2004. In the event that any of the Debtors, the United States Trustee, the Debtors’ postpetition lenders or the Committee has an objection to the compensation or reimbursement sought in a particular statement, such party shall, within ten (10) days of the Monthly Statement Date, serve upon the respective Professional and the other persons designated to receive monthly statements, a written “Notice of Objection to Fee Statement” setting forth the precise nature of the objection and the amount at issue. Thereafter, the objecting party and the Professional whose statement is objected to shall attempt to reach an agreement regarding the correct payment to be made. If the parties are unable to reach an agreement on the objection within ten (10) days after receipt of such objection, the objecting party may file its objection with the Court and serve such objection on the respective Professional and the other parties designated to receive monthly statements listed above and the Court shall consider and dispose of the objection at the next interim fee application hearing. The Debtors will be required to pay promptly those fees and disbursements that are not the subject of a Notice of Objection to Fee Statement. Approximately every four (4) months, each of the Professionals shall file with the Court and serve on the parties designated to receive monthly statements, on or before the 45th day following the last day of the compensation period for which compensation is sought, an application for interim Court approval and allowance, pursuant to section 331 of the Bankruptcy Code, of the compensation and reimbursement of expenses requested for the prior four (4) months. The first such application shall be filed on or before January 31, 2005 and shall cover the period from the commencement of these cases through December 31, 2004. Any Professional who fails to file an application when due shall be ineligible to receive further interim payments of fees or expenses as provided herein until such time as the application is submitted. The pendency of an application or a court order for payment of compensation or reimbursement of expenses, and the pendency of any Notice of Objection to Fee Statement or other objection, shall not disqualify a Professional from the future payment or compensation or reimbursement

626


of expenses as set forth above. Neither the payment of, nor the failure to pay, in whole or in part, monthly interim compensation and reimbursement as provided herein shall bind any party-in-interest or this Court with respect to the allowance of applications for compensation and reimbursement of Professionals. (f) Each member of the Committee in this case shall be permitted to submit statements of expenses and supporting vouchers to counsel for the Committee who shall collect and submit such requests for reimbursement in accordance with the foregoing procedure for monthly and interim compensation and reimbursement of Professionals. Dated: September , 2004 Kansas City, Missouri UNITED STATES BANKRUPTCY JUDGE

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(C) Billing for Interim Services for January 5, 2008 through February 28, 2008 Huron CONSULTING GROUP BOSTON CHARLOTTE CHICAGO HOUSTON LOS ANGELES NEW YORK SAN FRANCISCO WASHINGTON DC April 3, 2008 J. Randall Vance Senior Vice President, Chief Financial Officer and Treasurer Interstate Bakeries Corporation 12 East Armour Boulevard Kansas City, MO 64111 Re: Interstate Bakeries Corporation Case No. 04-45814 (JWV) Dear Mr. Vance: Enclosed please find our billing for professional services rendered in the above-referenced projects. This billing represents the fees for time incurred from January 5, 2008 through February 29, 2008. Please return the remittance copy with your payment to: Huron Consulting Services LLC 4795 Paysphere Circle Chicago, IL 60674 If you have any questions on the enclosed billing or any aspect of the engagement, please do not hesitate to contact me. Very truly yours, Michael C. Sullivan Managing Director Copies to: Kent B. Magill, Esq. J. Eric lvester, Esq. ∗ ∗ ∗

April 3, 2008 J. Randall Vance Senior Vice President, Chief Financial Officer and Treasurer Interstate Bakeries Corporation 12 East Armour Boulevard Kansas City, MO 64111 STRICTLY CONFIDENTIAL

DUE UPON RECEIPT INVOICE #: 137078 JOB #: 03639 HURON TAX ID#: 01-0666453

628


Re: Interstate Bakeries Corporation Billing for professional services rendered from January 5, 2008 through February 29, 2008, in conjunction with the above referenced project: Professional Fees Fresh Start Reporting Valuation Total Fees 20% Holdback Total Net Monthly Fees

186,325.00 90,366.50 $ 276,691.50 (55,338.30) 221,353.20

Total Out of Pocket Expenses Total Fees and Out of Pocket Expenses Current Amount Due

38,304.89 259,658.09 $ 259,658.09

The exhibits following this invoice provide detail regarding fees and out of pocket expenses. Invoice Date: 4/3/2008 Invoice No.: 137078 Job No.: 03639 J. Randall Vance Senior Vice President, Chief Financial Officer and Treasurer Interstate Bakeries Corporation 12 East Armour Boulevard Kansas City, MO 64111 For Professional Services Rendered from January 5, 2008 through February 29, 2008: Total Fees 20% Holdback Total Net Monthly Fees Total Out of Pocket Expenses Current Amount Due

$ 276,691.50 (55,338.30) 221,353.20 38,304.89 $ 259,658.09

To ensure proper credit please refer to invoice number 137078 FEDERAL TAX ID # XX-XXXXXXX REMITTANCE COPY

7.19


Payment by check: Huron Consulting Services LLC 4795 Paysphere Circle Chicago, IL 60674 Payment by wire transfer: LaSalle Bank, N.A. Chicago, Illinois Routing No. 0710-0050-5 Account Title: Huron Consulting Services LLC Account Number: 5800297276 Comments: (Include Invoice Number to ensure proper credit)

629

630


Exhibits Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E

— — — — —

Fee Summary Out of Pocket Expense Summary Project Code Summary Detailed Time Reporting by Professional Expense Details

Exhibit A: Fee Summary Interstate Bakeries Corporation Exhibit A— Fee Summary January–February 2008 Name — — — — — — — — — — — — — — — Grand Total

Title

Total Hours

Rates

Total Fees

— — — — — — — — — — — — — — —

96.2 40.6 1.0 2.5 131.0 0.5 158.7 102.3 85.4 2.5 1.0 10.0 2.5 1.0 2.0 637.2

— — — — — — — — — — — — — — — 434.3

$ 62,530.00 26,357.50 695.00 1,737.50 68,775.00 270.00 51,577.50 32,736.00 27,328.00 800.00 320.00 2,300.00 575.00 230.00 460.00 $ 276,691.50

631

127

$ 2,732

2,861

Michael C. Sullivan Joseph A. DiSalvatore Brent Johnson Mi-Goung Choi Anthony Pirraglia Michael Shea Grand Total

6,369 532 5,772 712 1,203 25 2,053 72 $ 20,989 $ 1,516

$ 49

Airfare

Name

350 841 91 180 $ 2,016

—

$ 553 2

$—

3,215 106 2,796 48 886 — 1,100 — $ 10,245 $ 155

900

$ 1,348

84 139 — — $ 246

24

$—

— — 300 — $ 300

—

$—

— — — 11 $ 11

—

$

153 108 — 20 $ 324

43

$—

— — — — $ 76

76

$—

4,032

$ 4,933

Grand Total

644 11,453 962 11,376 473 2,978 95 3,532 $ 2,426 $ 38,305

$ 251

Ground Hotel/ Stationery & Rental Meals Transportation Lodging Other Telecom Research Printing Parking Mileage Car

Out of Pocket Expense Summary Interstate Bakeries Corporation Exhibit B—Out of Pocket Expense Summary January–February 2008

Exhibit B:

632


Exhibit C: Project Code Summary Interstate Bakeries Corporation Exhibit C—Project Code Summary January–February 2008 Task

Description

Hours

Fees

01

Meeting/Teleconference w/ Debtor Mgmt, Board, or Counsel Court Hearings and Preparation Retention and Fee Applications Appraisals / Valuation General / Case Administration Fresh Start Reporting—Research Analysis Fresh Start Reporting—White Papers / Documentation

188.7

$ 90,094.50

0.9 15.9 184.0 45.8 163.9 38.0

585.0 7,965.0 68,089.5 18,602.5 76,682.5 14,672.5

637.2

$ 276,691.50

04 06 22 24 25 26 Grand Total

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633

Exhibit D: Detailed Time Reporting by Professional Interstate Bakeries Corporation Exhibit D—Detailed Time Reporting By Professional January–February 2008 Task Code

Date

Professional

2/5/2008

Anthony Pirraglia

22

2/20/2008

Anthony Pirraglia

1

Task Code Desc.

Description

Hours

Appraisals/Valuations

Researched industry information to be used in Final Report

2.70

Participated in the IBC Weekly Status Meeting

1.00

Provide guidance regarding retention and declaration documents related to Huron employment application in IBC case

0.60

Update white papers tracking list to incorporate modifications learned during meetings with Debtor management and valuation professionals

0.70

Coordinate internal engagement setup matters

0.90

Participated in internal discussion regarding applicability of fresh start reporting to Mrs. Cubbison’s and Huron’s role in the valuation of internally developed and acquired software

0.50

∗ ∗ ∗ ∗

Meeting/ Teleconference w/ Debtor Mgmt, Board, or Counsel ∗ ∗ ∗ ∗

2/1/2008

Brent Johnson

6

2/1/2008

Brent Johnson

26

Retention and Fee Application

∗ ∗ ∗ ∗

Fresh Start Reporting—White Papers/ Documentation

∗ ∗ ∗ ∗

2/4/2008

Brent Johnson

24

General/Case Administration ∗ ∗ ∗ ∗

2/9/2008

Brent Johnson

25

Fresh Start Reporting—Research Analysis

∗ ∗ ∗ ∗

634


Exhibit E: Expense Details Interstate Bakeries Corporation Exhibit E—Expense Details January–February 2008 Date

Professional

Description

Amount

Narrative

2/22/2008

Anthony Pirraglia

Airfare

587.50

Midwest Airlines, LGA to MCI, Interstate Bakeries Valuation

8 Accounting and Financial Services for the Debtor-in-Possession or Trustee: Part I 8.1 Order Authorizing Use of Present Cash Management System and Bank Accounts Objective. Section 8.8(a) of Volume 1 of Bankruptcy and Insolvency Accounting describes the process of properly managing the cash of all entities that have filed a chapter 11 petition. A motion for an order and an order for continued use of an existing cash system is illustrated on the following pages by examples from Vertis Holdings, Inc., consisting of: (a) Debtors’ Motion for Order (I) Authorizing Debtors to (A) Continue Existing Cash Management System and (B) Maintain Existing Bank Accounts and Business Forms, and (II) Granting an Extension of Time to Comply with Section 345(b) (b) Exhibit A: Proposed Order (I) Authorizing Debtors to (A) Continue Existing Cash Management System and (B) Maintain Existing Bank Accounts and Business Forms, and (II) Granting an Extension of Time to Comply with Section 345(b) (c) Exhibit B: Bank of America Account Schematic (a) Cash Management Motion IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ————————————————— x : In re : Chapter 11 : VERTIS HOLDINGS, INC., et al., : Case No. 08- ———— ( : : (Jointly Administered) Debtors. : : ————————————————— x

)

635

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Accounting and Financial Services for the Debtor-in-Possession or Trustee: Part I

DEBTORS’ MOTION FOR AN ORDER PURSUANT TO SECTIONS 105(a), 363(c), AND 345(b) OF THE BANKRUPTCY CODE (I) AUTHORIZING DEBTORS TO (A) CONTINUE EXISTING CASH MANAGEMENT SYSTEM AND (B) MAINTAIN EXISTING BANK ACCOUNTS AND BUSINESS FORMS AND (II) GRANTING AN EXTENSION OF TIME TO COMPLY WITH SECTION 345(b) OF THE BANKRUPTCY CODE TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Vertis Holdings, Inc. (“Vertis Holdings”) and its affiliated debtors in the above-referenced chapter 11 cases, as debtors and debtors in possession (collectively, “Vertis,” or the “Debtors”),1 hereby move pursuant to sections 105(a), 345(b), and 363(c) of title 11 of the United States Code (the “Bankruptcy Code”) for an order, substantially in the form of order annexed hereto as Exhibit “A” (the “Proposed Order”) (i) authorizing the Debtors to (a) continue their existing cash management system, and (b) maintain existing bank accounts and business forms; and (ii) granting an extension of time to comply with section 345(b) of the Bankruptcy Code (the “Motion”). In support of the Motion, the Debtors submit the Declaration of Jeffery J. Stegenga in Support of the Debtors’ Chapter 11 Petitions and Request for First Day Relief (the “Stegenga Declaration”) and the Affidavit of Service and Vote Certification of Financial Balloting Group LLC (the “FBG Affidavit”), both filed contemporaneously herewith, and respectfully represent as follows: Background 1. On the date hereof (the “Commencement Date”), the Debtors each commenced with this Court a voluntary case under chapter 11 of the Bankruptcy Code (the “Vertis Debtors’ Reorganization Cases”). The Debtors are authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Further, a motion pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for joint administration of the Debtors’ chapter 11 cases is pending before this Court. 2. Prior to the Commencement Date, the Debtors solicited votes on the Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Vertis Holdings, Inc., et al., proposed by Vertis Holdings, Inc., et al. and ACG Holdings, Inc., et al. (the “Vertis Prepackaged Plan”) through their disclosure statement pursuant to sections 1125 and 1126(b) of the Bankruptcy Code (the “Disclosure Statement”). As discussed more fully below, the Vertis Prepackaged Plan has been accepted by all classes entitled to vote in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code.

1 The

Debtors in these cases, along with the last four (4) digits of each Debtor’s federal tax identification number, are Vertis Holdings (1556), Vertis, Inc. (8322), Webcraft, LLC (6725), Webcraft Chemicals, LLC (6726), Enteron Group, LLC (3909), Vertis Mailing, LLC (4084), and USA Direct, LLC (5311).

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Vertis’ Businesses 3. Vertis is one of the leading commercial printers, providing advertising inserts, newspaper products, direct mail services and related services to grocery stores, drug stores and other retail chains, general merchandise producers and manufacturers, financial and insurance service providers, newspapers and advertising agencies. By offering an extensive list of solutions across a broad spectrum of media, Vertis enables its clients to reach target customers with the most effective message. 4. Vertis operates primarily through two reportable business segments: advertising inserts (“Advertising Inserts”) and direct mail (“Direct Mail”). In addition, Vertis also provides premedia and related services (“Premedia”) as well as media planning and placement services (“Media Services”). 5. Advertising Inserts provides a full array of targeted advertising insert products and services. The products and services include targeted advertising insert programs for retailers and manufacturers, newspaper products (TV magazines, Sunday magazines, color comics and special supplements), and consumer research. Vertis is one of the leading providers of advertising inserts, newspaper TV listing guides and Sunday comics in the United States. In 2007, Vertis produced more than 31 billion advertising inserts, with the Advertising Insert segment accounting for approximately 66.7% of Vertis’ total revenue for 2007. 6. Direct Mail provides a full array of targeted direct marketing products and services. The products and services include highly customized one-to-one marketing programs, direct mail production with varying levels of personalization, data design, collection and management to identify target audiences, mailing management services, automated digital fulfillment services, effectiveness measurement and response management, and warehousing and fulfillment services. Revenue from the Direct Mail segment accounted for approximately 26.4% of Vertis’ total revenue for 2007. 7. Premedia, Media Services and other technologies assist clients with advertising campaigns, including digital content management, graphic design and animation, digital photography, compositing and retouching, in-store displays, billboards and building wraps, consulting services, newspaper advertising development and media planning, and placement and software solutions that deliver messages through alternative media channels such as emails, texting, personalized “URLs” and the Internet. Premedia, Media Services and other technologies accounted for the remainder of Vertis’ total revenue for 2007. 8. Vertis Holdings is the parent corporation of Vertis, Inc. The other Debtors are wholly-owned direct or indirect subsidiaries of Vertis, Inc. (collectively, the “Vertis Subsidiary Debtors”). All business operations are carried out by Vertis, Inc., the Vertis Subsidiary Debtors, and Vertis Inc.’s non-debtor subsidiaries. Each of the Debtors is either a Delaware corporation or Delaware limited liability company. Vertis’ principal executive offices are located at 250 West Pratt Street, Baltimore, Maryland 21201. 9. As of May 31, 2008, Vertis, Inc. and the Vertis Subsidiary Debtors had approximately 5,414 employees in North America and their unaudited consolidated financial statements reflected $1.3 billion of revenue for the prior 12-month period, assets of approximately $523 million and liabilities of approximately $1.4 billion. As of May 31, 2008, Vertis Holdings’ unaudited

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consolidated financial statements reflected assets of approximately $523 million and liabilities of approximately $1.7 billion. The Proposed Vertis Prepackaged Plan 10. The Vertis Prepackaged Plan contemplates a comprehensive financial restructuring of the Debtors’ existing equity and debt structures and effectuates a merger (the “Merger”) of the Debtors and ACG Holdings, Inc. (“ACG Holdings”), American Color Graphics, Inc. (“ACG”), American Images of North America, Inc., Sullivan Marketing, Inc., and Sullivan Media Corporation (collectively, the “ACG Debtors”). As a result of the Merger, ACG Holdings and its subsidiaries will become wholly-owned direct and indirect subsidiaries of Vertis. 11. Prior to the Commencement Date, the ACG Debtors also solicited votes on the ACG Debtors’ proposed joint prepackaged chapter 11 plans of reorganization (the “ACG Prepackaged Plan,” and, collectively with the Vertis Prepackaged Plan, the “Prepackaged Plans”). The ACG Debtors have, contemporaneously with the commencement of the Vertis Debtors’ Reorganization Cases, commenced voluntary cases under chapter 11 of the Bankruptcy Code seeking confirmation of the ACG Prepackaged Plan (the “ACG Debtors’ Reorganization Cases”). The ACG Debtors are co-proponents of the Vertis Prepackaged Plan in the Vertis Debtors’ Reorganization Cases and the Vertis Debtors are co-proponents of the ACG Prepackaged Plan in the ACG Debtors’ Reorganization Cases. The Prepackaged Plans provide that they will become effective simultaneously with each other and the consummation of the Merger. 12. The Vertis Prepackaged Plan and Disclosure Statement were filed on the Commencement Date. As set forth in the FBG Affidavit, the proposed Vertis Prepackaged Plan has been accepted in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code by all classes entitled to vote.2 Specifically, 100% of the classes consisting of Vertis Holdings General Unsecured Claims, Vertis Second Lien Notes Claims and Vertis Senior Subordinated Notes Claims, both by number and by amount that voted on the Vertis Prepackaged Plan, voted to accept the Vertis Prepackaged Plan. The class consisting of Vertis Senior Notes Claims voted to accept the Vertis Prepackaged Plan by 98.6% in amount and 98.3% in number of those voting on the Vertis Prepackaged Plan. 13. The ACG Prepackaged Plan was filed on the Commencement Date. As set forth in the Affidavit of Service and Vote Certification of Financial Balloting Group LLC filed concurrently with the ACG Debtors’ chapter 11 petitions, the proposed ACG Prepackaged Plan has been accepted by all classes entitled to vote in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code. Specifically, the holders of ACG Second Lien Notes Claims 2 Although the holder of the Vertis Term Loan Claim and the Vertis Holdings Term Loan Guarantee

Claim (as defined in the Disclosure Statement) voted to reject the Vertis Prepackaged Plan, the Vertis Prepackaged Plan provides that such votes shall be disregarded and such claims will be unimpaired if the Debtors opt to pay the Vertis Term Loan Claim in full on the Effective Date. As the Debtors have decided to pay the holder of the Vertis Term Loan Claim in full in cash on the Effective Date, the classes consisting of the Vertis Term Loan Claim and the Vertis Holdings Term Loan Guarantee Claim are not entitled to vote.

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voted to accept the ACG Prepackaged Plan by 99.9% in amount and 95.3% in number of those voting on the ACG Prepackaged Plan. 14. On the effective date of the Prepackaged Plans (the “Effective Date”), Vertis shall issue the following securities: (i) new second lien notes of Vertis in the same principal amount as its existing second lien notes (i.e., $350 million) (the “New Vertis Second Lien Notes”); (ii) new senior notes of Vertis in the total principal amount of $200 million (the “New Vertis Senior Notes,” and, together with the New Vertis Second Lien Notes, the “New Vertis Notes”); (iii) one class of common stock of Vertis Holdings (the “New Common Stock”); and (iv) new warrants, which may be exercised, subject to certain terms and conditions described in more detail below, to purchase a number of shares of New Common Stock equal to an aggregate of 11.5% of the number of outstanding shares of New Common Stock as of the Effective Date at an exercise price of $0.01 per share (the “New Warrants”). The New Vertis Notes will be guaranteed by all of Vertis’ domestic subsidiaries following consummation of the Merger. 15. The foregoing securities will be distributed under the Prepackaged Plans as follows: (i) holders of Vertis, Inc. 93/4 % Senior Secured Second Lien Notes due 2009 will receive New Vertis Second Lien Notes in the same principal amount as their existing notes; (ii) holders of Vertis, Inc. 10 7/8% Senior Notes due 2009 will receive $107 million of New Vertis Senior Notes and 57.04% of the outstanding shares of the New Common Stock; (iii) holders of Vertis, Inc. 131/2 % Senior Subordinated Notes due 2009 will receive $27 million of New Vertis Senior Notes, 10% of the outstanding shares of the New Common Stock and the New Warrants; and (iv) holders of American Color Graphics, Inc. 10% Senior Second Secured Notes due 2010 will receive $66 million of the New Vertis Senior Notes and 32.96% of the New Common Stock. 16. In addition, the Vertis Prepackaged Plan provides for the payment in full of (i) allowed administrative expense claims, (ii) federal, state, and local tax claims, and (iii) certain other priority non-tax claims, and leaves holders of general unsecured claims against the Vertis Debtors (other than Vertis Holdings) unimpaired. Furthermore, as permitted by the Vertis Prepackaged Plan, the Vertis Term Loan Claim will be paid in full on the Effective Date, leaving both it and the Vertis Holdings Term Loan Guarantee Claim unimpaired. Holders of general unsecured claims against Vertis Holdings, which are claims arising under that certain Mezzanine Note and Warrant Purchase Agreement, originally dated as of December 7, 1999, by and among Vertis Holdings and various purchasers and under certain management services agreements, will receive their pro rata share of $3.232 million and an aggregate of $1,048,149 (plus up to $25,000 in legal expenses) in accordance with, and in exchange for the obligations provided in, certain side letter agreements. The existing common stock of Vertis Holdings will be cancelled with no distribution. 17. The restructuring contemplated by these prepackaged chapter 11 cases will reduce the Vertis Debtors’ leverage and enhance the Vertis Debtors’ longterm growth prospects and competitive position. In addition to reducing their debt, the Vertis Debtors expect to improve their operating performance and enhance their value through the realization of significant cost-saving Mergerrelated synergies.

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Jurisdiction 18. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Relief Requested 19. To manage their businesses efficiently and seamlessly, the Debtors utilize a centralized cash management system (the “Cash Management System”) to collect and transfer the funds generated by their operations and disburse funds to satisfy their financial obligations. The Cash Management System facilitates the Debtors’ cash monitoring, forecasting, and reporting, and enables the Debtors to maintain control over the administration of their bank accounts (the “Bank Accounts”) located at various banks (the “Banks”), including those listed on Exhibit “1” of the Proposed Order. By this Motion, the Debtors seek entry of an order, pursuant to sections 105(a), 363(c) and 345(b) of the Bankruptcy Code granting them (i) authorization to (a) continue their existing cash management system and (b) maintain existing bank accounts and business forms, and (ii) an extension of time to comply with section 345(b) of the Bankruptcy Code. Without the requested relief, the Debtors submit that they would be unable to maintain their financial operations effectively and efficiently, which would cause significant harm to the Debtors and to their estates. The Debtors’ Cash Management System 20. In the ordinary course of business, the Debtors use the Cash Management System, which is similar to those utilized by other large companies that operate in numerous locations, to collect, transfer, and disburse funds generated by the Debtors’ business operations efficiently. The Debtors accurately record such collections, transfers, and disbursements as they are made. The Cash Management System has three (3) main components: (i) cash collection, including the collection of payments made to the Debtors by customers, (ii) cash concentration; and (iii) cash disbursements to fund the Debtors’ operations, primarily consisting of payments made to vendors and service provides to ensure a steady supply of products the Debtors use to service their clients, as well as funding payroll. In addition, the Cash Management System is comprised of certain accounts that process receivables and certain stand-alone accounts that are used for the purposes specified below. For demonstrative purposes, a diagram generally illustrating the Cash Management is annexed as Exhibit “B” hereto. Cash Collection 21. The Debtors generate revenue primarily from their two reportable business segments, Advertising Inserts and Direct Mail. Additional cash is generated from the Debtors’ Premedia and Media services. The monies generated from these business segments and services are deposited each day into eight (8) accounts maintained with Bank of America, which can be categorized as (i) depository accounts, (ii) lockbox accounts for the deposit of checks, or (iii) depository accounts that service limited disbursements and/or debit transactions (collectively, the “Cash Accounts”).

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22. Vertis is also party to a three-year Receivables Sale and Servicing Agreement (the “A/R Sales Agreement”), dated as of November 25, 2005, pursuant to which Vertis sells substantially all of the trade accounts receivable it generates to its non-debtor subsidiary, Vertis Receivables II, LLC (“Vertis Receivables”). Vertis Receivables funds the purchase of the trade accounts receivables through the issuance of $130 million variable rate trade receivable backed notes pursuant to a Receivables Funding and Administration Agreement (the “A/R Sale and Servicing Agreement”, and together with the A/R Sales and Servicing Agreement, the “A/R Facility”), dated as of November 25, 2005, by and among, Vertis Receivables and General Electric Capital Corporation (“GECC”) as a lender and the administrative agent. The Debtors maintain four (4) lockbox accounts, as explained below, to collect the trade accounts receivables (the “Receivables Accounts”) and Vertis Receivables maintains one stand-alone account to receive the securitized funds from GECC (the “Receivables StandAlone Account”). Cash Concentration 23. At the end of each business day, the funds in the Cash Accounts are automatically swept into a consolidation account maintained with Bank of America in the name of Vertis, Inc. (the “Master Account”) and the Cash Accounts are reduced to a zero (0) balance. 24. Each day, (i) the funds in the Receivables Accounts are transferred to a separate concentration account (the “Concentration Account”) maintained by Vertis Receivables; (ii) the funds in the Concentration Account are transferred to GECC pursuant to the A/R Facility; (iii) GECC securitizes the trade accounts receivables and manually wires the funds received on account thereof to the Receivables Stand-Alone Account; (iv) the Debtors manually wire the funds from the Receivables Stand-Alone Account to the Master Account. Disbursements 25. To fund the Debtors’ (i) accounts payable, (ii) manual payroll account, and (iii) postage costs, funds in the Master Account are transferred, as needed, into six (6) controlled disbursement accounts (the “Disbursement Accounts”). Furthermore, as mentioned above, two (2) of the Cash Accounts are depository accounts that service limited disbursements and/or debit transactions. Disbursements to satisfy payroll, and process and pay checks or wire transfers, in satisfaction of certain employee benefits, are made directly from the Master Account. As checks are presented to each of the Disbursement Accounts they are funded from the Master Account and cleared daily. 26. In addition to the Cash Accounts and the Disbursement Accounts, the Debtors maintain eight (8) stand-alone accounts, seven (7) of which are in localities where Bank of America does not provide service, and one (1) Bank of America local account with a balance of less than $5,000 (collectively, the “Stand-Alone Accounts”). The Debtors’ non-debtor subsidiary, Laser Tech Color Mexico S.A. de C.V. also maintains two (2) foreign accounts in Mexico (the “Foreign Accounts”). Certain disbursements and/or collections are made to or from the Stand-Alone Accounts and the Foreign Accounts for local needs. The majority of these accounts make disbursements to pay local obligations, such as petty cash and operating expenses. Excess funds in the Foreign

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Accounts and certain of the Stand-Alone Accounts are swept to the Master Account. Three (3) of the Stand-Alone Accounts, which are maintained with M&T Bank, are swept daily either by wire or by check from the account into the Master Account. One (1) of the Stand-Alone Accounts, which is maintained with Wachovia is swept daily either by wire or by check from the account into the Master Account. The remaining Stand-Alone Accounts that are not swept to the Master Account maintain small balances, generally of less than $500. 27. Although uncommon, there are days on which all of the funds in the Master Account are not used. In such limited circumstances, any excess funds in the Master Account are wired by Bank of America into an investment account (“The Reserve”) which automatically invests excess collected balances, generally on an overnight basis. The Reserve is an independent fund company not associated with Bank of America and is subject to specific quality and valuation standards. Upon the Debtors’ request for redemption of the funds, the overnight investments are transferred back to the Master Account for immediate use the next business day, allowing the Debtors to gain maximum interest benefit from the end-of-day balance on their Master Account. While this account is not insured by the Federal Deposit Insurance Corporation, the securities that are the subject of the The Reserve are always direct obligations of, or guaranteed by, the United States, its agencies, or instrumentalities. The balance transferred to and from the The Reserve varies, and has been in an amount up to $10 million. Materials relating to The Reserve are annexed hereto as Exhibit “C.” Continuing the Cash Management System Is in the Best Interests of the Debtors, Their Creditors, and All Parties in Interest 28. The Debtors seek authorization to continue to operate their Cash Management System, consistent with their prepetition practices and operations. The Cash Management System constitutes an ordinary course and essential business practice that provides significant benefits to the Debtors, including, among other things, the ability to (i) control corporate funds; (ii) ensure the maximum availability of funds when and where necessary; and (iii) reduce administrative expenses by facilitating the movement of funds and the development of more timely and accurate account balance information. Based upon the foregoing, maintenance of the existing Cash Management System is in the best practices of the Debtors and their estates. 29. Section 363(c)(1) of the Bankruptcy Code authorizes debtors in possession to “use property of the estate in the ordinary course of business without notice or a hearing.” 11 U.S.C. § 363(c)(1). The purpose of section 363(c)(1) is to provide a debtor in possession with the flexibility to engage in the ordinary transactions required to operate its businesses without unneeded oversight by its creditors or the court. See, e.g., In re Roth Am., 975 F.2d 949, 952 (3d Cir. 1992) (“Section 363 is designed to strike [a] balance, allowing a business to continue its daily operations without excessive court or creditor oversight and protecting secured creditors and others from dissipation of the estate’s assets.”) (internal quotation omitted); In re Nellson Nutraceutical, Inc., 369 B.R. 787, 796 (Bankr. D. Del. 2007) (“The framework of section 363 is designed to allow a trustee (or debtor in possession) the flexibility to engage in ordinary transactions without unnecessary creditor and bankruptcy court oversight, while

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protecting creditors by giving them an opportunity to be heard when transactions are not ordinary.”) (internal quotation omitted); Med. Malpractice Ins. Ass’n v. Hirsch (In re Lavigne), 114 F.3d 379, 384 (2d Cir. 1997) (same). Included within the purview of section 363(c) is a debtor’s ability to continue the “routine transactions” necessitated by a debtor’s cash management system. Amdura Nat’l Distrib. Co. v. Amdura Corp. (In re Amdura Corp.), 75 F.3d 1447, 1453 (10th Cir. 1996). Accordingly, the Debtors seek authority under section 363(c)(1) to continue the collection, concentration, and disbursement of cash pursuant to its Cash Management System described above. Maintenance of the Debtors’ Existing Bank Accounts and Business Forms Is Warranted 30. The Office of the United States Trustee’s “Operating Guidelines and Financial Reporting Requirements Required in All Cases Under Chapter 11” mandate the closure of the Debtors’ prepetition bank accounts, the opening of new accounts, and the immediate printing of new checks with a “Debtors in Possession” designation on them. If the Debtors were required to comply with these guidelines, their operations would be severely harmed by the disruption, confusion, delay, and cost that would most certainly result from the closure of their existing Bank Accounts, the opening of new accounts and the immediate printing of new checks. 31. The Debtors believe, therefore, that their transition to chapter 11 will be smoother and more orderly, with minimum disruption and harm to their operations, if the Bank Accounts are continued following the Commencement Date with the same account numbers; provided, however, that checks issued or dated prior to the Commencement Date will not be honored, absent a prior order of this Court. By preserving business continuity and avoiding the disruption and delay to the Debtors’ collection and disbursement procedures that would necessarily result from closing the Bank Accounts and opening new accounts, all parties in interest, including employees, vendors, and customers, will be best served. Accordingly, the Debtors respectfully request authority to maintain the Bank Accounts in the ordinary course of business, to continue utilizing the Cash Management System to manage cash in a manner consistent with prepetition practices, and to pay any ordinary course Bank fees that may be incurred in connection with the Bank Accounts prior to or following the Commencement Date. 32. Unless otherwise ordered by this Court, no Bank shall honor or pay any check issued on account of a prepetition claim. The Banks may honor any checks issued on account of prepetition claims where this Court has specifically authorized such checks to be honored. Furthermore, the Debtors request that the Banks be authorized to accept and honor all representations from the Debtors as to which checks should be honored or dishonored consistent with any order(s) of this Court, whether or not the checks are dated prior to, on, or subsequent to the Commencement Date. The Banks shall not be liable to any party on account of following the Debtor’s instructions or representations regarding which checks should be honored. The Banks also shall be permitted to accept and process chargebacks against the Bank Accounts arising out of returned deposits into such accounts without regard to the date such return item was deposited.

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33. In other similar chapter 11 cases, courts in this and other districts have recognized that strict enforcement of the requirement that a debtor in possession close its bank accounts does not serve the rehabilitative process of chapter 11. See, e.g., In re Whitehall Jewelers Holdings, Inc., Ch.11 Case No. 08-11261 (KG) (Bankr. D. Del. June 24, 2008); In re Landsource Comtys. Dev. LLC, Ch. 11 Case No. 08-11111 (KJC) (Bankr. D. Del. June 10, 2008); In re Sharper Image Corp., Ch. 11 Case No. 08-10322 (KG) (Bankr. D. Del. Feb. 20, 2008); In re Chary Holdings Co., Inc. Ch. 11 Case No. 08-10289 (BLS) (Bankr. D. Del. February 15, 2008); In re Holley Performances Prods., Ch. 11 Case No. 08-10256 (PJW) (Bankr. D. Del. February 12, 2008). Similar authorization is appropriate in these chapter 11 cases. 34. In addition to mandating the closure of all bank accounts, the United States Trustee Guidelines require the immediate printing of new checks with the label “Debtor in Possession.” Similarly, Local Rule 2015-2(a) of the Local Rules for The United States Bankruptcy Court for the District of Delaware (the “Local Rules”) mandate that the Debtors, upon exhausting their existing check stock, order new ones with the “Debtor in Possession” label. To minimize expenses, the Debtors further request that they be authorized to continue to use their correspondence and business forms, including, but not limited to, purchase orders, multicopy checks, letterhead, envelopes, promotional materials, and other business forms (collectively, the “Business Forms”), substantially in the forms existing immediately before the Commencement Date, without reference to their status as debtors in possession. The Debtors propose that in the event they need to purchase new Business Forms during the pendency of the chapter 11 cases, such forms will include a legend referring to the Debtors’ status as debtors in possession.

Extension of Time to Comply With Section 345(b) 35. Section 345 of the Bankruptcy Code governs a debtor’s deposit and investment of cash during a chapter 11 case and authorizes deposits or investments of money as “will yield the maximum reasonable net return on such money, taking into account the safety of such deposit or investment.” 11 U.S.C. § 345(a). For deposits or investments that are not “insured or guaranteed by the United States or by a department, agency, or instrumentality of the United States or backed by the full faith and credit of the United States,” section 345(b) requires the estate to obtain from the entity with which the money is deposited or invested a bond in favor of the United States that is secured by the undertaking of an adequate corporate surety, unless the Court for cause orders otherwise. Id. § 345(b). In the alternative, the estate may require the entity to deposit governmental securities pursuant to 31 U.S.C. § 9303, which provides that when a person is required by law to give a surety bond, that person, in lieu of a surety bond, may provide a governmental obligation. See 31 U.S.C. § 9303. 36. By this Motion, the Debtors seek a sixty (60) day extension of the time to comply with section 345(b) of the Bankruptcy Code. During the extension period, the Debtors propose to engage the Office of the United States Trustee in discussions to determine what modification to their investment guidelines, if any, would be appropriate under the circumstances. The Debtors believe that the benefits of the requested extensions far outweigh any harm to the estates.

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See, generally, In re Serv. Merchandise Co., Inc., 240 B.R. 894 (Bankr. M.D. Tenn. 1999). 37. The Debtors believe that investment of the funds, if any, will provide the protection contemplated by section 345(b) of the Bankruptcy Code, notwithstanding the absence of a “corporate surety” requirement. By utilizing The Reserve, the Debtors are investing only in those U.S. dollar–denominated, highquality, short-term money market instruments that will provide the greatest amount of return for the Debtors while taking into account the safety of the investments. 38. Similarly, the Debtors believe that funds held in the Bank Accounts in excess of the amounts insured by the Federal Deposit Insurance Corporation, are secure and that obtaining bonds to secure these funds, as required by section 345(b) of the Bankruptcy Code, is unnecessary and detrimental to the Debtors’ estates and creditors. Moreover, there is no question that the Debtors’ cash located at Bank of America is protected, as Bank of America is one of the most highly-rated banking institutions in the country. 39. Strict compliance with the requirements of section 345(b) of the Bankruptcy Code would, in a case such as this, be inconsistent with section 345(a), which permits a debtor in possession to make such investments of money of the estate “as will yield the maximum reasonable net return on such money.” Thus, in 1994, to avoid “needlessly handcuff[ing] larger, more sophisticated debtors,” Congress amended section 345(b) of the Bankruptcy Code to provide that its strict investment requirements may be waived or modified if the Court so orders “for cause.” 140 Cong. Rec. H. 10,767 (Oct. 4, 1994), 1994 WL 54773. 40. The Debtors believe that funds to be held in their Bank Accounts, even when in an amount in excess of the amounts insured by the Federal Deposit Insurance Corporation, are secure and that obtaining bonds to secure those funds, as required by section 345(b) of the Bankruptcy Code, is unnecessary and detrimental to the Debtors’ estates and creditors. The Debtors submit that “cause” exists pursuant to section 345(b) of the Bankruptcy Code to extend the time to comply with such requirement because, among other considerations, (i) the Debtors’ Banks are highly rated and are federally chartered banks subject to supervision by federal banking regulators, (ii) the Debtors retain the right to remove funds held at the banks and establish new bank accounts as needed, (iii) the cost associated with satisfying the requirements of section 345 is burdensome, and (iv) the process of satisfying those requirements would lead to needless inefficiencies in the management of the Debtors’ businesses. Moreover, strict compliance with the requirements of section 345 of the Bankruptcy Code would not be practical in these chapter 11 cases. A bond secured by the undertaking of a corporate surety would be prohibitively expensive, if such bond is available at all. 41. Similar extensions have been granted in other chapter 11 cases in this district. See, e.g., In re Whitehall Jewelers Holdings, Inc., Ch. 11 Case No. 0811261 (KG) (Bankr. D. Del. June 24, 2008); In re Landsource Comty. Dev. LLC, Ch. 11 Case No. 08-11111 (KJC) (Bankr. D. Del. June 10, 2008); In re Sharper Image Corp., Ch. 11 Case No. 08-10322 (KG) (Bankr. D. Del. Feb. 20, 2008); In re HomeBanc Mortgage Corp., Ch. 11 Case No. 07-11079 (KJC) (Bankr. D.

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Del. Aug. 14, 2007); In re Am. Home Mortgage Holdings, Inc., Ch. 11 Case No. 07-11047 (CSS) (Bankr. D. Del. Aug. 7, 2007). 42. In addition, with respect to investments made in The Reserve, Local Rule 4001-3 provides that there is “cause” for relief from the requirements of section 345(b): [W]here the money of the estate is invested in an open-end management investment company, registered under the Investment Company Act of 1940, that is regulated as a “money market fund” pursuant to Rule 2a-7 under the Investment Company Act of 1940; so long as the debtor has filed with the Court (i) a statement identifying the fund; and (ii) the fund’s certification, which shall be accompanied by its currently effective prospectus as filed with the Securities and Exchange Commission, that the fund:

(a) Invests exclusively in United States Treasury Bills and United States Treasury Notes owned directly or through repurchase agreements;

(b) Has received the highest money market fund rating from a nationally recognized statistical rating organization, such as Standard & Poor’s or Moody’s;

(c) Has agreed to redeem funds shares in cash, with payment being made no later than the business day following a redemption request by a shareholder, except in the event of an unscheduled closing of Federal Reserve Banks or the New York Stock Exchange; and (d) Has adopted a policy that it will notify its shareholders sixty (60) days prior to any change in its investment or redemption policies under (a) and (c) above.

Local Rule 4001-3. While the Debtors believe The Reserve satisfies the criteria delineated in subjections (a)–(c) of the Local Rule 4001-3, The Reserve does not have a formal policy whereby it notifies its shareholders with respect to any change in investment or redemption policies. The Debtors understand, however, that it is the customary practice of The Reserve to inform shareholders in advance of any such changes. Based on the foregoing, the Debtors submit that the relief requested is necessary and appropriate, is in the best interests of their estates and creditors, and should be granted in all respects. The Debtors Satisfy Bankruptcy Rule 6003 43. Bankruptcy Rule 6003 provides that to the extent relief is necessary to avoid immediate and irreparable harm, a bankruptcy court may approve a motion to “pay all or part of a claim that arose before the filing of the petition” prior to twenty (20) days after the Commencement Date. FED. R. BANKR. P. 6003. As described above and in the Stegenga Declaration, the Debtors’ business operations rely heavily on the Cash Management System. The Debtors submit that the relief requested in this Motion is necessary to avoid immediate and irreparable harm to the Debtors, as described herein, and that Bankruptcy Rule 6003 has been satisfied. Waiver of Bankruptcy Rules 6004(a) and (h) 44. To implement the foregoing successfully, the Debtors seek a waiver of the notice requirements under Bankruptcy Rule 6004(a) and the ten-day stay of an order authorizing the use, sale, or lease of property under Bankruptcy Rule 6004(h).

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The Relief Requested Is Appropriate 45. The requested relief is further supported by the prepackaged nature of these cases. As set forth above and in greater detail in the Stegenga Declaration and the FBG Affidavit, the Debtors and the ACG Debtors solicited votes on the Prepackaged Plans from all classes of holders of claims entitled to vote to accept or reject the Prepackaged Plans. The votes tabulated and received from these classes demonstrate overwhelming acceptance of the Prepackaged Plans. The most critical and complex task required to effectuate a successful reorganization—the negotiation and formulation of a chapter 11 plan of reorganization—has already been accomplished. Thus, the Debtors respectfully submit that given the backdrop of these prepackaged chapter 11 cases, the relief requested herein is appropriate inasmuch as such relief will assist the Debtors to move towards expeditious confirmation of the widely-supported Prepackaged Plans with the least possible disruption or harm to their businesses. Moreover, the relief requested is supported by the Debtors’ major creditor groups. Based on the foregoing, the Debtors submit that the relief requested is necessary and appropriate, is in the best interests of their estates and creditors, and should be granted in all respects. Notice 46. No trustee, examiner or statutory creditors’ committee has been appointed in these chapter 11 cases. Notice of this Motion has been provided to: (i) the United States Trustee for the District of Delaware; (ii) the Debtors’ thirty (30) largest unsecured creditors (on a consolidated basis); (iii) Winston & Strawn LLP, 35 W. Wacker Drive, Chicago, Illinois 60601, Attn: Brian I. Swett, Esq., and Winston & Strawn LLP, 200 Park Avenue, New York, New York 10166, Attn: William D. Brewer, Esq., as counsel to the agent under the Debtors’ postpetition senior secured credit agreement and prepetition senior secured credit agreement; (iv) Emmet, Marvin & Martin, LLP, 120 Broadway, 32nd Floor, New York, New York 10271, Attn: Edward P. Zujkowski, Esq., as counsel to The Bank of New York, as indenture trustee under the 93/4 % Indenture, the 10 7/8% Indenture, and the 131/2 % Indenture; (v) Akin Gump Strauss Hauer & Feld LLP, 590 Madison Avenue, New York, New York 10022, Attn: Ira Dizengoff, Esq. and David Simonds, Esq., and Pepper Hamilton LLP, Hercules Plaza, Suite 5100, 1313 Market Street, Wilmington, DE 19899-1709, Attn: David M. Fournier, Esq., as co-counsel to the Vertis Informal Committee;3 (vi) Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, Attn: Kristopher M. Hansen, Esq. and Jayme T. Goldstein, Esq., as counsel to the Vertis Second Lien Noteholder Group; (vii) Dewey & LeBoeuf LLP, 1301 Avenue of the Americas, New York, New York 10019, Attn: Martin J. Bienenstock, Esq., as counsel to those certain holders of notes under the 131/2 % Indenture that are signatories to the Restructuring Agreement; (viii) Ropes & Gray LLP, One International Place, Boston, MA 02110, Attn: Steven T. Hoort, Esq., as counsel to certain Vertis shareholders; (ix) Wollmuth Maher & Deutsch LLP, 500 Fifth Avenue, New York, New York 10110, Attn: Paul R. DeFilippo, Esq., and Manton, Sweeney, Gallo, Reich & Bolz LLP, 92-25 Queens 3 Capitalized terms used and not otherwise defined in this section shall have the meanings ascribed


648


Blvd., Rego Park, New York 11374, Attn: Frank Bolz, Esq., as counsel to CLI; (x) Simpson Thatcher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017, Attn: Mark J. Thompson, Esq., as counsel to the Evercore Parties; (xi) Kirkland & Ellis LLP, Citigroup Center, 153 East 53rd Street, New York, New York 10022-4611, Attn: Paul M. Basta, Esq., and Kirkland & Ellis LLP, Aon Center, 200 East Randolph Drive, Chicago, Illinois 60601, Attn: Ray C. Schrock, Esq. and Chad J. Husnick, Esq., as counsel to the ACG Debtors; and (xii) Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, New York 10005, Attn: Dennis F. Dunne, Esq., Abhilash M. Raval, Esq., and Debra Alligood White, Esq., as counsel to the ACG Informal Committee ((i) through (xii), collectively, the “Notice Parties”). The Debtors submit that no other or further notice need be provided. No Previous Request 47. No previous request for the relief sought herein has been made to this or any other Court. WHEREFORE the Debtors respectfully request entry of the Proposed Order granting the relief requested herein and such other and further relief as the Court may deem just and appropriate. Dated: July 15, 2008 Wilmington, Delaware

WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 (212) 310-8000 Gary T. Holtzer Stephen A. Youngman -andRICHARDS, LAYTON & FINGER, P.A. One Rodney Square P.O. Box 551 Wilmington, Delaware 19899 (302) 651-7700 By: Mark D. Collins (No. 2981) Michael J. Merchant (No. 3854) ATTORNEYS FOR THE DEBTORS AND DEBTORS IN POSSESSION

8.1


649

(b) Cash Management Order Exhibit A PROPOSED ORDER IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ————————————————— x : In re : Chapter 11 : VERTIS HOLDINGS, INC., et al., : Case No. 08- ———— ( : : (Jointly Administered) Debtors. : : ————————————————— x

)

ORDER PURSUANT TO SECTIONS 105(a), 363(c) AND 345(b) OF THE BANKRUPTCY CODE (I) AUTHORIZING DEBTORS TO CONTINUE EXISTING CASH MANAGEMENT SYSTEM AND (B) MAINTAIN EXISTING BANK ACCOUNTS AND BUSINESS FORMS, AND (II) GRANTING AN EXTENSION OF TIME TO COMPLY WITH SECTION 345(b) OF THE BANKRUPTCY CODE Upon the motion, dated July 15, 2008 (the “Motion”), of Vertis Holdings, Inc., and its affiliated debtors in the above-referenced chapter 11 cases, as debtors and debtors in possession (collectively, the “Debtors”),4 for an interim order, pursuant to sections 105(a), 345, and 363(c)(1) of the Bankruptcy Code,5 for (i) authority to continue to use the Cash Management System, (ii) authority to maintain the Bank Accounts and Business Forms, and (iii) an extension of time to comply with the requirements of section 345(b) of the Bankruptcy Code, all as more fully set forth in the Motion; and upon the Stegenga Declaration and the FBG Affidavit; and this Court having jurisdiction to consider the Motion and the relief requested therein pursuant to 28 U.S.C. §§ 157 and 1334; and consideration of the Motion and the relief requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b); and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Motion having been provided to the Notice Parties, and it appearing that no other or further notice need be provided; and this Court having determined that the relief sought in the Motion is in the best interests of the Debtors, their creditors, and all parties in interest; and the Court having determined that the 4 The

Debtors in these cases, along with the last four (4) digits of each Debtor’s federal tax identification number, are Vertis Holdings (1556), Vertis, Inc. (8322), Webcraft, LLC (6725), Webcraft Chemicals, LLC (6726), Enteron Group, LLC (3909), Vertis Mailing, LLC (4084), and USA Direct, LLC (5311). 5 Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Motion.

650


legal and factual bases set forth in the Motion establish just cause for the relief granted herein; and upon all of the proceedings had before this Court and after due deliberation and sufficient cause appearing therefor, it is ORDERED that the Debtors are authorized and empowered, pursuant to sections 105(a), 345(b), and 363(c)(1), of the Bankruptcy Code, to continue to manage their cash pursuant to the Cash Management System, and to collect, concentrate, and disburse cash in accordance with that Cash Management System; and it is further ORDERED that the Debtors are authorized to (i) designate, maintain, and continue to use any or all of the Bank Accounts, including but not limited to those bank accounts listed on Exhibit “A” annexed hereto, in the names and with the account numbers existing immediately prior to the commencement of their chapter 11 cases, (ii) deposit funds into and withdraw funds from such accounts by all usual means, including, without limitation, checks, wire transfers, automated transfers, and other debits, and (iii) treat their prepetition Bank Accounts for all purposes as debtor in possession accounts; and it is further ORDERED that the Debtors’ time to comply with section 345(b) of the Bankruptcy Code is hereby extended for a period of sixty (60) days from the date of this Order (the “Extension Period”); provided, however, that such extension is without prejudice to the Debtors’ right to request a further extension of the Extension Period or the waiver of the requirements of section 345(b) in these cases; and it is further ORDERED that all Banks with which the Debtors maintained Bank Accounts as of the Commencement Date are authorized and directed to continue to treat, service, and administer the Bank Accounts as accounts of the respective Debtor as a debtor in possession without interruption and in the usual and ordinary course, and to receive, process, honor and pay any and all checks, drafts, wires, or other transfers by the holders or makers thereof, as the case may be which originated (i) prepetition and were presented prepetition but not honored until after the Commencement Date; (ii) prepetition but are not presented to the Banks for payment until after the Commencement Date; and (iii) postpetition and are presented to the Banks for payment after the Commencement Date; and it is further ORDERED that each Bank that maintains a Disbursement Account shall implement reasonable handling procedures designed to effectuate the terms of this Order, and no Bank that implements such handling procedures and then honors a prepetition check or other item drawn on any Bank Account that is the subject of this Order either (i) at the direction of the Debtors to honor such prepetition check or item, (ii) in good faith belief that the Court has authorized such prepetition check or item to be honored, or (iii) as a result of an innocent mistake made despite implementation of such handling procedures, shall be deemed in violation of this Order and shall have no liability for a prepetition or other item drawn on any Bank Account that is subject to this Order; and it is further ORDERED that the Banks are authorized to charge back against the Bank Accounts (i) any returned items drawn or presented against the Bank Accounts, regardless of whether such returned items originated prepetition or postpetition, and (ii) any overadvances, credit balances or other customary fees or expenses on Bank Accounts which arise in the ordinary course of business,

8.1


651

either prepetition or postpetition, in connection with the use and management of such Bank Accounts; provided, however, that none of the Banks shall be required to make transfers from or honor any draws against any of the Bank Accounts except to the extent of collected funds available in such respective Bank Accounts; and it is further ORDERED that the Debtors are authorized to pay customary prepetition banking and custody fees owed to any of their Banks and any such customary postpetition banking and custody fees will have administrative priority; and it is further ORDERED that nothing contained herein shall prevent the Debtors from closing any Bank Account(s) or opening any additional bank accounts, as they may deem necessary and appropriate, to the extent consistent with the terms of and subject to the restrictions contained in any of the Debtors’ postpetition financing agreement and any order(s) of this Court relating thereto, and any relevant bank is authorized to honor the Debtors’ requests to close or open such Bank Accounts or additional bank accounts, as the case may be; provided, however, that any new account shall be with a bank that is insured with the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation and that is organized under the laws of the United States or any State therein; provided further, however, that notice of the opening or closure of any account shall be given to the U.S. Trustee; and it is further ORDERED that the Debtors are authorized to use their existing Business Forms and are not required to (i) obtain new stock reflecting their status as debtors in possession, including listing the chapter 11 case numbers under which these cases are being jointly administered, or (ii) print “debtor in possession” on any of their Business Forms or in wire transfer instructions; and it is further ORDERED that Bankruptcy Rule 6003(b) has been satisfied because the relief requested in the Motion is necessary to avoid immediate and irreparable harm to the Debtors; and it is further ORDERED that notice of the Motion, as provided therein, shall be deemed good and sufficient notice of such Motion and the requirements of Bankruptcy Rule 6004(a) are hereby waived; and it is further ORDERED that notwithstanding any applicability of Bankruptcy Rule 6004(h), the terms and conditions of this Order shall be immediately effective and enforceable upon its entry; and it is further ORDERED that within three (3) business days after the date of this Order, the Debtors shall serve a copy of this order on the Banks; and it is further ORDERED that this Court shall retain jurisdiction to hear and determine all matters arising from or related to the implementation, interpretation and/or enforcement of this Order. Dated:

, 2008

Wilmington, Delaware

UNITED STATES BANKRUPTCY JUDGE

652


Exhibit 1 to Proposed Order Bank Accounts Bank

Account No.

Type

Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Beverly Medley Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255

3750357673

Depository

3756599574

Securitizations from GECC

3750354443

Depository/ LB # 844167 & 404555

3750083196

Depository/ LB # 840617

3751970318


3752013931


3756294549

Depository

3750067426


3750083183

Depository

3752169610


3752022634

Depository

3752066218


3751884006

Depository

3752066221

Depository

3756309654

Depository

3299976763

Controlled Disbursement

8.1


653

Bank

Account No.

Type

Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Wachovia 84 Veronica Avenue Somerset, NJ 08873 Fifth Third Bank 410 S. Greenville West Drive Greenville, MI 48838 JP Morgan Chase 1600 Hilliard Rome Road Hilliard, OH 43026 JP Morgan Chase 3430 South Redwood Road Salt Lake City, UT 84119 M&T Bank 107 West Market Street York, PA 17401 M&T Bank 107 West Market Street York, PA 17401 M&T Bank 107 West Market Street York, PA 17401 Banamex, SA - Mexico Tecnologico# 100 Col Carrizal CP: 76030 Queretaro, Qro. Mexico Banamex, SA - Mexico Tecnologico# 100 Col Carrizal CP: 76030 Queretaro, Qro. Mexico Bank of America 101 South Tryon Street Charlotte, SC 28255

3299963233


3359000563


3359000570


3299956674


3299911554


1463350107

Depository

2000012818893

Checking

7160980855

Checking

000000981938607

Checking

000000660197716

Checking

9842960453


61000000130815


9842960461

Checking

50980052890

Checking

50989999734

Depository

3750357673

Depository

654


Bank

Account No.

Type

Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Beverly Medley Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255

3756599574

Securitizations from GECC

3750354443

Depository/ LB # 844167 & 404555

3750083196


3751970318


3752013931


3756294549

Depository

3750067426


3750083183

Depository

3752169610


3752022634

Depository

3752066218


3751884006

Depository

3752066221

Depository

3756309654

Depository

3299976763


3299963233


3359000563


8.1


655

Bank

Account No.

Type

Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Bank of America 101 South Tryon Street Charlotte, SC 28255 Wachovia 84 Veronica Avenue Somerset, NJ 08873 Fifth Third Bank 410 S. Greenville West Drive Greenville, MI 48838 JP Morgan Chase 1600 Hilliard Rome Road Hilliard, OH 43026 JP Morgan Chase 3430 South Redwood Road Salt Lake City, UT 84119 M&T Bank 107 West Market Street York, PA 17401 M&T Bank 107 West Market Street York, PA 17401 M&T Bank 107 West Market Street York, PA 17401 Banamex, SA - Mexico Tecnologico# 100 Col Carrizal CP: 76030 Queretaro, Qro. Mexico Banamex, SA - Mexico Tecnologico# 100 Col Carrizal CP: 76030 Queretaro, Qro. Mexico

3359000570


3299956674


3299911554


1463350107

Depository

2000012818893

Checking

7160980855

Checking

000000981938607

Checking

000000660197716

Checking

9842960453


61000000130815


9842960461

Checking

50980052890

Checking

50989999734

Depository

656


(c) Cash Management Schematic Exhibit B

Bank of America ACCOUNT SCHEMATIC VERTIS, Inc. Master Account 3750357673

Zero Balance to Master

3756309654 Vertis, Inc.

3751884006 Vertis, Inc.-DPS

1463350107 Vertis, Inc.

3750083183 APS Operating Account

3752066218 Vertis, Inc.-MMS (Lockbox# 403433) 3750067426 Vertis, Inc. (Local Acct) (Lockbox# 277898 )

3752169610 Enteron Group, LLC – VPS Lockbox# 846108

3752066221 Webcraft, LLC

Bank of America ACCOUNT SCHEMATIC Zero Balance to Master

Vertis, Inc. Master Account 3750357673 3299956674 Vertis, Inc. (Manual Payroll Account)

3299976763 Vertis, Inc. (Craig Adhesives A/P)

3359000570 Vertis Communications Sacramento – Media A/P

3752066221 Webcraft, LLC (Postage)

3359000562 Vertis Communications Corporate A/P (A/P for Inserts, DM & Premedia)

3299911554 Vertis, Inc. (DMS Postage account)

37518884006 Vertis, Inc. – DPS

3299963233 Vertis, Inc. – DPS Postage

Controlled Disbursement Accounts

8.1


Bank of America ACCOUNT SCHEMATIC

Vertis Receivables II, LLC Daily wire to Deutsche Bank F/B/O GECC

Premedia Receipts 3750083196 Lockbox # 840617

3756599574

3756294549

Daily Manual Wire To

Concentration Account

Inserts Receipts 3750354443 Lockbox #404555 & #844167

3750357673

DM Receipts 3751970318

Craig Receipts 3752013931

Lockbox #40321

Lockbox #403249

ACCOUNT SCHEMATIC Stand-Alone Accounts 3752022634 3752022634 Vertis, Local Acct. Vertis,Inc. Inc.––Local Acct.

MISC. ACCOUNT SCHEMATIC Stand-Alone Accounts Balances of $500 Maintained – Petty Cash

JP Morgan Chase Bank – Columbus Vertis, Inc. – 000000981938607

Fifth Third Bank – Greenville PrintCo Inc. – 7160980855

JP Morgan Chase Bank – Salt Lake City Vertis, Inc. – 000000660197716

Wachovia – North Brunswick Vertis, Inc. – 2000012818893

FOREIGN ACCOUNTS Excess Cash Swept to BOA Master via Wire Transfer

Banamex, SA – Mexico Laser Tech Color Mexico, SA de CV 50989999734 Currency: US Dollars

Banamex, SA – Mexico Laser Tech Color Mexico, SA de CV 50980052890 Currency: Mexican Pesos

657

658


M&T ACCOUNT SCHEMATIC USA Direct, LLC Excess Cash Swept to BOA Master via Wire Transfer

USA Direct, LLC Zero Balance Checking 9842960461

USA Direct, LLC Operating/Checking 9842960453

USA Direct, LLC CDA 61000000130815

8.2

8.2

Sample Application for Order to Pay Prepetition Wages

659


Objective. Section 8.8(a) of Volume 1 of Bankruptcy and Insolvency Accounting describes the types of first day orders needed for employees. Presented below are (a) sample of an application for order to pay prepetition wages, and (b) example of a motion for such an order taken from the case of Vertis Holdings, Inc., a prepackaged bankruptcy filing. The order provided for (1) payment of unpaid wages accrued just prior to petition filing, and (2) retention of present payroll accounts and payment of uncashed payroll checks drawn on those accounts.

(a) Sample Application for Order to Pay Prepetition Wages UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA

In re Debtors.

Cases Nos. LA-XX- through LA-XX APPLICATION FOR ORDER AUTHORIZING DEBTORS-IN-POSSESSION TO PAY PREPETITION WAGES AND RELATED BENEFITS AND TO HONOR OUTSTANDING PAYROLL CHECKS; AND ORDER THEREON

The application of all the debtors-in-possession respectfully represents and shows: 1. The Debtors have heretofore filed petitions for relief under Chapter 11 of the Bankruptcy Code. Applicants are the respective Debtors in Possession in those chapter 11 cases. 2. Within 90 days prior to the filing of the chapter 11 cases, the Debtors issued to their respective employees certain payroll checks from their general payroll accounts some of which checks may not have been cashed prior to the filing of the respective chapter 11 case. In addition, wages and related benefits for the pay period ending on or about April 23, 20XX will be due on or about April 30, 20XX. 3. Applicants believe that in order to avoid the risk of massive resignations and of discontent or loss of morale among their essential employees, and in view of the priority awarded to wage claims, it is necessary and appropriate that Applicants be permitted to take the necessary steps to insure that the uncashed payroll checks of its employees be honored and the payroll be made for the pay period ending on or about April 23, 20XX. Applicants propose to accomplish this either by retaining the existing payroll accounts and permitting checks drawn on these accounts prior to or after the Chapter 11 filings to be paid or by other means. WHEREFORE, Applicants pray that this Court enter its order authorizing Applicants to retain their present payroll accounts, to permit uncashed payroll checks drawn on said accounts to be honored, and to pay pre-petition wages by whatever procedures Applicants devise.

660


DATED: April 24, 20XX. , a Member of STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION Attorneys for Debtors and Debtors in Possession

Order IN LOS ANGELES, CALIFORNIA, IN SAID DISTRICT, ON THIS 24 DAY OF APRIL, 20XX. Upon consideration of the foregoing Application and good cause appearing, it is hereby ORDERED, that the Application is granted and that all the Debtors-inPossession are authorized to pay pre-petition wages by whatever procedures they adopt including but not limited to the retention of their payroll accounts and the honoring of uncashed checks drawn thereon prior to the Chapter 11 filings. UNITED STATES BANKRUPTCY JUDGE THE OFFICE OF UNITED STATES TRUSTEE HAS NO OBJECTION TO THE RELIEF REQUESTED IN THE FOREGOING APPLICATION By

(b) Motion for Order to Pay Prepetition Wages and Use Existing Payroll Accounts IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

————————————————— x : In re : Chapter 11 : VERTIS HOLDINGS, INC., et al., : Case No. 08- ————— ( : : (Jointly Administered) Debtors. : : ————————————————— x

)

8.2


661

DEBTORS’ MOTION FOR AN ORDER PURSUANT TO SECTIONS 105(a), 363(b), AND 507(a) OF THE BANKRUPTCY CODE (I) AUTHORIZING PAYMENT OF WAGES, SALARIES, COMPENSATION, AND EMPLOYEE BENEFITS AND (II) AUTHORIZING THE DEBTORS’ FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS Vertis Holdings, Inc. (“Vertis Holdings”) and its affiliated debtors in the above-referenced chapter 11 cases, as debtors and debtors in possession (collectively, “Vertis,” or the “Debtors”),1 hereby move for an order (the “Proposed Order”) pursuant to sections 105(a), 363(b), and 507(a) of title 11 of the United States Code (the “Bankruptcy Code”) (I) authorizing payment of wages, salaries, compensation, employee benefits, bonuses and certain severance and (II) authorizing the Debtors’ banks and financial institutions to honor and process checks and transfers related to such obligations (the “Motion”). In support of the Motion, the Debtors submit the Declaration of Jeffery J. Stegenga in Support of the Debtors’ Chapter 11 Petitions and Request for First Day Relief (the “Stegenga Declaration”) and the Affidavit of Service and Vote Certification of Financial Balloting Group LLC (the “FBG Affidavit”), both filed contemporaneously herewith, and the Debtors respectfully represent as follows: Background 1. On the date hereof (the “Commencement Date”), the Debtors each commenced with this Court a voluntary case under chapter 11 of the Bankruptcy Code (the “Vertis Debtors’ Reorganization Cases”). The Debtors are authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Further, a motion pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for joint administration of the Debtors’ chapter 11 cases is pending before this Court. 2. Prior to the Commencement Date, the Debtors solicited votes on the Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Vertis Holdings, Inc., et al., proposed by Vertis Holdings, Inc., et al. and ACG Holdings, Inc., et al. (the “Vertis Prepackaged Plan”) through their disclosure statement pursuant to sections 1125 and 1126(b) of the Bankruptcy Code (the “Disclosure Statement”). As discussed more fully below, the Vertis Prepackaged Plan has been accepted by all classes entitled to vote in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code. Vertis’ Businesses 3. Vertis is one of the leading commercial printers, providing advertising inserts, newspaper products, direct mail services and related services to grocery stores, drug stores and other retail chains, general merchandise producers and manufacturers, financial and insurance service providers, newspapers and advertising agencies. By offering an extensive list of solutions across a broad 1 The

Debtors in these cases, along with the last four (4) digits of each Debtor’s federal tax identification are Vertis Holdings (1556), Vertis, Inc. (8322), Webcraft, LLC (6725), Webcraft Chemicals, LLC (6726), Enteron Group, LLC (3909), Vertis Mailing LLC (4084), and USA Direct, LLC (5311).

662


spectrum of media, Vertis enables its clients to reach target customers with the most effective message. 4. Vertis operates primarily through two reportable business segments: advertising inserts (“Advertising Inserts”) and direct mail (“Direct Mail”). In addition, Vertis also provides premedia and related services (“Premedia”) as well as media planning and placement services (“Media Services”). 5. Advertising Inserts provides a full array of targeted advertising insert products and services. The products and services include targeted advertising insert programs for retailers and manufacturers, newspaper products (TV magazines, Sunday magazines, color comics and special supplements), and consumer research. Vertis is one of the leading providers of advertising inserts, newspaper TV listing guides and Sunday comics in the United States. In 2007, Vertis produced more than 31 billion advertising inserts, with the Advertising Insert segment accounting for approximately 66.7% of Vertis’ total revenue for 2007. 6. Direct Mail provides a full array of targeted direct marketing products and services. The products and services include highly customized one-to-one marketing programs, direct mail production with varying levels of personalization, data design, collection and management to identify target audiences, mailing management services, automated digital fulfillment services, effectiveness measurement and response management, and warehousing and fulfillment services. Revenue from the Direct Mail segment accounted for approximately 26.4% of Vertis’ total revenue for 2007. 7. Premedia, Media Services and other technologies assist clients with advertising campaigns, including digital content management, graphic design and animation, digital photography, compositing and retouching, in-store displays, billboards and building wraps, consulting services, newspaper advertising development and media planning, and placement and software solutions that deliver messages through alternative media channels such as emails, texting, personalized “URLs” and the Internet. Premedia, Media Services and other technologies accounted for the remainder of Vertis’ total revenue for 2007. 8. Vertis Holdings is the parent corporation of Vertis, Inc. The other Debtors are wholly-owned direct or indirect subsidiaries of Vertis, Inc. (collectively, the “Vertis Subsidiary Debtors”). All business operations are carried out by Vertis, Inc., the Vertis Subsidiary Debtors, and Vertis Inc.’s non-debtor subsidiaries. Each of the Debtors is either a Delaware corporation or Delaware limited liability company. Vertis’ principal executive offices are located at 250 West Pratt Street, Baltimore, Maryland 21201. 9. As of May 31, 2008, Vertis, Inc. and the Vertis Subsidiary Debtors had approximately 5,414 employees in North America and their unaudited consolidated financial statements reflected $1.3 billion of revenue for the prior 12-month period, assets of approximately $523 million and liabilities of approximately $1.4 billion. As of May 31, 2008, Vertis Holdings’ unaudited consolidated financial statements reflected assets of approximately $523 million and liabilities of approximately $1.7 billion. The Proposed Vertis Prepackaged Plan 10. The Vertis Prepackaged Plan contemplates a comprehensive financial restructuring of the Debtors’ existing equity and debt structures and effectuates a merger (the “Merger”) of the Debtors and ACG Holdings, Inc. (“ACG

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Holdings”), American Color Graphics, Inc. (“ACG”), American Images of North America, Inc., Sullivan Marketing, Inc., and Sullivan Media Corporation (collectively, the “ACG Debtors”). As a result of the Merger, ACG Holdings and its subsidiaries will become wholly-owned direct and indirect subsidiaries of Vertis. 11. Prior to the Commencement Date, the ACG Debtors also solicited votes on the ACG Debtors’ proposed joint prepackaged chapter 11 plans of reorganization (the “ACG Prepackaged Plan,” and, collectively with the Vertis Prepackaged Plan, the “Prepackaged Plans”). The ACG Debtors have, contemporaneously with the commencement of the Vertis Debtors’ Reorganization Cases, commenced voluntary cases under chapter 11 of the Bankruptcy Code seeking confirmation of the ACG Prepackaged Plan (the “ACG Debtors’ Reorganization Cases”). The ACG Debtors are co-proponents of the Vertis Prepackaged Plan in the Vertis Debtors’ Reorganization Cases and the Vertis Debtors are co-proponents of the ACG Prepackaged Plan in the ACG Debtors’ Reorganization Cases. The Prepackaged Plans provide that they will become effective simultaneously with each other and the consummation of the Merger. 12. The Vertis Prepackaged Plan and Disclosure Statement were filed on the Commencement Date. As set forth in the FBG Affidavit, the proposed Vertis Prepackaged Plan has been accepted in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code by all classes entitled to vote.2 Specifically, 100% of the classes consisting of Vertis Holdings General Unsecured Claims, Vertis Second Lien Notes Claims and Vertis Senior Subordinated Notes Claims, both by number and by amount that voted on the Vertis Prepackaged Plan, voted to accept the Vertis Prepackaged Plan. The class consisting of Vertis Senior Notes Claims voted to accept the Vertis Prepackaged Plan by 98.6% in amount and 98.3% in number of those voting on the Vertis Prepackaged Plan. 13. The ACG Prepackaged Plan was filed on the Commencement Date. As set forth in the Affidavit of Service and Vote Certification of Financial Balloting Group LLC filed concurrently with the ACG Debtors’ chapter 11 petitions, the proposed ACG Prepackaged Plan has been accepted by all classes entitled to vote in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code. Specifically, the holders of ACG Second Lien Notes Claims voted to accept the ACG Prepackaged Plan by 99.9% in amount and 95.3% in number of those voting on the ACG Prepackaged Plan. 14. On the effective date of the Prepackaged Plans (the “Effective Date”), Vertis shall issue the following securities: (i) new second lien notes of Vertis in the same principal amount as its existing second lien notes (i.e., $350 million) (the “New Vertis Second Lien Notes”); (ii) new senior notes of Vertis in the total principal amount of $200 million (the “New Vertis Senior Notes,” and, together with the New Vertis Second Lien Notes, the “New Vertis Notes”); (iii) 2 Although the holder of the Vertis Term Loan Claim and the Vertis Holdings Term Loan Guarantee

Claim (as defined in the Disclosure Statement) voted to reject the Vertis Prepackaged Plan, the Vertis Prepackaged Plan provides that such votes shall be disregarded and such claims will be unimpaired if the Debtors opt to pay the Vertis Term Loan Claim in full on the Effective Date. As the Debtors have decided to pay the holder of the Vertis Term Loan Claim in full in cash on the Effective Date, the classes consisting of the Vertis Term Loan Claim and the Vertis Holdings Term Loan Guarantee Claim are not entitled to vote.

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one class of common stock of Vertis Holdings (the “New Common Stock”); and (iv) new warrants, which may be exercised, subject to certain terms and conditions described in more detail below, to purchase a number of shares of New Common Stock equal to an aggregate of 11.5% of the number of outstanding shares of New Common Stock as of the Effective Date at an exercise price of $0.01 per share (the “New Warrants”). The New Vertis Notes will be guaranteed by all of Vertis’ domestic subsidiaries following consummation of the Merger. 15. The foregoing securities will be distributed under the Prepackaged Plans as follows: (i) holders of Vertis, Inc. 93/4 % Senior Secured Second Lien Notes due 2009 will receive New Vertis Second Lien Notes in the same principal amount as their existing notes; (ii) holders of Vertis, Inc. 10 7/8% Senior Notes due 2009 will receive $107 million of New Vertis Senior Notes and 57.04% of the outstanding shares of the New Common Stock; (iii) holders of Vertis, Inc. 131/2 % Senior Subordinated Notes due 2009 will receive $27 million of New Vertis Senior Notes, 10% of the outstanding shares of the New Common Stock and the New Warrants; and (iv) holders of American Color Graphics, Inc. 10% Senior Second Secured Notes due 2010 will receive $66 million of the New Vertis Senior Notes and 32.96% of the New Common Stock. 16. In addition, the Vertis Prepackaged Plan provides for the payment in full of (i) allowed administrative expense claims, (ii) federal, state, and local tax claims, and (iii) certain other priority non-tax claims, and leaves holders of general unsecured claims against the Vertis Debtors (other than Vertis Holdings) unimpaired. Furthermore, as permitted by the Vertis Prepackaged Plan, the Vertis Term Loan Claim will be paid in full on the Effective Date, leaving both it and the Vertis Holdings Term Loan Guarantee Claim unimpaired. Holders of general unsecured claims against Vertis Holdings, which are claims arising under that certain Mezzanine Note and Warrant Purchase Agreement, originally dated as of December 7, 1999, by and among Vertis Holdings and various purchasers and under certain management services agreements, will receive their pro rata share of $3.232 million and an aggregate of $1,048,149 (plus up to $25,000 in legal expenses) in accordance with, and in exchange for the obligations provided in, certain side letter agreements. The existing common stock of Vertis Holdings will be cancelled with no distribution. 17. The restructuring contemplated by these prepackaged chapter 11 cases will reduce the Vertis Debtors’ leverage and enhance the Vertis Debtors’ longterm growth prospects and competitive position. In addition to reducing their debt, the Vertis Debtors expect to improve their operating performance and enhance their value through the realization of significant cost-saving Mergerrelated synergies. Jurisdiction 18. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Relief Requested 19. By this Motion, the Debtors request, pursuant to sections 105(a), 363(b), and 507(a) of the Bankruptcy Code, entry of the Proposed Order substantially

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in the form attached hereto as Exhibit “A” (I) authorizing, but not requiring, the Debtors to (a) pay, in their sole discretion, wage, salary and commission obligations, payroll taxes, garnishments, expense reimbursements, employee benefits, bonuses, certain severance obligations, and retirement plan and benefit obligations, and costs incident to the foregoing (each as defined below, and collectively, the “Employee Obligations”), and (b) maintain and continue to honor their practices, programs, and policies for their employees (the “Employee Benefits”) as they were in effect on the Commencement Date, and as they may be modified, amended, or supplemented from time to time in the ordinary course of business, and (II) authorizing the Debtors’ banks and financial institutions to receive, honor, process, and pay any and all checks or wire transfers drawn on the Debtors’ accounts in satisfaction of Employee Obligations and Employee Benefits. 20. As part of their cash management system, the Debtors maintain a master account and a manual payroll account at Bank of America. The Debtors (or their payroll servicer) draw upon funds in these accounts at Bank of America to satisfy Employee Obligations and Employee Benefits. The Debtors request that the Court authorize Bank of America (or such other bank or financial institution, as required) to receive, honor, process, and pay any and all checks drawn, or electronic fund transfers requested or to be requested, on the Debtors’ accounts to the extent that such checks or electronic fund transfers relate to any Employee Obligations or Employee Benefits. The Debtors’ Prepetition Employee Obligations 21. In the ordinary course of their businesses, the Debtors incur payroll and various other obligations and provide other benefits to their employees for the performance of services. As of the Commencement Date, the Debtors employ approximately 5,411 full-time3 employees, of which (i) approximately 1,354 are salaried employees (the “Salaried Employees,” of which approximately 140 of those Salaried Employees hold the position of directors or above, the “Executive Employees”), (ii) approximately 3,933 are non-union employees paid on an hourly basis (the “Hourly Employees,” together with the Salaried Employees, the “Full-time Employees”), and (iii) approximately 124 employees are employed pursuant to an independent collective bargaining agreement (the “CBA”) between the Debtors and USW Local 318 (the “Union,” and its represented employees, the “Union Employees”) and paid on an hourly basis. The Debtors also employ approximately sixty-eight (68) part-time employees who are paid on an hourly basis4 and four (4) part-time salaried employee (the “Parttime Employees,” and, together with the Full-time Employees and the Union Employees, the “Employees”). 22. The Debtors have incurred obligations to their Employees in the period prior to the Commencement Date. Certain of these costs and obligations are outstanding, due and payable, while others will become due and payable in 3 Full-time

employees work more than thirty (30) hours per week. Employees fall into two (2) categories: (a) Part-time Employees who work more than twenty (20) hours a week but less than thirty (30) hours (“Nonexempt Part-time Employees”); and (b) Part-time Employees who work less than twenty (20) hours a week (“Exempt Part-time Employees”).

4 Part-time

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the ordinary course of the Debtors’ businesses after the Commencement Date. Pursuant to this Motion, the Debtors request authority to pay such obligations for the reasons discussed below. Wages, Salaries, Commissions, and Incentive Programs (i) Wage and Salary Obligations 23. Prior to the Commencement Date and in the ordinary course of their businesses, the Debtors typically paid obligations relating to wages, salary, and compensation to their Employees (collectively, the “Wage Obligations”) bi-weekly on the basis of group designation—Group A or Group B. Group A consists of approximately 2,604 employees, and Group B consists of approximately 2,807 employees, with a concentration of Executive Employees in Group B. Though the Debtors pay each group’s Wage Obligations bi-weekly through direct-deposit or, in limited instances, by check, the Debtors pay the groups on alternating Fridays. The Debtors’ current estimated bi-weekly gross payroll is approximately $5,400,000 for Group A employees, and approximately $6,400,000 for Group B employees. 24. The Debtors engage a payroll service, ADP, to facilitate payment of their Wage Obligations. On or about July 10, 2008, the Debtors funded (and ADP debited from the Debtors’ payroll account) payroll for the two-week period ending July 6, 2008, which compensated Group A employees, and on or about July 14, 2008, the Debtors funded (and ADP debited from the Debtors’ payroll account) payroll for the two-week period ending July 12, 2008, which compensated Group B employees. Under the Debtors’ payroll system, Employees are compensated for work already performed one (1) week in arrears. Thus, when Employees receive their bi-weekly direct deposit or payroll check, those employees have already earned—and are owed—another week’s pay. As of the Commencement Date, the Debtors estimate they have approximately $5,600,000 outstanding in accrued prepetition Wage Obligations. (ii) Payroll Taxes 25. The Debtors are required by law to withhold from the Employees’ salaries and wages amounts related to federal, state, and local income taxes, as well as Social Security and Medicare taxes (collectively, the “Withholding Taxes”) and to remit the same to the appropriate taxing authorities (collectively, the “Taxing Authorities”). In addition, the Debtors are required to make payments from their own funds on account of Social Security and Medicare taxes, and to pay, based on a percentage of gross payroll (and subject to state-imposed limits), additional amounts to the Taxing Authorities for, among other things, state and federal unemployment insurance (collectively, the “Employer Payroll Taxes” and, together with the Withholding Taxes, the “Payroll Taxes”). 26. The Debtors’ average bi-weekly liability for Payroll Taxes as of the Commencement Date is approximately $1,900,000 of which approximately $1,000,000 is withheld from Employees’ paychecks and approximately $900,000 is paid by the Debtors. Therefore, as of the Commencement Date, the Debtors estimate they owe the Taxing Authorities approximately $1,900,000 on account of Payroll Taxes relating to the prepetition period.

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(iii) Garnishments 27. In the ordinary course of processing payroll checks for their Employees, the Debtors may be required by law, in certain circumstances, to withhold from certain Employees’ wages amounts for various garnishments, such as tax levies, child support, and other court-ordered garnishments (collectively, the “Garnishments”). On a bi-weekly basis, the Debtors withhold amounts from certain Employees’ paychecks related to Garnishments, and remit the same to the appropriate state agencies on a monthly basis. Thus far in 2008, the Debtors have withheld approximately $200,000 per month in Garnishments. As of the Commencement Date, the Debtors estimate that they have approximately $150,000 of unremitted Garnishments relating to the prepetition period. (iv) Obligations in Respect of Payroll Processing Service 28. As noted above, ADP provides payroll services to the Debtors, for which ADP is paid a $17,030 monthly fee in arrears by wire on the first day of every month. Therefore, as of the Commencement Date, the Debtors owe ADP approximately $8,500 in outstanding prepetition amounts on account of services rendered. (v) Reimbursement of Expenses 29. Certain of the Debtors’ Full-time Employees incur various expenses in the discharge of their ordinary duties, such as travel and meal expenses. Because these expenses are incurred as part of their official duties and in furtherance of the Debtors’ businesses, the Debtors reimburse the Full-time Employees for such expenses (the “Expense Reimbursement”). The method of Expense Reimbursement differs for Salaried Employees and Hourly Employees. 30. The Debtors provide nearly half of their Salaried Employees—generally those who are expected to travel as part of their position—with companyissued American Express (“Amex”) cards. After a Salaried Employee receives a monthly statement from Amex, the Salaried Employee is required to engage in an automated expense reimbursement verification process, which includes completing an online expense claim form, securing manager approval of such claims, and submitting the manager-approved claim form to Amex for processing. After submissions are processed, Amex totals all of the submitted claims and invoices the Debtors on a weekly basis on account of such claims. The Debtors pay Amex by wire each week. Pursuant to the agreements with Amex, if the Debtors fail to pay, Amex has recourse against the Salaried Employee cardholders. As of the Commencement Date, the Debtors estimate they owe Amex approximately $1,500,000 with regard to Expense Reimbursements relating to the prepetition period. In the absence of Court authority to pay these amounts, the Debtors’ Salaried Employees would incur personal liability equal to the amounts owed to Amex. 31. Hourly Employees are not issued an Amex card. Rather, Hourly Employees must submit an expense report detailing their claim and seek reimbursement from the Debtors. There may be a lag of approximately a month between submission and reimbursement of such claims. Although the lag in reimbursements to Hourly Employees makes it difficult for the Debtors to determine the amount of Expense Reimbursements outstanding at any particular time,

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the Debtors are currently aware of approximately no outstanding non-Amex Expense Reimbursement amounts as of the Commencement Date. Based upon historical figures, however, the Debtors estimate that there may be approximately $50,000 of Expense Reimbursements outstanding.5 Accordingly, the Debtors request authority to pay approximately $1,550,000 with respect to Expense Reimbursements incurred prepetition. (v) Commission Obligations 32. The Debtors’ businesses rely heavily on the ability to attract new customers and maintain relationships with existing customers. Those Employees who promote and sell the Debtors’ products, including, among others, sales representatives, account managers, and executives (collectively, the “Sales Staff”), serve as the Debtors’ public face and are responsible for enhancing service to existing customers and cultivating new business opportunities. In certain instances, compensation for a member of the Sales Staff is tied to the sales that member generates. Accordingly, in addition to base pay, and subject to criteria that vary by function and the Debtors’ business segment, the Debtors provide additional compensation to their Sales Staff. Specifically, members of the Sales Staff may be eligible to receive additional monthly or quarterly achievement commissions if specific sales benchmarks are met or surpassed (the “Commission Obligations”). The Debtors generally pay Commission Obligations in arrears on a monthly or quarterly basis. In 2007, the Debtors paid a total of approximately $11,866,835 in Commission Obligations. 33. Importantly, the Debtors’ competitors offer similar incentives to their respective sales employees; therefore, if the Debtors were to cut or not pay amounts due under such programs, the Debtors would be at a competitive disadvantage for retaining talented salespersons at a time when such talent is critical to the Debtors’ businesses. Given that the Debtors’ success depends upon the continued efforts and excellent service of their Sales Staff, it is imperative that the Debtors continue paying their Commission Obligations. The Debtors estimate that approximately $2,300,000 in prepetition Commission Obligations are accrued and unpaid as of the Commencement Date to approximately 113 Employees. (vi) OMIP Incentive Program 34. To recognize and encourage exceptional employee performance, prior to the Commencement Date the Debtors implemented the Operations Manager Incentive Program (the “OMIP”), an incentive program for non–commission based employees. 35. The Debtors approved the OMIP in late 2007 and implemented it on January 1, 2008. Pursuant to the OMIP, approximately fifteen (15)6 plant operations managers7 in the Debtors’ Advertising Inserts segment are eligible to 5 The

average amount of Expense Reimbursements paid monthly for the period of January 2007 through March 2008 was approximately $879,305. 6 While there are currently only fourteen (14) operations managers, the Debtors may hire one (1) more operations manager during the course of these chapter 11 cases. 7 The duties of an operations manager typically include plant safety, scheduling, maintenance, and budgeting.

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receive quarterly bonus payments so long as those managers maintain plant operational performance at mandated levels established by the Debtors’ upper management. The OMIP was implemented to provide an incentive to plant managers to increase productivity and reduce costs. 36. Under the OMIP, the Debtors’ senior executives approve quarterly and yearly performance benchmarks for each plant, as recommended by the Advertising Inserts’ senior personnel.8 The Advertising Inserts’ senior personnel decide on each plant’s benchmarks by considering, among other things, (i) the plant’s prior performance, (ii) the Debtors’ overall goals and strategy, and (iii) budgetary concerns. Under the OMIP, plant managers are eligible to receive a base award of up to $25,000 each year. If a plant reaches a quarterly benchmark, then the plant’s manager is entitled to receive twenty percent (20%) of the base award (up to $5,000 a quarter). If a plant reaches its yearly goal, the plant manager is entitled to receive the entire base award regardless of whether the plant met the stated quarterly goals. In addition, plant managers are each entitled to receive up to an additional $25,000 if their plant exceeds the performance benchmarks by a certain amount. Such additional awards are paid pursuant to an “escalation formula,” which provides payment for each percentage point that a plant exceeds its quarterly and yearly goals. 37. Approximately seven (7) operations managers earned bonuses under the OMIP in the second quarter of 2008 and as of the Commencement Date, only two (2) of the operations managers have accrued and unpaid bonuses—in the approximate aggregate amount of $12,593.75—on account of the OMIP. Employee Benefits 38. In the ordinary course of business, the Debtors have established various benefit plans and policies for their Employees, which can be divided into the following categories: (i) paid time-off plans, including vacation days, personal days, paid holidays, jury duty, and bereavement days (collectively, the “PTO Plans”), (ii) medical insurance, dental insurance, vision care, life insurance, accidental death and dismemberment insurance, disability benefits, and flexible spending programs (collectively, the “Health and Welfare Plans”), (iii) certain severance programs, (iv) other employee benefit programs including, among other things, tuition reimbursement, relocation reimbursement, and an employee assistance program (the “Other Employee Programs”), and (v) a union 401(k) plan, a non-union 401(k) plan (the “401(k) Plan”), and other qualified and non-qualified retirement plans (collectively, the “Retirement Plans”). As discussed more fully below, the Debtors deduct specified amounts from their Employees’ wages in connection with certain of the Employee Benefits, such as the Health and Welfare Plans and certain of the Retirement Plans.

8 Benchmarks

are set based on the five (5) following criteria: (i) reduction of labor costs; (ii) reduction of downtime (amount of time machines are not in use); (iii) reduction in “make ready time” (the time it takes to prepare a machine for a new job); (iv) reduction in paper waste; and (v) run speed (the amount of time it takes to complete a job).

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(i) PTO Plans 39. Under the PTO Plans, certain eligible Employees receive their full wages for, among other things, vacation days, personal days, holidays, jury duty, and bereavement periods. (a) Vacation Days and Personal Days (i) Salaried Employees 40. After four (4) months of employment with the Debtors, and depending on position and total service time with the Debtors, a Salaried Employee is eligible to accrue up to four (4) weeks of paid vacation over the course of a year. To the extent a Salaried Employee does not take all earned vacation days during any particular year, he or she may carry over up to 120 hours to the following year. As a partial alternative to carrying over all accrued and unused vacation days, Salaried Employees may elect to cash out (i) up to one (1) week of accrued and unused vacation time at the end of each calendar year, or (ii) a maximum of seven (7) weeks upon separation from the company. Salaried Employees are not eligible to accrue or take personal days. (ii) Hourly Employees 41. After four (4) months of employment with the Debtors, and depending on the Hourly Employee’s tenure with the Debtors, an Hourly Employee is eligible to accrue up to four (4) weeks of paid vacation over the course of a year. Similar to Salaried Employees, Hourly Employees may carry over up to 120 hours of earned and unused vacation. Hourly Employees also are entitled to cash out (i) one week of accrued and unused vacation time at the end of each calendar year, or (ii) a maximum of seven (7) weeks upon separation from the company. In addition to paid vacation days, Hourly Employees receive three (3) personal days at the beginning of each calendar year, subject to proration if the employee commences service with the company at any point after January 1 of the year. Though Salaried Employees are not permitted to carry over unused personal days at the end of each calendar year, the Full-time Hourly Employee may be paid for personal days on account of any unused balance from the preceding year (or upon separation). (iii) Executive Employees 42. Executive Employees do not accrue vacation but are eligible to take up to four (4) weeks of paid vacation days a year depending on length of service with the Debtors. Executive Employees are not permitted to carry over unused vacation days. Executive Employees also are not eligible to accrue or take personal days. (iv) Union Employees 43. Depending on service time with the Debtors, Union Employees may accrue up to 160 hours of paid vacation time a year, commencing after a Union Employee works 1,500 hours in a calendar year. Upon separation, a Union Employee may be eligible to receive pro rata vacation pay. Union Employees may carry over a maximum of one (1) week’s vacation time to the following calendar year, and any remaining vacation time that is not carried over will be paid out to employees no later than the first regular payday of the succeeding year. In addition, Union Employees are entitled to up to six (6) paid personal days per year. Though earned and unused personal days may not be carried

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over, the Debtors pay out Union Employees on account of unused personal days on the first day of the following year. (v) Part-time Employees 44. Commencing after the completion of four (4) months of employment with the Debtors, Nonexempt Part-time Employees are eligible, depending on service time, to accrue up to two (2) weeks of paid vacation. While earned and unused vacation may be carried over—up to an aggregate of sixty (60) hours—vacation may be cashed out only upon separation from the company. In addition to paid vacation, Nonexempt Part-time Employees may receive up to twelve (12) hours of paid personal time per year, which, if unused, are subject to payout (i) on January 1 of the following year, (ii) upon separation from the company, or (ii) upon a transfer to an exempt position within the company. 45. Exempt Part-time Employees are ineligible to accrue vacation or personal days. (b) Holiday Pay 46. Depending on geographic location and employment status (i.e., union v. non-union), Employees are entitled to between seven (7) and eleven (11) paid holidays per calendar year. Generally, these paid holidays include: New Year’s Day, Martin Luther King Jr. Day, President’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving, Christmas Day, and either the day before or the day after Christmas. If a holiday falls on a Saturday or Sunday, the Debtors, in their discretion, may re-assign such paid holiday. Any Hourly Employee who must work on a paid holiday is eligible to receive payment at 1.5x that Hourly Employee’s regular hourly rate. (c) Jury Duty 47. Each Employee is eligible for paid leave for an unlimited number of days if he or she is summoned for jury duty. In 2007, the Debtors paid approximately $106,424 in paid leave on account of jury duty. (d) Bereavement 48. With some exceptions, each Employee is entitled to take up to three (3) paid bereavement days per year in the event of the death an immediate family member.9 In 2007, the Debtors paid approximately $352,035 on account of paid bereavement leave. 49. As of the Commencement Date, the Debtors estimate they have approximately $10,374,000 of accrued but unpaid prepetition obligations under the PTO Plans, of which only a very small percentage reflects earned but unused vacation time that can be converted to a cash payment obligation. This small percentage is not a current cash pay obligation because qualified Employees only are not entitled to be paid for accrued and unused vacation or personal days until the end of the calendar year or in the event of separation. Because the PTO Plans are essential to the Debtors’ Employees and failure to provide these benefits could harm Employee morale and/or encourage the premature departure of Employees, the Debtors request authority to honor all of their obligations under the PTO Plans as and when they become due. 9 Full-time

stances.

Union Employees are entitled to up to five (5) days per year depending on the circum-

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(ii) Health and Welfare Plans 50. The Debtors sponsor several Health and Welfare Plans to provide benefits to eligible Full-time Employees including, without limitation, (i) medical, prescription drug, dental, and vision plans, (ii) life insurance and accidental death and dismemberment insurance (“AD&D”), (iii) short and long-term disability benefits, and (iv) a flexible spending program for medical and dependent care (the “Flexible Spending Programs”).10 Newly hired Full-time Employees become eligible to participate in the Health and Welfare Plans on the first calendar day of the first month after they have been employed by the Debtors for sixty (60) days. Full-time Employees who (i) are reinstated within six (6) months of termination, (ii) experience a status change from part-time to full-time employment, or (iii) cease to be covered by a collective bargaining agreement may be eligible to enroll in the Debtors’ Health and Welfare Plans effective the first of the month subsequent to the date of the status change. (a) The Debtors’ Medical Plans 51. The Debtors offer medical benefits to Full-time Employees and their families through two (2) different plans, depending on the location of the Employee. As discussed below, the costs of these benefits are shared by the Debtors and the covered Full-time Employees. 52. Most Full-time Employees receive medical benefits through the Debtors’ self-insured “preferred provider organization” plan (the “PPO Plan”) administered by CareFirst Blue Cross Blue Shield (“CareFirst”). The PPO Plan works as follows: first, eligible Full-time Employees (or their medical care providers) submit their claims to CareFirst; second, upon verification of the claims, CareFirst provides the Debtors with a weekly summary of submitted claims with a request for payment; third, the Debtors process CareFirst’s request and remit payment to CareFirst on account of the claims; and, finally, CareFirst reimburses each Full-time Employee (or the Full-time Employees’ medical providers, as the case may be). 53. At the beginning of each plan year, the Debtors conduct an actuarial analysis to project the annual costs of providing PPO Plan benefits. The Debtors also use this analysis to establish the amount that will be paid by participating Full-time Employees through employee premium payments. It is the Debtors’ policy to pay approximately 70% of the projected plan costs with participating Full-time Employees paying the remaining 30% through bi-weekly payroll deductions. Based on the most recent actuarial analyses, the Debtors project annual costs on account of the PPO Plan to be approximately $26,000,000, or approximately $500,000 weekly. Actual weekly expenses remitted to CareFirst are based on the claims that were received and processed the prior week and will vary from week to week. To date, however, actual payments have been running higher than projections with the average plan-year weekly wire averaging approximately $540,000. The larger than expected claims generally are attributable to an unexpected increase in large claims (those above $10,000 per occurrence) in the first two (2) months of the plan-year. 10 Unless

specifically noted otherwise herein, Part-time Employees and Union Employees are ineligible to participate in the company-sponsored Health and Welfare Plans.

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54. The Debtors pay an average of $150,000 in advance per month to CareFirst in administrative fees for its services in connection with the PPO Plan. As of the Commencement Date, the Debtors do not owe CareFirst any accrued and unpaid prepetition amounts on account of services rendered in connection with the PPO Plan. 55. In addition to the PPO Plan, Kaiser Permanente HMO (“Kaiser”) administers a fully-insured medical plan (the “Kaiser Plan,” and together with the PPO Plan, the “Medical Plans”) to those Full-time Employees who live or work in California, Maryland, Virginia, Washington DC, or Georgia. The Debtors recently renewed the Kaiser Plan effective April 1, 2008. The Debtors expect to pay Kaiser monthly premium payments averaging approximately $300,000 for an average total of $3,600,000 in annual premium payments. Kaiser’s fees for administering the Kaiser Plan are wrapped into the Debtors’ monthly premiums. The Debtors pay their premiums on a go-forward basis and last paid their premiums to Kaiser on or around July 1, 2008; consequently, the Debtors do not owe Kaiser any prepetition amounts on account of services provided with respect to the Kaiser Plan. 56. Prescription drug coverage is provided automatically to those Full-time Employees who enroll in the Medical Plans and pay their required premiums (the “Prescription Drug Program”). Medco administers the Prescription Drug Program for those Full-time Employees who have elected CareFirst coverage; Kaiser administers the Prescription Drug Program for those Full-time Employees who have chosen the Kaiser Plan. The Debtors pay approximately $200,000 every other week for the prescription drug benefits provided to Employees under the PPO Plan.11 57. The cost of the Medical Plans is shared by the Debtors and the participating Full-time Employees. The total annual cost of premiums for the Medical Plans is approximately $36,600,000, of which approximately $25,620,000 is paid by the Debtors, and $10,980,000 is paid by the Full-time Employees. On a bi-weekly basis, the Debtors withhold from Full-time Employees’ wages amounts related to the Full-time Employees’ contributions toward the premiums for the Medical Plans, and remit the same, along with the Debtors’ portion of the premiums, on a monthly pro rata basis to CareFirst and Kaiser. As of the Commencement Date, the Debtors believe that approximately $36,761 has been collected from Full-time Employees but remains unpaid to Kaiser on account of the Kaiser Plan. Additionally, as of the Commencement Date, approximately $3.5 million of incurred claims have accrued under the PPO Plan, of which the Debtors have submitted approximately (i) $500,000 for payment by CareFirst on account of the PPO Plan and (ii) $200,000 on account of the Prescription Drug Program that remains unpaid. (b) The Debtors’ Dental Plan 58. The Debtors offer dental coverage to Full-time Employees through two different plans. As described below, the cost of the dental coverage is shared between the Debtors and the Full-time Employees. 59. First, the Debtors offer to all Full-time Employees a self-insured PPO dental plan administered by CIGNA (the “CIGNA PPO Plan”). The CIGNA 11 Payments

on account of prescription drug coverage for Employees subscribed to the Kaiser Plan are subsumed in the premium payments to Kaiser.

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PPO Plan works as follows: first, an eligible Full-time Employee (or his/her dental service provider) submits a claim directly to CIGNA; second, upon receipt and after verification of the claim, CIGNA submits the claim to the Debtors; third, the Debtors process the claim and remit payment on account of the claim to CIGNA on the same day; and, finally, CIGNA reimburses the Full-time Employee (or the Full-time Employee’s dental service provider, as the case may be). On account of the CIGNA PPO Plan, the Debtors pay CIGNA premium payments averaging approximately $231,000 per month for an approximate total of $2,772,000 in annual premium payments. Included within the monthly premium payment is the Debtors’ payment of approximately $5,000 per month to CIGNA in administrative fees for its services in connection with the CIGNA PPO Plan. As of the Commencement Date, the Debtors estimate they owe CIGNA $10,000 in accrued or unpaid prepetition amounts on account of services rendered in connection with the CIGNA PPO Plan. 60. In addition to the CIGNA PPO Plan, CIGNA administers a fully-insured dental plan (the “CIGNA HMO Plan,” and together with the CIGNA PPO Plan, the “Dental Plans”), which is available to all Full-time Employees. On account of the CIGNA HMO Plan, the Debtors pay CIGNA monthly premium payments averaging approximately $43,057 for an average total of $516,684 in annual premium payments. CIGNA’s monthly fees of approximately $20,000 for administering the CIGNA HMO Plan are wrapped into the Debtors’ monthly premiums. The Debtors last paid their premiums to CIGNA on or around July 1, 2008; consequently, the Debtors do not owe CIGNA any prepetition amounts on account of services provided under the CIGNA HMO Plan. 61. The cost of the Dental Plans is shared by the Debtors and the participating Full-time Employees. The total annual cost of premiums for the Dental Plans is approximately $3,300,000, of which approximately $1,800,000 is paid by the Full-time Employees, and $1,500,000 is paid by the Debtors. On a biweekly basis, the Debtors withhold from Full-time Employees’ wages amounts related to the Full-time Employees’ contributions toward the premiums for the Dental Plans, and remit the same, along with the Debtors’ portion of the premiums, on a monthly pro rata basis to CIGNA. As of the Commencement Date, the Debtors believe that approximately $56,527 has been collected from Full-time Employees but remains unpaid to CIGNA on account of the Dental Plans. (c) The Debtors’ Vision Plan 62. Vision Service Plan (“VSP”) administers the Debtors’ fully insured vision care plan (the “Vision Plan”). The monthly cost of premiums for the Vision Plan is approximately $42,000 and the annual cost is approximately $504,000, the entirety of which is paid by the Full-time Employees. On a bi-weekly basis, the Debtors withhold from Full-time Employees’ wages amounts related to their contributions toward premiums for the Vision Plan, and remit the same on a monthly basis to VSP. As of the Commencement Date, the Debtors believe that approximately $21,000 has been collected from Full-time Employees but remains unpaid to VSP on account of the Vision Plan. (d) Medical, Dental, and Vision Coverage for Union Employees

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63. The Debtors’ eligible Union Employees12 receive medical, dental, and vision coverage (the “Union Plan”) pursuant to the terms and provisions of the CBA between the Debtors and the Union. The Union manages and maintains the Union Plan via the Local 1-0 318 Health & Welfare Trust Fund (the “Union Fund”). On the Union Employees’ behalf, the Debtors remit monthly premiums averaging approximately $140,000 to the Union Fund. Aside from this monthly payment, the Debtors have no additional obligations under the Union Plan. The Debtors remitted their last monthly premium on July 2, 2008; therefore, as of the Commencement Date, the Debtors owe no premiums to the Union Fund. (e) Life and AD&D Insurance 64. The Debtors provide eligible Full-time Employees company-sponsored basic life and additional insurance coverage in the event of serious illness, injury, or death (the “Basic Life/AD&D Plan”). Prudential Life Insurance Co. (“Prudential”) maintains and administers the Debtors’ Basic Life/AD&D plan. The Prudential policy also provides Full-time Employees with the option to purchase supplemental voluntary life insurance and accidental death insurance for themselves and their dependents (the “Supplemental Life Insurance Plan”). 65. Under the Basic Life/AD&D Plan, in the event of a Full-time Employee’s serious illness, injury, or death, the Full-time Employee’s designee may be entitled to receive an amount equaling the Full-time Employee’s annual base salary, up to a maximum of $100,000, with additional amounts available for accidental death up to $100,000. 66. The Debtors pay 100% of the premiums with respect to the Basic Life/AD&D Plan, which costs approximately $24,908 monthly in the aggregate. To the extent a Full-time Employee elects to participate in the Supplemental Life Insurance Plan, the Debtors deduct the payment amounts from the Full-time Employee’s wages on a bi-weekly basis, and then remit the same to Prudential on a monthly basis. 67. In 2007, the Debtors paid Prudential approximately $301,498 in premiums and fees for administration of the Basic Life/AD&D Plan. As of the Commencement Date, the Debtors believe that approximately $25,124 in fees remain owing and unpaid to Prudential with respect to the Basic Life/AD&D Plan and the Supplemental Life Insurance Plan. Moreover, as of the Commencement Date, approximately $42,703 has been collected from Full-time Employees but remains unpaid to Prudential on account of the Supplemental Life Insurance Plan. 68. The Debtors also provide life insurance benefits to their Union Employees. Pursuant to the CBA, on the first day of the first month following sixty (60) days of continuous employment, Union Employees are eligible to receive $50,000 of fully-subsidized life insurance from the Debtors (the “Union Life 12 To be eligible, Union Employees must be employed continuously for three (3) months and enroll in the Union Plan. After enrollment, a Union Employee is eligible for medical coverage by the Union Fund (as defined below) on the first day of the month following three (3) consecutive months of contributions from the Debtors on the Union Employee’s behalf. All Union Employees are eligible for dental and vision coverage by the Union Fund on the first day of the month following twelve (12) consecutive months of contributions by the Debtors on the Union Employee’s behalf.

676


Insurance”).13 The Union Life Insurance plan is administered by Prudential. Including Prudential’s fees, the Debtors paid approximately $7,740 in premiums and fees to Prudential for the Union Life Insurance plan in 2007. As of the Commencement Date, the Debtors believe approximately $140 remains unpaid to Prudential on account of the Union Employees’ life coverage. (f) Disability Benefits 69. The Debtors maintain self-insured, short-term disability insurance at no cost to eligible Full-time Employees.14 The program is administered by Prudential. On the first day of the first month after sixty (60) days of continuous employment, eligible Full-time Employees may receive 66.67% of their base salary from either the first or eighth day following an injury (depending on the circumstances) up to a maximum of twenty-six (26) weeks. Short-term disability benefits that are paid to an employee are treated as taxable wages and are subject to all regular payroll deductions and taxes. 70. For those eligible Full-time Employees who are totally or partially disabled for longer than twenty-six (26) weeks, the Debtors participate in a fullyinsured long-term disability insurance program offered through Prudential, which confers benefits equal to 60% of the Employee’s basic annual earnings, up to a maximum of $10,000 per month. The maximum long-term disability benefit payment period is based on (i) the Employee’s age when the disability begins and (ii) the type of disability.15 71. To administer the self-insured, short-term disability program, the Debtors pay Prudential $2.18 per eligible Employee per month for an average monthly payment of $11,442. For the fully-insured long-term disability program, the Debtors pay Prudential monthly premiums of approximately $96,684, inclusive of Prudential’s fees. In 2007, the Debtors paid Prudential approximately $1,172,184 in fees on account of the short- and long-term disability programs. As of the Commencement Date, the Debtors believe that approximately $3,840 remains unpaid to Prudential on account of the disability programs. 72. The aggregate annual cost to the Debtors to provide short-and long-term disability insurance is approximately $2,481,696. (d) Flexible Spending Programs for Medical and Dependent Care 13 Full-time

Union Employees do not receive Basic Life/AD&D coverage. in states that also provide short-term disability benefits (New York, New Jersey or California) will have their company benefits reduced by an amount equal to their state benefit. Union Employees receive New Jersey State benefits only. 15 The Debtors also provide additional long-term disability coverage to approximately twentythree (23) current members of senior management pursuant to a supplemental long-term disability program (the “Executive Long-term Disability Program”). The Executive Long-term Disability Program is currently frozen to new participants. Under the Executive Long-term Disability Program, current participants are covered—above and beyond the company-provided long-term disability benefits—by individual policies that confer additional benefits equal to 30% of the employee’s basic annual earnings, up to a maximum of $10,000. UNUM administers the program. Monthly premiums amount to approximately $5,469, of which the Debtors contribute approximately $3,840 per month and the covered Employees contribute approximately $1,629 per month. UNUM’s fees are wrapped into the premiums. On a monthly basis, the Debtors withhold from these Employees’ wages amounts related to the Executive Long-term Disability Program and remit the same to UNUM. As of the Commencement Date, all amounts withheld by the Debtors from the Employees’ wages on account of the Executive Long-term Disability Program have been submitted to UNUM. 14 Employees

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73. The Debtors offer Full-time Employees and Union Employees two Flexible Spending Programs, one for health care costs (the “Healthcare FSA”). and one for dependent care costs (the “Dependent FSA”). The Flexible Spending Programs are administered by ADP. Pursuant to these programs, Full-time Employees and Union Employees may contribute up to $5,000 per year of pre-tax income through payroll deductions to be used for out-of-pocket medical, dental, or vision expenses under the Healthcare FSA, and up to $5,000 per year for child-care or elder-care expenses under the Dependent FSA. All Full-time Employees and Union Employees may participate in the Flexible Spending Programs beginning on their date of hire. Currently, approximately 900 eligible Employees participate in the Flexible Spending Programs. 74. ADP administers the Healthcare FSA through the use of FlexDirect debit cards. The annual amount that eligible Employees elect to set aside for the Flexible Spending Programs is credited to the Employee’s FlexDirect debit cards at the beginning of each plan year. Full-time Employees and Union Employees may then use the FlexDirect debit cards to pay for eligible expenses. Thereafter, those Employees must submit to ADP their receipts to verify that debits were on account of eligible expenses. 75. Contributions on account of the Dependent FSA are deducted on a biweekly basis from employee wages. The Debtors directly reimburse employees for eligible amounts as incurred claims are submitted. 76. Because of the manner in which expenses are incurred and claims are processed under the Dependent FSA, it is difficult for the Debtors to determine the accrued obligations outstanding under the Flexible Spending accounts at any particular time. Each business day, however, ADP draws an average of $3,600 from the Debtors’ disbursement account to reimburse employees for medical and/or dependent care claims that the employees may have submitted. The Debtors, therefore, estimate that, as of the Commencement Date, approximately $44,610 in contributions to the Dependent FSA have been deducted from eligible Employees’ pay but have not yet been reimbursed. 77. The Debtors pay ADP approximately $3,400 per month to administer the Flexible Spending Programs. As of the Commencement Date, the Debtors do not owe ADP any prepetition amounts on account of the Flexible Spending Programs. (iii) Severance 78. Prior to the Commencement Date and in the ordinary course of business, the Debtors terminated several employees on an independent basis and, in addition, initiated several reductions in force (the “RIFs”) subsuming a total of approximately sixty (60) involuntarily terminated employees. In connection with the RIFs, the Debtors launched non-standard severance programs (the “Severance Programs”)16 that entitle terminated non-executive employees to receive severance pay equal to between one and a half (1 and 1/2) weeks and sixteen (16) weeks’ pay depending upon the employees’ position and length of service. To receive severance payments under the Severance Programs, an 16 The aforementioned Severance Programs are not the result of a standard severance policy or program of the Debtors. The Debtors may change, cancel, or modify their severance programs and policies without constraint from ERISA or otherwise.

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eligible employee must have signed a separation agreement and general release form, which includes non-compete and non-solicitation provisions. As of the Commencement Date, the Debtors estimate that they owe approximately $1,743,252 on account of accrued and unpaid obligations owed under the Severance Programs, of which approximately $828,000 to $1.070,000 is to become due in the next approximately sixty (60) to ninety (90) days. The Debtors request to pay such amounts in the ordinary course of business.17 79. In addition to the aforementioned RIFs, on or about March 31, 2008, the Debtors informed approximately 125 employees that while their intention is to maintain all of their employees to the extent possible, the restructuring may necessitate the termination of their employment (the “125 Employees”). The 125 Employees consist primarily of mid-level managers, directors, and vice presidents who manage and/or oversee particular segments of the Debtors’ businesses but do not manage or oversee the Debtors as a whole. On the same date, the Debtors entered into employee agreements with the 125 Employees (the “Employment Agreements”). Pursuant to the terms of the Employment Agreements, if terminated without cause, the 125 Employees would continue to receive their weekly salary as of the date of their termination for up to twenty-four (24) to fifty-two (52) weeks, depending on the Employee’s position and length of time with the Debtors. The Employees would also be eligible to participate in their health-benefits program for the duration of their severance period. The maximum severance payable to the 125 Employees would likely total no more than $18,174,000. (iv) Other Programs 80. As discussed more fully below, in the ordinary course of their businesses, the Debtors maintain several other programs for the benefit of their Employees (the “Other Programs”). In the aggregate, the Debtors estimate that accrued and unpaid obligations related to these programs as of the Commencement Date aggregate approximately $645,000. (a) Mobility Program 81. Subject to certain approvals, certain of the Debtors’ Employees are eligible to receive a company-provided cell phone, while other qualified Employees are eligible to receive a company-provided Blackberry/PDA device (the “Mobility Program”). To effectuate the purchase of most of these devices and services, the Debtors use ProfitLine, Inc. (“ProfitLine”) as their mobility management provider. ProfitLine functions as a direct intermediary between the Debtors and various mobile services providers, including AT&T and Sprint. With respect to AT&T and Sprint, the Mobility Program functions as follows: first, ProfitLine places orders for mobile devices and related services directly with AT&T and Sprint on an Employee’s behalf; second, AT&T and Sprint forward ProfitLine a batch of invoices on compact discs, which reflect amounts due and owing to the providers, respectively; third, ProfitLine requests payment from the Debtors of the invoiced amounts; fourth, the Debtors remit payment to ProfitLine by wire transfer typically within two (2) business days; and, finally, after processing the incoming wire transfer, ProfitLine remits payment to AT&T and Sprint. 17 In

addition to the relief sought in this Motion, the Debtors intend to assume all such obligations pursuant to the Vertis Prepackaged Plan.

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82. Verizon does not use ProfitLine’s requisition and billing system. Rather, Verizon is paid pursuant to the Amex reimbursement expense procedure outlined in more detail in paragraph 30 above.18 Upon information and belief, Verizon will switch to ProfitLine’s process by the end of 2008. 83. On a monthly basis, the Debtors pay approximately $96,000 on account of the Mobility Program, exclusive of ProfitLine’s fees. In consideration for its services, the Debtors pay ProfitLine an average monthly fee of approximately $6,930. The Debtors owe ProfitLine approximately $144,000 for due and unpaid prepetition obligations in connection with the Mobility Program. (b) Tuition Reimbursement 84. The Debtors provide up to $1,500 in tuition reimbursement per eligible Full-time Employee and Union Employee, subject to a company-wide cap on tuition reimbursements of $50,000 per year. Full-time Employees and Union Employees with six (6) months of service time are eligible to receive the tuition reimbursement, provided that the educational program relates to the Employee’s work responsibilities and the Employee has obtained manager approval. Of the $50,000 budget for 2008, approximately $27,300 remains available for distribution to eligible Employees. As of the Commencement Date, there are no amounts outstanding that have been pledged to Employees on account of tuition reimbursement. (c) Employee Assistance Program 85. The Debtors maintain an employee assistance program with Magellan Health Services (“Magellan”), which offers confidential counseling to all Employees and their dependents with respect to, among other things, family issues, mental problems, stress, substance abuse, financial issues, work-related problems, eating disorders, and elder care (the “Employee Assistance Program”). The Employee Assistance Program entitles all Employees and their families to three (3) free counseling sessions per problem area, per year. All Employees are eligible to participate in the Employee Assistance Program beginning on their date of hire. The Debtors pay all costs associated with the Employee Assistance Program. The annual cost to provide this benefit is approximately $104,052. As of the Commencement Date, the Debtors do not owe Magellan any prepetition amounts on account of the Employee Assistance Program. (d) Relocation Reimbursement Plan 86. The Debtors offer a relocation reimbursement plan (the “Relocation Reimbursement Plan”) to new hires and current employees who transfer to a different geographical location. The Relocation Reimbursement Plan applies to the following three (3) categories of employees and the level of benefits varies for each: (i) Executive Employees (e.g., Vice-Presidents and above); (ii) exempt Salaried Employees (e.g., Salaried Employees junior to Vice-Presidents); and (iii) Hourly Employees. The scope of benefits varies among the three (3) categories of employees covered by the Relocation Reimbursement Plan, but in general includes reimbursement for residence-finding trips, temporary residence expense, moving expenses, home equity advances and similar types of arrangements. The Debtors have entered into an agreement with a relocation 18 To the extent Verizon is due any prepetition amounts on account of the Mobility Program, those amounts are subsumed in the aggregate amount that remains outstanding as an Expense Reimbursement in paragraph 31 above.

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services provider, American International Relocation Solutions LLC (“AIReS”), to administer the Relocation Reimbursement Plan. As of the Commencement Date, the Debtors do not owe AIReS any prepetition amounts on account of services rendered by AIReS pursuant to the Relocation Reimbursement Plan.19 A lag in reimbursements requests, however, makes it difficult for the Debtors to determine the amount of relocation reimbursements outstanding at any particular time. The Debtors are currently aware of no outstanding relocation reimbursements as of the Commencement Date.20 Based upon the Debtors’ budget for relocation expenses, however, the Debtors estimate that there may be approximately $500,000 in unreported relocation reimbursements outstanding. Accordingly, the Debtors request authority to pay approximately $500,000 with respect to relocation reimbursements incurred prepetition. (e) Military Leave Policy 87. The Debtors have a military leave policy, pursuant to which the Debtors compensate Employees who are on military training leave for any difference between the amount the military compensates those employees and the amount the Employee is otherwise paid by the Debtors (the “Military Leave Policy”). When needed, Employees are eligible to take advantage of the Military Leave Policy as of their date of hire, for up to six (6) months of active duty. There were no costs incurred with respect to this benefit in 2007 and, as of the Commencement Date, there are no outstanding amounts due thereunder. 19 Pursuant to the Relocation Reimbursement Plan, the Debtors and John Howard, the Debtors’ Chief Legal Officer, entered into a letter agreement, dated September 12, 2007, as amended (the “Letter Agreement”) concerning the relocation of Mr. Howard to Boulder, Colorado to manage the Debtors’ Digital Solutions Group. In connection therewith, Mr. Howard also entered into a purchase and sale agreement directly with AIReS, dated December 26,2007 (the “Purchase Agreement”), pursuant to which AIReS purchased Mr. Howard’s house and Mr. Howard received the estimated equity value of the house. The purchase price was calculated according to the appraisal procedures normally utilized by AIReS. Pursuant to the Purchase Agreement, however, the house remains subject to Mr. Howard’s mortgage until the final sale thereof to a third-party buyer and AIReS makes the mortgage payments while it facilitates such a sale. The Debtors advance to AIReS all amounts payable by AIReS under the Relocation Reimbursement Plan, including the equity given to Mr. Howard by AIReS, as well as the monthly mortgage payments, which the Debtors continue to fund. The total mortgage payments amount to approximately $3,000 per month. Upon the sale of the house to a third-party buyer, the Debtors are entitled to the sale proceeds, net of the mortgage. To ensure a smooth sale process, the Debtors would continue advancing the mortgage payments pursuant to the Relocation Reimbursement Agreement to avoid defaulting on the mortgage and ultimate foreclosure. Upon review of the documents, the parties agreed that because the house remains subject to Mr. Howard’s mortgage subject to the final sale, certain amendments were necessary to clarify Mr. Howard’s rights in the event of default either by the Debtors or AIReS. As such, on April 30,2008, the Purchase Agreement was amended to clarify that upon a default by AIReS in its obligations under the Purchase Agreement, Mr. Howard shall have the option to exercise full control over the sale or lease of the house, fund the remaining mortgage payments and deduct any reasonable outof-pocket costs incurred in connection with the sale from the sale proceeds. On April 30, 2008, the Letter Agreement was amended to clarify that upon the default by the Debtors in their obligations under the Relocation Reimbursement Plan and/or the Letter Agreement, Mr. Howard may resign and will not be required to repay the Debtors any percentage of the relocation expenses. Pursuant to the Purchase Agreement, AIReS currently is marketing the home to potential third-party buyers. 20 Although the Debtors are not aware of any such amounts due, as of the Commencement Date, thirty-one (31) employees are eligible to receive reimbursements pursuant to the Relocation Reimbursement Plan. Typically, the Debtors incur $100,000 per month in expenses on account of the Relocation Reimbursement Plan.

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(f) Automobile Allowance 88. Approximately 145 Employees are entitled to a monthly automobile allowance (the “Automobile Allowance”) as a component of their salary. The monthly amounts range from $350 to $1,000, depending on the Employees’ positions with the Debtors. The aggregate monthly amount paid to all Employees on account of Automobile Allowances totals approximately $98,000.21 Automobile Allowances are paid on a monthly basis in conjunction with Employee salary and wage disbursements and are subject to Withholding Taxes. (g) Long-term Care Program 89. Certain Employees participate in a long-term care program that will provide benefits towards the cost of nursing home care or other elderly care benefits (the “Long-term Care Program”).22 The Long-term Care Program is administered by UNUM. The Long-term Care Program is voluntary and any Employee electing to participate must incur 100% of the cost of the program. On a biweekly basis, the Debtors deduct the costs of the Long-term Care Program from the Employees’ after-tax wages and pass on those monthly amounts—which include amounts related to fees—to UNUM. As of the Commencement Date, the Debtors believe they have collected $1,210 from Employees that remains unpaid to UNUM on account of the Long-term Care Program. (h) Voluntary Benefits Program 90. The Debtors also provide voluntary benefits including (i) critical illness insurance, (ii) auto and home insurance, and (iii) group legal coverage (the “Voluntary Benefits Program”) administered by MetLife. The Voluntary Benefits Programs are offered as a supplement to the Debtors’ regular benefits and when an Employee elects to participate in any of the Voluntary Benefits Programs, the Debtors deduct the costs of the programs from the electing Employee’s after-tax wages and pass those amounts on to MetLife. The Debtors incur no expenses on account of these programs. Retirement Plans and Benefits 91. The Debtors maintain (i) a 401(k) Plan and a Union 401(k) Plan, (ii) two qualified non-contributory defined benefit pension plans (the Webcraft Retirement Income Plan (“WRIP”) and the Webcraft Service Related Pension Plan (the “WSRPP,” and, together with the WRIP, the “Qualified Pension Plans”)) and (iii) two nonqualified retirement plans (the Vertis Deferred Compensation Plan (the “DCP”), and the Vertis Supplemental Executive Retirement Plan (“SERP,” together with the DCP, the “Nonqualified Pension Plans”) (collectively, the “Retirement Plans,” and the amounts required to be paid by the Debtors pursuant thereto are collectively referred to as the “Retirement Plans and Benefits Obligations”)). The Debtors continue to have Retirement Plans and Benefits Obligations with respect to those individual Employees who are retired as of the Commencement Date as well as to Employees who will retire during the pendency of the Debtors’ chapter 11 cases (the “Retirees”).

21 In

addition, the Debtors reimburse Employees who do not receive an Automobile Allowance for mileage incurred in connection with the Employee’s use of a personal car for business purposes. 22 The Debtors’ Long-term Care Program is a non-ERISA program. Therefore, the Debtors have no filing or reporting requirements with respect to the Long-term Care Program.

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(i) 401(k) Plan 92. The Debtors sponsor a retirement investment plan and withhold from the wages of participating Full-time Employees and Part-time Employees contributions toward the Debtors’ 401(k) Plan. To participate, Full-time Employees and Part-time Employees must complete fifteen (15) days of service with the Debtors. Eligible Full-time Employees and Part-time Employees may contribute to the 401(k) Plan on a pre-tax and post-tax basis. Under the plan, for every dollar an employee contributes up to the first 6% of the employee’s eligible earnings, the Debtors make a matching contribution of $0.50 (the “Matching Contributions”), but these contributions do not vest immediately. Beginning after the first anniversary of an employee’s date of hire, Matching Contributions vest at a rate of twenty-five percent (25%) per year for each of the first four (4) years of employment. Therefore, after four (4) years of continuous employment, 100% of the Debtors’ Matching Contributions vest to the employees. In 2007, the Debtors contributed approximately $5.2 million in Matching Contributions to employee 401(k) accounts. 93. The 401(k) Plan is administered by Mercer HR Services (“Mercer”). Employee contributions are deducted and forwarded, with the Matching Contributions, on a weekly basis to Mercer to invest. The Debtors pay Mercer approximately $68,000 per year to administer the 401(k) Plan over and above certain fees Mercer collects from participants. As of the Commencement Date, the Debtors estimate that they have approximately $306,854 outstanding in accrued and undeposited prepetition obligations relating to 401(k) Plan withholding obligations and Matching Contributions. The Debtors currently have no outstanding amounts owed to Mercer on account of the 401(k) Plan. (ii) Union 401(k) Plan 94. For the Union Employees, the Debtors maintain the Webcraft Employees Accumulated Savings Trust Plan, a 401(k) plan that is identical to the 401(k) Plan in all material respects (the “Union 401(k) Plan”). In 2007, 182 Union Employees participated in the Union 401(k) Plan, and the Debtors contributed approximately $195,167 in Matching Contributions on account of the Union 401(k) Plan. Mercer also administers the Union 401(k) Plan at an approximate annual cost of $3,000. As of the Commencement Date, the Debtors estimate that they have approximately $25,535 outstanding in accrued and undeposited prepetition obligations relating to Union 401(k) Plan withholding obligations and Matching Contributions. The Debtors currently have no outstanding amounts owed to Mercer on account of the Union 401(k) Plan. (iii) The Qualified Pension Plans 95. The Debtors froze the WRIP to new participants on November 30, 1998 and froze the WSRPP to new participants on February 15, 2005—Employees may no longer join these plans. Prior to that time, certain Employees who were employed with the Debtors for at least one (1) year (1,000 hours) were eligible to participate in the Qualified Pension Plans. Currently, 383 employees are participants in WRIP, and 143 employees are participants in WSRPP. Benefits under the Qualified Pension Plans vest after five (5) years of service and participants become eligible to collect benefits upon reaching the age of 65. The Debtors are

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required to make contributions to the Qualified Pension Plans in accordance with the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended, to ensure that the plans are funded. The Debtors contribute the following payments on a quarterly basis: (a) on account of WRIP, $335,000; and (b) on account of WSRPP, $125,000 (the “Qualified Pension Plan Payments”). The Debtors made their last quarterly payment on July 14, 2008; therefore, the Debtors have no Qualified Pension Plan Payments outstanding. 96. The Debtors administer the Qualified Pension Plans internally. The assets, however, are held by SEI Investments (“SEI”). SEI’s fees are deducted from plan assets and built into the Qualified Pension Plan Payments. SEI provides services related to, among other things, investment, reporting, processing and paying benefits, and tax compliance in connection with the Qualified Pension Plans. 97. Retirees may elect to receive payments from the Qualified Pension Plans in one of the following ways: (i) upon separation from the company, Retirees may opt to take a lump sum payment; or (ii) Retirees may select an annuity plan and receive annual payments until death, or, in the case of a “joint survivor annuity,” over the life of the Retiree and the Retiree’s chosen dependent. SEI administers these payments. 98. As of the last annual valuation date, the current liability (as calculated pursuant to the Pension Protection Act of 2006) for the WSRPP is $6,613,030, and the current liability for the WRIP is $16,734,138.23 (iv) Non-Qualified Pension Plans 99. The DCP is a defined contribution retirement plan that, prior to its freeze on January 1,2008, was funded solely by Employee deferrals. Neither the Debtors nor the Employees are currently making any contributions to the DCP. The day-to-day management (i.e., distribution, among other things) of the DCP is administered by Mullin TBG (“Mullin”), while the contributed assets are maintained in a rabbi trust (the “Rabbi Trust”) managed by First American Trust (“FAMT”). After retirement, most participants receive payments under the DCP on an annual basis with the next payment due on February 1, 2009.24 In total, as of April 15, 2008, approximately $443,000 in liabilities exist against the DCP. The Debtors pay Mullin payments aggregating to approximately $1,500 per quarter and FAMT payments aggregating to approximately $1,750 per quarter for services rendered in connection with the DCP. As of the Commencement Date, the Debtors do not owe Mullin any fees or any monthly payments to Retirees on account of the DCP; however, the Debtors do owe FAMT approximately $800 of accrued and outstanding monthly fees on account of the DCP. 100. Before it was frozen to new participants several years ago, certain executives were enrolled in the SERP, a supplemental defined benefit retirement 23 The Debtors are in compliance with current funding obligations as set by the Pension Benefit Guaranty Corporation. 24 Subject to certain fees and other applicable penalties, participants may elect to (i) receive payments prior to retirement or (ii) initiate an early distribution of all funds. One participant currently receives monthly payments of $740.

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plan. Unlike the DCP, the SERP was entirely company-funded. Payments under the SERP can only be made as an annuity stream to Employees of retirement age (generally 65, or 62 in those instances where employees qualify for early retirement). The Rabbi Trust holds all assets attributable to the SERP and is managed by FAMT for the benefit of SERP participants. Although the Debtors maintain no further obligation to fund the Rabbi Trust, the Debtors have continuing obligations under the SERP to (i) thirty-seven (37) current employees and separated non–retirement age former employees and (ii) thirty-nine (39) Retirees. Currently, the Retirees receive monthly benefits under the SERP of between $88,000 and $132,643, averaging approximately $95,800 per month over the course of a year.25 As of the Debtors’ December 31, 2007 valuation of the SERP, total obligations under the SERP equal approximately $15,902,557, which constitutes the present value of SERP liabilities, future payments and promised benefits. 101. The Debtors pay FAMT approximately $2,050 on a quarterly basis for services rendered in connection with the SERP. As of the Commencement Date, the Debtors owe FAMT approximately $1,950 in outstanding fees on account of the SERP. Cause Exists to Authorize the Payment of the Debtors’ Employees 102. Pursuant to section 507(a)(4)(A) of the Bankruptcy Code, claims of employees against a debtor for “wages, salaries, or commissions, including vacation, severance, and sick leave pay” earned within 180 days before the Commencement Date are afforded priority unsecured status to the extent of $10,950 per individual. 11 U.S.C. § 507(a)(4)(A). Similarly, section 507(a)(5) of the Bankruptcy Code provides that employees’ claims for contributions to certain employee benefit plans are also afforded priority unsecured status to the extent of $10,950 per employee covered by such plan, less any amount paid pursuant to Bankruptcy Code section 507(a)(4). Id. § 507(a)(5). 103. Furthermore, section 363(b)(1) of the Bankruptcy Code provides, “[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” Id. § 363(b)(1). Section 105(a) of the Bankruptcy Code further provides: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

Id. §105(a). 104. The Debtors believe that a substantial portion of the Employee Obligations relating to the period prior to the Commencement Date constitutes priority claims under sections 507(a)(4) and (5) of the Bankruptcy Code. As priority 25 The Debtors make payments to Retirees on account of the SERP in conjunction with total payroll; therefore, to the extent the Debtors have any accrued and outstanding obligations under the SERP, those obligations are reflected in paragraph 24 above.

8.2


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claims, these obligations must be paid in full before any of the Debtors’ general unsecured obligations may be satisfied. Accordingly, the relief requested will affect only the timing of the payment of these priority obligations, and should not prejudice the rights of general unsecured creditors or other parties in interest. 105. The Debtors submit that, to the extent any Employee is owed in excess of $10,950, satisfaction and payment of such amount is necessary and appropriate, and may be authorized under sections 105(a) and 363(b) of the Bankruptcy Code pursuant to the “doctrine of necessity.” The “doctrine of necessity” functions in a chapter 11 case as a mechanism by which the bankruptcy court can exercise its equitable power to allow payment of critical prepetition claims not explicitly authorized by the Bankruptcy Code and further supports the relief requested herein. See In re Lehigh & New England Ry. Co., 657 F.2d 570, 581 (3rd Cir. 1981) (holding that a court may authorize payment of prepetition claims if such payment is essential to continued operation of the debtor); In re Ionosphere Clubs, Inc., 98 B.R. 174, 176 (Bankr. S.D.N.Y. 1989) (authorizing the payment of prepetition employee wages and benefits while acknowledging that judicial power to “authorize a debtor in a reorganization case to pay prepetition claims where such payment is essential to the continued operation of the debtor”); see also In re Just for Feet, Inc., 242 B.R. 821, 824-25 (D. Del. 1999) (holding that Bankruptcy Code section 105(a) “provides a statutory basis for the payment of pre-petition claims” under the doctrine of necessity and noting that the Supreme Court, the United States Circuit Court of Appeals for the Third Circuit, and the District Court of Delaware all accept the authority of the bankruptcy court “to authorize payment of prepetition claims when such payment is necessary for the debtor’s survival during chapter 11”); In re Columbia Gas Sys., Inc., 171 B.R. 189, 191-92 (Bankr. D. Del. 1994) (explaining that the doctrine of necessity is the standard in the Third Circuit for enabling a court to authorize the payment of prepetition claims prior to confirmation of a reorganization plan). The rationale for the “doctrine of necessity” is consistent with the paramount goal of chapter 11—“facilitating the continued operation and rehabilitation of the debtor.. . .” Ionosphere Clubs, 98 B.R. at 176. Accordingly, pursuant to section 105(a) and 363(b) of the Bankruptcy Code, this Court is empowered to grant the relief requested herein. 106. The Debtors submit, that, as set forth above, payments made in connection with the Employee Obligations and Employee Programs are justified by the facts and circumstances of the case. Courts in this and other districts have ruled that the standard for approval under section 503(c)(3)—that the programs are justified by the facts and circumstances of the case—is essentially the same as the standard for similar transactions under section 363(b)(1) of the Bankruptcy Code: the business judgment standard. As Judge Walrath remarked recently, “[I] find [the 503(c) standard] quite frankly nothing more than a reiteration of the standard under section 363.” See Transcript from In re Nobex Corp., Case No. 05-20050, Docket No. 194, p. 86 (Bankr. D. Del. Jan. 12, 2006) See also Dana, 358 B.R. at 584 (reviewing bonus plans under the business judgment standard). Thus, payments in connection with Employee Obligations are allowed under section 503(c)(3) of the Bankruptcy Code because, as set forth above, they represent a sound business judgment under section 363 and they are in the best business interest of the Debtors’ estates and their creditors.

686


107. In this case, any delay or failure to pay wages, salaries, expense reimbursements (including Amex obligations), benefits, severance, and other similar items could irreparably impair the Employees’ morale, dedication, confidence, and cooperation, and could adversely impact the Debtors’ relationship with the Employees at a time when the Employees’ support is critical to the success of the Debtors’ chapter 11 cases. The Debtors simply cannot risk the substantial damage to their businesses that would inevitably attend any decline in their Employees’ morale. Moreover, because these prepackaged cases are advancing under a compressed schedule and because general unsecured claims are unimpaired under the Vertis Prepackaged Plan, paying the Employees in the ordinary course of business will enable the Debtors to operate smoothly during these cases. Such relief allows the Debtors to focus on consummating the Vertis Prepackaged Plan for the benefit of the Debtors, their estates, and their creditors. Under these circumstances, approval of the requested relief is appropriate. 108. Absent an order granting the relief requested herein, the Employees could suffer undue hardship and, in many instances, serious financial difficulties, as the amounts in question may be needed to enable certain of the Employees to meet their own personal financial obligations. Without the requested relief, the stability of the Debtors will be undermined, perhaps irreparably, by the distinct possibility that otherwise loyal Employees will seek other employment alternatives. In addition, it would be inequitable to require the Employees to bear personally the cost of any business expenses they incurred prepetition on behalf of the Debtors with the understanding that they would be reimbursed. 109. Moreover, the continuation of the Severance Programs offers financial protection and support for employees who have been displaced due to business circumstances. Cessation of severance payments to the former employees may result in lower morale and loyalty among the remaining Employees—many of whom have developed strong and lasting relationships with those who have been terminated—and cause those remaining Employees to perform their duties at less-than-optimal levels, or lead them to seek other employment. This will severely hinder the Debtors’ ability to reorganize. 110. With respect to Payroll Taxes in particular, the payment of such taxes will not prejudice other creditors of the Debtors, as the relevant Taxing Authorities generally would hold priority claims under section 507(a)(8) of the Bankruptcy Code with respect to such obligations. Moreover, the portion of the Payroll Taxes withheld from an employee’s wages on behalf of an applicable Taxing Authority are held in trust by the Debtors. As such, these Payroll Taxes are not property of the Debtors’ estates under section 541 of the Bankruptcy Code. See, e.g., Begier v. IRS, 496 U.S. 53 (1990) (concluding that withholding taxes are property held by a debtor in trust for another and, as such, are not property of the debtor’s estate). 111. In addition, the Debtors believe it is necessary to continue payment of administrative fees to the administrators of the Debtors’ Employee Obligations and to the administrators of programs related to Employee Benefits. Without the continued service of these administrators, including, but not limited to, ADP, Mercer, SEI, and Mullin, the Debtors will be unable to continue to honor their obligations under these programs in an efficient and cost-effective manner.

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112. The Debtors do not seek to alter any of the Employee Benefits at this time. This Motion is intended only to permit the Debtors, in their discretion, to (i) make payments consistent with existing policies to the extent that, without the benefit of an order approving this Motion, such payments may be inconsistent with the relevant provisions of the Bankruptcy Code, and (ii) continue to honor practices, programs, and policies with respect to their Employees, as such practices, programs, and policies were in effect as of the Commencement Date. Payment of all Employee Obligations in accordance with the Debtors’ prepetition business practices is in the best interests of the Debtors’ estates, their creditors, and all parties in interest, and will enable the Debtors to continue to operate their businesses in an economic and efficient manner without disruption. The Debtors’ Employees are central to their businesses and are vital to these chapter 11 cases, and failure to pay the Employee Obligations would have a detrimental impact on the Debtors, their value, and their reorganization efforts. The total amount sought to be paid herein is relatively modest compared with the size of the Debtors’ overall businesses and the importance of the Employees to the Debtors’ chapter 11 cases. 113. In other chapter 11 cases, courts in this district have approved payment of prepetition claims for compensation, benefits, and expense reimbursements similar to those described herein. See, e.g., In re Tropicana Entertainment, LLC, Case No. 08-10856 (KJC) (Bankr. D. Del. May 6, 2008); In re Sharper Image Corp., Case No. 08-10322 (KG) (Bankr. D. Del. Feb. 20, 2008); In re Charys Holding Company, Inc., and Crochet & Borel Services, Inc., Case No. 08-10289 (BLS) (Bankr. D. Del. Feb. 15, 2008); In re Holley Performance Products, Inc., Case No. 08-10256 (PJW) (Bankr. D. Del. Feb. 12, 2008); In re Buffets Holdings, Inc., Ch. 11 Case No. 08-10141 (MFW) (Bankr. D. Del. Jan. 23, 2008); In re Am. Home Mortg. Holdings, Inc., Ch. 11 Case No. 07-11047 (CSS) (Bankr. D. Del. Aug. 7, 2007); In re Hancock Fabrics, Inc., Case No. 07-10353 (BLS) (Bankr. D. Del. Mar. 22, 2007); In re Sea Containers Ltd., Ch. 11 Case No. 06-22256 (MFW) (Bankr. D. Del. Oct. 27, 2006); In re Foamex International Inc., Case No. 05-12685 (PJW) (Bankr. D. Del. Sept. 20, 2005); In re Maxide Acquisition, Inc., Case No. 05-10429 (MFW) (Bankr. D. Del. Feb. 15, 2005). 114. Accordingly, by this Motion, the Debtors seek authority, pursuant to sections 105(a) and 363(b) of the Bankruptcy Code to continue to provide Employee Benefits and pay Employee Obligations, at their discretion, as they become due and owing during the pendency of these cases and to continue, uninterrupted, all practices, programs and policies with respect to the Debtors’ employees, as such practices, programs and policies were in effect as of the Commencement Date. Reservation of Rights 115. Nothing contained herein is intended or shall be construed as (i) an admission as to the validity of any claim against the Debtors, (ii) a waiver of the Debtors’ or any party in interest’s rights to dispute any claim, or (iii) an approval or assumption of any agreement, contract, program, policy or lease under section 365 of the Bankruptcy Code. Likewise, if this Court grants the relief sought herein, any payment made pursuant to the Court’s order is not intended and should not be construed as an admission to the validity of any claim or a waiver of the Debtors’ rights to dispute such claim subsequently.

688


Finally, the relief requested herein shall not oblige the Debtors to accept any services, to accept the shipment of goods, or prevent the Debtors from returning or rejecting goods. Request for Authority for Banks to Honor and Pay Checks Issued and Electronic Funds Transferred to Pay Employee Obligations 116. The Debtors further request that the Court authorize and direct all applicable banks and other financial institutions to receive, process, honor and pay any and all checks drawn or electronic funds transferred to pay Employee Obligations, whether such checks were presented prior to or after the Commencement Date; provided, however, such checks or electronic transfers are identified by the Debtors as relating directly to the authorized payment of Employee Obligations. The Debtors also seek authority to issue new postpetition checks, or effect new electronic fund transfers, on account of such claims to replace any prepetition checks or electronic fund transfer requests that may be dishonored or rejected as a result of the commencement of the Debtors’ chapter 11 cases. The Debtors submit that they have sufficient cash reserves to pay such amounts as they become due in the ordinary course of the Debtors’ businesses. The Debtors Satisfy Bankruptcy Rule 6003 117. Bankruptcy Rule 6003 provides that to the extent relief is necessary to avoid immediate and irreparable harm, a bankruptcy court may approve a motion to “pay all or part of a claim that arose before the filing of the petition” prior to twenty (20) days after the Commencement Date. FED. R. BANKR. P. 6003. As described above and in the Stegenga Declaration, the Debtors’ business operations rely heavily on the Debtors’ Employees. The Debtors submit that the relief requested in this Motion is necessary to avoid immediate and irreparable harm to the Debtors, as described herein, and that Bankruptcy Rule 6003 has been satisfied. Waiver of Bankruptcy Rules 6004(a) and (h) 118. To implement the foregoing successfully, the Debtors seek a waiver of the notice requirements under Bankruptcy Rule 6004(a) and the ten-day stay of an order authorizing the use, sale, or lease of property under Bankruptcy Rule 6004(h). The Relief Requested Is Appropriate 119. This Motion and relief requested herein is further supported by the prepackaged nature of these cases and has been consented to by the agent for the proposed postpetition secured lending credit facility and the Vertis Informal Committees (as defined in the Vertis Prepackaged Plan). As set forth above and in greater detail in the Stegenga Declaration and the FBG Affidavit, the Debtors and the ACG Debtors solicited votes on the Prepackaged Plans from all classes of holders of claims entitled to vote to accept or reject the Prepackaged Plans. The votes tabulated and received from these classes demonstrate overwhelming acceptance of the Prepackaged Plans. The most critical and complex task required to effectuate a successful reorganization—the negotiation and formulation of a chapter 11 plan of reorganization—has already been accomplished.

8.2


689

Thus, the Debtors respectfully submit that given the backdrop of these prepackaged chapter 11 cases, the relief requested herein is appropriate inasmuch as such relief will assist the Debtors to move towards expeditious confirmation of the widely-supported Prepackaged Plans with the least possible disruption or harm to their businesses. Moreover, the relief requested is supported by the Debtors’ major creditor groups. Based on the foregoing, the Debtors submit that the relief requested is necessary and appropriate, is in the best interests of their estates and creditors, and should be granted in all respects. Notice 120. No trustee, examiner or statutory creditors’ committee has been appointed in these chapter 11 cases. Notice of this Motion has been provided to: (i) the United States Trustee for the District of Delaware; (ii) the Debtors’ thirty (30) largest unsecured creditors (on a consolidated basis); (iii) Winston & Strawn LLP, 35 W. Wacker Drive, Chicago, Illinois 60601, Attn: Brian I. Swett, Esq., and Winston & Strawn LLP, 200 Park Avenue, New York, New York 10166, Attn: William D. Brewer, Esq., as counsel to the agent under the Debtors’ postpetition senior secured credit agreement and prepetition senior secured credit agreement; (iv) Emmet, Marvin & Martin, LLP, 120 Broadway, 32nd Floor, New York, New York 10271, Attn: Edward P. Zujkowski, Esq., as counsel to The Bank of New York, as indenture trustee under the 93/4 % Indenture, the 10 7/8% Indenture, and the 131/2 % Indenture; (v) Akin Gump Strauss Hauer & Feld LLP, 590 Madison Avenue, New York, New York 10022, Attn: Ira Dizengoff, Esq. and David Simonds, Esq., and Pepper Hamilton LLP, Hercules Plaza, Suite 5100, 1515 Market Street, Wilmington, DE 19899-1709, Attn: David M. Fournier, Esq., as co-counsel to the Vertis Informal Committee;26 (vi) Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, Attn: Kristopher M. Hansen, Esq. and Jayme T. Goldstein, Esq., as counsel to the Vertis Second Lien Noteholder Group; (vii) Dewey & LeBoeuf LLP, 1301 Avenue of the Americas, New York, New York 10019, Attn: Martin J. Bienenstock, Esq., as counsel to those certain holders of notes under the 131/2 % Indenture that are signatories to the Restructuring Agreement; (viii) Ropes & Gray LLP, One International Place, Boston, MA 02110, Attn: Steven T. Hoort, Esq., as counsel to certain Vertis shareholders; (ix) Wollmuth Maher & Deutsch LLP, 500 Fifth Avenue, New York, New York 10110, Attn: Paul R. DeFilippo, Esq., and Manton, Sweeney, Gallo, Reich & Bolz, 92-25 Queens Blvd., Rego Park, New York 11374, Attn: Frank Bolz, Esq., as counsel to CLI; (x) Simpson Thatcher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017, Attn: Mark J. Thompson, Esq. as counsel to the Evercore Parties; (xi) Kirkland & Ellis LLP, Citigroup Center, 153 East 53rd Street, New York, New York 10022-4611, Attn: Paul M. Basta, Esq., and Kirkland & Ellis LLP, Aon Center, 200 East Randolph Drive, Chicago, Illinois 60601, Attn: Ray C. Schrock, Esq. and Chad J. Husnick, Esq., as counsel to the ACG Debtors; and (xii) Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, New York 10005, Attn: Dennis F. Dunne, Esq., Abhilash M. Raval, Esq., and Debra Alligood White, Esq., as counsel to the ACG Informal Committee 26 Capitalized terms used and not otherwise defined in this section shall have the meanings ascribed


690


((i) through (xii), collectively, the “Notice Parties”). The Debtors submit that no other or further notice need be provided. No Previous Request 121. No previous request for the relief sought herein has been made to this or any other court. WHEREFORE the Debtors respectfully request entry of the Proposed Order granting the relief requested herein and such other and further relief as the Court may deem just and appropriate. Dated: July 15, 2008 Wilmington, Delaware WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 (212) 310-8000 Gary T. Holtzer Stephen A. Youngman -andRICHARDS, LAYTON & FINGER, P.A. One Rodney Square P.O. Box 551 Wilmington, Delaware 19899 (302) 651-7700 By: Mark D. Collins (No. 2981) Michael J. Merchant (No. 3854) ATTORNEYS FOR THE DEBTORS AND DEBTORS IN POSSESSION

8.2

691


Exhibit A Proposed Order IN THE UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ————————————————— x : In re : Chapter 11 : VERTIS HOLDINGS, INC., et al., : Case No. 08: : (Jointly Administered) Debtors. : : ————————————————— x

( )

ORDER PURSUANT TO SECTIONS 105(a), 363(b), AND 507(a) OF THE BANKRUPTCY CODE (I) AUTHORIZING PAYMENT OF WAGES, SALARIES, COMPENSATION AND EMPLOYEE BENEFITS AND (II) AUTHORIZING FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS Upon the motion dated July 15, 2008 (the “Motion”) of Vertis Holdings, Inc., and its affiliated debtors in the above-referenced chapter 11 cases, as debtors and debtors in possession (collectively, the “Debtors”),27 for entry of an order pursuant to sections 105(a) and 363(b) of the Bankruptcy Code,28 authorizing (i) payment of wages, salaries, compensation and employee benefits and (ii) the Debtors’ banks and financial institutions to honor and process checks and electronic funds transfers related to such obligations, all as more fully described in the Motion; and upon consideration of the Stegenga Declaration and the FBG Affidavit; and the Court having jurisdiction to consider the Motion and the relief requested therein pursuant to 28 U.S.C. §§ 157 and 1334; and consideration of the Motion and the relief requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b); and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409; and due and proper notice of the Motion having been provided to the Notice Parties, and it appearing that no other or further notice need be provided; and the Court having determined that the relief sought in the Motion is in the best interests of the Debtors, their creditors, and all parties in interest; and the Court having determined that the legal and factual bases set forth in the Motion establish just cause for the relief granted herein; and 27 The

Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are Vertis Holdings (1556), Vertis, Inc. (8322), Webcraft, LLC (6725), Webcraft Chemicals, LLC (6726), Enteron Group, LLC (3909), Vertis Mailing, LLC (4084), and USA Direct, LLC (5311). 28 Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Motion.

692


upon all of the proceedings had before the Court and after due deliberation and sufficient cause appearing therefor, it is ORDERED that the Motion is granted; and it is further ORDERED that, pursuant to sections 105(a) and 363(b) of the Bankruptcy Code, the Debtors are authorized, but not required, to satisfy all prepetition Employee Obligations without further Order of the Court, and in accordance with the Debtors’ stated policies, including, without limitation, all obligations with respect to (i) salary, wages and commissions, (ii) garnishments, (iii) payroll taxes, (iv) reimbursement expenses, (v) paid time off benefits, (vi) health and welfare benefit plans, (vii) certain severance payments, (viii) retirement savings plans, and (ix) all obligations with respect to insurance policies and coverage related to the foregoing; and it is further ORDERED that the Debtors are authorized, but not required, to continue to honor all practices, programs, and policies with respect to the Employees as such practices, programs, and policies were in effect as of the date of the Commencement Date, including, but not limited to the Employee Obligations and Employee Benefits; and it is further ORDERED that the Debtors are authorized, but not required, to pay costs and expenses incidental to the payment of the Employee Obligations, including all administration and processing costs and payments to third parties, in the ordinary course of business, to facilitate the administration and maintenance of the Debtors’ programs and policies related to the Employee Obligations; and it is further ORDERED that nothing in this Order nor any action taken by the Debtors in furtherance of the implementation hereof shall be deemed an approval of the assumption or rejection of any executory contract or unexpired lease pursuant to section 365 of the Bankruptcy Code; and it is further ORDERED that nothing in this Order shall impair the ability of the Debtors or appropriate party in interest to contest any claim of any creditor pursuant to applicable law or otherwise dispute, contest, set off, or recoup any claim, or assert any rights, claims or defenses related thereto; and it is further ORDERED that Bank of America and all other applicable banks or financial institutions are authorized, when requested by the Debtors in the Debtors’ sole discretion, to receive, process, honor and pay all checks drawn on or direct deposit and funds transfer instructions relating to the Debtors’ accounts and any other transfers that are related to Employee Obligations and the costs and expenses incident thereto; provided that sufficient funds are available in the accounts to make such payments; provided further that any such bank or financial institution may rely on the representations of the Debtors regarding which checks that were drawn or instructions that were issued by the Debtors before the Commencement Date should be honored postpetition pursuant to an Order of this Court and that any such bank or financial institution shall not have any liability to any party for relying on the representations of the Debtors as provided herein; and it is further ORDERED that Rule 6003 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) has been satisfied because the relief requested in the Motion is necessary to avoid immediate and irreparable harm to the Debtors; and it is further

8.2


693

ORDERED that notwithstanding any applicability of Bankruptcy Rule 6004(h), the terms and conditions of this Order shall be immediately effective and enforceable upon its entry; and it is further ORDERED that notice of the Motion as provided therein shall be deemed good and sufficient notice of such Motion and the requirements of Bankruptcy Rule 6004(a) are hereby waived; and it is further ORDERED that this Court shall retain jurisdiction to hear and determine all matters arising from or related to the implementation, interpretation, and/or enforcement of this Order. , 2008 Dated: Wilmington, Delaware UNITED STATES BANKRUPTCY JUDGE

694


8.3 Sample Application Allowing Payments to Retail Customers (Warranty Claims) Objective. Section 8.8(a) of Volume 1 describes the types of first-day orders that are issued to maintain customer goodwill. This application allowed warranty payments to be made to retail customers for refund of overpayments on charge accounts, for return of unsatisfactory merchandise purchased prepetition (cash payments or credit), and for refund of prepetition deposits made for goods the customers no longer wanted. UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA In re Debtors

APPLICATION FOR ORDER PERMITTING PAYMENTS TO RETAIL CUSTOMERS; AND ORDER THEREON

The application of the debtors and debtors in possession listed on Exhibit A hereto respectfully represents: 1. Applicants have filed voluntary petitions under Chapter 11 of the Bankruptcy Code and are debtors and debtors in possession in the abovecaptioned cases. 2. The debtor and its affiliates own and operate various retail stores, including department stores, furniture stores, supermarkets, drug stores, women’s clothing stores and other retail outlets. 3. At the time that Applicants filed their respective Chapter 11 cases, various retail customers had credit balances on their charge accounts owing to overpayment, or had placed deposits on goods which they no longer want delivered. In addition, some of Applicants’ customers desire to return unsatisfactory goods which were purchased pre-petition for either cash or credit. 4. Together with Applicants’ affiliates who are not debtors in possession before this Court, Applicants comprise an enterprise doing business at more than 2,000 locations, located throughout the United States, Europe and the Middle East. A significant percentage of Applicants’ business is in the retail sector, and consequently, maintaining the satisfaction of the consumer population is imperative to the success of any reorganization by Applicants. 5. The Court has previously entered orders recognizing the need for unusual relief in these Chapter 11 cases. For example, the Court has granted Applicants the authority to honor certain demands pursuant to 11 U.S.C. § 546(c). In addition, the Court has recognized the importance of keeping employee morale high and has authorized Applicants to pay pre-petition wage and related benefits and to honor accrued vacation days, sick leave days and employment and other personnel policies. 6. Applicants’ customers are essential to its vitality. It is crucially important to Applicants’ business that customer goodwill be maintained and that Applicants be permitted to: (a) refund customer overpayments on charge accounts; (b) accept for return unsatisfactory merchandise purchased pre-petition and issue cash or credit therefor; and

8.3

Sample Application Allowing Payments to Retail Customers (Warranty Claims)

695

(c) refund pre-petition deposits made by customers on goods no longer wanted. 7. The requested relief is in the best interests of these estates as it will have a trivial economic impact on Applicants’ creditors, while preserving for the creditors the invaluable assets of customer goodwill. WHEREFORE, Applicants pray that this Court enter its order permitting Applicants, without further order of this Court, to: (a) refund customer overpayments on charge accounts; (b) accept for return unsatisfactory goods purchased pre-petition and issue cash or credit therefor; and (c) refund to customers pre-petition deposits on goods no longer wanted. DATED: May 11, 20XX. a Member of STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION Attorneys for Debtors and Debtors in Possession THE OFFICE OF THE UNITED STATES TRUSTEE HAS NO OBJECTION TO THE RELIEF REQUESTED IN THE FOREGOING APPLICATION. By

696


8.4 Sample Application for Order to Honor Accrued Vacation Days, Sick Leave, and Other Personnel Policies Objective. Section 8.8(a) of Volume 1 discusses the types of first-day orders that are needed for employees. Here, the company is asking the court for an order that will allow it to honor accrued vacation days, sick leave, and other personnel policies. The application requests that the debtor be granted the right to continue payroll policies on a day-to-day basis and that employees be permitted to utilize accrued benefits such as vacation pay and sick leave that may have accrued prior to the filing of the petition. UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA

In re

Debtors.

APPLICATION FOR AUTHORIZATION TO HONOR ACCRUED VACATION DAYS, SICK-LEAVE DAYS AND EMPLOYMENT AND OTHER PERSONNEL POLICIES; AND ORDER THEREON

The application of all the debtors in possession respectfully represents and shows: 1. Applicants have commenced these cases by filing voluntary petitions under chapter 11 of the Bankruptcy Code. Applicants are the respective Debtors in Possession in these cases. 2. At the time the Debtors filed these chapter 11 cases, the Debtors had adopted corporate employment and personnel policies including policies allowing a certain number of vacation and sick-leave days per year to each employee. 3. At present, Applicants wish to continue the Debtors’ employment and personnel policies. Applicants believe that it is in the best interests of the estates to continue these policies to the extent practicable on a day-to-day basis, and to permit employees to utilize accrued benefits such as sick day and vacation leave even if they accrued prior to the chapter 11 filings. Continuing these policies will enable Applicants to retain employees and keep employee morale high, which is vital to the success of these chapter 11 cases. WHEREFORE, Applicants pray that this Court enter its Order authorizing Applicants to honor for as long as they deem it advisable the existing employee and personnel policies including accrued vacation day and sick-leave day commitments to their employees. DATED: April 24, 20XX. , a Member of STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION Attorneys for Debtors and Debtors-in-Possession

8.4

Sample Application for Order to Honor Accrued Vacation Days

697

Order AT LOS ANGELES, IN SAID DISTRICT, ON THIS 24 DAY OF APRIL, 20XX. The Court having considered the foregoing Application of all the Debtorsin-Possession; and good cause appearing, now, therefore, it is hereby ORDERED, that the foregoing application of the Debtors-in-Possession is granted; and it is further ORDERED, that the Debtors-in-Possession are authorized to honor, in their discretion, existing employee and personnel policies including but not limited to vacation day and sick-leave day commitments to their employees; and it is further ORDERED, that the Debtors-in-Possession may, in their discretion, choose not to honor such policies or to change them as the circumstances may require, and it is further ORDERED, that by honoring existing employee and personnel policies or any modifications thereof, the Debtors-in-Possession shall not be deemed to have assumed any executory contracts. Any such assumption of executory contracts shall be provided for by an Order of this Court or through a confirmed plan or plans of reorganization.

UNITED STATES BANKRUPTCY JUDGE THE OFFICE OF UNITED STATES TRUSTEE HAS NO OBJECTION TO THE RELIEF REQUESTED IN THE FOREGOING APPLICATION By

698 8.5


Employee Questions and Answers

Objective. Section 8.8(e) of Volume 1 emphasizes how important it is for employees to be fully informed about a chapter 11 filing. Several questions that employees may ask, and the suggested answers, are listed below. It is critical in most bankruptcy filings that the employees fully understand the nature of the filing and that their questions regarding the results of the filing be dealt with satisfactorily.

1. Is the Company going to file bankruptcy? The Company will file for corporate reorganization under chapter 11 of the United States Bankruptcy Code later today. Chapter 11 is a provision of the Bankruptcy Code intended to provide businesses with an opportunity to reorganize their finances and operations under court supervision. The Company intends to use chapter 11 to permit continued business operations while developing a proposal to satisfy its obligations to creditors. A chapter 11 is very different from a chapter 7, in which business operations are terminated and all assets are liquidated by a court-appointed trustee. The Company does not intend to file under chapter 7. 2. Why will the Company file chapter 11? The board of directors of the Company, in consultation with management and its advisers, concluded that a chapter 11 case was necessary in order to protect and preserve the value of the Company’s assets and operations. Under chapter 11, the Company should be able to obtain funding and credit necessary to maintain operations and production while determining how its business should be reorganized. Chapter 11 will also facilitate the sale of non-core business operations and should allow the maximum value to be realized for all its assets and operations. The Company will receive other benefits from the chapter 11 case, including an automatic stay or injunction against the prosecution or commencement of lawsuits against the Company. Pending lawsuits have been very disruptive to operations and have threatened the Company with the loss of valuable property and rights. The goal of the Company’s chapter 11 case is a Plan of Reorganization that will satisfy creditors, customers, vendors, and employees and ensure that all parties are treated fairly and in accordance with their legal rights. 3. Will a trustee be appointed? A trustee is not usually appointed in a chapter 11 case, and no trustee is expected to be appointed for the Company. Current management will be authorized to continue to manage the Company and conduct business in the ordinary course, subject to certain restrictions imposed by the Bankruptcy Code. 4. Is the Company going out of business? No; the Company will continue to operate in the ordinary course of business. Existing management remains in control. The Company will continue its research, development, and manufacturing enterprises. The Company anticipates no disruption in its distribution and supply

8.5

Employee Questions and Answers

5.

6.

7.

8.

9.

10.

699

systems. Customers will continue to receive goods and services. The Company does not plan to lay off any employees. What should employees tell customers? Customers will be concerned about product service, warranty, and support. Callers who have questions about the chapter 11 case should be told that the Company is still in business and is shipping and supporting its products. It is important to the success of the chapter 11 case and the viability of the Company business that customers’ questions are answered clearly, accurately, and promptly. Customer inquiries should be routed in the same manner as before, but special problems and situations . should be referred to Will employees get paid? Counsel for the Company will ask the Bankruptcy Court to order that any normal payroll, salary, and medical insurance benefits that were earned before the chapter 11 filing date and have not already been paid, be paid without interruption. Counsel will also seek an order that allows the payroll bank account to remain open, so that all payroll checks issued prepetition will be honored. Will employees receive severance, accrued vacation, and bonuses? Unless otherwise authorized by order of the Bankruptcy Court, the Company is prohibited by the Bankruptcy Code from paying any debt incurred before the chapter 11 petition was filed, including employee severance, accrued vacation, and bonuses. Employees have the right to file a claim for wages and benefits earned but unpaid during the 90 days before the case filing. The priority claim amount is limited to $2,000 per employee. Is the 401K Plan protected? The Plan funds are on deposit in a trust account at the Company. The , and is trustee. Plan payments Plan is administered by should not be affected. What can suppliers and trade creditors expect during the chapter 11? The Company must pay all of its obligations for goods and services received in the ordinary course of business after the chapter 11 filing. Payment of these obligations can be made by the Company on regular trade terms without court approval. The Company cannot pay any creditor or supplier for goods delivered or services provided before the chapter 11 filing. The Company is prohibited from making such payments unless there is a special court order. All creditors, suppliers, insurers, subcontractors, and equipment lessors are prohibited (by the automatic stay) from taking any action to collect a debt that arose before the chapter 11 filing. This includes lawsuits, collection actions, and attempts to repossess goods. No employee of the Company should give legal advice to creditors. Creditors should be informed of the chapter 11 case and of their right to file proof-of-claim forms with the Bankruptcy Court. What is the effect of chapter 11 on lawsuits against the Company? All proceedings in pending lawsuits are automatically stayed, which means that no further action can be taken without an order from the court. In addition, no new lawsuits can be filed against the Company to

700


collect claims that arose before the chapter 11 case was filed. During the chapter 11 case, the Company will work to develop a proposal to satisfy all valid claims of creditors fairly and expeditiously. 11. How should employees respond to creditors’ threats or demands for turnover of property or money? If any creditor threatens to take action regarding a debt, including the seizure of any property of the Company or of property in its possession, be polite and calm but be sure to write down: a. The date of the call; b. The name of the caller; c. The creditor that the caller represents; d. The caller’s phone number; and e. The action that the caller proposes to take. at as soon as You must send the above information to possible. If any creditor sends a collection letter, especially if it contains a written request to reclaim goods, a copy of the letter or request should imat . mediately be sent to 12. How shall we answer questions from the press or the media? All inquiries . should be referred to 13. Will the employees be informed of events in the chapter 11 case? Yes. You will receive certain official court notices and we will provide you with information on all major developments during the case. A problem in many chapter 11 cases is the development of a rumor mill that creates confusion and concern among employees, customers, and vendors. If you have a question or concern about the chapter 11 case, . please contact your supervisor or Source: Audrea T. Porter, Esq. Murphy, Weir & Bulter, 9th Annual Reorganization and Bankruptcy Conference, Association of Insolvency Accountants (1993).

8.6

8.6

701

Schedules

Schedules

Objective. Section 8.11 of Volume 1 of Bankruptcy and Insolvency Accounting describes the schedules and statements that must be filed when a chapter 11 petition is filed. They are extensive, as illustrated in selected documents from Pierre Foods reproduced below. Note that in many larger bankruptcies, book values are used rather than market values, as stated in “Global Notes” to the schedules. IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re PIERRE FOODS, INC., et al.,1 Debtors.

) ) Chapter 11 ) ) Case No. 08-11480 (KG) ) ) Jointly Administered )

THESE SCHEDULES OF ASSETS AND LIABILITIES APPLY TO:

X

Chef’s Pantry, Inc. Clovervale Farms, Inc. Clovervale Transportation, Inc. Fresh Foods Properties, LLC PF Management, Inc. Pierre Foods, Inc. Pierre Holding Corp.

Pierre Real Property, LLC Warfighter Foods, LLC Zar Tran Real Property, LLC Zar Tran, LLC Zartic Real Property, LLC Zartic, LLC

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Pierre Foods, Inc. (5643); Pierre Holding Corp. (0320); PF Management, Inc. (4935); Pierre Real Property, LLC (5302); Fresh Foods Properties, LLC (1730); Clovervale Farms, Inc. (1082); Chefs Pantry, Inc. (5649); Clovervale Transportation, Inc. (9470); Zartic, LLC (9891); Zartic Real Property, LLC (9895); Zar Tran, LLC (9892); Warfighter Foods, LLC (5678); Zar Tran Real Property, LLC (9896). The location of the Debtors’ corporate headquarters and the service address for all Debtors is: 9990 Princeton Road, Cincinnati, Ohio 45246.

702





GLOBAL NOTES AND STATEMENT OF LIMITATIONS, METHODS AND DISCLAIMER REGARDING THE DEBTORS’ SCHEDULES OF ASSETS AND LIABILITIES AND STATEMENTS OF FINANCIAL AFFAIRS Pierre Foods, Inc., et al.1 (collectively, the “Debtors”) are filing their respective Schedules of Assets and Liabilities (the “Schedules”) and Statements of Financial Affairs (the “Statements” and, with the Schedules, the “Schedules and Statements”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors, with the assistance of their advisors, prepared the Schedules and Statements in accordance with section 521 of title 11 of the United States Code, 11 U.S.C. §§ 101–1532 (the “Bankruptcy Code”) and Rule 1007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). These Global Notes and Statement of Limitations, Methods and Disclaimer Regarding the Debtors’ Schedules and Statements (collectively, the “Global Notes”) pertain to, are incorporated by reference in, and comprise an integral part of, all the Schedules and Statements. These Global Notes should be referred to, and reviewed in connection with, any review of the Schedules and Statements.2 The Schedules and Statements have been prepared by the Debtors’ management and are unaudited and subject to further review and potential adjustment. In preparing the Schedules and Statements, the Debtors relied on financial data 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are: Pierre Foods, Inc., (5643); Chefs Pantry, Inc. (5649); Clovervale Farms, Inc. (1082); Clovervale Transportation, Inc. (9470); Fresh Foods Properties, LLC (1730); PF Management, Inc. (4935); Pierre Holding Corp. (0320); Pierre Real Property, LLC (5302); Warfighter Foods, LLC (5678); Zartic, LLC (9891); Zartic Real Property, LLC (9895); Zar Tran, LLC (9892); Zar Tran Real Property, LLC (9896). The location of the Debtors’ corporate headquarters and the service address for all Debtors is: 9990 Princeton Road, Cincinnati, Ohio 45246. 2 These Global Notes are in addition to any specific notes contained in each Debtor’s Schedules or Statements. The fact that the Debtors have prepared a “General Note” with respect to any of the Schedules and Statements and not to others should not be interpreted as a decision by the Debtors to exclude the applicability of such General Note to any of the Debtors’ remaining Schedules and Statements, as appropriate.

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Schedules

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derived from their books and records that was available at the time of preparation. The Debtors have made reasonable efforts to ensure the accuracy and completeness of such financial information, however, subsequent information or discovery may result in material changes to the Schedules and Statements and inadvertent errors, omissions or inaccuracies may exist. The Debtors reserve all rights to amend or supplement their Schedules and Statements. Reservation of Rights. Nothing contained in the Schedules and Statements or these Global Notes shall constitute a waiver of any of the Debtors’ rights or an admission with respect to their chapter 11 cases including, but not limited to, any issues involving objections to claims, substantive consolidation, equitable subordination, defenses, characterization or re-characterization of contracts, assumption or rejection of contracts under the provisions of chapter 3 of the Bankruptcy Code and/or causes of action arising under the provisions of chapter 5 of the Bankruptcy Code or any other relevant applicable laws to recover assets or avoid transfers. Description of the Cases and “As of” Information Date. On July 15, 2008 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief with the Court under chapter 11 of the Bankruptcy Code. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On July 16, 2008, the Court entered an order jointly administering these cases pursuant to Bankruptcy Rule 1015(b). Unless otherwise indicated (see Note regarding Totals below), all amounts listed in the Schedules and Statements are as of 8:30 a.m. on July 15, 2008. Corporate Structure. The corporate structure is as follows: a. Pierre Holding Corp. owns 100% of PF Management, Inc.; b. PF Management, Inc. owns 100% of Pierre Foods, Inc.; c. Pierre Foods, Inc. owns 100% of each of Warfighter Foods, LLC, Zar Tran, LLC, Zartic, LLC, Clovervale Farms, Inc., Fresh Foods Properties, LLC, Pierre Real Property, LLC; d. Zar Tran, LLC owns 100% of Zar Tran Real Property, LLC; e. Zartic, LLC owns 100% of Zartic Real Property, LLC; f. Clovervale Farms, Inc. owns 100% of each of Clovervale Transportation, Inc., and Chefs Pantry, Inc.; g. Madison Dearborn Capital Partners IV. L.P. owns 90.24% of Pierre Holding Corp. (Common Stock); and h. Madison Dearborn Capital Partners IV. L.P. owns 96.27% of Pierre Holding Corp. (Preferred Stock). Basis of Presentation. For purposes of filing reports with the Securities and Exchange Commission (the “SEC”), Pierre Foods, Inc. has historically prepared consolidated financial statements which include each of the Debtors other than Pierre Holding Corp. and PF Management, Inc. Unlike the consolidated financial statements, the Schedules and Statements, except where otherwise indicated, reflect the assets and liabilities of each Debtor on a non-consolidated basis. Accordingly, the totals listed in the Schedules and Statements will likely differ, at times materially, from the consolidated financial reports prepared by the Debtors for public reporting purposes or otherwise.

704


The Debtors’ books and records have historically been kept on a consolidated basis and are not maintained by legal entity. For purposes of the Schedules and Statements, the Debtors used reasonable efforts to attribute the assets and liabilities of each regional division to the proper legal entity; however, because of the consolidated nature of the Debtors’ bookkeeping, it is possible that not all assets or liabilities have been recorded at the correct legal entity on the Schedules and Statements. As such, the Debtors reserve all rights to amend these Schedules and Statements accordingly. Although these Schedules and Statements may, at times, incorporate information prepared in accordance with generally accepted accounting principles (“GAAP”), the Statements and Schedules neither purport to represent nor reconcile financial statements otherwise prepared and/or distributed by the Debtors in accordance with GAAP or otherwise. Moreover, given, among other things, the uncertainty surrounding the collection and ownership of certain assets and the valuation and nature of certain liabilities, to the extent that a Debtor shows more assets than liabilities, this is not an admission that the Debtor was solvent at the Petition Date or at any time prior to the Petition Date. Likewise, to the extent that a Debtor shows more liabilities than assets, this is not an admission that the Debtor was insolvent at the Petition Date or any time prior to the Petition Date. Confidentiality. There may be instances within the Schedules and Statements where names, addresses or amounts have been left blank. Due to the nature of an agreement between the Debtors and the third party, concerns of confidentiality or concerns for the privacy of an individual, the Debtors may have deemed it appropriate and necessary to avoid listing such names, addresses and amounts. Consolidated Entity Accounts Payable and Disbursement Systems. Although separate accounts payable systems are maintained, the Debtors operate their businesses as a consolidated entity and, as such, although efforts have been made to attribute open payable amounts and/or payments to the correct legal entity, the Debtors reserve their right to modify or amend their schedules to attribute such payable to a different legal entity. Payments made are listed by the entity making such payment notwithstanding that certain payments will have been made on behalf of another entity. Intercompany Claims. Receivables and payables among the Debtors in these cases (each an “Intercompany Receivable” or “Intercompany Payable” and, collectively, the “Intercompany Claims”) are reported on Schedule F as a net intercompany claim. To the extent that a Debtor has a net intercompany receivable, such receivable is not reported on Schedule B as an asset of that Debtor. Schedules with payables are listed in that amount and Schedules with receivables are listed as negative amounts. These Intercompany Claims are comprised primarily of the following components: 1) amounts owed or owing for goods and services, 2) allocations of certain expense items, 3) entries to reflect payments made by one Debtor entity on behalf of another, and 4) accounting entries to reflect the net income or net loss of a given entity for financial reporting purposes (an “Intercompany Income Reconciliation”). These Intercompany Claims, in particular, the Intercompany Income Reconciliations may or may not result in allowed or enforceable claims by or against a given Debtor. In situations where there is

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Schedules

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not an enforceable claim, the assets and/or liabilities of the applicable Debtor will be greater or lesser than the amounts stated herein. While the Debtors have used reasonable efforts to ensure that the proper intercompany balance is attributed to each legal entity, all rights to amend the Intercompany Claims in the Schedules and Statements are reserved. The Debtors have listed all intercompany payables as unsecured non-priority claims on Schedule F for each applicable Debtor but reserve their rights to later change the characterization, classification, categorization or designation of such claims, including by designating all or any portion of the amounts listed as secured. Insiders. For purposes of the Schedules and Statements, the Debtors define “insiders” pursuant to section 101(31) as (a) directors, (b) officers, (c) those in control of the Debtors, (d) relatives of directors, officers, or persons in control of the Debtors and (e) non-debtor affiliates. Payments to insiders listed in (a) through (d) above are set forth on Statement 3c. Payments to non-debtor affiliates are set forth on Statement 3c as the change in intercompany claims and balances over a period just over one year. Persons listed as “insiders” have been included for informational purposes only. The Debtors do not take any position with respect to (a) such person’s influence over the control of the Debtors, (b) the management responsibilities or functions of such individual, (c) the decision-making or corporate authority of such individual or (d) whether such individual could successfully argue that he or she is not an “insider’ under applicable law, including, without limitation, the federal securities laws, or with respect to any theories of liability or for any other purpose. Excluded Accruals/GAAP entries. Liabilities resulting from accruals and/or estimates of long-term liabilities either are not payable at this time or have not yet been reported and, therefore, do not represent specific claims as of the Petition Date and are not otherwise set forth in the Statement and Schedules. Additionally, certain deferred charges, accounts or reserves recorded for GAAP reporting purposes only and assets with a net book value of zero are not included in the Debtors’ Schedules. The excluded assets relate to, among other things, goodwill, customer relationship intangibles and loan commitment fees and excluded liabilities relate to, among other things, accrued taxes and accrued wage and/or employee benefit related obligations. In addition, the Debtors accrue for their obligations under the USDA commodity program which accrued liability has also been excluded from the Schedules. As of the Petition Date, the Debtors had accrued a net liability of approximately $5 million which represents the book value of the Debtors’ obligations to the various school districts net of inventory available to satisfy such obligations. In the ordinary course of the Debtors’ business, this liability accrual is continually adjusted as replacement inventory becomes available. Summary of Significant Reporting Policies. The following is a summary of certain significant reporting policies: a. Foreign Currency. Unless otherwise indicated, all amounts are reflected in U.S. dollars. b. Current Market Value — Net Book Value. In many instances, current market valuations are neither maintained by nor readily available to the

706


Debtors. It would be prohibitively expensive and unduly burdensome to obtain current market valuations of the Debtors’ property interests that are not maintained or readily available. Accordingly, unless otherwise indicated, the Schedules and Statements reflect the net book values, rather than current market values, of the Debtors’ assets as of the Petition Date and may not reflect the net realizable value. For this reason, amounts ultimately realized will vary, at some times materially, from net book value. c. Paid Claims. Pursuant to certain first-day and second-day orders issued by the Bankruptcy Court (collectively, the “First Day Orders”), the Bankruptcy Court has authorized the Debtors to pay certain outstanding prepetition claims, such as certain employee wages and benefit claims, claims for taxes and fees, claims related to customer programs, critical vendor claims, lien claims, and claims of shippers and warehousemen. Unless otherwise stated, these Schedules reflect (and do not list) prepetition obligations that have been satisfied prior to August 27, 2008 pursuant to such First Day Orders. Notwithstanding best efforts, certain claims paid pursuant to a First Day Order may inadvertently be listed in the Schedules, and the Debtors may pay some of the claims listed on the Schedules in the ordinary course of business during these cases pursuant to such First Day Orders or other court orders. To the extent claims listed on the Schedules have been paid pursuant to an order of the Bankruptcy Court (including the First Day Orders), the Debtors reserve all rights to amend or supplement their Schedules and Statements as is necessary and appropriate. Moreover, certain of the First Day Orders preserve the rights of parties in interest to dispute any amounts paid pursuant to First Day Orders. Nothing herein shall be deemed to alter the rights of any party in interest to contest a payment made pursuant to a First Day Order that preserves such right to contest. d. Setoffs. The Debtors routinely incur certain setoffs and other similar rights from customers or suppliers in the ordinary course of business. Setoffs in the ordinary course can result from various items including, but not limited to, intercompany transactions, pricing discrepancies, returns, warranties, and other disputes between the Debtors and their customers and/or suppliers. These normal setoffs and other similar rights are consistent with the ordinary course of business in the Debtors’ industries and can be particularly voluminous, making it unduly burdensome and costly for the Debtors to list such ordinary course setoffs. Therefore, although such setoffs and other similar rights may have been accounted for when scheduling certain amounts, setoffs are not independently accounted for, and as such, are excluded from the Debtors’ Schedules and Statements. e. Credits and Adjustments. The claims of individual creditors for, among other things, goods, products, services or taxes are listed as the amounts entered on the Debtors’ books and records and may not reflect credits, allowances or other adjustments due from such creditors to the Debtors. The Debtors reserve all of their rights with regard to such credits, allowances and other adjustments, including the right to assert claims objections and/or setoffs with respect to same.

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Schedules

707

f. Accounts Receivable. The accounts receivable information listed on Schedule B includes net receivables from the Debtors’ customers which receivables are calculated net of any amounts that, as of the Petition Date, may be owed to such customers in the form of rebates, offsets or other price adjustments pursuant to the Debtors’ customer program policies and day-to-day operating policies. A claim is listed on Schedule F to the extent that a net payable remains to a given customer. As noted above, payables listed on Schedule F have been adjusted to reflect obligations satisfied pursuant to First Day Orders between the Petition Date and August 27, 2008. g. Mechanics’ Liens. The inventories, property and equipment listed in these Statements and Schedules are presented without consideration of any mechanics’ liens. h. Leases. In the ordinary course of business, the Debtors may lease certain fixtures and equipment from certain third party lessors for use in the daily operation of their business. The Debtors’ obligations pursuant to capital leases appear on Schedule D and their obligations pursuant to operating leases have been listed on Schedule F. The underlying lease agreements are listed on Schedule G. Nothing in the Schedules and Statements is or shall be construed as an admission as to the determination of the legal status of any lease (including whether any lease is a true lease or a financing arrangement), and the Debtors reserve all rights with respect to such issues. Undetermined Amounts. The description of an amount as “unknown,” “TBD” or “undetermined” is not intended to reflect upon the materiality of such amount. Estimates. To close timely the books and records of the Debtors as of the Petition Date and to prepare such information on a legal entity basis, the Debtors were required to make certain estimates and assumptions that affect the reported amounts of assets and reported revenue and expenses as of the Petition Date. The Debtors reserve all rights to amend the reported amounts of assets, reported revenue and expenses to reflect changes in those estimates and assumptions. Totals. The asset totals listed on Schedules A and B and the liability totals listed on Schedule D represent all known amounts included in the Debtors’ books and records as of the Petition Date. The liability totals listed on Schedule F, however, reflect postpetition payments on prepetition claims made pursuant to First Day Orders, as noted above, and therefore reflect the totals of all known claim amounts included in the Debtors’ books and records as of August 27, 2008. To the extent there are unknown or undetermined amounts, the actual total may be different than the listed total. Classifications. Listing a claim (a) on Schedule D as “secured,” (b) on Schedule E as “priority,” (c) on Schedule F as “unsecured priority,” or (d) listing a contract or lease on Schedule G as “executory” or “unexpired,” does not constitute an admission by the Debtors of the legal rights of the claimant, or a waiver of the Debtors’ right to recharacterize or reclassify such claim or contract.

708


Claims Description. Any failure to designate a claim on a given Debtor’s Schedules as “disputed,” “contingent,” or “unliquidated” does not constitute an admission by the Debtor that such amount is not “disputed,” “contingent” or “unliquidated.” The Debtors reserve all rights to dispute, or to assert any offsets or defenses to, any claim reflected on their respective Schedules on any grounds including, without limitation, amount, liability, validity, priority or classification, or to otherwise subsequently designate any claim as “disputed,” “contingent” or “unliquidated.” Listing a claim does not constitute an admission of liability by the Debtors, and the Debtors reserve the right to amend the Schedules accordingly. Guaranties and Other Secondary Liability Claims. The Debtors have used their best efforts to locate and identify guaranties and other secondary liability claims (collectively “Guaranties”) in their executory contracts, unexpired leases, secured financing, debt instruments and other such agreements, however, a review of these agreements, specifically the Debtors’ leases and contracts, is ongoing. Where such Guaranties have been identified, they have been included in the relevant Schedule. The Debtors have reflected the Guaranty obligations for both the primary obligor and the guarantors with respect to their secured financings and debt instruments on Schedule H. Guaranties with respect to the Debtors’ contracts and leases are not included on Schedule H and the Debtors believe that certain Guaranties embedded in the Debtors’ executory contracts, unexpired leases, other secured financing, debt instruments and similar agreements may have been inadvertently omitted from the Schedules but that such Guaranties may be identified upon further review. Therefore, the Debtors reserve their rights to amend the Schedules to the extent additional Guaranties are identified. Schedule A. Schedule A of the particular Debtors includes solely that Debtor’s owned real property. To the extent that such Debtor has an ownership in any building or structure that resides at such location, such interest is listed on Schedule B35 of that Debtor. Schedule B35. Pursuant to contract renewal negotiations with two of its customers, Hardee’s Food Systems, Inc. (“Hardees”) and Carl Karcher Enterprises, Inc. (“CKE”), Pierre Foods, Inc. (“Pierre”) transferred the legal rights to certain formulas for precooked beef patties to Hardees and CKE in December 2006 and August 2007, respectively. Although the rights to such formulas were given to these customers as of the commencement date of the respective contracts, Pierre continues to amortize the recorded value of the intangible formula assets over the life of the new contracts and such amounts are listed on Schedule B35 of Pierre Foods, Inc. as “Other Noncurrent Assets.” Schedule D — Creditors Holding Secured Claims. Except as otherwise agreed pursuant to a stipulation and agreed order or general order entered by the Bankruptcy Court that is or becomes final, the Debtors and/or their estates reserve their right to dispute or challenge the validity, perfection or immunity from avoidance of any lien purported to be granted or perfected in any specific asset to a creditor listed on Schedule D of any Debtor. Moreover, although the Debtors may have scheduled claims of various creditors as secured claims for informational purposes, no current valuation of the Debtors’ assets in which such creditors may have a lien has been undertaken. The Debtors reserve all

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Schedules

709

rights to dispute or challenge the secured nature of any such creditor’s claim or the characterization of the structure of any such transaction or any document or instrument (including, without limitation, any intercompany agreement) related to such creditor’s claim. In certain instances, a Debtor may be a coobligor, co-mortgagor or guarantor with respect to scheduled claims of other Debtors, and no claim set forth on Schedule D of any Debtor is intended to acknowledge claims of creditors that are otherwise satisfied or discharged by other entities. The descriptions provided in Schedule D are intended only to be a summary. Reference to the applicable loan agreements and related documents and a determination of the creditors’ compliance with applicable law is necessary for a complete description of the collateral and the nature, extent and priority of any liens. Nothing in the Global Notes or the Schedules and Statements shall be deemed a modification or interpretation of the terms of such agreements or related documents. Except as specifically stated herein, real property lessors, utility companies and other parties which may hold security deposits have not been listed on Schedule D. The Debtors have not included on Schedule D parties that may believe their claims are secured through setoff rights, deposit posted by, or on behalf of, the Debtors, or inchoate statutory lien rights. Although there are multiple parties that hold a portion of the debt included in the secured facility, only the collateral agent has been listed for purposes of Schedule D. Schedule E — Creditors Holding Unsecured Priority Claims. With the exception of certain tax claims listed on Schedule E of Pierre Foods, Inc. which relate to known payments due under the terms of a settlement agreement, the Debtors have not listed on Schedule E any tax, wage or wage-related obligations for which the Debtors’ have been granted authority to pay pursuant to a First Day Order. The Debtors believe that all such claims have been or will be satisfied in the ordinary course during these chapter 11 cases pursuant to the authority granted in the relevant First Day Orders. The Debtors reserve their right to dispute or challenge whether creditors listed on Schedule E are entitled to priority claims. Schedule F — Creditors Holding Unsecured Nonpriority Claims. The Debtors have attempted to relate all liabilities to each particular Debtor. As a result of the Debtors’ consolidated operations, however, the reader should review Schedule F for all Debtors in these cases for a complete understanding of the unsecured debts of the Debtors. Certain creditors owe amounts to the Debtors and, as such, may have valid setoff and recoupment rights with respect to such amounts. Although the Debtors may have taken setoffs into account when scheduling the amounts owed to creditors, the Debtors reserve all rights to challenge such setoff and recoupment rights. The Debtors have not reduced the scheduled claims to reflect any such right of setoff or recoupment and reserve all rights to challenge any setoff and/or recoupment rights asserted. Additionally, certain creditors may assert mechanic’s, materialman’s, or other similar liens against the Debtors for amounts listed on Schedule F. The Debtors reserve their right to dispute or challenge the validity, perfection or immunity from avoidance of any lien purported to be perfected by a creditor listed on Schedule F of any Debtor.

710


Schedule F contains information regarding pending litigation involving the Debtors. In certain instances, the Debtor that is the subject of the litigation is unclear or undetermined. However, to the extent that litigation involving a particular Debtor has been identified, such information is contained in the Schedule for that Debtor. The amounts for these potential claims are listed as undetermined and marked as contingent, unliquidated and disputed in the Schedules. Schedule G — Executory Contracts and Unexpired Leases. Although reasonable efforts have been made to ensure the accuracy of Schedule G regarding executory contracts and unexpired leases (collectively the “Agreements”), review is ongoing and inadvertent errors, omissions or over-inclusion may have occurred. The Debtors may have entered into various other types of Agreements in the ordinary course of their business, such as indemnity agreements, supplemental agreements, amendments/letter agreements, and confidentiality agreements which may not be set forth in Schedule G. Omission of an Agreement from Schedule G does not constitute an admission that such omitted contract or agreement is not an executory contract or unexpired lease. Schedule G may be amended at any time to add any omitted Agreement. Likewise, the listing of an Agreement on Schedule G does not constitute an admission that such Agreement is an executory contract or unexpired lease or that such Agreement was in effect on the Petition Date or is valid or enforceable. The Agreements listed on Schedule G may have expired or may have been modified, amended, or supplemented from time to time by various amendments, restatements, waivers, estoppel certificates, letter and other documents, instruments and agreements which may not be listed on Schedule G. Any and all of the Debtors’ rights, claims and causes of action with respect to the Agreements listed on Schedule G are hereby reserved and preserved, and as such, the Debtors hereby reserve all of their rights to (i) dispute the validity, status, or enforceability of any Agreements set forth on Schedule G, (ii) dispute or challenge the characterization of the structure of any transaction, or any document or instrument related to a creditor’s claim, including, but not limited to, the Agreements listed on Schedule G and (iii) amend or supplement such Schedule as necessary. Certain of the Agreements listed on Schedule G may have been entered into by more than one of the Debtors. Additionally, the specific Debtor obligor(s) to certain of the Agreements could not be specifically ascertained in every circumstance. In such cases, the Debtors made reasonable efforts to identify the correct Debtors’ Schedule G on which to list the agreement and, where a contract party remained uncertain, such Agreements have been listed on Schedule G for Pierre Foods, Inc. Certain of the Agreements may not have been memorialized and could be subject to dispute. Agreements that are oral in nature have also been included in Schedule G. Schedule H — Co-Debtors. Each of the Debtors are co-debtors with respect to the senior secured facility and the senior subordinated notes. For purposes of Schedule H, only the collateral agent or indenture trustee is listed for such borrowings. Additionally, there may be instances where litigation is brought against multiple legal entities. Where possible, such litigation is listed on Schedule F of the appropriate Debtor but such litigation is not reflected in

8.6

711

Schedules

Schedule H. Co-debtors and/or co-obligors with respect to leases and contracts are listed on Schedule F as applicable but are not listed on Schedule H. Statement of Financial Affairs. All amounts that remain outstanding to any creditor listed on SOFA 3b or 3c are reflected in Schedules E and F as applicable. Any creditor wishing to verify any outstanding indebtedness should review those Schedules. a. SOFA 2—Other Income. From time to time, the Debtor may have de minimis income from sources other than the operation of business that will not appear on SOFA 2. b. SOFA 7—Gifts. The Debtors have listed gifts according to the legal entity making the disbursement, however, in certain instances, such disbursement is made on behalf of another debtor entity. Gifts of product have been made pursuant to the Company’s inventory liquidation and obsolescence policy. c. SOFA 20—Inventory. The inventory amounts listed in response to SOFA 20 reflect warehouses in which full physical inventories were performed. The Debtors also utilize non-physical inventory tracking and valuation methods combined with cycle counting in other warehousing locations. These valuations are included in the assets reported by the Debtors on Schedule B. United States Bankruptcy Court District of Delaware In re Pierre Foods, Inc. Debtor

,

Case No. 08-11480 (KG) Chapter 11

SUMMARY OF SCHEDULES Indicate as to each schedule whether that schedule is attached and state the number of pages in each. Report the totals from Schedules A, B, D, E, F, I, and J in the boxes provided. Add the amounts from Schedules A and B to determine the total amount of the debtor’s assets. Add the amounts of all claims from Schedules D, E, and F to determine the total amount of the debtor’s liabilities. Individual debtors also must complete the “Statistical Summary of Certain Liabilities and Related Data” if they file a case under chapter 7, 11, or 13.

712 No

J-Current Expenditures of Individual Debtor(s) TOTAL

No

I-Current Income of Individual Debtor(s)

H-Codebtors

548

2

147

G-Executory Contracts and Unexpired Leases

3

22

1

17

1

No. of Sheets

355

Attached (Yes/No)

F-Creditors Holding Unsecured Nonpriority Claims

E-Creditors Holding Unsecured Priority Claims (Total of Claims on Schedule E)

D-Creditors Holding Secured Claims

C-Property Claimed as Exempt

B-Personal Property

A-Real Property

Name of Schedule

$304,158,594.73

$302,538,594.73

$1,620,000.00

Assets

$440,209,180.13

$186,557,882.21

$924,747.00

$252,726,550.92

Liabilities

$

$

N/A

N/A

Other

8.6

713

Schedules

SCHEDULE A—REAL PROPERTY Except as directed below, list all real property in which the debtor has any legal, equitable, or future interest, including all property owned as a cotenant, community property, or in which the debtor has a life estate. Include any property in which the debtor holds rights and powers exercisable for the debtor’s own benefit. If the debtor is married, state whether the husband, wife, both, or the marital community own the property by placing an “H,” “W,” “J,” or “C” in the column labeled “Husband, Wife, Joint, or Community.” If the debtor holds no interest in real property, write “None” under “Description and Location of Property.” Do not include interests in executory contracts and unexpired leases on this schedule. List them in Schedule G—Executory Contracts and Unexpired Leases. If an entity claims to have a lien or hold a secured interest in any property, state the amount of the secured claim. See Schedule D. If no entity claims to hold a secured interest in the property, write “None” in the column labeled “Amount of Secured Claim.” If the debtor is an individual or if a joint petition is filed, state the amount of any exemption claimed in the property only in Schedule C—Property Claimed as Exempt.

Description and Location of Property

Nature of Debtor’s Interest in Property

Husband, Wife, Joint, or Community

Current Value of Debtor’s Interest in Property, without Deducting any Secured Claim or Exemption

Amount of Secured Claim

3437 East Main Street Claremont, NC 28610

Fee Simple

$670,000.00

Undetermined

9990 Princeton Road Cincinnati, OH 45246

Fee Simple

$950,000.00

Undetermined

Total

$1,620,000.00

(Report also on Summary of Schedules.)

SCHEDULE B—PERSONAL PROPERTY Except as directed below, list all personal property of the debtor of whatever kind. If the debtor has no property in one or more of the categories, place an “x” in the appropriate position in the column labeled “None.” If additional space is needed in any category, attach a separate sheet properly identified with the case name, case number, and the number of the category. If the debtor

714


is married, state whether the husband, wife, both, or the marital community own the property by placing an “H,” “W,” “J,” or “C” in the column labeled “Husband, Wife, Joint, or Community.” If the debtor is an individual or a joint petition is filed, state the amount of any exemptions claimed only in Schedule C—Property Claimed as Exempt. Do not list interests in executory contracts and unexpired leases on this schedule. List them in Schedule G—Executory Contracts and Unexpired Leases. If the property is being held for the debtor by someone else, state that person’s name and address under “Description and Location of Property.” If the property is being held for a minor child, simply state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child, by John Doe, guardian,” Do not disclose the child’s name. See 11 U.S.C. § 112 and Fed. R. Bankr. P. 1007(m).

715

1. Cash on hand. 2. Checking, savings or other financial accounts, certificates of deposit, or shares in banks, savings and loan, thrift, building and loan, and homestead associations, or credit unions, brokerage houses, or coopratives. 3. Security deposits with public utilities, telephone companies, landlords, and others. 4. Household goods and furnishings, including audio, video, and computer equipment. 5. Books; pictures and other art objects; antiques; stamp, coin, record, tape, compact disc, and other collections or collectibles. 6. Wearing apparel. 7. Furs and jewelry. 8. Firearms and sports, photographic, and other hobby equipment. 9. Interests in insurance policies. Name insurance company of each policy and itemize surrender or refund value of each. 10. Annuities. Itemize and name cach issuer. 11. Interests in an education IRA as defined in 26 U.S.C. § 530(b)(1) or under a qualified State tuition plan as defined in 26 U.S.C. § 529(b)(1). Give particulars. (File separately the record(s) of any such interest(s). 11 U.S.C. § 521(c).) 12. Interests in IRA, ERISA, Kcogh, or other pension or profit sharing plans. Give particulars. 13. Stock and interests in incorporated and unincorporated businesses. Itemize.

Type of Property

X

X X

X X X X

X

X

None

(Continued )

$112,800,046.75 + undetermined amounts

$3,129,193.02

See attached rider

See attached rider

$3,089.10 $1,932,906.28


Petty cash See attached rider



716 See attached rider See attached rider

X

19. Equitable or future interests. Life estates, and rights or powers exercisable for the benefit of the debtor other than those listed in Schedule A—Real Property. 20. Contingent and noncontingent interests in estate of a decedent, death benefit plan, life insurance policy, or trust. 21. Other contingent and unliquidated claims of every nature, including tax refunds, counterclaims of the debtor, and rights to setoff claims. Give estimated value of each. 22. Patents, copyrights, and other intellectual property. Give particulars.

23. Licenses, franchises, and other general intangibles. Give particulars.

X

X

17. Alimony, maintenance, support, and property settlements to which the debtor is or may be entitled. Give particulars. 18. Other liquidated debts owed to debtor including tax refunds. Give particulars.

See attached rider

Federal Income Tax Refund

See attached rider

None X X

Type of Property 14. Interests in partnerships or joint ventures. Itemize. 15. Government and corporate bonds and other negotiable and nonnegotiable instruments. 16. Accounts receivable.



$487,917.00 + undetermined amounts $28,997,671.81 + undetermined amounts $12,669,125.73

$6,524,357.00

$26,117,230.64


717

X X X X

X X

X

See attached rider

See attached rider See attached rider See attached rider

See attached rider

3 continuation sheets attached Total (Include amounts from any continuation sheets attached. Report total also on Summary of Schedules.)

31. Animals. 32. Crops—growing or harvested. Give particulars. 33. Farming equipment and implements. 34. Farm supplies, chemicals, and feed. 35. Other personal property of any kind not already listed. Itemize.

30. Inventory.

29. Machinery, fixtures, equipment, and supplies used in business.

24. Customer lists or other compilations containing personally identifiable information (as defined in 11 U.S.C. 101(41 A)) provided to the debtor by individuals in connection with obtaining a product or service from the debtor primarily for personal, family, or household purposes. 25. Automobiles, trucks, trailers, and other vehicles and accessories. 26. Boats, motors, and accessories. 27. Aircraft and accessories. 28. Office equipment, furnishings, and supplies.

$ 302,538,594.73 + undetermined amounts

$22,736,183.77

$54,438,707.42

$32,235,208.10

$274,494.22

$192,463.89

718

Cash Reclass O/S Checks



Cash Reclass Other

Bank of America Bank of America US Bank

ABN-AMRO Bank (Canadian) Bank of America Bank of America Bank of America Bank of America

Bank

540 W. Madison Chicago, IL 60661 540 W. Madison Chicago, IL 60661 PO Box 1800 Saint Paul, MN 55101-0.

11998: Cash Reclass Other 11999: Cash Reclass O/S Checks 11999: Cash Reclass O/S Checks 11999: Cash Reclass O/S Checks

11140: Payable 11116: Medical/Dental 11121: Medical/Dental 11135: Payroll 11126: Worker’s Compensation 11105: Operating 11055: Local Depository

11100:Lockbox

Maritime Life Tower 15th Floor 79 Wellington Street Toronto, Ontario M5K 1 G8 Canada

540 W. Madison Chicago, IL 60661 540 W. Madison Chicago, IL 60661 540 W. Madison Chicago, IL 60661 540 W. Madison Chicago, IL 60661

Account Type

Address

SCHEDULE B—PERSONAL PROPERTY Rider B.2—Bank accounts

9842XX Total

9842XX

9842XX

9948XX

5590XXXXXX 5800XXXXXX 1301XXXXXXXX

5590XXXXXX 5590XXXXXX 5590XXXXXX 5800XXXXXX

4601XXXXXXXX

Account Number

$2,284,274.19 $1,932,906.28

$32,554.60

$2,607,976.37

$(3,160,341.87)

$55,004.01 $2,565,578.83 $9,612.68

$(3,325,109.83) $(184,081.88) $(9,937.48) 5,741,603.52

$315,773.14

Balance

8.6

719

Schedules

SCHEDULE B—PERSONAL PROPERTY Rider B.3—Security deposits Deposit

Amount

15560: Professional Retainers 15570: UPS 15570: Prologis—Storage Deposit 15570: R&R LTD—Land Lease 15570: Hardy Realty—Rome rental 15570: Percy and Dixie Limited Partners 15570: BP Canada Energy—Gas deposit Total

$2,617,170.02 $450.00 $3,298.00 $2,400.00 $1,000.00 $4,875.00 $500,000.00 $3,129,193.02

SCHEDULE B—PERSONAL PROPERTY Rider B.13—Stocks and interests in incorporated businesses Name of Business

Ownership Interest

Net Book Value

100% 100% 100% 100% 100% 100%

$21,134,425.81 $91,665,620.94 Undetermined Undetermined Undetermined Undetermined $112,800,046.75 plus undetermined amounts

Clovervale Farms, Inc. Zartic, LLC Warfighter Foods, LLC Zar Tran, LLC Fresh Foods Properties, LLC Pierre Real Property, LLC

Total

SCHEDULE B—PERSONAL PROPERTY Rider B.16—Accounts receivable Description

Value

13100: Trade Accts Receivable 13105: Uninvoiced Rebate Receivable 13110: Invoiced Rebate Receivable 13145: Unearned Revenue—SIT 13150: Reserve—general bad debts 13155: Reserve—specific bad debts A/R Miscellaneous Less Rebates and Promotions Total

$ 32,301,394.70 $ 301,815.34 $ 387,670.43 $ (1,111,479.82) $ (490,236.80) $ (126,217.57) $ 235,702.78 $ (5,381,418.42) $26,117,230.64

720


SCHEDULE B—PERSONAL PROPERTY Rider B.21—Other contingent and unliquidated claims of every nature Description

Value

15100: Estimated State and Local Tax Refund Pierre Foods, Inc. v Richard Cawrse, Jr.; Claim for Indemnification Pierre Foods, Inc. v Richard Cawrse, Jr.; Claim for Indemnification

$487,917.00 Undetermined Undetermined $487,917.00 plus undetermined amounts

Total

SCHEDULE B—PERSONAL PROPERTY Rider B.22—Patents, copyrights, and other intellectual property Registered U.S. Trademarks Unamortized Trade Name Intangibles—Trade Names: Pierre, Zartic, Z-Bird, Circle Z, Jim’s Country Mill Sausage, Covervale Farms, Chefs Pantry, Fast Choice, Rib-B-Q, Blue Stone Grill, Hot ‘n’ Ready, Big AZ, Chicken FryZ, Smokie Grill and Chop House Accum. Amort—Trade Name Buffaloaded Fastbites French Toast Boat Ham N Go (and design) Mercato Grille Mercato Grille (and design) Mom ‘N’ Pop’s Outrageous Angus Pierre Signatures Yukon Grill

Registration No.

Registration Date

Value $ 19,200,000.00

3455211 2261 26 1554935 2345081 3320050 3353485 1341236 3160338 3363145 3392829

6/24/2008 /13/1999 9/5/1989 4/25/2000 10/23/200− 12/11/200 6/11/1985 10/1 /2006 1/1/2008 3/4/2008

$ 15,304,031.00 $ (,5 1,996.83) Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined (Continued )

721

8.6 Schedules

Pending U.S. Trademarks Absolute Angus Absolute Angus Big A Big AZ Buffaloaded Chef Logo Black Design Chef Logo Red Design EI Puesto De Pedro Hot Diggity Subs Pierre Grillers Response Food Labs Registered Foreign Trademarks/Country Pierre Frozen Foods (and design)/MEXICO Rib-B-Q / CANADA Rib-B-Q (and design) / CANADA

Registered U.S. Copyrights 16165: Software 16565: Accum. Depr.—Software Barnyard Basics of Good Nutrition For Grades 1 & 2: Educator’s Guide Barnyard Basics of Good Nutrition For Grades 1 & 2: Educator’s Guide Barnyard Basics of Good Nutrition Questions and Answers Barnyard Scene Bulletin Board Display: Barnyard Basics of Good Nutrition Today’s Nutritious Lunch: It’s Barnyard Bonus Day!

Registration No.

Filed Date

Value

Allowed Allowed Pending Pending Allowed Allowed Pending Pending Pending Pending Pending

9/15/2004 9/15/2004 5/20/2008 5/20/2008 5/16/2005 4/1/2005 4/1/2005 5/20/2008 5/20/2008 9/13/200 3/8/200

Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined Undetermined

Registration No.

Filed Date

Value

Pending

6/2∗∗∗ /1990

Undetermined

TMA305055 TMA305056

/19/1985 /19/1985

Undetermined Undetermined

Issue Date

Value

Registration No.

$ 5,0 9,158.15 $ (3,013,520.51)

TX-3-291-538

4/2/1992

Undetermined

TX-3-380-555

8/∗∗∗ /1992

Undetermined

TX-3-390-603

8/∗∗∗ /1992

Undetermined

VA-519-989

8/∗∗∗ /1992

Undetermined

VA-519-990

8/∗∗∗ /1992

Undetermined (Continued )

722


Barnyard Basics of Good Nutrition Punch-Out Toys Cafeteria Adventures Radical Promotion Program Cafeteria Adventures Rock ‘n Roll Promotion Program Cafeteria Adventures Stars & Stripes Promotion Program Tastes of the World Promotion Program: Manager’s Kit Cafeteria Adventures Hamburger Man Cafeteria Adventures Stars and Stripes General Cafeteria Adventures Radical Chicken Cafeteria Adventures Tastes of the World Logo Proper Procedures for Product Evaluation and Taste Trends in Food

Registered U.S. Patents Food Mold Plate and Assembly

VA-524-9∗∗∗ 3

8/∗∗∗ /1992

Undetermined

TX-3-421-698

10/8/1992

Undetermined

TX-3-421-699

10/8/1992

Undetermined

TX-3-421-∗∗∗ 00

10/8/1992

Undetermined

TX-3-∗∗∗ 38-8∗∗∗ VA-528-348

12/2∗∗∗ /1993 10/8/1992


VA-528-349

10/8/1992

Undetermined

VA-528-350

10/8/1992

Undetermined

VA-613-418

12/16/1993

Undetermined

TX-5-302-∗∗∗ 96 TX-5-302-∗∗∗ 9∗∗∗

11/∗∗∗ /2000 11/∗∗∗ /2000


Patent No. 6398540

Issue Date ∗∗∗

Value

/6/2002

Undetermined

Total

$28,997, 71.81 plus undetermined amounts

723

8.6 Schedules

SCHEDULE B—PERSONAL PROPERTY Rider B.23—Licenses, franchises and general intangibles Description

Net Book Value

18030: Intangibles—License: Checkers, Rally’s Krystal, Tony Roma’s and Nathan’s Famous 18035: Accum. Amort—License Formulas Total

$ 6,277,627.00 $(5,868,313.95) $12,259,812.68 $12,669,125.73

SCHEDULE B—PERSONAL PROPERTY Rider B.25—Automobiles and other vehicles Description 16140: Vehicles 16540: Accum Depr.—Vehicles Total

Net Book Value $479,086.72 $(286,622.83) $192,463.89

SCHEDULE B—PERSONAL PROPERTY Rider B.28—Office equipment, furnishings and supplies Description 16145: Office Furniture 16155: Office Machinery/Equipment 16545: Accum. Depr.—Office Furniture 16555: Accum. Depr.—Office M&E Total

Net Book Value $435,440.01 $769,151.84 $(215,070.71) $(715,026.92) $274,494.22

724


SCHEDULE B—PERSONAL PROPERTY Rider B.29—Machinery, fixtures, equipment and supplies used in business Description

Net Book Value

15575: Spare Parts—Current 15576: Rollers/Dies/Plates 16130: Plant Machinery & Equipment 16195: Construction In Progress 16530: Accum. Depr.—Plant M&E 19020: Spare Parts—Non-Current 19025: Reserve for Obsolete Spare Prt Total

$1,448,433.17 $65,546.54 $49,850,789.12 $1,068,079.45 $(20,715,654.40) $943,301.99 $(425,287.77) $32,235,208.10

SCHEDULE B—PERSONAL PROPERTY Rider B.30—Inventory Description 14015: RM Inv—Packaging 14020: RM Inv—Meat 14025: RM Inv—Non Meat 14031: Finished Goods—Boil in Bag 14032: Finished Goods—Compart Meals 14033: Finished Goods—Fruit&Vegetab 14034: Finished Goods—Desserts 14035: Finished Goods—Co-Packed 14040: Finished Goods—Manufactured 14045: Finished Goods—Mfd CKE 14055: Finished Goods—Commodity 14060: Finished Goods Clmt—Sandwich 14061: Finished Goods Amhst—Sandwich 14065: Finished Goods—Bakery & Tray 14066: Finished Goods—Baltimore 14070: Capitalized Variances—Corp 14075: Capitalized Variances—Clmt 14080: Capitalized Variances—Cinti 14081: Capitalized Variances—Amherst 14082: Capitalized Variances—Easley 14083: Cap. Variances—West Rome 14084: Cap. Variances—Cedartown 14095: Work In Process 14100: SIT—Inventory Reserve 14110: Obsolete Inventory Accrual 14115: Inventory Accrual—LOCM Total

Net Book Value $2,571,433.25 $3,171,986.64 $3,427,070.32 $52,846.63 $221,989.48 $94,265.34 $1,020,348.07 $666,769.10 $22,772,700.24 $2,163,566.14 $4,649,098.16 $11,552,848.67 $1,125,460.10 $833,425.93 $1,145,250.36 $64,109.64 $(810,379.26) $658,519.02 $85,666.94 $20,970.49 $778,951.82 $(132,821.47) $16,602.19 $736,370.02 $(1,444,295.82) $(1,004,044.58) $54,438,707.42

725

8.6 Schedules

SCHEDULE B—PERSONAL PROPERTY Rider B.35—Other personal property of any kind Description

Net Book Value

15510: Prepaid Insurance 15520: Prepaid Marketing Promos/Rebat 15530: Prepaid Misc. 15540: Prepaid Voucher 15550: Prepaid Warmers 19010: Other Non Current Assets Net Book Value of buildings located on owned real property Total

$662,042.33 $3,206.54 $849,715.46 $4,285,339.56 $233,107.07 $13,108.07 $16,689,664.74 $22,736,183.77

SCHEDULE C—PROPERTY CLAIMED AS EXEMPT Debtor claims the exemptions to which debtor is entitled under: (Check one box) 11 U.S.C. § 522(b)(2) 11 U.S.C. § 522(b)(3)

Description of Property Not Applicable

Specify Law Providing Each Exemption

Check if debtor claims a homestead exemption that exceeds $136,875.

Value of Claimed Exemption

Current Value of Property Without Deducting Exemption

SCHEDULE D—CREDITORS HOLDING SECURED CLAIMS State the name, mailing address, including zip code, and last four digits of any account number of all entities holding claims secured by property of the debtor as of the date of filing of the petition. The complete account number of any account the debtor has with the creditor is useful to the trustee and the creditor and may be provided if the debtor chooses to do so. List creditors holding all types of secured interests such as judgment liens, garnishments, statutory liens, mortgages, deeds of trust, and other security interests. List creditors in alphabetical order to the extent practicable. If a minor child is the creditor, state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child, by John Doe, guardian.” Do not disclose the child’s name. See, 11 U.S.C. §112 and Fed. R. Bankr. P. 1007(m). If all secured creditors will not fit on this page, use the continuation sheet provided.

726


If any entity other than a spouse in a joint case may be jointly liable on a claim, place an “X” in the column labeled “Codebtor,” include the entity on the appropriate schedule of creditors, and complete Schedule H—Codebtors. If a joint petition is filed, state whether the husband, wife, both of them, or the marital community may be liable on each claim by placing an “H,” “W,” “J,” or “C” in the column labeled “Husband, Wife, Joint, or Community.” If the claim is contingent, place an “X” in the column labeled “Contingent.” If the claim is unliquidated, place an “X” in the column labeled “Unliquidated.” If the claim is disputed, place an “X” in the column labeled “Disputed.” (You may need to place an “X” in more than one of these three columns.) Total the columns labeled “Amount of Claim Without Deducting Value of Collateral” and “Unsecured Portion, if Any” in the boxes labeled “Total(s)” on the last sheet of the completed schedule. Report the total from the column labeled “Amount of Claim Without Deducting Value of Collateral” also on the Summary of Schedules and, if the debtor is an individual with primarily consumer debts, report the total from the column labeled “Unsecured Portion, if Any” on the Statistical Summary of Certain Liabilities and Related Data. Check this box if debtor has no creditors holding secured claims to report on this Schedule D.

727

1 continuation sheets attached

Wachovia Bank, National Association

ACCOUNT NO.

Subtotal (Total of this page) Total (Use only on last page)

VALUE $

Letter of Credit re School Bonds Dated 9/30/2007

VALUE $

Pre-petition Credit Facility

ACCOUNT NO.


VALUE $

DATE CLAIM WAS INCURRED, NATURE OF LIEN, AND DESCRIPTION AND VALUE OF PROPERTY SUBJECT TO LIEN

Scandia Capital Group

CODEBTOR

Capital Lease

HUSBAND, WIFE, JOINT, OR COMMUNITY

ACCOUNT NO.

CREDITOR’S NAME AND MAILING ADDRESS INCLUDING ZIP CODE AND AN ACCOUNT NUMBER (SEE INSTRUCTIONS ABOVE.)

CONTINGENT

X

X

X

UNLIQUIDATED

X

X

X

X

DISPUTED

$ $ (If applicable, report also on Statistical Summary of Certain Liabilities and Related Data.)

$ (Report also on Summary of Schedules.)

UNSECURED PORTION, IF ANY

$ 252,051,550.92

5,694,500.00

246,357,050.92

Undetermined

AMOUNT OF CLAIM WITHOUT DEDUCTING VALUE OF COLLATERAL


ACCOUNT NO.


ACCOUNT NO.


CODEBTOR

VALUE $

Letter of Credit re Workers Compensation Dated 11/17/2008

VALUE $

Letter of Credit re Workers Compensation Dated 11/08/2007

DATE CLAIM WAS INCURRED, NATURE OF LIEN, AND DESCRIPTION AND VALUE OF PROPERTY SUBJECT TO LIEN

SCHEDULE D—CREDITORS HOLDING SECURED CLAIMS (Continuation Sheets)


728

CONTINGENT X

X

UNLIQUIDATED X

X

DISPUTED

525,000.00

150,000.00


UNSECURED PORTION, IF ANY

729

VALUE $

VALUE $

VALUE $

UCC Financing Statements

Sheet no. 1 of 1 continuation sheets attached Subtotal(s) to Schedule of Creditors Holding Secured (Total(s) of this page) Claims Total(s) (Use only on last page)

ACCOUNT NO.

ACCOUNT NO.

See attached Schedule D1

ACCOUNT NO. X

X

X

$ $ (If applicable, report also on Statistical Summary of Certain Liabilities and Related Data.)

675,000.00 $ 252,726,550.92 (Report also on Summary of Schedules.)

$

Undetermined

730


In re: Pierre Foods, Inc. Case No. 08-11480 Schedule D Creditors Holding Secured Claims D1 UCC Financing Statements

CREDITOR’S NAME

CREDITORS NOTICE NAME CODEBTOR

Bank of The West

ADDRESS 1

ADDRESS ADDRESS 2 3

CITY

S TATE

ZIP

201 N Civic Dr Ste 360B

Walnut Creek CA

94596

Crown Credit Company

N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569

731

DISPUTED


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20070097112M dated 10/12/2007 regarding all equipment, general intangibles, including software and related licenses and rights, training and all modifications and attachments thereto and replacements therefore now and hereafter covered by the Equipment Lease Agreement dated as of October 04, 2007 between Bank of the West as Lessor and Pierre Foods, Inc. as Lessee and all additional commitments related thereto. Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 5/27/2003 regarding (3) Crown Lift Trucks. PE3540-60 27X4 SN: 6A205360, 6A205361, 6A205362

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 3/12/2004 regarding (2) Crown Lift Trucks. WP2045-45 27X4 SN:5A320 52, 5A320 53 (2) GBC Batteries. 12-SP-7, SN:M8K753019, MBK753020

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 3/24/2004 regarding (1) Crown Lift Truck. RC3020-30TT.190 SN:1A27313

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 5/19/2004 regarding (1) Crown Lift Truck. RD5220-30TT-270 SN:1A274324

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 11/2/2004 regarding (1) Crown Lift Truck. RC3020-30TT-190 SN: 1A2 1091

Y

Y

Y


DATE CLAIM WAS INCURRED, NATURE OF COUNTRY

LIEN AND DESCRIPTION AND VALUE OF PROPERTY SUBJECT TO LIEN

CONTINGENT

UNLIQUIDATED

8.6 Schedules

UNSECURED PORTION IF ANY

732

CREDITOR’S NAME


CREDITORS NOTICE ADDRESS NAME 1 CODEBTOR

ADDRESS ADDRESS 2 3

CITY

S TATE

ZIP


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569


N

40 S Washington St

New Bremen OH

4569

733

LIEN AND DESCRIPTION AND VALUE OF PROPERTY SUBJECT TO LIEN

CONTINGENT

UNLIQUIDATED

DISPUTED

8.6 Schedules


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 12/2/2004 regarding (1) Crown Lift Truck. RD5225-30TT-270 SN: 1A2 2105

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 5/12/2005 regarding (1) Crown Lift Truck. RC3020-30TT-190 SN: 1A2 363

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 5/26/2005 regarding (2) Crown Lift Trucks, RD5225-30TT-270 SN: 1A2 704, 1A2 705 Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 6/21/2005 regarding (1) Crown Lift Truck. PE4000-6D 27X4 : SN: 6A224497; (1) General Battery, 12- 5 13. SN:MDD7 636 : (1) IBC Charger, 12P1-0610-B1, SN: 06131363

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 6/23/2005 regarding (1) Crown Lift Truck. ST3000-30TT- 190, SN:5A502272

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 4/17/2006 regarding (1) Crown Lift Truck. RC3020-30TT-190, SN: 1A300 57

Y

Y

Y


UNITED STATES

North Carolina Secretary of State UCC financing statement # 20030053015M dated 6/26/2006 regarding (3) Crown Lift Trucks. RD5225-30TT-270. SN: 1A30503, 1A305039, 1A305113

Y

Y

DATE CLAIM WAS INCURRED, NATURE OF COUNTRY

UNSECURED PORTION IF ANY


734


SCHEDULE E—CREDITORS HOLDING UNSECURED PRIORITY CLAIMS A complete list of claims entitled to priority, listed separately by type of priority, is to be set forth on the sheets provided. Only holders of unsecured claims entitled to priority should be listed in this schedule. In the boxes provided on the attached sheets, state the name, mailing address, including zip code, and last four digits of the account number, if any, of all entities holding priority claims against the debtor or the property of the debtor, as of the date of the filing of the petition. Use a separate continuation sheet for each type of priority and label each with the type of priority. The complete account number of any account the debtor has with the creditor is useful to the trustee and the creditor and may be provided if the debtor chooses to do so. If a minor child is a creditor, state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child by John Doe, guardian.” Do not disclose the child’s name. See 11 U.S.C. § 112. and Fed. R. Bankr. P. 1007(m). If any entity other than a spouse in a joint case may be jointly liable on a claim, place an “X” in the column labeled “Codebtor,” include the entity on the appropriate schedule of creditors, and complete Schedule H—Codebtors. If a joint petition is filed, state whether the husband, wife, both of them, or the marital community may be liable on each claim by placing an “H,” “W,” “J,” or “C” in the column labeled “Husband, Wife, Joint, or Community.” If the claim is contingent, place an “X” in the column labeled “Contingent.” If the claim is unliquidated, place an “X” in the column labeled “Unliquidated.” If the claim is disputed, place an “X” in the column labeled “Disputed.” (You may need to place an “X” in more than one of these three columns.) Report the total of claims listed on each sheet in the box labeled “Subtotals” on each sheet. Report the total of all claims listed on this Schedule E in the box labeled “Total” on the last sheet of the completed schedule. Report this total also on the Summary of Schedules. Report the total of amounts entitled to priority listed on each sheet in the box labeled “Subtotals” on each sheet. Report the total of all amounts entitled to priority listed on this Schedule E in the box labeled “Totals” on the last sheet of the completed schedule. Individual debtors with primarily consumer debts report this total also on the Statistical Summary of Certain Liabilities and Related Data. Report the total of amounts not entitled to priority listed on each sheet in the box labeled “Subtotals” on each sheet. Report the total of all amounts not entitled to priority listed on this Schedule E in the box labeled “Totals” on the last sheet of the completed schedule. Individual debtors with primarily consumer debts report this total also on the Statistical Summary of Certain Liabilities and Related Data. Check this box if debtor has no creditors holding unsecured priority claims to report on this Schedule E. TYPES OF PRIORITY CLAIMS (Check the appropriate box(es) below if claims in that category are listed on the attached sheets) Domestic Support Obligations Claims for domestic support that are owed to or recoverable by a spouse, former spouse, or child of the debtor, or the parent, legal guardian, or responsible

8.6 Schedules

735

relative of such a child, or a governmental unit to whom such a domestic support claim has been assigned to the extent provided in 11 U.S.C. § 507(a)(1). Extensions of Credit in an Involuntary Case Claims arising in the ordinary course of the debtor’s business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee or the order for relief. 11 U.S.C. § 507(a)(3). Wages, Salaries, and Commissions Wages, salaries, and commissions, including vacation, severance, and sick leave pay owing to employees and commissions owing to qualifying independent sales representatives up to $10,950∗ per person earned within 180 days immediately preceding the filing of the original petition, or the cessation of business, whichever occurred first, to the extent provided in 11 U.S.C. § 507(a)(4). Contributions to Employee Benefit Plans Money owed to employee benefit plans for services rendered within 180 days immediately preceding the filing of the original petition, or the cessation of business, whichever occurred first, to the extent provided in 11 U.S.C. § 507(a)(5). Certain Farmers and Fishermen Claims of certain farmers and fishermen, up to $ 5,400∗ per farmer or fisherman, against the debtor, as provided in 11 U.S.C. § 507(a)(6). Deposits by Individuals Claims of individuals up to $2,425∗ for deposits for the purchase, lease, or rental of property or services for personal, family, or household use, that were not delivered or provided. 11 U.S.C. § 507(a)(7). Taxes and Certain Other Debts Owed to Governmental Units Taxes, customs duties, and penalties owing to federal, state, and local governmental units as set forth in 11 U.S.C. § 507(a)(8). Commitments to Maintain the Capital of an Insured Depository Institution Claims based on commitments to the FDIC, RTC, Director of the Office of Thrift Supervision, Comptroller of the Currency, or Board of Governors of the Federal Reserve System, or their predecessors or successors, to maintain the capital of an insured depository institution. 11 U.S.C. § 507(a)(9). Claims for Death or Personal Injury While Debtor Was Intoxicated Claims for death or personal injury resulting from the operation of a motor vehicle or vessel while the debtor was intoxicated from using alcohol, a drug, or another substance. 11 U.S.C. § 507(a)(10).

∗ Amounts

are subject to adjustment on April 1, 2010, and every three years thereafter with respect to cases commenced on or after the date of adjustment.


CODEBTOR

Sheet no. 1 of 1 continuation sheets attached to Schedule of Creditors Holding Priority Claims

Account No.

Account No.

Account No. See General Note Regarding Schedule E.

Butler County Water & Sewer 130 High St Hamilton, OH 45011-1827

Account No.


X

X

$ 924,747.00

$ 924,747.00

$924,747.00

$ 924,747.00

$ 924,747.00

$924,747.00

AMOUNT AMOUNT OF ENTITLED CLAIM TO PRIORITY

$ 0.00

$ 0.00

Undetermined

AMOUNT NOT ENTITLED TO PRIORITY, IF ANY

Type of Priority for Claims Listed on This Sheet UNLIQUIDATED

Subtotals (Totals of this page) Total (Use only on last page of the completed Schedule E. Report also on the Summary of Schedules.) Totals (Use only on last page of the completed Schedule E. If applicable, report also on the Statistical Summary of Certain Liabilities and Related Data.)

DATE CLAIM WAS INCURRED AND CONSIDERATION FOR CLAIM CONTINGENT

SCHEDULE E—CREDITORS HOLDING UNSECURED PRIORITY CLAIMS (Continuation Sheets)

DISPUTED

736

8.6 Schedules

737

SCHEDULE F—CREDITORS HOLDING UNSECURED NONPRIORITY CLAIMS State the name, mailing address, including zip code, and last four digits of any account number, of all entities holding unsecured claims without priority against the debtor or the property of the debtor, as of the date of filing of the petition. The complete account number of any account the debtor has with the creditor is useful to the trustee and the creditor and may be provided if the debtor chooses to do so. If a minor child is a creditor, state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child, by John Doe, guardian.” Do not disclose the child’s name. See, 11 U.S.C. §112 and Fed. R. Bankr. P. 1007(m). Do not include claims listed in Schedules D and E. If.all creditors will not fit on this page, use the continuation sheet provided. If any entity other than a spouse in a joint case may be jointly liable on a claim, place an “X” in the column labeled “Codebtor,” include the entity on the appropriate schedule of creditors, and complete Schedule H—Codebtors. If a joint petition is filed, state whether the husband, wife, both of them, or the marital community may be liable on each claim by placing an “H,” “W,” “J,” or “C” in the column labeled “Husband, Wife, Joint, or Community.” If the claim is contingent, place an “X” in the column labeled “Contingent.” If the claim is unliquidated, place an “X” in the column labeled “Unliquidated.” If the claim is disputed, place an “X” in the column labeled “Disputed.” (You may need to place an “X” in more than one of these three columns.) Report the total of all claims listed on this schedule in the box labeled “Total” on the last sheet of the completed schedule. Report this total also on the Summary of Schedules and, if the debtor is an individual with primarily consumer debts, report this total also on the Statistical Summary of Certain Liabilities and Related Data. Check this box if debtor has no creditors holding unsecured claims to report on this Schedule F.

738

0

continuation sheets attached

ACCOUNT NO.

See attached Schedule F2

ACCOUNT NO.

See attached Schedule F1

ACCOUNT NO.

US Bank National Association, as Indentured Trustee

ACCOUNT NO.

CREDITOR’S NAME, MAILING ADDRESS INCLUDING ZIP CODE, AND ACCOUNT NUMBER (SEE INSTRUCTIONS ABOVE.)

CONTINGENT X

X

X

X

Subtotal

X

X

UNLIQUIDATED

HUSBAND, WIFE, JOINT, OR COMMUNITY Total (Use only on last page of the completed Schedule F.) (Report also on Summary of Schedules and, if applicable, on the Statistical Summary of Certain Liabilities and Related Data.)

Other General Unsecured Claims

Intercompany Claims

Unsecured 9 7/8% Notes Due July 15, 2012

DATE CLAIM WAS INCURRED AND CONSIDERATION FOR CLAIM. IF CLAIM IS SUBJECT TO SETOFF, SO STATE.

DISPUTED

CODEBTOR

$ 186,577,882.21 $ 186,577,882.21

20,077,676.39

35,258,070.59

131,222,135.23

AMOUNT OF CLAIM

739

9990 Princerton Road





Clovervale Farms. Inc.

Clovervale Transporatation. Inc.

Zar Tran, LLC

Zartic, LLC

ADDRESS 1

Chefs Pantry. Inc.

CREDITOR’S NAME

CREDTOR NOTICE NAME

In re: Pierre Foods, Inc. Case No. 08-11480 (KG) Schedule F Creditors Holding Unsecured Claims F1 Intercompany Claims

ADDRESS 2 ADDRESS 3 S TATE

Cincinnati OH

Cincinnati OH

Cincinnati OH

Cincinnati OH

Cincinnati OH

CITY

45246

45246

45246

45246

45246

ZIP

UNITED STATES

UNITED STATES

UNITED STATES

UNITED STATES

UNITED STATES

COUNTRY

Intercomapny Payable

Intercomapny Receivable



Intercomapny Receivable

INCURRED AND CONSIDERATION FOR CLAIM

DATE CLAIM WAS

TO SETOFFS Y/N

SUBJECT

CONTENGENT

Y

Y

Y

Y

Y

UNLIQUIDATED

F1 Total:

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

DISPUTED

$35,258,070.59

$38,902,103,40

(56,177,201,46)

$156,365,56

$8,745,824,27

($6,369,021,18)

OF CLAM

TOTAL AMOUTN

740


CREDITOR’S NAME

CREDITOR NOTICE NAME

In re: Pierre Foods, Inc. Case No. 08-11480 (KG) Schedule F Creditors Holding Secured Claims F2 Other General Unsecured Claims

ADDRESS 1

4 Aces Inc A&L Imaging

ADDRESS 2 2500 Oxford State Rd 3963 Virginia Ave

A One Pallet Distributing Inc Aaa Corporate Service Abernathy Betty

PO Box 4103 Attn Travel Acconting 15 West Central Pkwy 1319 N. Main Ave.

Abernathy, Erin

RR 1, Box 81-A

Abrasive Technologies & Sup Ac Tool & Machine Company ACC Business

PO Box 10065 3711 Nobel Court PO BOX 13136

Accountemps

Ach Food Companies Inc

12400 Collections Center Dr 13029 Collections Center Dr PO Box 409177

Acreo Inc Action Technology

3209 Marshall Dr PO Box 18400

Adco Manufacturing

2170 Academy Ave

Accu Sort Systems Inc

Addair, Eric

3710 Cindetella St.

Adkins Marti

3637 Kinsinger Rd.

ADP Inc

PO Box 9001006

ADT Security Services Inc

PO Box 371967

Advanced Industrial Products Affordable Mobile Storage Air Liquide America Corp

Kevin PO Box 1059 PO Box 95198

Air Products & Chemicals

PO Box 178

Aircond Corporation

PO Box 945617

Airflow Equipment Inc

PO Box 75224

Airgas Great Lakes

PO Box 802807

Airgas Specialty Products Inc Aldridge, Welda

PO Box 532414 P.O. Box 184

All American Foods Inc

PO Box 8242

Allen & Allen Allen, Eligha

Attn Chris Allen 106 Sherman Ave.

Allen, Nancy

P.O. Box 582

Hwy 84 West

ADDRESS 3

741

TOTAL AMOUNT OF

UNITED STATES Vendor UNITED STATES Vendor

N N

N N N N

$3,422.50 $1,021.05

47025 45202 286583043 286108901 28603

UNITED STATES Vendor UNITED STATES Vendor UNITED STATES Unclaimed check

N N N

N N N N N N

$28,193.70 $2,695.42 $62.50

UNITED STATES Unclaimed check

N

N N

$77.50

UNITED STATES Vendor

N

N N

$10,832.78

UNITED STATES Vendor UNITED STATES

N N

N N N N

$652.50 $7,432.32

IL

40216 071015636 60693


N

N N

$59,151.67

Chicago

IL

60693


N

N N

$4,816.86

Atlanta

GA

30384


N

N N

$40,124.00

Amelia Newark

OH NJ


N N

N N N N

$240.00 $2,116.80

Sanger

CA


N

N N

$465.27

Claremont

NC


N

N N

$50.00

Hamilton

OH


N

N N

$25.00

Louisville

KY

45102 071918400 936573795 286109582 450139711 402901006


N

N N

$1,378.50

Pittsburgh

PA

152507667


N

N N

$237.50

Plain City Conover Chicago

OH NC IL

UNITED STATES Vendor UNITED STATES Vendor UNITED STATES Vendor

N N N

N N N N N N

$283.82 $108.45 $10,528.42

Kingsport

TN


N

N N

$350.00

CITY

STATE

DISPUTED

UNLIQUIDATED

CONTINGENT

DATE CLAIM WAS

SUBJECT TO SETOFFS Y/N

8.6 Schedules

ZIP

Middletown Cincinnati

OH OH

45044 45227

Lawrenceburg Cincinnati Newton

IN OH NC

Claremont

NC

Hickory

NC

Louisville Newark

KY NJ

Chicago

28613 606945198 376620178 30394

COUNTRY


CLAIM

Atlanta

GA


N

N N

$650.00

Ft Thomas

KY

410750224


N

N N

$1,572.24

Chicago

IL

606802807


N

N N

$61.58

Atlanta Crossnore

GA NC

UNITED STATES Vendor UNITED STATES Unclaimed check

N N

N N N N

$14,039.79 $490.00

Mankato

MN


N

N N

$3,337.50

Winnfield Hamilton

LA OH

UNITED STATES Vendor UNITED STATES Unclaimed check

N N

N N N N

$293.00 $25.00

Newport

TN

30353 286160184 560028242 71483 450133040 378220582


N

N N

$67.50

742

CREDITOR’S NAME

CREDITOR NOTICE NAME


ADDRESS 1

Allied Glass & Mirror Co Allied Industrial Supply Inc Allied Lock & Door Svc Allied Supply Co Allied Supply Co Inc Allison, Denise

Sales Dept

Alltel Alvallere, Orlando

605 North Ave.

Ambrose Packaging Inc

3758 Warsaw Ave 110 E Monument Ave 1100 E Monument Ave

1654 South Lone Elm Rd PO Box 650448

American Express American Express

Delta Skymiles

Box 0001

American Institute Of Baking

1213 Bakers Way

American Metal Supply Co American Power Services

PO Box 421233 2788 Circleport Dr

American Red Cross

Cincinnati Chapter

PO Box 640343

American Storage Trailers Inc Americold Logrstics

292 Brookview Rd PO Box 78949

Americold Logistics

PO Box 2017

Americraft Carton Memphis

PO Box 876303

Americraft Carton Winston Salem Amphire Solutions Inc

PO Box 87 6305

Anderson No 5 Anderson, Keith Anixter Inc

Dept Ch 17238 PO Box 439 P.O. Box 1081 PO Box 847428

Annas Awning & Canvas Co Anthony, Michael

PO Box 956 1754 Zion Rd., Lot 32

Anvil America Inc Applegate, Debra

175 Mills Gap Ste 700 6473 Lewis Rd.

Aquapure Technologies Inc Aramac Supply Co

5201 Creek Rd 2822 Spring Grove Ave PO Box 12131 PO Box 92572

Aramark Uniform Services Archer Daniels Midland Archer Daniels Midland Company

ADDRESS 3

2036 Reading Rd PO Box 3525

2075 Settlemyre Bridge Rd. 2766 Liberty Church Rd. PO BOX 95019

Allison, James

ADDRESS 2

Ron Cardwell

4666 Faries Pkwy

PO Box 3999

743

TOTAL AMOUNT OF

ZIP

DISPUTED

UNLIQUIDATED

CONTINGENT

STATE

DATE CLAIM WAS

SUBJECT TO SETOFFS Y/N

8.6 Schedules

Cincinnati Hickory

OH NC

45202 28603


N N

N N N N

$402.48 $2,381.08

Cincinnati Dayton Dayton

OH OH OH

UNITED STATES Vendor UNITED STATES Vendor UNITED STATES Vendor

N N N

N N N N N N

$55.91 $310.90 $291.00

Newton

NC


N

N N

$100.00

Yadkinville

NC

45205 45402 454025820 286589566 270556382 282960019 273304533 66061


N

N N

$25.00


N

N N

$696.48


N

N N

$32.50


N

N N

$1,985.27


N

N N

$2,178.09


N

N N

$3,785.57


N

N N

$100.00


N N

N N N N

$14,187.17 $1,176.00

CITY

CHARLOTTE NC

COUNTRY


CLAIM

Sanford

NC

Olathe

KS

Dallas

TX

Los Angeles

CA

Manhattan

KS

Middletown Erlanger

OH KY

Cincinnati

OH

452640343


N

N N

$40.00

Statesville Milwaukee

NC WI


N N

N N N N

$6,528.99 $114,071.85

Portland

OR


N

N N

$982.69

Kansas City

MO


N

N N

$341,206.46

Kansas City

MO


N

N N

$22,413.76

Palatine

IL


N

N N

$368.00

Anderson Claremont Dallas

SC NC TX

UNITED STATES Vendor UNITED STATES Unclaimed check UNITED STATES Vendor

N N N

N N N N N N

$72.65 $7.50 $181.65

Hickory

NC


N

N N

$160.50

Morganton

NC

28625 632780949 972082017 641876303 641876305 600557238 29622 28610 752847428 286030956 28655-


N

N N

$27.50

Fletcher

NC

8919 28732


N

N N

$12,271.22

Loveland

OH

451409175


N

N N

$87.50

Blue Ash

OH OH

45242 45225


N N

N N N N

$286.44 $16.18

Cincinnati Chiacgo

OH IL


N N

N N N N

$17,603.25 $28,006.60

Decatur

IL

45212 606752572 62525


N

N N

$683,719.75

752650448 900960001 665053999 45042 41018

744


SCHEDULE G—EXECUTORY CONTRACTS AND UNEXPIRED LEASES Describe all executory contracts of any nature and all unexpired leases of real or personal property. Include any timeshare interests. State nature of debtor’s interest in contract, i.e., “Purchaser,” “Agent,” etc. State whether debtor is the lessor or lessee of a lease. Provide the names and complete mailing addresses of all other parties to each lease or contract described. If a minor child is a party to one of the leases or contracts, state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child, by John Doe, guardian.” Do not disclose the child’s name. See, 11 U.S.C. §112 and Fed. R. Bankr. P. 1007(m). Check this box if debtor has no executory contracts or unexpired leases.

NAME AND MAILING ADDRESS, INCLUDING ZIP CODE, OF OTHER PARTIES TO LEASE OR CONTRACT. See attached rider.

DESCRIPTION OF CONTRACT OR LEASE AND NATURE OF DEBTOR’S INTEREST. STATE WHETHER LEASE IS FOR NONRESIDENTIAL REAL PROPERTY. STATE CONTRACT NUMBER OF ANY GOVERNMENT CONTRACT.

745

3963 Virginia Ave

15521 67th St East

A & L Imaging

A. Wall Enterprises LLC

15 W Central Pkwy

15 W Central Pkwy

15 W Central Pkwy

3437 SW 24th Ave

PO Box 13136

AAA

AAA Corporate Travel Services

AAA Corporate Travel Services

Abc Research

Acc Business

A-1 Marketing Inc

A.I.C.P.

Address 1

Name of other parties to lease or contract

In re: Pierre Foods, Inc. Case No. 08-11480 Schedule G Executory Contracts and Unexpired Leases

Address 2

Newark

Gainesville

Cincinnati

Cincinnati

Cincinnati

Sumner

Cincinnati

City

NJ

FL

OH

OH

OH

WA

OH

State

07101-5636

32607

45202

45202

45202

98390

45227

Zip

United States

United States

United States

United States

United States

United States

Country

(Continued )

Private Line Pricing Schedule between Pierre Foods, Inc. and ACC Business dated 6-1-2005

General Professional Services

Travel Management Agreement

Sell General Professional Services

Travel


Description of contract or lease and nature of debtor’s interest. State whether lease is of nonresidential real property. State contract number of any government contract

746

4109 Williams Blvd

625 Eden Park Dr. 120

12400 Collections Center Dr

4790 Rings Rd

2850 E 29th St

2215 Tradeport Dr

PO Box 0888

PO Box 229

PO Box 944 212 John Davenport Drive

100 1 Patco

Accent Marketing

Accountants To You

Accountemps

ACWS

Acom Solutions

Action Brokerage Consult Inc

ADP Inc.

Advance Marketing Inc

Advance Painting Services Inc Advanceo Cleaning Systems

Advantage Marketing

Advantage Marketing NY

Address 1

Name of other parties to lease or contract Address 2

Islandia

Grayson

Bluefield

Carol Stream

Orlando

Long Beach

Dublin

Chicago

Cincinnati

Kenner

City

NY

GA

VA

IL

FL

CA

OH

IL

OH

LA

State

11749

30017

24605

60132

32824

90806

43017

60693

45202

70065

Zip

United Stales

United States

United States

United States

United Sates

United States

United States

United States

United States

Country

General Professional Services Cleaning Service Agreement

ADP Professional Services

Forms software-BOL and Invoices

Claim Management

Temporary Personnel/Consulants

Temporary Personnel/Consultants


747

PO Box 680932

1400Coliseum Blvd

336 West 3rd Street

PO Box 2732

Alabama Commercial Doors Inc

Alabama Dept Of Environmental Management

Alarm Systems

Alarm Systems lnc

PO Box 2732

590 MADISON AVE 22ND FLR

Akin Gunp Strauss Hauer & Feld Llp

Rome

Rome

Montgomery

Fort Payne

NEW YORK

Atlanta

GA

GA

AL

AL

NY

GA

30164

30164-2732

36110-2059

35968

10022

30353

30161-5247

United States

United States

United States

United States

United States

United States

United States

PO Box 532414

GA

(Continued )

General Office Services

Security—Burglar and Fire Alarms





Supplies Nitrogen & CO2

Liquid Carbon Dioxide Supplyer Partnership Agreement

Airgas Specialty Products Inc.

Rome

60525

900 Spider Webb Drive SE

IL

Airgas South

Countryside

United States

3rd Party Audit Professional Services

5230 S East Ave

60694

United Stats

Air Liquide America Lp

IL

66502

United States

United States

Equipment Sale Agreement

Federalsburg

KS

70123

91107

PO Box 95198

Manhattan

LA

CA

Air Liquide America

1213 Bankers Way

AIB International

Harahan

Pasadena

Human Resources Contract

176 Imperial Woods Dr

Ahd Foodservice Consultants

Pnc Bank Lockbox 911721

AIG American General

465 North Halstead Ste 160

Advantage Sales & Marketing SE

748

124 Beebe Ave

750 Forest Edge Dr

43650 Oberlin Rd

PO Box 9001902

Allen Thompson

Allied Marketing

Allied Waste

Alltel

Louisville

Oberlin

Vernon Hills

Elynae

Virginia Beach

535 London Bridge Rd

Cincinnati

All Virgina Fd Svc Brokers

4307 Wuebold Ln

Alfred Determan

Grand Rapids

Juneau

City

Louisville

1444 Scribner N W

Alec Stephens Associates Inc

PO Box 110500

Address 2

Alfred Nickles Bakery, 7401 Trade Port Dr Inc. Algood Food Company

801 W 10th St. Ste 200

Address 1

Alaska Department Of Education And Early Development

Name of other parties to lease or contract

NK

OH

IL

OH

VA

KY

OH

MI

AK

National Processing Agreement—State Participation Agreement

United States Trash removal

United States Consulting Professional Services

United States

Vendor Contract Peanut Butter Supplier Agreement

United States Sell Consulting Professional Services

United States

Country

40290-1902 United States Communications—Claremont Facility Wireless Contracts

44074

60051

44035

23454

40258

45245

49504

99611-0500

State Zip


749

Anthony Nocito

PO Box 1265

Anderson Fire & Salety

Anderson

Issaquah

SC

WA

29622

98027

30092

United States

United States

United States

Employees—Lab-Outside Services

Safety inspections

Lab—Outside Services

Lab—Outside Services

845 Lake Dr Ste 200

GA

United States

Anderson Chamberlin Inc

Norcross

30340

110 Technology Pkwy

GA

Untied States

Analytical Services Inc

Atlanta

92612

3785 Presidential Pkwy

CA

Analytical Environmental

Irvine

Rotary Cutting Conveyor

18201 Von Karman Ave

Acct Rev Ste 700

United States

Amplicon Financial

90401

Propane Tanks

For PO’s to Cloverale—ZARTIC

CA

44044

Amphire (C-Vale)

Santa Monica

OH

1417 6th St 3rd F1

Sanit/Sec-Plant Security

Ami Inflight LLC

Grafton

45248

United States

1143 Elm St

OH

66505-399


Amerigas

Cincinnati

KS

United States

Cell Phone Contract

Instructor Training

10670 Kenwood Road

Manhattan

10022

United Staes

Cincinnati Area Chapter

PO Box 3999

NY

28168

American Red Cross Cincinnati Chapter

1213 Bakers Way

American Institute Of Baking

New York

NC

Koenig equipment

600 Lexington Ave 6th Fl

Alvarez & Marshal Holdings LLC

Hickory

American Packaging Capital Inc

1085 Lenoir Rhyne Blvd SE

Alltel Wireless

750


SCHEDULE H—CODEBTORS Provide the information requested concerning any person or entity, other than a spouse in a joint case, that is also liable on any debts listed by the debtor in the schedules of creditors. Include all guarantors and co-signers. If the debtor resides or resided in a community property state, commonwealth, or territory (including Alaska, Arizona, California, Idaho, Lousiana, Nevada, New Mexico, Puerto Rico, Texas, Washington, or Wisconsin) within the eight year period immediately preceding the commencement of the case, identify the name of the debtor’s spouse and of any former spouse who resides or resided with the debtor in the community property state, commonwealth, or terrority. Include all names used by the nondebtor spouse during the eight years immediately preceding the commencement of this case. If a minor child is a codebtor or a creditor, state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child, by John Doe, guardian.” Do not discolse the child’s name. See 11 U.S.C. § 112; Fed. Bankr.P. 1007(m). Check this box if debtor has no codebtors. NAME AND ADDRESS OF CODEBTOR See attached rider.

NAME AND ADDRESS OF CREDITOR

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8.6 Schedules

Schedule H Codebtors Pierre Foods, Inc. Case No. 08-11480 (KG) Debtor Pierre Foods, Inc.,

Obligation Pre-petition

Chefs Pantry, Inc., Clovervale Farms, Inc., Clovervale Transportation, Inc.,

Credit Facility (See Schedule D)

Fresh Foods Properties, LLC, PF Management, Inc., Pierre Holding Corp., Pierre Real Property, LLC, Warfighter Foods, LLC, Zartic, LLC, Zartic Real Property, LLC, Zar Tran, LLC, and Zar Tran Real Property, LLC Pierre Foods, Inc.,

Unsecured 97/8% Notes due July 15, 2012

Chefs Pantry, Inc., Clovervale Farms, Inc., Clovervale Transportation, Inc., Fresh Foods Properties, LLC, Pierre Real Property, LLC, Warfighter Foods, LLC, Zartic, LLC, Zartic Real Property, LLC, Zar Tran, LLC, and Zar Tran Real Property, LLC Pierre Foods, Inc., Chefs Pantry, Inc., Clovervale Farms, Inc., Clovervale Transportation, Inc., Fresh Foods Properties, LLC, PF Management, Inc., Pierre Holding Corp., Pierre Real Property, LLC, Warfighter Foods, LLC, Zartic, LLC, Zartic Real Property, LLC, Zar Tran, LLC, and Zar Tran Real Property, LLC

(See Schedule F)

Pending Litigation (See Schedule F)

Creditor Wachovia Bank, National Association 201 S Tyron St. 7th Fl Main Charlotte, NC 28288-1008

US Bank National Association, as Indentured Trustee Corporate Trust Services One Federal St. 3rd Floor Boston, MA 02110

Various Parties

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DECLARATION CONCERNING DEBTOR’S SCHEDULES DECLARATION UNDER PENALTY OF PERJURY BY INDIVIDUAL DEBTOR I declare under penalty of perjury that I have read the foregoing summary sheets, and that they are true and correct to and schedules, consisting of the best of my knowledge, information, and belief.

Date Date

Signature: Debtor Signature: (Joint Debtor, if any) [If joint case, both spouses must sign.]

DECLARATION AND SIGNATURE OF NON-ATTORNEY BANKRUPTCY PETITION PREPARER (See 11 U.S.C. § 110) I declare under penalty of perjury that: (1) I am a bankruptcy petition preparer as defined in 11 U.S.C. § 110; (2) I prepared this document for compensation and have provided the debtor with a copy of this document and the notices and information required under 11 U.S.C. § 110(b), 110(h) and 342(b); and, (3) if rules or guidelines have been promulgated pursuant to 11 U.S.C. § 110(h) setting a maximum fee for services chargeable by bankruptcy petition preparers, I have given the debtor notice of the maximum amount before preparing any document for filing for a debtor or accepting any fee from the debtor, as required by that section. Printed or Typed Name and Title, if any, of Bankruptcy Petition Preparer

Social Security No. (Required by 11 U.S.C. § 110)

If the bankruptcy petition preparer is not an individual, state the name, title (If any), address, and social security number of the officer, principal, responsible person, or partner who signs this document.

Address X Signature of Bankruptcy Petition Preparer

Date

Names and Social Security numbers of all other individuals who prepared or assisted in preparing this document, unless the bankruptcy petition preparer is not an individual: If more than one person prepared this document, attach additional signed sheets conforming to the appropriate Official Form for each person.

753

8.6 Schedules

A bankruptcy petition preparer’s failure to comply with the provisions of title 11 and the Federal Rules of Bankruptcy Procedure may result in fines or imprisonment or both. 11 U.S.C. § 110; 18 U.S.C. § 156. DECLARATION UNDER PENALTY OF PERJURY ON BEHALF OF A CORPORATION OR PARTNERSHIP Vice President, Chief Financial Officer, I, the Secretary and Treasurer [the president or other officer or an authorized agent of the corporation or a member or an authorized agent of the partnership] of the Pierre Foods, Inc. [corporation or partnership] named as debtor in this case, declare under penalty of perjury that I have read the foregoing summary sheets (Total shown on summary page plus and schedules, consisting of 1), and that they are true and correct to the best of my knowledge, information, and belief. Date 09/02/2008

Signature: Vice President, Chief Financial Officer, Cynthia S. Hughes, Secretary and Treasurer

[Print or type name of individual signing on behalf of debtor.] [An individual signing on behalf of a parnership or corporation must indicate position or relationship to debtor.] Penalty for making a false statement or concealing property: Fine of up to $500,000 or imprisonment for up to 5 years or both. 18 U.S.C. §§ 152 and 3571.

754 8.7


Statement of Financial Affairs

Objective. Section 8.12 of Volume 1 of Bankruptcy and Insolvency Accounting describes the statement of financial affairs, a series of detailed questions about the debtor’s property and conduct. The general purpose of the statement of financial affairs is to give both the creditors and the court an overall view of the debtor’s operations. Presented below are documents from the completed statement of affairs for Pierre Foods. Selected parts of some of the more detailed information have been omitted (for example, the answer to question 3(b) dealing with payments to creditors, which was 221 pages long). IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE



THIS STATEMENT OF FINANCIAL AFFAIRS APPLIES TO:

X

Chef’s Pantry, Inc. Clovervale Farms, Inc. Clovervale Transportation, Inc. Fresh Foods Properties, LLC PF Management, Inc. Pierre Foods, Inc. Pierre Holding Corp.

Pierre Real Property, LLC Warfighter Foods, LLC Zar Tran Real Property, LLC Zar Tran, LLC Zartic Real Property, LLC Zartic, LLC

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Pierre Foods, Inc. (5643); Pierre Holding Corp. (0320); PF Management, Inc. (4935); Pierre Real Property, LLC (5302); Fresh Foods Properties, LLC (1730); Clovervale Farms, Inc. (1082); Chefs Pantry, Inc. (5649); Clovervale Transportation, Inc. (9470); Zartic, LLC (9891); Zartic Real Property, LLC (9895); Zar Tran, LLC (9892); Warfighter Foods, LLC (5678); Zar Tran Real Property, LLC (9896). The location of the Debtors’ corporate headquarters and the service address for all Debtors is: 9990 Princeton Road, Cincinnati, Ohio 45246.

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GLOBAL NOTES AND STATEMENT OF LIMITATIONS, METHODS AND DISCLAIMER REGARDING THE DEBTORS’ SCHEDULES OF ASSETS AND LIABILITIES AND STATEMENTS OF FINANCIAL AFFAIRS Pierre Foods, Inc., et al.1 (collectively, the “Debtors”) are filing their respective Schedules of Assets and Liabilities (the “Schedules”) and Statements of Financial Affairs (the “Statements” and, with the Schedules, the “Schedules and Statements”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors, with the assistance of their advisors, prepared the Schedules and Statements in accordance with section 521 of title 11 of the United States Code, 11 U.S.C. §§ 101–1532 (the “Bankruptcy Code”) and Rule 1007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). These Global Notes and Statement of Limitations, Methods and Disclaimer Regarding the Debtors’ Schedules and Statements (collectively, the “Global Notes”) pertain to, are incorporated by reference in, and comprise an integral part of, all the Schedules and Statements. These Global Notes should be referred to, and reviewed in connection with, any review of the Schedules and Statements.2 The Schedules and Statements have been prepared by the Debtors’ management and are unaudited and subject to further review and potential adjustment. In preparing the Schedules and Statements, the Debtors relied on financial data derived from their books and records that was available at the time of preparation. The Debtors have made reasonable efforts to ensure the accuracy and 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are: Pierre Foods, Inc., (5643); Chefs Pantry, Inc. (5649); Clovervale Farms, Inc. (1082); Clovervale Transportation, Inc. (9470); Fresh Foods Properties, LLC (1730); PF Management, Inc. (4935); Pierre Holding Corp. (0320); Pierre Real Property, LLC (5302); Warfighter Foods, LLC (5678); Zartic, LLC (9891); Zartic Real Property, LLC (9895); Zar Tran, LLC (9892); Zar Tran Real Property, LLC (9896). The location of the Debtors’ corporate headquarters and the service address for all Debtors is: 9990 Princeton Road, Cincinnati, Ohio 45246. 2 These Global Notes are in addition to any specific notes contained in each Debtor’s Schedules or Statements. The fact that the Debtors have prepared a “General Note” with respect to any of the Schedules and Statements and not to others should not be interpreted as a decision by the Debtors to exclude the applicability of such General Note to any of the Debtors’ remaining Schedules and Statements, as appropriate.

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completeness of such financial information, however, subsequent information or discovery may result in material changes to the Schedules and Statements and inadvertent errors, omissions or inaccuracies may exist. The Debtors reserve all rights to amend or supplement their Schedules and Statements. Reservation of Rights. Nothing contained in the Schedules and Statements or these Global Notes shall constitute a waiver of any of the Debtors’ rights or an admission with respect to their chapter 11 cases including, but not limited to, any issues involving objections to claims, substantive consolidation, equitable subordination, defenses, characterization or re-characterization of contracts, assumption or rejection of contracts under the provisions of chapter 3 of the Bankruptcy Code and/or causes of action arising under the provisions of chapter 5 of the Bankruptcy Code or any other relevant applicable laws to recover assets or avoid transfers. Description of the Cases and “As of” Information Date. On July 15, 2008 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief with the Court under chapter 11 of the Bankruptcy Code. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On July 16, 2008, the Court entered an order jointly administering these cases pursuant to Bankruptcy Rule 1015(b). Unless otherwise indicated (see Note regarding Totals below), all amounts listed in the Schedules and Statements are as of 8:30 a.m. on July 15, 2008. Corporate Structure. The corporate structure is as follows: a. Pierre Holding Corp. owns 100% of PF Management, Inc.; b. PF Management, Inc. owns 100% of Pierre Foods, Inc.; c. Pierre Foods, Inc. owns 100% of each of Warfighter Foods, LLC, Zar Tran, LLC, Zartic, LLC, Clovervale Farms, Inc., Fresh Foods Properties, LLC, Pierre Real Property, LLC; d. Zar Tran, LLC owns 100% of Zar Tran Real Property, LLC; e. Zartic, LLC owns 100% of Zartic Real Property, LLC; f. Clovervale Farms, Inc. owns 100% of each of Clovervale Transportation, Inc., and Chefs Pantry, Inc.; g. Madison Dearborn Capital Partners IV. L.P. owns 90.24% of Pierre Holding Corp. (Common Stock); and h. Madison Dearborn Capital Partners IV. L.P. owns 96.27% of Pierre Holding Corp. (Preferred Stock). Basis of Presentation. For purposes of filing reports with the Securities and Exchange Commission (the “SEC”), Pierre Foods, Inc. has historically prepared consolidated financial statements which include each of the Debtors other than Pierre Holding Corp. and PF Management, Inc. Unlike the consolidated financial statements, the Schedules and Statements, except where otherwise indicated, reflect the assets and liabilities of each Debtor on a non-consolidated basis. Accordingly, the totals listed in the Schedules and Statements will likely differ, at times materially, from the consolidated financial reports prepared by the Debtors for public reporting purposes or otherwise. The Debtors’ books and records have historically been kept on a consolidated basis and are not maintained by legal entity. For purposes of the Schedules and

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Statements, the Debtors used reasonable efforts to attribute the assets and liabilities of each regional division to the proper legal entity; however, because of the consolidated nature of the Debtors’ bookkeeping, it is possible that not all assets or liabilities have been recorded at the correct legal entity on the Schedules and Statements. As such, the Debtors reserve all rights to amend these Schedules and Statements accordingly. Although these Schedules and Statements may, at times, incorporate information prepared in accordance with generally accepted accounting principles (“GAAP”), the Statements and Schedules neither purport to represent nor reconcile financial statements otherwise prepared and/or distributed by the Debtors in accordance with GAAP or otherwise. Moreover, given, among other things, the uncertainty surrounding the collection and ownership of certain assets and the valuation and nature of certain liabilities, to the extent that a Debtor shows more assets than liabilities, this is not an admission that the Debtor was solvent at the Petition Date or at any time prior to the Petition Date. Likewise, to the extent that a Debtor shows more liabilities than assets, this is not an admission that the Debtor was insolvent at the Petition Date or any time prior to the Petition Date. Confidentiality. There may be instances within the Schedules and Statements where names, addresses or amounts have been left blank. Due to the nature of an agreement between the Debtors and the third party, concerns of confidentiality or concerns for the privacy of an individual, the Debtors may have deemed it appropriate and necessary to avoid listing such names, addresses and amounts. Consolidated Entity Accounts Payable and Disbursement Systems. Although separate accounts payable systems are maintained, the Debtors operate their businesses as a consolidated entity and, as such, although efforts have been made to attribute open payable amounts and/or payments to the correct legal entity, the Debtors reserve their right to modify or amend their schedules to attribute such payable to a different legal entity. Payments made are listed by the entity making such payment notwithstanding that certain payments will have been made on behalf of another entity. Intercompany Claims. Receivables and payables among the Debtors in these cases (each an “Intercompany Receivable” or “Intercompany Payable” and, collectively, the “Intercompany Claims”) are reported on Schedule F as a net intercompany claim. To the extent that a Debtor has a net intercompany receivable, such receivable is not reported on Schedule B as an asset of that Debtor. Schedules with payables are listed in that amount and Schedules with receivables are listed as negative amounts. These Intercompany Claims are comprised primarily of the following components: 1) amounts owed or owing for goods and services, 2) allocations of certain expense items, 3) entries to reflect payments made by one Debtor entity on behalf of another, and 4) accounting entries to reflect the net income or net loss of a given entity for financial reporting purposes (an “Intercompany Income Reconciliation”). These Intercompany Claims, in particular, the Intercompany Income Reconciliations may or may not result in allowed or enforceable claims by or against a given Debtor. In situations where there is not an enforceable claim, the assets and/or liabilities of the applicable Debtor

758


will be greater or lesser than the amounts stated herein. While the Debtors have used reasonable efforts to ensure that the proper intercompany balance is attributed to each legal entity, all rights to amend the Intercompany Claims in the Schedules and Statements are reserved. The Debtors have listed all intercompany payables as unsecured non-priority claims on Schedule F for each applicable Debtor but reserve their rights to later change the characterization, classification, categorization or designation of such claims, including by designating all or any portion of the amounts listed as secured. Insiders. For purposes of the Schedules and Statements, the Debtors define “insiders” pursuant to section 101(31) as (a) directors, (b) officers, (c) those in control of the Debtors, (d) relatives of directors, officers, or persons in control of the Debtors and (e) non-debtor affiliates. Payments to insiders listed in (a) through (d) above are set forth on Statement 3c. Payments to non-debtor affiliates are set forth on Statement 3c as the change in intercompany claims and balances over a period just over one year. Persons listed as “insiders” have been included for informational purposes only. The Debtors do not take any position with respect to (a) such person’s influence over the control of the Debtors, (b) the management responsibilities or functions of such individual, (c) the decision-making or corporate authority of such individual or (d) whether such individual could successfully argue that he or she is not an “insider” under applicable law, including, without limitation, the federal securities laws, or with respect to any theories of liability or for any other purpose. Excluded Accruals/GAAP entries. Liabilities resulting from accruals and/or estimates of long-term liabilities either are not payable at this time or have not yet been reported and, therefore, do not represent specific claims as of the Petition Date and are not otherwise set forth in the Statement and Schedules. Additionally, certain deferred charges, accounts or reserves recorded for GAAP reporting purposes only and assets with a net book value of zero are not included in the Debtors’ Schedules. The excluded assets relate to, among other things, goodwill, customer relationship intangibles and loan commitment fees and excluded liabilities relate to, among other things, accrued taxes and accrued wage and/or employee benefit related obligations. In addition, the Debtors accrue for their obligations under the USDA commodity program which accrued liability has also been excluded from the Schedules. As of the Petition Date, the Debtors had accrued a net liability of approximately $5 million which represents the book value of the Debtors’ obligations to the various school districts net of inventory available to satisfy such obligations. In the ordinary course of the Debtors’ business, this liability accrual is continually adjusted as replacement inventory becomes available. Summary of Significant Reporting Policies. The following is a summary of certain significant reporting policies: a. Foreign Currency. Unless otherwise indicated, all amounts are reflected in U.S. dollars. b. Current Market Value — Net Book Value. In many instances, current market valuations are neither maintained by nor readily available to the Debtors. It would be prohibitively expensive and unduly burdensome to

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obtain current market valuations of the Debtors’ property interests that are not maintained or readily available. Accordingly, unless otherwise indicated, the Schedules and Statements reflect the net book values, rather than current market values, of the Debtors’ assets as of the Petition Date and may not reflect the net realizable value. For this reason, amounts ultimately realized will vary, at some times materially, from net book value. c. Paid Claims. Pursuant to certain first-day and second-day orders issued by the Bankruptcy Court (collectively, the “First Day Orders”), the Bankruptcy Court has authorized the Debtors to pay certain outstanding prepetition claims, such as certain employee wages and benefit claims, claims for taxes and fees, claims related to customer programs, critical vendor claims, lien claims, and claims of shippers and warehousemen. Unless otherwise stated, these Schedules reflect (and do not list) prepetition obligations that have been satisfied prior to August 27, 2008 pursuant to such First Day Orders. Notwithstanding best efforts, certain claims paid pursuant to a First Day Order may inadvertently be listed in the Schedules, and the Debtors may pay some of the claims listed on the Schedules in the ordinary course of business during these cases pursuant to such First Day Orders or other court orders. To the extent claims listed on the Schedules have been paid pursuant to an order of the Bankruptcy Court (including the First Day Orders), the Debtors reserve all rights to amend or supplement their Schedules and Statements as is necessary and appropriate. Moreover, certain of the First Day Orders preserve the rights of parties in interest to dispute any amounts paid pursuant to First Day Orders. Nothing herein shall be deemed to alter the rights of any party in interest to contest a payment made pursuant to a First Day Order that preserves such right to contest. d. Setoffs. The Debtors routinely incur certain setoffs and other similar rights from customers or suppliers in the ordinary course of business. Setoffs in the ordinary course can result from various items including, but not limited to, intercompany transactions, pricing discrepancies, returns, warranties, and other disputes between the Debtors and their customers and/or suppliers. These normal setoffs and other similar rights are consistent with the ordinary course of business in the Debtors’ industries and can be particularly voluminous, making it unduly burdensome and costly for the Debtors to list such ordinary course setoffs. Therefore, although such setoffs and other similar rights may have been accounted for when scheduling certain amounts, setoffs are not independently accounted for, and as such, are excluded from the Debtors’ Schedules and Statements. e. Credits and Adjustments. The claims of individual creditors for, among other things, goods, products, services or taxes are listed as the amounts entered on the Debtors’ books and records and may not reflect credits, allowances or other adjustments due from such creditors to the Debtors. The Debtors reserve all of their rights with regard to such credits, allowances and other adjustments, including the right to assert claims objections and/or setoffs with respect to same.

760


f. Accounts Receivable. The accounts receivable information listed on Schedule B includes net receivables from the Debtors’ customers which receivables are calculated net of any amounts that, as of the Petition Date, may be owed to such customers in the form of rebates, offsets or other price adjustments pursuant to the Debtors’ customer program policies and day-to-day operating policies. A claim is listed on Schedule F to the extent that a net payable remains to a given customer. As noted above, payables listed on Schedule F have been adjusted to reflect obligations satisfied pursuant to First Day Orders between the Petition Date and August 27, 2008. g. Mechanics’ Liens. The inventories, property and equipment listed in these Statements and Schedules are presented without consideration of any mechanics’ liens. h. Leases. In the ordinary course of business, the Debtors may lease certain fixtures and equipment from certain third party lessors for use in the daily operation of their business. The Debtors’ obligations pursuant to capital leases appear on Schedule D and their obligations pursuant to operating leases have been listed on Schedule F. The underlying lease agreements are listed on Schedule G. Nothing in the Schedules and Statements is or shall be construed as an admission as to the determination of the legal status of any lease (including whether any lease is a true lease or a financing arrangement), and the Debtors reserve all rights with respect to such issues. Undetermined Amounts. The description of an amount as “unknown,” “TBD” or “undetermined” is not intended to reflect upon the materiality of such amount. Estimates. To close timely the books and records of the Debtors as of the Petition Date and to prepare such information on a legal entity basis, the Debtors were required to make certain estimates and assumptions that affect the reported amounts of assets and reported revenue and expenses as of the Petition Date. The Debtors reserve all rights to amend the reported amounts of assets, reported revenue and expenses to reflect changes in those estimates and assumptions. Totals. The asset totals listed on Schedules A and B and the liability totals listed on Schedule D represent all known amounts included in the Debtors’ books and records as of the Petition Date. The liability totals listed on Schedule F, however, reflect postpetition payments on prepetition claims made pursuant to First Day Orders, as noted above, and therefore reflect the totals of all known claim amounts included in the Debtors’ books and records as of August 27, 2008. To the extent there are unknown or undetermined amounts, the actual total may be different than the listed total. Classifications. Listing a claim (a) on Schedule D as “secured,” (b) on Schedule E as “priority,” (c) on Schedule F as “unsecured priority,” or (d) listing a contract or lease on Schedule G as “executory” or “unexpired,” does not constitute an admission by the Debtors of the legal rights of the claimant, or a waiver of the Debtors’ right to recharacterize or reclassify such claim or contract. Claims Description. Any failure to designate a claim on a given Debtor’s Schedules as “disputed,” “contingent,” or “unliquidated” does not constitute an

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admission by the Debtor that such amount is not “disputed,” “contingent” or “unliquidated.” The Debtors reserve all rights to dispute, or to assert any offsets or defenses to, any claim reflected on their respective Schedules on any grounds including, without limitation, amount, liability, validity, priority or classification, or to otherwise subsequently designate any claim as “disputed,” “contingent” or “unliquidated.” Listing a claim does not constitute an admission of liability by the Debtors, and the Debtors reserve the right to amend the Schedules accordingly. Guaranties and Other Secondary Liability Claims. The Debtors have used their best efforts to locate and identify guaranties and other secondary liability claims (collectively “Guaranties”) in their executory contracts, unexpired leases, secured financing, debt instruments and other such agreements, however, a review of these agreements, specifically the Debtors’ leases and contracts, is ongoing. Where such Guaranties have been identified, they have been included in the relevant Schedule. The Debtors have reflected the Guaranty obligations for both the primary obligor and the guarantors with respect to their secured financings and debt instruments on Schedule H. Guaranties with respect to the Debtors’ contracts and leases are not included on Schedule H and the Debtors believe that certain Guaranties embedded in the Debtors’ executory contracts, unexpired leases, other secured financing, debt instruments and similar agreements may have been inadvertently omitted from the Schedules but that such Guaranties may be identified upon further review. Therefore, the Debtors reserve their rights to amend the Schedules to the extent additional Guaranties are identified. Schedule A. Schedule A of the particular Debtors includes solely that Debtor’s owned real property. To the extent that such Debtor has an ownership in any building or structure that resides at such location, such interest is listed on Schedule B35 of that Debtor. Schedule B35. Pursuant to contract renewal negotiations with two of its customers, Hardee’s Food Systems, Inc. (“Hardees”) and Carl Karcher Enterprises, Inc. (“CKE”), Pierre Foods, Inc. (“Pierre”) transferred the legal rights to certain formulas for precooked beef patties to Hardees and CKE in December 2006 and August 2007, respectively. Although the rights to such formulas were given to these customers as of the commencement date of the respective contracts, Pierre continues to amortize the recorded value of the intangible formula assets over the life of the new contracts and such amounts are listed on Schedule B35 of Pierre Foods, Inc. as “Other Noncurrent Assets.” Schedule D — Creditors Holding Secured Claims. Except as otherwise agreed pursuant to a stipulation and agreed order or general order entered by the Bankruptcy Court that is or becomes final, the Debtors and/or their estates reserve their right to dispute or challenge the validity, perfection or immunity from avoidance of any lien purported to be granted or perfected in any specific asset to a creditor listed on Schedule D of any Debtor. Moreover, although the Debtors may have scheduled claims of various creditors as secured claims for informational purposes, no current valuation of the Debtors’ assets in which such creditors may have a lien has been undertaken. The Debtors reserve all rights to dispute or challenge the secured nature of any such creditor’s claim or the characterization of the structure of any such transaction or any document

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or instrument (including, without limitation, any intercompany agreement) related to such creditor’s claim. In certain instances, a Debtor may be a coobligor, co-mortgagor or guarantor with respect to scheduled claims of other Debtors, and no claim set forth on Schedule D of any Debtor is intended to acknowledge claims of creditors that are otherwise satisfied or discharged by other entities. The descriptions provided in Schedule D are intended only to be a summary. Reference to the applicable loan agreements and related documents and a determination of the creditors’ compliance with applicable law is necessary for a complete description of the collateral and the nature, extent and priority of any liens. Nothing in the Global Notes or the Schedules and Statements shall be deemed a modification or interpretation of the terms of such agreements or related documents. Except as specifically stated herein, real property lessors, utility companies and other parties which may hold security deposits have not been listed on Schedule D. The Debtors have not included on Schedule D parties that may believe their claims are secured through setoff rights, deposit posted by, or on behalf of, the Debtors, or inchoate statutory lien rights. Although there are multiple parties that hold a portion of the debt included in the secured facility, only the collateral agent has been listed for purposes of Schedule D. Schedule E — Creditors Holding Unsecured Priority Claims. With the exception of certain tax claims listed on Schedule E of Pierre Foods, Inc. which relate to known payments due under the terms of a settlement agreement, the Debtors have not listed on Schedule E any tax, wage or wage-related obligations for which the Debtors have been granted authority to pay pursuant to a First Day Order. The Debtors believe that all such claims have been or will be satisfied in the ordinary course during these chapter 11 cases pursuant to the authority granted in the relevant First Day Orders. The Debtors reserve their right to dispute or challenge whether creditors listed on Schedule E are entitled to priority claims. Schedule F — Creditors Holding Unsecured Nonpriority Claims. The Debtors have attempted to relate all liabilities to each particular Debtor. As a result of the Debtors’ consolidated operations, however, the reader should review Schedule F for all Debtors in these cases for a complete understanding of the unsecured debts of the Debtors. Certain creditors owe amounts to the Debtors and, as such, may have valid setoff and recoupment rights with respect to such amounts. Although the Debtors may have taken setoffs into account when scheduling the amounts owed to creditors, the Debtors reserve all rights to challenge such setoff and recoupment rights. The Debtors have not reduced the scheduled claims to reflect any such right of setoff or recoupment and reserve all rights to challenge any setoff and/or recoupment rights asserted. Additionally, certain creditors may assert mechanic’s, materialman’s, or other similar liens against the Debtors for amounts listed on Schedule F. The Debtors reserve their right to dispute or challenge the validity, perfection or immunity from avoidance of any lien purported to be perfected by a creditor listed on Schedule F of any Debtor. Schedule F contains information regarding pending litigation involving the Debtors. In certain instances, the Debtor that is the subject of the litigation is unclear or undetermined. However, to the extent that litigation involving

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a particular Debtor has been identified, such information is contained in the Schedule for that Debtor. The amounts for these potential claims are listed as undetermined and marked as contingent, unliquidated and disputed in the Schedules. Schedule G — Executory Contracts and Unexpired Leases. Although reasonable efforts have been made to ensure the accuracy of Schedule G regarding executory contracts and unexpired leases (collectively the “Agreements”), review is ongoing and inadvertent errors, omissions or over-inclusion may have occurred. The Debtors may have entered into various other types of Agreements in the ordinary course of their business, such as indemnity agreements, supplemental agreements, amendments/letter agreements, and confidentiality agreements which may not be set forth in Schedule G. Omission of an Agreement from Schedule G does not constitute an admission that such omitted contract or agreement is not an executory contract or unexpired lease. Schedule G may be amended at any time to add any omitted Agreement. Likewise, the listing of an Agreement on Schedule G does not constitute an admission that such Agreement is an executory contract or unexpired lease or that such Agreement was in effect on the Petition Date or is valid or enforceable. The Agreements listed on Schedule G may have expired or may have been modified, amended, or supplemented from time to time by various amendments, restatements, waivers, estoppel certificates, letter and other documents, instruments and agreements which may not be listed on Schedule G. Any and all of the Debtors’ rights, claims and causes of action with respect to the Agreements listed on Schedule G are hereby reserved and preserved, and as such, the Debtors hereby reserve all of their rights to (i) dispute the validity, status, or enforceability of any Agreements set forth on Schedule G, (ii) dispute or challenge the characterization of the structure of any transaction, or any document or instrument related to a creditor’s claim, including, but not limited to, the Agreements listed on Schedule G and (iii) to amend or supplement such Schedule as necessary. Certain of the Agreements listed on Schedule G may have been entered into by more than one of the Debtors. Additionally, the specific Debtor obligor(s) to certain of the Agreements could not be specifically ascertained in every circumstance. In such cases, the Debtors made reasonable efforts to identify the correct Debtors’ Schedule G on which to list the agreement and, where a contract party remained uncertain, such Agreements have been listed on Schedule G for Pierre Foods, Inc. Certain of the Agreements may not have been memorialized and could be subject to dispute. Agreements that are oral in nature have also been included in Schedule G. Schedule H — Co-Debtors. Each of the Debtors are co-debtors with respect to the senior secured facility and the senior subordinated notes. For purposes of Schedule H, only the collateral agent or indenture trustee is listed for such borrowings. Additionally, there may be instances where litigation is brought against multiple legal entities. Where possible, such litigation is listed on Schedule F of the appropriate Debtor but such litigation is not reflected in Schedule H. Co-debtors and/or co-obligors with respect to leases and contracts are listed on Schedule F as applicable but are not listed on Schedule H.

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Statement of Financial Affairs. All amounts that remain outstanding to any creditor listed on SOFA 3b or 3c are reflected in Schedule E and F as applicable. Any creditor wishing to verify any outstanding indebtedness should review those Schedules. a. SOFA 2 — Other Income. From time to time, the Debtor may have de minimis income from sources other than the operation of business that will not appear on SOFA 2. b. SOFA 7 — Gifts. The Debtors have listed gifts according to the legal entity making the disbursement, however, in certain instances, such disbursement is made on behalf of another debtor entity. Gifts of product have been made pursuant to the Company’s inventory liquidation and obsolescence policy. c. SOFA 20 — Inventory. The inventory amounts listed in response to SOFA 20 reflect warehouses in which full physical inventories were performed. The Debtors also utilize non-physical inventory tracking and valuation methods combined with cycle counting in other warehousing locations. These valuations are included in the assets reported by the Debtors on Schedule B. UNITED STATES BANKRUPTCY COURT DISTRICT OF Delaware In re Pierre Foods, Inc. Debtor

, Case No. 08-11480 (KG) (if known)

STATEMENT OF FINANCIAL AFFAIRS This statement is to be completed by every debtor. Spouses filing a joint petition may file a single statement on which the information for both spouses is combined. If the case is filed under chapter 12 or chapter 13, a married debtor must furnish information for both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed. An individual debtor engaged in business as a sole proprietor, partner, family farmer, or self-employed professional, should provide the information requested on this statement concerning all such activities as well as the individual’s personal affairs. To indicate payments, transfers and the like to minor children, state the child’s initials and the name and address of the child’s parent or guardian, such as “A.B., a minor child, by John Doe, guardian.” Do not disclose the child’s name. See 11 U.S.C. § 112 and Fed. R.Bankr. P. 1007(m). Questions 1–18 are to be completed by all debtors. Debtors that are or have been in business, as defined below, also must complete Questions 19–25. If the answer to an applicable question is “None,” mark the box labeled “None.” If additional space is needed for the answer to any question, use and attach a separate sheet properly identified with the case name, case number (if known), and the number of the question.

8.7


765

DEFINITIONS “In business.” A debtor is “in business” for the purpose of this form if the debtor is a corporation or partnership. An individual debtor is “in business” for the purpose of this form if the debtor is or has been, within six years immediately preceding the filing of this bankruptcy case, any of the following: an officer, director, managing executive, or owner of 5 percent or more of the voting or equity securities of a corporation; a partner, other than a limited partner, of a partnership; a sole proprietor or self-employed full-time or parttime. An individual debtor also may be “in business” for the purpose of this form if the debtor engages in a trade, business, or other activity, other than as an employee, to supplement income from the debtor’s primary employment. “Insider.” The term “insider” includes but is not limited to: relatives of the debtor; general partners of the debtor and their relatives; corporations of which the debtor is an officer, director, or person in control; officers, directors, and any owner of 5 percent or more of the voting or equity securities of a corporate debtor and their relatives; affiliates of the debtor and insiders of such affiliates; any managing agent of the debtor. 11 U.S.C. § 101.

None

1. Income from employment or operation of business State the gross amount of income the debtor has received from employment, trade, or profession, or from operation of the debtor’s business, including part-time activities either as an employee or in independent trade or business, from the beginning of this calendar year to the date this case was commenced. State also the gross amounts received during the two years immediately preceding this calendar year. (A debtor that maintains, or has maintained, financial records on the basis of a fiscal rather than a calendar year may report fiscal year income. Identify the beginning and ending dates of the debtor’s fiscal year.) If a joint petition is filed, state income for each spouse separately. (Married debtors filing under chapter 12 or chapter 13 must state income of both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) AMOUNT SOURCE $−16,500,000.00 2009 Fiscal Year Net Loss $−241,600,000.00 2008 Fiscal Year Net Loss $1,800,000.00 2007 Fiscal Year Net Income Prior to its Form 15 filing with the Securities and Exchange Commission (“SEC) on July 16, 2008, Pierre Foods, Inc. (the SEC registrant) filed consolidated financial reports based on a fiscal year ending on or about March 1, 2008. These reports included the consolidated financial results of each of the Debtors in the jointly administered case In re: Pierre Foods, Inc., Case Number 08-11480 except Pierre Holding Corp. (“Holding”) and PF Management, Inc. (“PFMI”). Holding and PFMI do not generate revenue and incur de minimis expenses annually.

766

None

None

None


2. Income other than from employment or operation of business State the amount of income received by the debtor other than from employment, trade, profession, operation of the debtor’s business during the two years immediately preceding the commencement of this case. Give particulars. If a joint petition is filed, state income for each spouse separately. (Married debtors filing under chapter 12 or chapter 13 must state income for each spouse whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) AMOUNT SOURCE The amounts reported in response to Question 1 above include certain income earned from activities other than the operation of the Debtors’ business (“Other Income”). Please refer to the Form 10-k of Pierre Foods, Inc. for details of Other Income for Fiscal Year 2007 and 2008. Other Income for the pre-petition period of Fiscal Year 2009 totals $1,987,292 and includes the following: i) $1,920,823 in net insurance proceeds to cover business interruption losses due to a fire at a company plant located in Hamilton, Alabama, ii) interest income for Pierre Foods, Inc. ($48,618) and Clovervale Farms, Inc. ($6,110), and iii) $11,741 in proceeds to Zartic, LLC for certain recycling and vendor incentive programs. 3. Payments to creditors Complete a. or b., as appropriate, and c. a. Individual or joint debtor(s) with primarily consumer debts: List all payments on loans, installment purchases of goods or services, and other debts to any creditor made within 90 days immediately preceding the commencement of this case unless the aggregate value of all property that constitutes or is affected by such transfer is less than $600. Indicate with an asterisk (∗ ) any payments that were made to a creditor on account of a domestic support obligation or as part of an alternative repayment schedule under a plan by an approved nonprofit budgeting and creditor counseling agency. (Married debtors filing under chapter 12 or chapter 13 must include payments by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND DATES OF AMOUNT AMOUNT ADDRESS OF PAYMENTS PAID STILL CREDITOR OWING b. Debtor whose debts are not primarily consumer debts: List each payment or other transfer to any creditor made within 90 days immediately preceding the commencement of the case unless the aggregate value of all property that constitutes or is affected by such transfer is less than $5,475. (Married debtors filing under chapter 12 or chapter 13 must include payments and other transfers by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND DATES OF AMOUNT AMOUNT ADDRESS OF PAYMENTS/ PAID OR STILL CREDITOR TRANSFERS VALUE OF OWING TRANSFERS See attached rider

8.7


None

None

None

None

767

c. All debtors: List all payments made within one year immediately preceding the commencement of this case to or for the benefit of creditors who are or were insiders. (Married debtors filing under chapter 12 or chapter 13 must include payments by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND DATE OF AMOUNT PAID AMOUNT ADDRESS OF PAYMENT STILL OWING CREDITOR AND RELATIONSHIP TO DEBTOR See attached rider 4. Suits and administrative proceedings, executions, garnishments and attachments a. List all suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case. (Married debtors filing under chapter 12 or chapter 13 must include information concerning either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) CAPTION OF NATURE OF COURT OR STATUS OR SUIT AND PROCEEDING AGENCY AND DISPOSITION CASE NUMBER LOCATION See attached rider b. Describe all property that has been attached, garnished or seized under any legal or equitable process within one year immediately preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include information concerning property of either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND ADDRESS DATE OF DESCRIPTION OF PERSON FOR WHOSE SEIZURE AND VALUE OF BENEFIT PROPERTY WAS PROPERTY SEIZED 5. Repossessions, foreclosures and returns List all property that has been repossessed by a creditor, sold at a foreclosure sale, transferred through a deed in lieu of foreclosure or returned to the seller, within one year immediately preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include information concerning property of either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND DATE OF REPOSSESSION, DESCRIPTION ADDRESS OF FORECLOSURE SALE, TRANSFER AND VALUE OF CREDITOR OR OR RETURN PROPERTY SELLER

768

None

None

None

None


6. Assignments and receiverships a. Describe any assignment of property for the benefit of creditors made within 120 days immediately preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include any assignment by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND DATE OF TERMS OF ASSIGNMENT OR ADDRESS OF ASSIGNMENT SETTLEMENT ASSIGNEE b. List all property which has been in the hands of a custodian, receiver, or court-appointed official within one year immediately preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include information concerning property of either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND NAME AND DATE OF DESCRIPTION ADDRESS OF LOCATION OF ORDER AND VALUE OF CUSTODIAN COURT CASE PROPERTY TITLE & NUMBER 7. Gifts List all gifts or charitable contributions made within one year immediately preceding the commencement of this case except ordinary and usual gifts to family members aggregating less than $200 in value per individual family member and charitable contributions aggregating less than $100 per recipient. (Married debtors filing under chapter 12 or chapter 13 must include gifts or contributions by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND RELATIONSHIP DATE OF GIFT DESCRIPTION ADDRESS OF TO DEBTOR, IF AND VALUE OF PERSON OR ANY GIFT ORGANIZATION See attached rider 8. Losses List all losses from fire, theft, other casualty or gambling within one year immediately preceding the commencement of this case or since the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include losses by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) DESCRIPTION DESCRIPTION OF DATE OF LOSS AND VALUE OF CIRCUMSTANCES AND, IF LOSS PROPERTY WAS COVERED IN WHOLE OR IN PART BY INSURANCE, GIVE PARTICULARS See attached rider

8.7


None

None

None

None

769

9. Payments related to debt counseling or bankruptcy List all payments made or property transferred by or on behalf of the debtor to any persons, including attorneys, for consultation concerning debt consolidation, relief under the bankruptcy law or preparation of a petition in bankruptcy within one year immediately preceding the commencement of this case. NAME AND DATE OF AMOUNT OF MONEY OR ADDRESS OF PAYMENT, NAME DESCRIPTION AND VALUE OF PAYEE OF PAYER IF PROPERTY OTHER THAN DEBTOR See attached rider 10. Other transfers a. List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include transfers by either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND ADDRESS OF DATE DESCRIBE TRANSFEREE, RELATIONSHIP PROPERTY TO DEBTOR TRANSFERRED AND VALUE RECEIVED Pursuant to contract renewal negotiations with two of its customers, Hardee’s Food Systems, Inc. (“Hardees”) and Carl Karcher Enterprises, Inc. (“CKE”), Pierre Foods, Inc. (“Pierre”) transferred the legal rights to certain formulas for pre-cooked beef patties to Hardees and CKE in December 2006 and August 2007, respectively. The combined net book value of these intangible assets at the time of transfer was approximately $6.7 million. Although the rights to such formulas were given to these customers as of the commencement date of the respective contracts, Pierre continues to amortize the recorded value of the intangible formula assets over the life of the new contracts. b. List all property transferred by the debtor within ten years immediately preceding the commencement of this case to a self-settled trust or similar device of which the debtor is a beneficiary. NAME OF DATE(S) OF AMOUNT OF MONEY OR TRUST OR TRANSFER(S) DESCRIPTION AND VALUE OF OTHER PROPERTY OR DEBTOR’S INTEREST DEVICE IN PROPERTY 11. Closed financial accounts List all financial accounts and instruments held in the name of the debtor or for the benefit of the debtor which were closed, sold, or otherwise transferred within one year immediately preceding the commencement of this case. Include checking, savings, or other financial accounts, certificates of deposit, or other instruments; shares and share accounts held in banks, credit unions, pension funds, cooperatives, associations, brokerage houses and other financial institutions. (Married debtors filing under chapter 12 or chapter 13 must include information concerning accounts or instruments held by or for either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.)

770


NAME AND ADDRESS OF INSTITUTION

TYPE OF ACCOUNT, LAST FOUR DIGITS OF ACCOUNT NUMBER, AND AMOUNT OF FINAL BALANCE

AMOUNT AND DATE OF SALE OR CLOSING

See attached rider None

None

None

None

12. Safe deposit boxes List each safe deposit or other box or depository in which the debtor has or had securities, cash, or other valuables within one year immediately preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include boxes or depositories of either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND NAMES AND DESCRIPTION DATE OF ADDRESS OF ADDRESSES OF OF CONTENTS TRANSFER OR BANK OR THOSE WITH SURRENDER, IF OTHER ACCESS TO ANY DEPOSITORY BOX OR DEPOSITORY 13. Setoffs List all setoffs made by any creditor, including a bank, against a debt or deposit of the debtor within 90 days preceding the commencement of this case. (Married debtors filing under chapter 12 or chapter 13 must include information concerning either or both spouses whether or not a joint petition is filed, unless the spouses are separated and a joint petition is not filed.) NAME AND ADDRESS OF DATE OF AMOUNT OF CREDITOR SETOFF SETOFF Please refer to the Debtors’ Global Notes and Statement of Limitations, Methods and Disclaimer Regarding the Debtors’ Schedules of Assets and Liabilities and Statements of Financial Affairs attached hereto. 14. Property held for another person List all property owned by another person that the debtor holds or controls. NAME AND DESCRIPTION AND VALUE OF LOCATION OF ADDRESS OF PROPERTY PROPERTY OWNER In the normal course of business, the Debtor maintains a contractual relationship with the United States Department of Agriculture (“USDA”), Food and Nutrition Service (“FNS”) and several state distributing agencies pursuant to which the Debtor processes and distributes food products donated by the USDA to various US school districts (the “FNS Programs”). These federally provided foods are donated directly to the various school districts and pass through the Debtor’s possession for processing and distribution purposes only. Operations pursuant to the FNS Programs account for approximately 9.5% of the Debtors’ annual sales revenue. 15. Prior address of debtor If debtor has moved within three years immediately preceding the commencement of this case, list all premises which the debtor occupied during that period and vacated prior to the commencement of this case. If a joint petition is filed, report also any separate address of either spouse. ADDRESS NAME USED DATES OF OCCUPANCY

8.7


None

771

16. Spouses and Former Spouses If the debtor resides or resided in a community property state, commonwealth, or territory (including Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington, or Wisconsin) within eight years immediately preceding the commencement of the case, identify the name of the debtor’s spouse and of any former spouse who resides or resided with the debtor in the community property state. NAME Not Applicable 17. Environmental Information For the purpose of this question, the following definitions apply: “Environmental Law” means any federal, state, or local statute or regulation regulating pollution, contamination, releases of hazardous or toxic substances, wastes or material into the air, land, soil, surface water, groundwater, or other medium, including, but not limited to, statutes or regulations regulating the cleanup of these substances, wastes, or material. “Site” means any location, facility, or property as defined under any Environmental Law, whether or not presently or formerly owned or operated by the debtor, including, but not limited to, disposal sites. “Hazardous Material” means anything defined as a hazardous waste, hazardous substance, toxic substance, hazardous material, pollutant, or contaminant or similar term under an Environmental Law.

None

a. List the name and address of every site for which the debtor has received notice in writing by a governmental unit that it may be liable or potentially liable under or in violation of an Environmental Law. Indicate the governmental unit, the date of the notice, and, if known, the Environmental Law: SITE NAME AND NAME AND DATE OF ENVIRONMENTAL ADDRESS ADDRESS OF NOTICE LAW GOVERNMENTAL UNIT See attached rider

None

b. List the name and address of every site for which the debtor provided notice to a governmental unit of a release of Hazardous Material. Indicate the governmental unit to which the notice was sent and the date of the notice. SITE NAME AND NAME AND DATE OF ENVIRONMENTAL ADDRESS ADDRESS OF NOTICE LAW GOVERNMENTAL UNIT

None

c. List all judicial or administrative proceedings, including settlements or orders, under any Environmental Law with respect to which the debtor is or was a party. Indicate the name and address of the governmental unit that is or was a party to the proceeding, and the docket number. NAME AND DOCKET NUMBER STATUS OR ADDRESS OF DISPOSITION GOVERNMENTAL UNIT Matter settled via Ohio EPA, 50 West No Docket Number, but see: entry into consentual Town St., Suite 700, http://www.epa. state.oh.us/ administrative order. Columbus, dapc/enforcement/year 2007/ Pierre082907.pdf OH 43215

772


18. Nature, location and name of business None a. If the debtor is an individual, list the names, addresses, taxpayer-identification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation, partner in a partnership, sole proprietor, or was self-employed in a trade, profession, or other activity either full- or part-time within six years immediately preceding the commencement of this case, or in which the debtor owned 5 percent or more of the voting or equity securities within six years immediately preceding the commencement of this case. If the debtor is a partnership, list the names, addresses, taxpayer-identification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was a partner or owned 5 percent or more of the voting or equity securities, within six years immediately preceding the commencement of this case. If the debtor is a corporation, list the names, addresses, taxpayeridentification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was a partner or owned 5 percent or more of the voting or equity securities within six years immediately preceding the commencement of this case. NAME LAST FOUR ADDRESS NATURE OF BEGINNING DIGITS OF BUSINESS AND SOCIALENDING SECURITY OR DATES OTHER INDIVIDUAL TAXPAYER-I.D. NO. (ITIN)/ COMPLETE EIN See attached rider None b. Identify any business listed in response to subdivision a., above, that is “single asset real estate” as defined in 11 U.S.C. § 101. NAME ADDRESS The following questions are to be completed by every debtor that is a corporation or partnership and by any individual debtor who is or has been, within six years immediately preceding the commencement of this case, any of the following: an officer, director, managing executive, or owner of more than 5 percent of the voting or equity securities of a corporation; a partner, other than a limited partner, of a partnership, a sole proprietor, or self-employed in a trade, profession, or other activity, either full- or part-time. (An individual or joint debtor should complete this portion of the statement only if the debtor is or has been in business, as defined above, within six years immediately preceding the commencement of this case. A debtor who has not been in business within those six years should go directly to the signature page.) 19. Books, records and financial statements None a. List all bookkeepers and accountants who within two years immediately preceding the filing of this bankruptcy case kept or supervised the keeping of books of account and records of the debtor. NAME AND ADDRESS DATES SERVICES RENDERED See attached rider

8.7


773

None b. List all firms or individuals who within two years immediately preceding the filing of this bankruptcy case have audited the books of account and records, or prepared a financial statement of the debtor. NAME ADDRESS DATES SERVICES RENDERED Deloitte & Deloitte & Touche, LLP 7/2006—Present Touche, LLP Suite 1900 250 East Fifth Street Cincinnati, Ohio 45202 None c. List all firms or individuals who at the time of the commencement of this case were in possession of the books of account and records of the debtor. If any of the books of account and records are not available, explain. NAME ADDRESS 9990 Princeton Rd. Cynthia S. Hughes Cincinnati, Ohio 45246 9990 Princeton Rd. Steven S. Beatty Cincinnati, Ohio 45246 None d. List all financial institutions, creditors and other parties, including mercantile and trade agencies, to whom a financial statement was issued by the debtor within two years immediately preceding the commencement of this case. NAME AND ADDRESS DATE ISSUED The Debtor Pierre Foods, Inc. is a private company with outstanding public debt. Prior to filing, Pierre was required to register with the SEC and as such, in the ordinary course, the Debtor may have provided financial information to banks, bond holders, customers, suppliers, rating agencies and various other interested parties. 20. Inventories None a. List the dates of the last two inventories taken of your property, the name of the person who supervised the taking of each inventory, and the dollar amount and basis of each inventory. DATE OF INVENTORY DOLLAR AMOUNT OF INVENTORY INVENTORY SUPERVISOR (Specify cost, market or other basis) See attached rider None b. List the name and address of the person having possession of the records of each of the inventories reported in a., above. DATE OF INVENTORY NAME AND ADDRESSES OF CUSTODIAN OF INVENTORY RECORDS Tisha Livingston, Accounting—Plant Controller Please refer to dates listed in 9990 Princeton Road Cincinnati, OH question 20a. 45246 21. Current Partners, Officers, Directors and Shareholders None a. If the debtor is a partnership, list the nature and percentage of partnership interest of each member of the partnership. NAME AND NATURE OF PERCENTAGE OF INTEREST ADDRESS INTEREST Not Applicable

774 None

None

None

None

None


b. If the debtor is a corporation, list all officers and directors of the corporation, and each stockholder who directly or indirectly owns, controls, or holds 5 percent or more of the voting or equity securities of the corporation. NAME AND TITLE NATURE AND PERCENTAGE ADDRESS OF STOCK OWNERSHIP See attached rider 22. Former partners, officers, directors and sharcholders a. If the debtor is a partnership, list each member who withdrew from the partnership within one year immediately preceding the commencement of this case. NAME ADDRESS DATE OF WITHDRAWAL Not Applicable b. If the debtor is a corporation, list all officers or directors whose relationship with the corporation terminated within one year immediately preceding the commencement of this case. NAME AND TITLE DATE OF ADDRESS TERMINATION Robert C. Naylor Senior Vice President of 10/31/2007 9990 Princeton Sales and Marketing Road Cincinnati, OH 45246 Joseph W. Meyers VP of Finance, Secretary, 06/20/2008 9990 Princeton CFO and Treasurer Road Cincinnati, OH 45246 23. Withdrawals from a partnership or distributions by a corporation If the debtor is a partnership or corporation, list all withdrawals or distributions credited or given to an insider, including compensation in any form, bonuses, loans, stock redemptions, options exercised and any other perquisite during one year immediately preceding the commencement of this case. NAME & DATE AND AMOUNT OF MONEY OR ADDRESS OF PURPOSE OF DESCRIPTION AND VALUE RECIPIENT, WITHDRAWAL OF PROPERTY RELATIONSHIP TO DEBTOR See response for question 3c 24. Tax Consolidation Group If the debtor is a corporation, list the name and federal taxpayer-identification number of the parent corporation of any consolidated group for tax purposes of which the debtor has been a member at any time within six years immediately preceding the commencement of the case. NAME OF PARENT TAXPAYERCORPORATION IDENTIFICATION NUMBER (EIN) Pierre Holding Corp. 20-1300320

8.7

775


None

25. Pension Funds. If the debtor is not an individual, list the name and federal taxpayer-identification number of any pension fund to which the debtor, as an employer, has been responsible for contributing at any time within six years immediately preceding the commencement of the case. NAME OF PENSION FUND TAXPAYER-IDENTIFICATION NUMBER (EIN) ∗ ∗ ∗ ∗ ∗ ∗

[If completed by an individual or individual and spouse] I declare under penalty of perjury that I have read the answers contained in the foregoing statement of financial affairs and any attachments thereto and that they are true and correct. Date

Signature of Debtor

Date

Signature of Joint Debtor (if any)

[If completed on behalf of a partnership or corporation] I declare under penalty of perjury that I have read the answers contained in the foregoing statement of financial affairs and any attachments thereto and that they are true and correct to the best of my knowledge, infomation and belief. Date

09/02/2008.

Signature Print Name and Title

Cynthis S. Hughes Vice President, Chief Financial Officer, Secretary and Treasurer

[An individual signing on behalf of a partnership or corporation must indicate position or relationship to debtor.] continuation sheets attached Penalty for making a false statement: Fine of up to $500.000 or imprisonment for up to 5 years, or both. 18 U.S.C. §§ 152 and 3571 DECLARATION AND SIGNATURE OF NON-ATTORNEY BANKRUPTCY PETITION PREPARER (See 11 U.S.C. § 1110) I declare under penalty of perjury that: (1) I am a baukruptcy petition preparer as defined in 11 U.S.C. § 110; (2) I prepared this document for compensation and have provided the debtor with a copy of this document and the notices and information required under 11 U.S.C. §§ 1110(b), 110(h), and 342(b); and, (3) if rules or guidelines have been promulgated pursuant to 11 U.S.C. § 110(h) setting a maximum fee for services chargeable by bankruptcy petition preparers, I have given the debtor notice of the maximum amount before preparing any

776


document for filing for a debtor or accepting any fee from the debtor, as required by that section.

Printed or Typed Name and Title, if any, of Bankruptcy Petition Preparer

Social-Security No. (Required by 11 U.S.C. § 110.)

If the bankruptcy petition preparer is not an individual, state the name, title (if any), address, and social-security number of the officer, principal, responsible person, or partner who signs this document. Address Signature of Bankruptcy Petition Preparer

Date

Names and Social-Security numbers of all other individuals who prepared or assisted in preparing this document unless the bankruptcy petition preparer is not an individual: If more than one person prepared this document, attach additional signed sheets conforming to the appropriate Official Form for each person. A bankruptcy petitiou preparer’s fallure to comply with the provisions of title 11 and the Federal Rules of Bankruptcy Procedure may result in fines or imprisonment or both. 18 U.S.C. § 156.

777

A & L Imaging A & L Imaging A & L Imaging A & L Imaging A 1 Marketing Inc A 1 Marketing Inc A 1 Marketing Inc A C Legg Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc

Name of Creditor

Address 1

Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

City Cincinnati Cincinnati Cincinnati Cincinnati Tulsa Tulsa Tulsa Calera Lawrenceburg

Address 3

3963 Virginia Ave 3963 Virginia Ave 3963 Virginia Ave 3963 Virginia Ave 3932 S Lewis PI 3932 S Lewis PI 3932 S Lewis PI PO Box 709 PO Box 4103

Address 2

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 3b Payments to creditors

IN

IN

IN

IN

IN

IN

OH OH OH OH OK OK OK AL IN

State

47025

47025

47025

47025

47025

47025

45227 45227 45227 45227 74105 74105 74105 35040 47025

Zip

5/30/2008

5/23/2008

5/15/2008

5/8/2008

5/1/2008

4/24/2008

5/1/2008 6/2/2008 6/4/2008 6/20/2008 6/5/2008 6/11/2008 7/11/2008 4/21/2008 4/21/2008

Payment Date

$3,589.80

$4,529.80

$6,274.70

$5,327.20

$4,804.80

$9,609.60

$2,296.45 $1,194.11 $1,653.77 $1,245.34 $80.96 $9,922.00 $4,857.54 $8,561.45 $2,402.40

Amount Paid

(Continued )

Amount Still Owing

778

A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A One Pallet Distributing Inc A Wall Enterprises LLC A Wall Enterprises LLC A Wall Enterprises LLC

Name of Creditor

Address 1

Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg Lawrenceburg Sumner Sumner Sumner

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

PO Box 4103

15521 67th St East

15521 67th St East

15521 67th St East

City Lawrenceburg

Address 3

PO Box 4103

Address 2

WA

WA

WA

IN

IN

IN

IN

IN

IN

IN

IN

State

98390

98390

98390

47025

47025

47025

47025

47025

47025

47025

47025

Zip

6/11/2008

5/5/2008

5/5/2008

7/14/2008

7/10/2008

6/26/2008

6/24/2008

6/19/2008

6/17/2008

6/12/2008

6/6/2008

Payment Date

$1,794.72

$446.50

$3,805.29

$4,804.80

$4,804.80

$4,594.80

$2,402.40

$4,804.80

$2,402.40

$1,982.40

$4,804.80

Amount Paid

Amount Still Owing

779

Abrasive Technologies & Sup Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc Ww Grainger Inc

Aaa Corporate Travel Service Aaa Corporate Travel Service Aaa Corporate Travel Service Abf Packing Inc

Attn Travel Accounting Attn Travel Accounting Attn Travel Accounting

Palatine Palatine Palatine Palatine Palatine Palatine Palatine Palatine Palatine Palatine Palatine

TX

Dublin

Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673 Dept 828705673

OH

Cincinnati

IL IL IL IL IL IL IL IL IL IL IL

NC

OH

Cincinnati

Hickory

OH

Cincinnati

15 West Central Pkwy 15 West Central Pkwy 15 West Central Pkwy 8758 South US Hwy 377 PO Box 10065

60038-0001 60038-0001 60038-0001 60038-0001 60038-0001 60038-0001 60038-0001 60038-0001 60038-0001 60038-0001 60038-0001

28603

76446

45202

45202

45202

5/27/2008 5/28/2008 6/2/2008 6/3/2008 6/10/2008 6/10/2008 6/18/2008 6/20/2008 7/7/2008 7/14/2008 6/12/2008 Total

4/22/2008

7/11/2008

7/3/2008

6/18/2008

5/16/2008

$559.57 $172.79 $256.57 $271.97 $269.15 $92.65 $262.89 $164.48 $1,444.99 $862.92 $45,808.11 $113,272,362.20

$2,977.92

$78,960.00

$1,614.17

$1,391.50

$2,581.12

780

GYDE, RICHARD GYDE, RICHARD HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO

Names of Creditors Who Were Insiders Cincinnati Cincinnati FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

City

9990 Princeton Road 9990 Princeton Road 7430 US HWY 42 STE 201

Address 1

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 3c Payments to creditors who were insiders

KY

KY

KY

KY

KY

KY

KY

KY

OH OH KY

State

41042

41042

41042

41042

41042

41042

41042

41042

45246 45246 41042

Zip

1/30/2008

1/4/2008

12/5/2007

10/30/2007

10/17/2007

9/26/2007

9/17/2007

9/5/2007

1/30/2008 6/12/2008 7/27/2007

Payment Date

$9,004.33

$7,967.87

$13,138.17

$11,488.15

$170.00

$20,771.20

$1,600.00

$10,277.14

$10,764.49 $17,500.00 $6,393.23

Amount Paid

Amount Still Owing

781

HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HAACKE SCHRODER INC DBA SCHRODER CO HUGHES, CYNTHIA HUGHES, CYNTHIA WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J

FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE FLORENCE Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

7430 US HWY 42 STE 201

9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road

OH OH OH OH OH

KY

KY

KY

KY

KY

KY

KY

KY

45246 45246 45246 45246 45246

41042

41042

41042

41042

41042

41042

41042

41042

2/29/2008 2/29/2008 1/18/2008 1/23/2008 2/1/2008

7/3/2008

6/3/2008

4/29/2008

4/1/2008

3/24/2008

3/12/2008

3/4/2008

2/21/2008

(Continued )

$8,423.07 $15,000.00 $5,384.61 $92.71 $5,384.61

$12,860.85

$11,009.59

$9,050.47

$9,344.56

$500.00

$200.00

$11,785.66

$325.00

782

WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J WOODHAMS, NORBERT J

Names of Creditors Who Were Insiders

9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 9990 Princeton Road

Address 1 Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati

City OH OH OH OH OH OH OH OH OH OH OH OH OH OH OH OH OH OH OH OH

State 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246 45246

Zip 2/15/2008 2/19/2008 2/29/2008 3/11/2008 3/13/2008 3/14/2008 3/28/2008 4/4/2008 4/11/2008 4/25/2008 4/29/2008 5/9/2008 5/12/2008 5/23/2008 5/27/2008 6/6/2008 6/11/2008 6/20/2008 7/3/2008 7/14/2008 TOTAL

Payment Date

$5,384.61 $596.17 $5,384.61 $2,362.68 $208.27 $5,519.23 $5,519.23 $1,174.16 $5,519.23 $5,519.23 $277.50 $5,519.23 $44.00 $5,519.23 $5,337.24 $7,013.46 $989.81 $5,661.54 $5,661.54 $677.03 $3,659,928.83

Amount Paid

Amount Still Owing

783

Roy Nichols Christine E. Lupariello Oumar Sy The J.M. Smucker Company US Department of Defense

Caption of Suit

473-2007-00731 473-2008-00188 473-2008-00782 5:08-cv-01970-SL

Case Number

Nature of Proceeding Employment Litigation Employment Litigation Employment Litigation Trademark Litigation Records Subpoena

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 4a Suits, executions, garnishments, and attachments

US District Court US District Court

Court

EEOC EEOC EEOC Northern District of Ohio Northern District of Georgia

Location of Court

Pending Pending Pending Pending Pending

Status or Disposition

784

The Green Room Community Theatre Inc.

SFF Basketball Extravaganza Tess Blackwelder Fund

Diocesan Publications Concordia Christian Day School Hospice of Palm Beach County Catawba County Fraternal Order of Police Down Syndrome Assoc of Greater Cincinnati Autism Speaks City of Claremont Water Department Lee National Denim Day Lords Rose Garden

Name of Person or Organization

PO Box 1317

Newton

Madeira

7137 Miami Road

US Bank

Charlotte Claremont

4530 Park Road PO Box 446 Los Angeles West Chester Cincinnati

Cincinnati

644 Linn St/STE 1128

PO Box 60468 8919 Eagle View Drive #7 PO Box 389169-9169

Newton

PO Box 1331

Suite 320

West Palm

5300 East Avenue

City Dublin Conover

Address 2

PO Box 3250 215 5th Ave SE

Address 1

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 7 Gifts and charitable contributions

NC

OH

OH

CA OH

NC NC

OH

NC

FL

OH NC

State

28658

45243

45238

28209 286100446 90060 45069

45203

28658

33407

43016 28613

Zip

None

None

None

None None

None None

None

None

None

None None

Relationship to the Debtor

$250.00

$100.00

$100.00

$512.00 $880.00

Value of Gift

$100.00

$200.00

$240.00 $300.00

11/8/2007 $1,000.00

10/15/2007

10/15/2007

10/11/2007 10/15/2007

9/13/2007 $100.00 9/28/2007 $2,500.00

8/22/2007

8/10/2007

8/9/2007

7/10/2007 8/8/2007

Date

785

Greater Cincinnati Police Athletic Association United Hmong Association Inc. Catawba County Fraternal Order of Police Special Olympics North Carolina United Hmong Association Inc. The Outreach Center Morganton The Outreach Center Morganton The Outreach Center Morganton The Outreach Center Morganton Second Harvest Foodbank Second Harvest Foodbank Concordia Luthern Church Oxford Baptist Church Catawba UMC Girl Scout Council of Catawba Valley

Cincinnati Hickory Newton Raleigh Hickory Morganton Morganton Morganton Morganton Charlotte Charlotte Conover Hickory Catawba Hickory

4975 Glenway Avenue

PO Box 9683

PO Box 1331

PO Box 91464

PO Box 9683

500 E Fleming Dr

500 E Fleming Dr

500 E Fleming Dr

500 E Fleming Dr

560 Spralt St 560 Spralt St 216 5th Ave SE

5105 NC Hwy 10 207 E Central Ave 530 Fourth Street SW

NC NC NC

NC NC NC

NC

NC

NC

NC

NC

NC

NC

NC

OH

28602 28609 28602

28206 28206 28613

28655

28655

28655

28655

276751464 28603

28658

28603

45238

None None None

None None None

None

None

None

None

None

None

None

None

None

$100.00

$100.00

$350.00

$300.00

$214.15

4/29/2008 5/2/2008 1/25/2008

$151.24 $357.54 $281.18

4/29/2008 $7,856.64 7/9/2008 $2,656.28 3/14/2008 $117.18

2/23/2008 $8,896.77

1/11/2008 $11,892.83

12/29/2008

11/15/2007 $10,959.41

1/14/2008 $1,000.00

12/17/2007

12/17/2007

12/13/2007

12/1/2007

786


In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 8 Losses Date 10/3/2007 10/9/2007 10/9/2007 10/17/2007 10/24/2007 10/25/2007 10/26/2007 10/31/2007 11/2/2007 11/11/2007 11/14/2007 11/19/2007 11/21/2007 11/26/2007 11/26/2007 11/29/2007 12/1/2007 12/7/2007 12/12/2007 12/12/2007 1/10/2008 1/10/2008 1/18/2008 2/8/2008 2/11/2008 2/11/2008 2/13/2008 3/1/2008 3/7/2008 3/31/2008 4/2/2008 5/2/2008 6/1/2008 6/2/2008 6/14/2008 6/19/2008 7/24/2008 7/28/2008

Description of Property

Value of Property

Claimed on Insurance

Property damage due to transformer loss Casualty-Auto Physical Damage Casualty-Auto Liability Casualty-General Liability Casualty-Auto Liability Casualty-General Liability Casualty-Auto Liability Casualty-General Liability Casualty-General Liability Casualty-Auto Liability Casualty-General Liability Casualty-Auto Liability Casualty-Auto Liability Casualty-Auto Liability Casualty-Auto Liability Casualty-Auto Physical Damage Casualty-General Liability Casualty-Auto Liability Casualty-General Liability Casualty-General Liability Casualty-Auto Physical Damage Casualty-General Liability Casualty-General Liability Westland/Hallmark recall Casualty-General Liability Casualty-General Liability Casualty-Auto Liability Casualty-General Liability Casualty-General Liability Casualty-Auto Liability Casualty-General Liability Casualty-General Liability Casualty-General Liability Casualty-General Liability Casualty-General Liability Casualty-General Liability Casualty-General Liability Casualty-General Liability

$5,985.00 $8,925.00 $683.00 $273.00 $8,652.00 $4,250.00 $3,103.00 $5,310.00 $460.00 $8,260.00 $461.00 $90.00 $2,061.00 $8.00 $75.00 $574.00 $300.00 $12.025.00 $144.00 $2,107.00 $5,184.00 $687.00 $100.00 $319,200.00 $635.00 $775.00 $12,919.00 $4,300.00 $430.00 $2,808.00 $2,600.00 $4,000.00 $1,500.00 $2,600.00 $3,400.00 $600.00 $200.00 $2,025.00

Covered Covered Covered Covered Covered None Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered Covered None Covered None Covered None Covered Covered None None None None None None None None

787

Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Kirkland & Ellis LLP Alvarez & Marsal North America, LLC Alvarez & Marsal North America, LLC Alvarez & Marsal North America, LLC

Name of Payee

Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center Citigroup Center 600 Lexington Avenue 600 Lexington Avenue 600 Lexington Avenue

Address 1 New York New York New York New York New York New York New York New York New York New York New York New York New York New York

6th Floor 6th Floor

City

153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 153 East 53rd Street 6th Floor

Address 2

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 9 Payments related to debt counseling or bankruptcy

NY

NY

NY NY NY NY NY NY NY NY NY NY NY NY

State

10022

10022

10022 10022 10022 10022 10022 10022 10022 10022 10022 10022 10022 10022

Zip

Name of Payor If Other than Debtor

$43,658.69 $18,243.75 $150,000.00 $7,279.40 $20,166.25 $200,000.00 $90,965.05 $300,000.00 $321,960.82 $728,041.65 $247,296.25 $250,000.00

Amount of Money

6/27/2008

(Continued )

$98,145.00

6/20/2008 $161,938.00

3/4/2008 3/12/2008 4/8/2008 4/9/2008 4/10/2008 5/12/2008 5/23/2008 5/29/2008 6/17/2008 7/3/2008 7/14/2008 6/20/2008

Date of Payment

788

Alvarez & Marsal North America, LLC Alvarez & Marsal North America, LLC Alvarez & Marsal North America, LLC Richards, Layton & Finger, P.A. Perella Weinberg Partners LP Perella Weinberg Partners LP Perella Weinberg Partners LP Kurtzman Carson Consultants LLC Kurtzman Carson Consultants LLC

Name of Payee

DE NY

CA CA

New York Wilmington New York New York New York El Segundo El Segundo

6th Floor 920 North King Street

767 Fifth Avenue

767 Fifth Avenue

2335 Alaska Avenue 2335 Alaska Avenue

NY

NY

NY

NY

New York

6th Floor

NY

State

New York

City

6th Floor

Address 2

600 Lexington Avenue 600 Lexington Avenue 600 Lexington Avenue One Rodney Square 767 Fifth Avenue

Address 1

90245

90245

10155

10154

10153

19801

10022

10022

10022

Zip

Name of Payor If Other than Debtor

Amount of Money

$83,018.00

7/14/2008

6/2/2008

7/14/2008

$25,282.00

$50,000.00

$12,464.00

7/2/2008 $166,385.00

6/4/2008 $310,000.00

6/19/2008 $150,000.00

7/14/2008

7/9/2008 $104,846.00

7/3/2008 $104,539.00

Date of Payment

789

LaSalle Bank, NA, A Bank of America Company LaSalle Bank, NA, A Bank of America Company WACHOVIA BANK, NA WACHOVIA BANK, NA Shell Card Center BP Oil

Name of Account

540 W. Madison

301 S. College St 301 S. College St P.O. Box 689081 P.O. Box 9033

Investment Sweep

SWAP TRANSACTION SWAP TRANSACTION Fleet Card

Fleet Card

540 W. Madison

Address 1

Purchase Card

Type of Account

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 11 Closed financial accounts

CA

IA

Des Moines Carlsbad

NC

Charlotte

NC0537

NC

IL

IL

State

Charlotte

Chicago

Chicago

City

NC0537

Address 2

92008-903

50368-908

28288

28288

60661

60661

Zip

9851

2062

1122

4040

6901

2470

Number of Account

3/24/2008

Terminated 6/16/2008 Terminated 6/16/2008 3/21/2008

7/16/2008

6/2/2008

Date Closed

$

$

$

$

$

—

—

—

—

—

$92,859.50

Final Balance

790

9990 Princeton Road 9990 Princeton Road

Pierre Foods

Amherst

Cincinnati

Cincinnati

City

OH

OH

OH

State

45202 Butler County Department of Environmental Services 44001 City of Ahmerst Building and Utilities Department

45202 Ohio EPA

Zip

480 Park Avenue

130 High Street

50 West Town St.

City

Amherst

Hamilton

Suite 700 Columbus

Name of Governmental Unit Address 1 Address 2

OH

OH

OH

State

Date of Notice

Environmental Law

44001 7/7/2007 Amherst Ordinance 912.05.

43215 8/6/2006 Ohio Clean Air Act (OH Code 3704.03). 45011 4/7/2007 Butler Co., Ohio Resolution 108-9-1209.

Zip

∗ Pierre Real Property LLC is the owner of the Clovervale Farms. Inc. facility. The notice giving rise to this SOFA 17a response was provided to Pierre Foods, Inc.

Clovervale 1833 Farms, Inc. Cooper Foster Park Road

Pierre Foods

Address 1

Site Name

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 17a Environmental information

791

9990 Princeton Rd. 9990 Princeton Rd.

76-0839892

76-0839891

34-0661082

56-2081730

76-0835302

Warfighter Foods, LLC

Zar Tran, LLC

Zartic, LLC

Clovervale Farms, Inc.

Fresh Foods Properties, LLC Pierre Real Property, LLC

9990 Princeton Rd.

9990 Princeton Rd.

9990 Princeton Rd.

9990 Princeton Rd.

56-2625678

Name

Address 1

Taxpayer I.D. Number

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 18a Nature, location, and name of business

Cincinnati

Cincinnati

Cincinnati

Cincinnati

Cincinnati

Cincinnati

City

OH

OH

OH

OH

OH

OH

State

45246

45246

45246

45246

45246

45246

Zip

Food Service & Manufacturing Food Service & Manufacturing Food Service & Manufacturing Food Service & Manufacturing Food Service & Manufacturing Food Service & Manufacturing

Nature of Business

Current

Current

Current

Current

Current

Current

Beginning and Ending Dates of Operation

792

Joseph W. Meyers Joseph W. Meyers Steven S. Beatty Lisa M. Kessler Cynthia S. Hughes

Name

9990 Princeton Rd. 9990 Princeton Rd. 9990 Princeton Rd. 9990 Princeton Rd. 9990 Princeton Rd.

Address 1

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 19a Books, records and financial statements Address 2 Cincinnati Cincinnati Cincinnati Cincinnati Cincinnati

City OH OH OH OH OH

State 45246 45246 45246 45246 45246

Zip

VP Finance Chief Financial Officer Corporate Controller Corporate Controller Chief Financial Officer

Title

2/2008 - 6/2008 7/2006 - 2/2008 8/2007 - Present 7/2006 - 7/2007 2/2008 - Present

Dates Services Rendered

8.7


793

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 20a Inventories Date of Inventory 3/1/2008 3/3/2007 3/1/2008 3/3/2007 3/3/2007 3/1/2008 3/1/2008 3/3/2007 3/1/2008 3/3/2007 3/1/2008 3/3/2007 3/1/2008

Inventory Supervisor Evelyn Doyle Chris Lupariello Tom Tepper Tom Tepper Ted Geishart Brian Foor Carey West Jan Linberg Bob Barton Bob Barron Rachel Hemminger Evelyn Doyle Kenneth Moore

Dollar Amount of Inventory $5,501,225.00 $3,881,355.00 $5,923,255.00 $3,415,174.00 $2,912,669.54 [closed] $11,548,276.00 $6,421,617.50 $1,063,813.24 $1,011,039.08 $20,339,432.00 $17,307,620.00 $5,016,428.00

794

9990 Princeton Road 9990 Princeton Road 9990 Princeton Road 133 Clovervale Dr. 9990 Princeton Road

9990 Princeton Road 9990 Princeton Road

9990 Princeton Road

Anthony J. Schroder Cynthia S. Hughes

John Schaefer

Address 1

PF Management, Inc. George A. Peinado Nicholas W. Alexos Robin P. Selati Scott Meader Norbert E. Woodhams

Name

Route 135

Address 2

In re: Pierre Foods, Inc. Case No. 08-11480 SOFA 21b Current partners, officers, directors and shareholders

Cincinnati

Cincinnati Cincinnati

Cincinnati Cincinnati Cincinnati Easley Cincinnati

City

OH

OH OH

OH OH OH SC OH

State

45246

45246 45246

45246 45246 45246 29640 45246

Zip

Shareholder Director Director Director Director President, Chief Executive Officer, Chairman of the Board, and Director Senior VP Sales Secretary, Chief Financial Officer and Treasurer Chief Operating Officer (effective July 15, 2008)

Title

N/A

N/A N/A

100% N/A N/A N/A N/A N/A

Nature and Percentage of Stock Ownership

8.8

8.8

Rules for Filing Operating Statements

795


Objective. Section 8.13 of Volume 1 of Bankruptcy and Insolvency Accounting discusses rules covering procedural matters that relate to handling a bankruptcy case, including rules for filing operating statements. Examples of local rules for the Central District of California are presented below; other regions have similar rules.

LBR 2014-1. EMPLOYMENT OF DEBTOR AND PROFESSIONAL PERSONS (a) Employment of Debtor’s Principals or Insiders in Chapter 11 Cases. (1) Notice of Setting/Increasing Insider Compensation. No. compensation or other remuneration may be paid from the assets of the estate to a debtor’s owners, partners, officers, directors, shareholders, or relatives of insiders as defined by 11 U.S.C. §101(31), from the time of the filing of the petition until the confirmation of a plan nor may approved compensation be increased unless the debtor serves a Notice of Setting/Increasing Insider Compensation (“Notice”) in accordance with procedures adopted by the United States trustee pursuant to this rule. (2) Service of Notice. The debtor must: (A) serve the Notice on the United States trustee, the creditors’ committee or the 20 largest creditors if no committee has been appointed, any other committee appointed in the case, counsel for any of the foregoing, and any secured creditor that claims an interest in cash collateral, and (B) provide proof of service to the United States trustee. As a non-filed document, the Notice does not result in the generation and delivery of an NEF, and therefore consent to electronic service via NEF on the United States trustee and other CM/ECF Users is not applicable to the Notice. (3) Payment of Insider Compensation. An insider may receive compensation or other remuneration from the estate if no objection is received within 15 days after service of the Notice. An insider may receive an increase in the amount of insider compensation or other remuneration previously approved if no objection is received within 30 days after service of the Notice. (4) Objection and Notice of Hearing. If an objection is timely received, the debtor must set the matter for hearing. The debtor must file a true and correct copy of the Notice, objection, and the original notice of hearing. The debtor must serve not less than 20 days notice of the date and time of the hearing on the objecting party and the United States trustee. (b) Employment of Professional Person. (1) Application for Employment. (A) An application seeking approval of employment of a professional person pursuant to 11 U.S.C. §§ 327, 328, 1103(a), or 1114 must comply with the requirements of FRBP 2014 and 6003(a) and be filed with the court. The application must

796


specify unambiguously whether the professional seeks compensation pursuant to 11 U.S.C. § 328 or 11 U.S.C. § 330. (B) The application must be accompanied by a declaration of the person to be employed establishing disinterestedness or disclosing the nature of any interest held by such person. (C) The United States trustee must be served, in accordance with LBR 2002-2(a), with a copy of the application and supporting declaration not later than the day it is filed with the court. No hearing is required unless requested by the United States trustee or a party in interest, or as otherwise ordered by the court. (D) A chapter 7 trustee who seeks authorization to act as attorney or accountant for the estate, or to employ the trustee’s firm in such capacity, must explain why such employment is in the best interests of the estate. (E) A timely application for employment is a prerequisite to compensation from the estate. Therefore, an application for the employment of counsel for a debtor in possession should be filed as promptly as possible after the commencement of the case, and an application for employment of any other professional person should be filed as promptly as possible after such person has been engaged. (F) The substitution of an attorney must also comply with LBR 2091-1(b). (2) Notice of Application. (A) Notice of an application by the debtor (if such application is required), debtor in possession, or trustee, to retain a professional person must be filed and served, in accordance with LBR 20022(a) and LBR 9036-1, on the United States trustee, the debtor (if a trustee has been appointed), the creditors’ committee or the 20 largest unsecured creditors if no committee has been appointed, any other committee appointed in the case, counsel for any of the foregoing, and any other party in interest entitled to notice under FRBP 2002. (B) Notice of an application by a committee to retain a professional person must be filed and served, in accordance with LBR 2002-2(a) and LBR 9036-1, on the United States trustee, debtor or debtor in possession, the trustee (if appointed), and their counsel. (C) The notice must be filed and served not later than the day the application is filed with the court. (3) Content of Notice. The notice must: (A) State the identity of the professional and the purpose and scope for which it is being employed; (B) State whether the professional seeks compensation pursuant to 11 U.S.C. § 328 or 11 U.S.C. § 330; (C) Describe the arrangements for compensation, including the hourly rate of each professional to render services, source of

8.8


797

the fees, the source and amount of any retainer, the date on which it was paid, and any provision regarding replenishment thereof; (D) Provide a name, address, and telephone number of the person who will provide a copy of the application upon request; and (E) Advise the recipient that any response and request for hearing, in the form required by LBR 9013-1(f)(1), must be filed and served on the applicant (and counsel, if any), and the United States trustee not later than 15 days from the date of service of the notice. (4) No Response and Request for Hearing. If the response period expires without the filing and service of a response and request for hearing, the applicant must promptly comply with LBR 9013-1(o)(3), except that: (A) The proposed order and declaration must be served only on the United States trustee; and (B) The Notice of Entered Order and Service List must limit service by the court to the debtor or debtor in possession, trustee (if any), the creditor’s committee, any other committee appointed in the case, counsel for any of the foregoing, and the United States trustee. (5) Response and Request for Hearing Filed. If a timely response and request for hearing is filed with the court and served upon the applicant and the United States trustee, the applicant must comply with LBR 9013-1(o)(4). (c) Reconsideration of Employment Terms. (1) If the court approves the terms of a professional’s employment, including a fee based on an hourly rate, fixed or percentage fee, contingency or success fee, or a combination thereof, the court will not reconsider such terms of employment at a subsequent time except as provided in 11 U.S.C. § 328(a). (2) Notwithstanding the foregoing, the court may exercise its discretion pursuant to 11 U.S.C. § 330(a)(2).

LBR 2015-2. REQUIREMENTS FOR CHAPTER 11 DEBTORS IN POSSESSION OR CHAPTER 11 TRUSTEES (a) Reports Before Confirmation of Plan. (1) The debtor, the debtor in possession, or chapter 11 trustee must provide the United States trustee with financial, management and operational reports, and such other information requested by the United States trustee in writing pursuant to the United States Trustee Notices and Guides as necessary to properly supervise the administration of a chapter 11 case. (2) The United States trustee may, at any time during the pendency of a case, add or delete requirements where such modifications are necessary or appropriate.

798


(b) Duty to Comply With Requirements of the United States Trustee Notices and Guides. A debtor in possession or chapter 11 trustee must comply with the reasonable requirements of the United States trustee with respect to form, maintenance of records, and reporting requirements as set forth in the United States Trustee Notices and Guides. Timely compliance is mandatory. (c) Duties Upon Conversion to Chapter 7. Upon entry of an order converting a case to one under chapter 7, the debtor in possession or Chapter 11 trustee, if any, must, in addition to complying with those duties set forth in FRBP 1019: (1) Secure, preserve and refrain from disposing of property of the estate; (2) Contact the chapter 7 trustee and arrange to deliver property of the estate and all books and records to the trustee or the trustee’s designated agent; and (3) Within 5 days after entry of said order, file and serve upon the United States trustee and the chapter 7 trustee, a verified schedule of all property of the estate as of the conversion date. LBR 2016-1. COMPENSATION OF PROFESSIONAL PERSONS (a) Interim Fee Applications. (1) Form of Fee Application. An application for interim fees incurred or costs advanced by an attorney, accountant or other professional person, and a trustee or examiner must contain the following: (A) A brief narrative history and report concerning the status of the case, including the following: (i) Chapter 11. Applicant must describe the general operations of the debtor, stating whether the business of the debtor, if any, is being operated at a profit or loss, whether the business has sufficient operating cash flow, whether a plan has been filed, and if not, the prospects for reorganization and the anticipated date for the filing of a plan. (ii) Chapter 7. Applicant must report the status of administration of the estate, discussing the actions taken to liquidate property of the estate, the property remaining to be administered, the reasons the estate is not in a position to be closed, and whether it is feasible to pay an interim dividend to creditors. (iii) All Cases. Applicant must disclose the amount of money on hand in the estate and the estimated amount of other accrued expenses of administration. At the hearing on an application for interim fees, the applicant should be prepared to supplement the application by declaration or by testimony to inform the court of the current financial status of the debtor’s estate. (iv) Multiple Fee Applications. If more than 1 application for interim fees in a case is noticed for hearing at the same date and time, the narrative history provided in one of the applications may be incorporated by reference into the other

8.8


799

interim fee applications to be heard contemporaneously by the court. (v) Exception. A fee application submitted by an auctioneer, real estate broker, or appraiser does not have to comply with subsection (A) of this rule, except that auctioneers, unless otherwise ordered by the court, must file the report required by FRBP 6004(f) prior to receiving final compensation. (B) The date of entry of the order approving the employment of the individual or firm for whom payment of fees or expenses is sought, and the date of the last fee application for the professional. (C) A listing of the amount of fees and expenses previously requested, those approved by the court, and how much has been received. (D) A brief narrative statement of the services rendered and the time expended during the period covered by the application. (E) Unless employment has been approved on a fixed fee, percentage fee, or contingent fee basis, the application must contain a detailed listing of all time spent by the professional on matters for which compensation is sought, including the following: (i) Date service was rendered. (ii) Description of service. It is not sufficient to merely state “Research,” “Telephone Call,” “Court Appearance,” etc. Applicant must refer to the particular person, motion, discrete task performed, and other matters related to such service. A summary that lists a number of services under only 1 time period is not satisfactory. (iii) Amount of time spent. A summary is not adequate. Time spent must be accounted for in tenths of an hour and broken down in detail by the specific task performed. Lumping of services is not satisfactory. (iv) Identification of person who rendered service. If more than 1 person’s services are included in the application, applicant must identify the person who performed each item of service. (F) An application that seeks reimbursement of actual and necessary expenses must include a summary listing of all expenses by category (i.e., long distance telephone, photocopy costs, facsimile charges, travel, messenger and computer research). As to each unusual or costly expense item, the application must state: (i) The date the expense was incurred; (ii) A description of the expense; (iii) The amount of the expense; and (iv) An explanation of the expense. (G) Unless employment has been approved on a fixed fee, percentage fee, or contingent fee basis, the application must contain a listing of the hourly rates charged by each person whose services form a basis for the fees requested in the application.

800


The application must contain a summary indicating for each attorney by name: (i) The hourly rate and the periods each rate was in effect; (ii) The total hours in the application for which compensation is sought; and (iii) The total fee requested in the application. (H) A description of the professional education and experience of each of the individuals rendering services, including identification of the professional school attended, year of graduation, year admitted to practice, publications or other achievements, and explanation of any specialized background or expertise in bankruptcy-related matters. (I) If the hourly rate has changed during the period covered by the application, the application must specify the rate that applies to the particular hours for which compensation is sought. (J) A separately filed declaration from the client indicating that the client has reviewed the fee application and has no objection to it. If the client refuses to provide such a declaration, the professional must file a declaration describing the steps that were taken to obtain the client’s declaration and the client’s response thereto. (K) A statement that the applicant has reviewed the requirements of this rule and that the application complies with this rule. (2) Notice of Interim Fee Application and Hearing. (A) In all cases where the employment of more than one professional person has been authorized by the court, a professional person who files an application for interim fees must give other professional persons employed in the case not less than 45 days notice of the date and time of the hearing. The notice of hearing must further state: “Other professional persons retained pursuant to court approval may also seek approval of interim fees at this hearing, provided that they file and serve their applications in a timely manner. Unless otherwise ordered by the court, hearings on interim fee applications will not be scheduled less than 120 days apart.”

(B) Applicant must serve not less than 21 days notice of the hearing on the debtor or debtor in possession, the trustee (if any), the creditors’ committee or the 20 largest unsecured creditors if no committee has been appointed, any other committee appointed in the case, counsel for any of the foregoing, the United States trustee, and any other party in interest entitled to notice under FRBP 2002. The notice must identify the professional person requesting fees, the period covered by the interim application, the specific amounts requested for fees and reimbursement of expenses, the date, time and place of the hearing, and the deadline for opposition papers.

8.8


801

(C) In addition to the notice, a copy of the application, together with all supporting papers, must be served on the debtor or debtor in possession, the trustee (if any), any committee appointed in the case, counsel for any of the foregoing, and the United States trustee. A copy of the complete application must also be promptly furnished upon specific request to any other party in interest. (3) Objections. Any opposition or other responsive paper by the United States trustee or other party in interest must be served and filed at least 14 days prior to the hearing in the form required by LBR 9013-1(f). (b) Motions to Approve Compensation Procedures in Chapter 11 Cases, Including Monthly Draw-down and Contingency or Success Fee Agreements. A professional person employed in a chapter 11 case may request approval for and modifications of draw-down procedures and an order allowing payment of interim compensation more frequently than once every 120 days. (c) Final Fee Application. (1) Who Must File. The trustee, if any, and each professional person employed in the case must file a final fee application. (2) Contents. An application for allowance and payment of final fees and expenses must contain the information required of an interim fee application under LBR 2016-1(a)(1). (3) When Filed; Notice Required in Chapter 11 Cases. (A) Unless otherwise ordered by the court, a final fee application by the trustee, if any, and each professional person employed in a chapter 11 case must be filed and set for hearing as promptly as possible after confirmation of a plan. (B) A final fee application must cover all of the services performed in the case, not just the last period for which fees are sought, and must seek approval of all prior interim fee awards. (C) Applicant must serve not less than 21 days notice of the hearing on the debtor or debtor in possession, the trustee (if any), any committee appointed in the case, counsel for any of the foregoing, the United States trustee, and any other party in interest entitled to notice under FRBP 2002. The notice must identify the person or entity requesting a final allowance of fees and expenses, the period covered by the final application, the specific amounts requested for fees and reimbursement of expenses, the date, time and place of the hearing, and the deadline for opposition papers. (D) In addition to the notice, a copy of the application, together with all supporting papers, must be served on the debtor or debtor in possession, the trustee (if any), any committee appointed in the case, counsel for any of the foregoing, and the United States trustee. A copy of the complete application must also be promptly furnished upon specific request to any other party in interest.

802


(4) When Filed; Notice Required in Chapter 7 Cases. (A) A chapter 7 trustee must give at least 30 days written notice of intent to file a final report and account to the attorney for the debtor, the trustee’s attorney and accountant, if any, and any other entity entitled to claim payment payable as an administrative expense of the estate. (B) A professional person seeking compensation must file and serve an application for allowance and payment of final fees and expenses on the trustee within 21 days of the date of the mailing of the trustee’s notice. The failure to timely to file an application may be deemed a waiver of compensation. (C) All final fee applications by professional persons must be set for hearing with the chapter 7 trustee’s final application for allowance and payment of fees and expenses. Notice of a final fee application must be given by the chapter 7 trustee as part of the notice of the hearing on the trustee’s request for compensation. A separate notice by the applicant is not required. (5) Objections. Any opposition or other responsive paper by the United States trustee or other party in interest must be served and filed at least 14 days prior to the hearing in the form required by LBR 9013-1(f). (d) Fee Examiner. The court may, either sua sponte or on the motion of a party in interest, exercise its discretion to appoint a fee examiner to review fee applications and make recommendations to the court for approval. LBR 2081-1. CHAPTER 11 CASES (a) Motions Requiring Emergency or Expedited Relief . Subject to FRBP 6003, the following motions may be heard pursuant to LBR 9075-1 either as an emergency motion or on shortened time: (1) Motion to limit notice; (2) Motion to extend time to file schedules and statement of financial affairs; (3) Utility motion pursuant to 11 U.S.C. § 366; (4) Motion to establish procedures for handling multiple reclamation claims; (5) Request for regularly scheduled hearing dates. Upon request of a debtor, the court may establish a fixed date and time for hearing all motions and other matters in a chapter 11 case. Once ordered, the dates and time, and exceptions, if any, will be made available through the clerk’s office and posted in advance on the court’s website; (6) Motion to pay prepetition payroll and to honor prepetition employment procedures. The motion must be supported by evidence that establishes: (A) The employees are still employed; (B) The necessity for payment;

8.8


803

(C) (D) (E) (F)

The benefit of the procedures; The prospect of reorganization; Whether the employees are insiders; Whether the employees’ claims are within the limits established by 11 U.S.C. § 507; and that (G) The payment will not render the estate administratively insolvent; (7) Motion to honor and comply with customer obligations and deposits. The motion must be supported by evidence that relief is essential to business operations and customer confidence or that the estate may suffer postpetition damages that would prejudice creditors, the reorganization, or the value of property of the estate; (8) Motion to pay prepetition taxes. The motion must be supported by evidence that establishes: (A) The necessity for payment; (B) The prospect of reorganization; (C) The means to pay; (D) That the taxes to be paid are entitled to priority pursuant to 11 U.S.C. § 507; and that (E) The payment will not render the estate administratively insolvent; (9) Motion for emergency use of cash collateral, debtor in possession financing, or cash management; (10) Motion for order establishing procedures for sale of estate’s assets; (11) Appointment of a patient care ombudsman under 11 U.S.C. § 333; and (12) Other motions where special circumstances exist. The motion must be supported by evidence that exigent circumstances exist justifying an expedited hearing. (b) Prepackaged Plans. A hearing on a motion for order confirming a chapter 11 plan upon which voting was conducted before commencement of the case pursuant to 11 U.S.C. § 1126(b) must be scheduled, if practicable, no more than 30 days after the order for relief. (c) Severance Compensation or Employee Incentive Motions. (1) Notice. A motion for approval of a severance compensation package or employee incentive program must be heard on regular notice, absent exigent circumstances. (2) Standard. The motion must state whether the employee is an insider. If so, the motion must state whether the insider has a bona fide job offer from another business at the same or greater rate of compensation and establish the elements of 11 U.S.C. § 503(c).

LBR 3016-1. FORM OF CHAPTER 11 PLAN Unless otherwise ordered, a plan of reorganization filed with the court may, but need not, conform with court-approved form F 3018-1, Form of Chapter 11 Plan.

804


LBR 3016-2. FORM OF CHAPTER 11 DISCLOSURE STATEMENT Unless otherwise ordered, a disclosure statement filed with the court may, but need not, conform with court-approved form F 3017-1, Chapter 11 Disclosure Statement Form. LBR 3017-1. CHAPTER 11 DISCLOSURE STATEMENT—APPROVAL IN CASE OTHER THAN SMALL BUSINESS CASE (a) Notice of Hearing on Motion for Approval of Disclosure Statement. A hearing on a motion for approval of a disclosure statement must not be set on less than 36 days notice, unless the court, for good cause shown, prescribes a shorter period. (b) Objections to Disclosure Statement. Objections to a disclosure statement must be filed and served on the proponent not less than 11 days before the hearing, unless otherwise ordered by the court. LBR 3017-2. CHAPTER 11 DISCLOSURE STATEMENT—APPROVAL IN SMALL BUSINESS CASE (a) Conditional Approval of Disclosure Statement. The court may, on application of the plan proponent or sua sponte, conditionally grant a motion for approval of a disclosure statement filed in accordance with 11 U.S.C. § 1125(f) and FRBP 3016. (b) Procedure for Requesting Conditional Approval of Disclosure Statement. The plan proponent may file an ex parte motion for conditional approval of the disclosure statement, asking that the hearing on the adequacy of the disclosure statement be combined with the hearing on confirmation. The motion must be supported by a declaration establishing grounds for conditional approval and accompanied by a proposed order consistent with FRBP 2002(b) that conditionally approves the disclosure statement and establishes: (1) A date by which the holders of claims and interests may accept or reject the plan; (2) A date for filing objections to the disclosure statement; (3) A date for the hearing on final approval of the disclosure statement to be held if a timely objection is filed; and (4) A date for the hearing on confirmation of the plan. (c) Objections and Hearing on Final Approval. (1) The debtor must file and serve a notice of the dates set forth above, together with a copy of the disclosure statement and plan, on all creditors and the United States trustee. (2) Final approval of the disclosure statement is required only when a timely objection is filed and served on the debtor, the trustee (if any), any committee appointed under the Bankruptcy Code, counsel for any of the foregoing, and any other entity as ordered by the court. LBR 3018-1. BALLOTS—VOTING ON CHAPTER 11 PLAN (a) Ballot Summary. The plan proponent must: (1) Tabulate the ballots of those accepting or rejecting the plan;

8.8


805

(2) File a ballot summary not later than 1 day before the hearing on the motion for order confirming the plan. The ballot summary must be signed by the plan proponent and must certify to the court the amount and number of allowed claims of each class voting to accept or reject the plan and the amount of allowed interests of each class voting to accept or reject the plan; and (3) Make available at the hearing all of the original ballots for inspection and review by the court and any interested party. (b) Amended Ballot Summary. In addition to the requirements set forth in subsection (a) of this rule, the court may order an amended ballot summary to be filed with the original ballots attached. LBR 3020-1. CHAPTER 11 PLAN CONFIRMATION (a) Payment of Special Charges. The proposed plan confirmation order must be accompanied by proof of payment of any and all special charges due to the clerk’s office. The amount of the charges to be paid may be obtained from the courtroom deputy of the judge hearing the case. (b) Postconfirmation Requirements. Unless otherwise provided in the plan, every order confirming a chapter 11 plan must contain the following language: “Within 120 days of the entry of this order, shall file a status report explaining what progress has been made toward consummation of the confirmed plan of reorganization. The initial report shall be served on the United States trustee, the 20 largest unsecured creditors, and those parties who have requested special notice. Further reports shall be filed days thereafter and served on the same entities, unless otherevery wise ordered by the court. [Optional depending on practices of particular , judge: A postconfirmation status conference will be held on at .m. in Courtroom .] 20 The status report shall include at least the following information: (1) A schedule listing for each debt and each class of claims: the total amount required to be paid under the plan; the amount required to be paid as of the date of the report; the amount actually paid as of the date of the report; and the deficiency, if any, in required payments; (2) A schedule of any and all postconfirmation tax liabilities that have accrued or come due and a detailed explanation of payments thereon; (3) Debtor’s projections as to its continuing ability to comply with the terms of the plan; (4) An estimate of the date for plan consummation and application for final decree; and (5) Any other pertinent information needed to explain the progress toward completion of the confirmed plan. Reporting entities whose equity securities are registered under Section 12(b) of the Securities Exchange Act of 1934 may provide information from their latest 10Q or 10K filing with the S.E.C., if it is responsive to the requirements of this subsection. Unless otherwise provided in the plan, if the above-referenced case is converted to one under chapter 7, the property of the reorganized debtor

806


shall be revested in the chapter 7 estate, except that, in individual cases, the postpetition income from personal services and proceeds thereof, and postconfirmation gifts or inheritances pursuant to 11 U.S.C. §§ 541(a)(5)(A), 541(a)(6), 1115(a) or 1115(b), shall not automatically revest in the chapter 7 estate.”

(c) Effect of Failure to File Postconfirmation Reports. The failure to file timely the required reports is cause for dismissal or conversion to a case under chapter 7 pursuant to 11 U.S.C. § 1112(b). (d) Final Decree in Chapter 11 Case. (1) After an estate is fully administered in a chapter 11 reorganization case, a party in interest may file a motion for a final decree in the manner provided in LBR 9013-1(o). (2) Notice of the motion must be served upon all parties upon whom the plan was served.

8.9

807

U.S. Trustee Requirements

8.9


Objective. Section 8.14 of Volume 1 of Bankruptcy and Insolvency Accounting describes how the U.S. trustee establishes with the debtor the type of operating reports that should be filed and the timing of such reports. A notice of filing requirements for chapter 11 cases filed in the Central District of California is reproduced below. U.S. Department of Justice

411 W. Fourth St Suite 9041 Santa Ana, CA 92701 (714) 338-3400 FAX (714) 338-3421

725 South Figueroa St. Suite 2600 Los Angeles, CA 90017 (213) 894-6811 FAX (213) 894-2603

United States Trustee Central District of California 3685 Main St. 21051 Warner Suite 300 Center Lane Riverside, CA Suite 115 92501 Woodland Hills, (909) 276-6990 CA 91367 FAX (909) 276-6973 (818) 716-8800 FAX (818) 716-1576

NOTICE OF FINANCIAL REPORTING REQUIREMENTS FOR CHAPTER 11 DEBTORS IN POSSESSION (“FINANCIAL REPORTING REQUIREMENTS”) ∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗

New Requirement, please note∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗∗

Effective November 15, 2004, Interim Statements and Operating Reports for new cases will not be accepted. If your case was commenced prior to said date, please check with the U.S. Trustee Analyst assigned to your case to determine whether the MOR must be used. For all other cases, you MUST use the MOR. General Instructions A chapter 11 debtor in possession serves as a fiduciary for the benefit of the creditors and owners in the case. Providing complete and accurate financial information regarding the estate is part of the debtor’s fiduciary duty. The Financial Report Form (“Report”) that is to be used for this purpose is attached. What Must Be Reported Monthly Operating Reports (MOR’s) contain information regarding bank accounts over which the debtor has possession, custody, control, access or signatory authority, even if the account is not in the debtor’s name, and whether or not the account contains only post-petition income. MOR’s must include a narrative statement regarding the status of the reorganization effort, and any problems or issues that have arisen since the filing of the prior MOR. Debtors are required to report all their financial information. Any portion of the debtor’s post-petition income that the debtor believes is not included in the estate should nevertheless be reported, with the source of the income specifically identified. Information on all bank accounts must be reported, even if the debtor believes that the account contains only post-petition income that is not part of the bankruptcy estate.

808


Reporting Periods MOR’s must be completed on a calendar monthly basis (unless modified in writing by the OUST) and must be submitted within 15 days after the last day of each month. MOR’s must be submitted whether or not any financial activity has occurred. If an unusual event occurs that will delay filing of any of the MOR’s, you must submit a written explanation of the delay in lieu of the MOR. Insufficient explanations may result in the filing of a motion to convert or dismiss your case. Applicable Accounting Rules The MOR’s are designed to enable debtors in possession to complete them without professional assistance. However, if professionals are utilized, they should follow Generally Accepted Accounting Principles (GAAP). Also, the MOR’s should indicate whether inventories are maintained on LIFO, FIFO or another valuation method. Part I of the MOR is to be prepared on the cash basis only. The Profit and Loss Statement (Part IX) and the Balance Sheet portion (Part X) of the MOR are to be prepared on the accrual basis only. The term “accrual” denotes revenues that have been earned or expenses that have been incurred, whether or not cash has actually been received or paid. Assets listed on the schedules at fair market value should be converted to historical cost for purposes of the MOR unless otherwise specifically noted. Completing the Reports and Use of Customized Reports The MOR is meant to be generic so that it can be easily adapted to various types of businesses. MOR’s must be typed or completed on a computer and signed by the debtor in possession. Any attachments must have the case name and number noted. All financial statements must be two hole punched and must not be blue-backed or submitted in duplicate. The OUST will not conform or return copies of these forms. Each MOR must be separately submitted. Do not staple groups of MOR’s together. All blanks must be filled out completely. If any information requested on the MOR is inapplicable, this must be noted on the MOR. If an MOR is incomplete, it will be treated as if it had not been filed. If you believe that the MOR needs significant modifications to be useful for your estate or if you already are preparing the Balance Sheet or Profit and Loss Statement, etc., in a format customized for your business, you should consult with the U.S. Trustee analyst assigned to your case, from whom you must obtain written permission before you may submit alternative reports. Where to Submit Reports Reports must be submitted to the United States Trustee. Do not file them with the Bankruptcy Court. Copies of the reports should also be submitted to the attorney for the debtor in possession and the chair of any creditors’ committee appointed in the case. Failure to Submit or Submission of Incomplete Reports Failure to submit MOR’s to the United States Trustee in a timely fashion may result in a motion to convert or dismiss the bankruptcy. The submission

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809

of MOR’s that are incomplete or not prepared in accordance with this Guide will be treated as a failure to submit. All MOR’s signed by anyone other than the debtor in possession or a responsible designate will be treated as not having been submitted. DOs and DON’Ts Do sign and date the MOR, otherwise it will not be accepted; Do file it on time: by the 15th day after the end of a calendar month; Do include all financial institution accounts in the MOR; Don’t complete the MOR in handwriting. It will be rejected; Don’t blueback the MOR; Don’t modify the MOR without OUST permission; Don’t have the debtor’s attorney sign the MOR. Debtor must sign it.

810 8.10


Compensation for Insiders

Objective. Section 8.14 of Volume I of Bankruptcy and Insolvency Accounting describes the U.S. trustee’s role in procedures regarding wages and compensation for officers and insiders. In the Central District of California, a form must be filed for approval of compensation for all insiders—owners, partners, officers, directors, shareholders, and relatives of any insider. The covering notice used and the form in its entirety are reproduced below. U.S. Department of Justice

411 W. Fourth St Suite 9041 Santa Ana, CA 92701 (714) 338-3400 FAX (714) 338-3421

725 South Figueroa St. Suite 2600 Los Angeles, CA 90017 (213) 894-6811 FAX (213) 894-2603

United States Trustee Central District of California 3685 Main St. 21051 Warner Suite 300 Center Lane Riverside, CA Suite 115 92501 Woodland Hills, (909) 276-6990 CA 91367 FAX (909) 276-6973 (818) 716-8800 FAX (818) 716-1576

Guide To Applications For Retainers, And Professional And Insider Compensation (“Compensation Guide”) I. Retainers A. General Information The provisions of this guide allowing draw-down of retainers apply only if the professional has obtained an order authorizing employment that also authorizes the draw-down of the retainer.1 B. Accounting For Services Covered By A Retainer Any unearned portion of a pre-petition or post-petition retainer that is an advance against fees must be deposited in a segregated trust account upon filing of the petition. If the pre-petition retainer is earned upon receipt, the funds need not be segregated by the professional. 1. Any professional who has received a pre-petition or post-petition retainer must submit to the United States Trustee a monthly Professional Fee Statement (Form USTLA-6) no later than the 20th day after the end of the month during which professional services were rendered, together with documentation supporting the charges for the professional services and expenses in the form required for professional fee applications by applicable law. In addition, a copy of the Professional Fee Statement (without the supporting documentation) must be served on the official creditors’ committee or, if no committee has been appointed, on the 20 largest unsecured creditors, and on those parties who have requested special notice. The Professional Fee Statement should include a statement that the supporting documentation can be obtained from the professional upon request. 1 Some

judges do not permit attorneys to draw down on retainers pursuant to the procedure set forth herein. Professionals with retainers should thus make certain at the time of their employment what procedures are required by the judge to whom the case is assigned.

8.10

Compensation for Insiders

811

2. The Professional Fee Statement must explicitly state that the fees and costs will be withdrawn from the trust account in the amount requested without further notice or hearing, unless an objection is filed with the clerk of the court and served upon the applicant(s) within 10 days after service of the Professional Fee Statement. If no objection is timely filed and served, the professional may withdraw the requested compensation without further notice, hearing or order. If an objection is timely filed and served, the professional should refrain from withdrawing any funds until the objection has been resolved by the court. 3. Notwithstanding the submission of the Professional Fee Statement, as long as the professional is performing services covered by a retainer, the professional must submit interim fee applications to the court as required by applicable law. Once the full amount of the retainer including an earned on receipt retainer, has been accounted for, no further Professional Fee Statements shall be filed. 4. Neither the United States Trustee nor any party in interest shall be estopped from raising objections to any charge or expense in any professional fee application filed with the court on the ground that no objection was lodged to the Professional Fee Statement. II. Insider Compensation Form USTLA-12 should be used for compliance with Local Rule Bankruptcy Rule 2014-1(a).

812 8.11


Operating Statements Guidelines

Objective. Section 8.15 of Volume 1 of Bankruptcy and Insolvency Accounting recounts how financial advisors have desired to have an operating statement that applied to all regions and the U.S Trustee is in the process of developing such a report. When it becomes available, it will be included in the annual supplement that updates both Volume 1 and 2 of Bankruptcy and Insolvency Accounting. The guidelines currently in effect for the judicial districts of Connecticut, New York, and Vermont are presented below. U.S. Department of Justice Office of the United States Trustee Region 2—New York, Connecticut and Vermont

OPERATING GUIDELINES AND REPORTING REQUIREMENTS FOR DEBTORS IN POSSESSION AND TRUSTEES (Revised 2/1/08) Title 28, §586(a)(3) of the United States Code directs the United States Trustee to supervise the administration of all Chapter 11 cases. To comply with this charge, the United States Trustee for Region 2 has established the Operating Guidelines and Reporting Requirements for Chapter 11 debtors and trustees. Chapter 11 debtors, trustees and their attorneys must notify the United States Trustee of significant matters affecting their case. The United States Trustee must be served with copies of all papers filed in the case, except as otherwise directed by the Court or the United States Trustee. Timely compliance with each of the following requirements is essential. Failure to comply may result in a motion to dismiss or convert this case to liquidation under Chapter 7, for the appointment of a Chapter 11 trustee or examiner, or for imposition of sanctions. If you believe that the requirements should be waived or varied in your case, you should immediately submit a written request to the appropriate Field Office of the United States Trustee. Contact information may be obtained from the United States Trustee website, http://www.usdoj.gov/ust/r02/. If you are represented by counsel, please contact your attorney with questions regarding this material. GUIDELINES AND OPERATING REQUIREMENTS 1. List of Creditors. When the petition is filed, a list of the debtor’s twenty (20) largest unsecured creditors, excluding insiders, must be filed with the Clerk of the Bankruptcy Court. The complete name, address, e-mail address, telephone number, fax number and name of contact of each creditor must be supplied. 2. Initial Debtor Interviews. In Chapter 11 cases, the United States Trustee generally requires the debtor and its counsel to meet with a member of the staff of the United States Trustee at an initial debtor interview prior to the Section 341 meeting of creditors. The purpose of the meeting is to discuss the debtor’s particular financial situation, its operating framework under Chapter 11, and the requirements of the United States Trustee.

8.11


813

At the meeting, the debtor is required to furnish the following documentation and such other information as requested. If no initial debtor interview is scheduled, such materials must be provided to the United States Trustee within fifteen days of the petition filing.1 – Copies of the debtor’s last two filed income tax returns, including all applicable schedules. – Copy of the most recently issued or prepared financial statements (inclusive of balance sheet, income statement, and statement of cash flows). – A schedule of aged accounts receivable. – Specimen (voided) checks that verify the opening of “debtor in possession” bank accounts (see “Bank Accounts”), and a listing of the authorized signatories (not the signature card). – Proof that all applicable insurance is in place (see “Insurance”). – A listing of all disbursements for the ninety days prior to the filing, which may take the form of a check register for an individual. – Copies of all licenses and/or permits (including licenses to intellectual property and certificates evidencing ownership of intellectual property). – Copies of all written policies given to customers regarding the sale of personally identifiable information. 3. Meeting of Creditors. A meeting of creditors will be held by the United States Trustee within 20 to 40 days after the filing of a voluntary petition. The debtor and debtor’s attorney are required to appear. All creditors and other parties in interest are notified of the meeting by the Clerk of the Bankruptcy Court. The debtor(s) will be examined under oath by the representative of the United States Trustee, creditors, and other parties in interest in attendance pursuant to 11 U.S.C. §§ 341 and 343, and Fed. R. Bankr. P. Rule 2003(b). 4. Books and Records. Debtor’s books and records (i.e. general ledger accounts) must be closed as of the petition date and new books and records opened. The old books and records must be retained and be available to the United States Trustee. 5. Bank Accounts. All pre-petition bank accounts controlled by the debtor must be closed immediately upon the filing of the petition, and the debtor shall immediately open new debtor-in-possession operating, payroll, and tax accounts at a United States Trustee Authorized Depository. A list of approved depositories is available on the United States Trustee Website, www.usdoj.gov/ust/r02/. In addition, individual debtors engaged in business as sole proprietors should open a separate debtor-in-possession account for payment of personal living expenses. All business revenues must be deposited into the general operating account, with amounts needed to fund the other accounts being transferred to those accounts as necessary. Deposits, other than transfers from the operating accounts, 1 If

the debtor is a “small business debtor” these documents must be filed along with the petition. 11 U.S.C. §1116

814


should not be made directly to the payroll or tax accounts. Any deviation from the three required Debtor In Possession Accounts must be approved by the United States Trustee prior to the Initial Debtor Interview. Disbursements other than by numbered check are prohibited. Counter checks are prohibited. Requests to use, create or maintain petty cash accounts must be submitted to the United States Trustee in writing. The checks for each account must bear the case name, case number, the words “Debtor-In-Possession”, and the type of account (operating, payroll or tax) imprinted on the face of each check, in substantially the following form:

ABC, Inc. Debtor-in-Possession, 08-XXXXX OPERATING ACCOUNT 123 Main Street New York, NY 10004 Pay to the Order of

No. 00001 , 20

$ Dollars

00XXX-XXX-00-XXXXX 000XXX-XX00

Within fifteen days of filing the petition, the debtor must provide the United States Trustee with a sworn statement describing all pre-petition accounts by depository name, account number and account name, verifying that each such pre-petition account has been closed. A form that complies with this requirement can be obtained from the United States Trustee Website, www.usdoj.gov/ust/r02/. Additionally, proof of closing old accounts and opening new accounts must be provided. 6. Insurance. Within fifteen days of filing the petition, the debtor must provide the United States Trustee with proof of the insurance coverage required by these guidelines. The proof must disclose, at a minimum, the effective date and the termination date of coverage, the type and limits of coverage provided, and the identity of all loss payees. Binders dated after the filing of the petition must be accompanied by paid receipts. Debtor should instruct its insurance companies to list the United States Trustee as a Certificate Holder. Upon expiration or other termination of any coverage, the debtor shall immediately provide the United States Trustee with adequate proof of replacement coverage. Debtor shall maintain at least the following coverage, where appropriate: a. General comprehensive liability b. Property (personal & theft) c. Casualty and theft d. Workers’ compensation e. Vehicle f. Product Liability

8.11


815

g. h. i. j.

Flood insurance Directors and Officers Liability Professional malpractice Other coverage customary or prudent in the debtor’s business, or required by law. k. Proof of Renewal of Insurance during pendency of the case. 7. Physical Inventory. Within thirty (30) days of filing the petition, debtor, if requested by the United States Trustee, shall provide the United States Trustee with a physical inventory as of the petition date. The inventory shall be itemized and indicate cost values. For purpose of this reporting requirement, “inventory” is defined as all goods in possession of the debtor intended for sale to customers. It includes finished goods and unfinished goods. It does not include fixed assets owned by the debtor. 8. Rental Property Records. Debtors who own commercial or residential rental property shall provide the United States Trustee with a rent roll as of the petition date within fifteen (15) days from the filing of the petition. The rent roll shall consist of (1) a description of each property owned, (2) rental price of each unit, (3) security or other deposits held, (4) occupancy and payment status of each unit, (5) name, address, and phone number of the management company, if any, and (6) the monthly management fee. 9. Monthly Operating Reports. Debtor must electronically file an original monthly operating report with the Clerk of the Bankruptcy Court, and serve a copy upon the United States Trustee.2 A copy should also be provided to the creditors committee, if one has been appointed in the case. Notwithstanding local ECF requirements, the United States Trustee will not accept service of the operating reports via electronic transmission. The monthly operating reports must be prepared using the forms provided herein. These forms are also located on our website at http://www.usdoj. gov/ust/r02. Compliance with Local Rules and filing procedures in each jurisdiction is required. The debtor is also required to attach to the monthly operating report a photocopy of each month’s bank statements. If bank statements are not available at the time the monthly operating report is filed, they should be submitted separately, as soon as the debtor-in-possession receives them. A bank reconciliation should be prepared and attached to the operating report. The monthly operating report is based on a calendar month (e.g. January 1 – January 31), and all reports must be filed by the 20th day of the month following the reporting period.3 Such reports shall disclose all transactions of the calendar month immediately preceding the due date. The first report shall include all transactions for the period of the first month the debtor is in bankruptcy. It is recognized that in almost all cases, this first report will only be for a partial 2 In

districts with ECF, the signature filed with the Court should be submitted in the manner required by the Court. The copy served on the United States Trustee must contain the actual signature of the preparer. 3 Reports for the Rochester and Buffalo Divisions of the Western District of New York are due on the 15th day of the month, as are reports for the Southern District of New York.

816


month. The partial month report should not be combined with that of the first full month. Debtors have a continuing obligation to file monthly operating reports until the court approves and confirms the Plan of Reorganization. After confirmation, debtors are required to file a Post-Confirmation Operating Report. The Post-Confirmation Operating Report includes, among other things, all payments made under the Plan of Reorganization and payments made in the ordinary course of doing business. The reports must be filed until the court enters a Final Decree, dismisses the case, or converts the case to another chapter in bankruptcy. The original report must be electronically filed with the Clerk of the Bankruptcy Court, and a copy served upon the United States Trustee. The report must be filed by the 20th day of the month following the reporting period.4 The Post-Confirmation Operating Reports may be obtained from the local office in the Region. 10. Taxes. Upon payment of each payroll, debtor shall transfer from the operating account to the debtor’s tax account sufficient funds to pay any liability associated with the payroll. Taxes shall be paid from the tax account accompanied by appropriate tax deposit coupons. State and local taxes shall also be paid from the tax account. Sales and use taxes shall be deposited to the tax account at least weekly. All tax returns and reports must be timely filed and accompanied by payment in full of any liability. A copy of each return and verification of payment of taxes due must be served on the United States Trustee with the monthly operating report. 11. Employment of Principals and Professionals. Pursuant to 11 U.S.C. §327 and Fed. R. Bankr. P. 2014, the debtor or trustee must apply for an order of the Court approving the employment of professionals, unless local rules otherwise direct. A copy of any application to employ or compensate a professional (including, but not limited to, lawyers, accountants, financial advisors, appraisers, auctioneers, real estate agents/brokers, and consultants) must be served upon the United States Trustee. Applications to employ such persons must be filed, and an order approving such employment must be entered, prior to any services being rendered to the debtor. Each applicant’s affidavit must disclose any relationship or contact applicant has with the debtor, any creditor, party in interest, their attorneys and accountants, and employees of the United States Trustee. A general statement that the applicant is disinterested and does not represent an interest adverse to the estate is not sufficient. No later than the date of the first meeting of creditors, the debtor shall provide the following information regarding employment and compensation of its principals: name and position of the individual; detailed description of the duties and responsibilities; reasons why employment of the individual is 4 Exception—Southern

District of New York Local Rule: Pursuant to Local Bankruptcy Rule 30211(c) of the Southern District of New York, Debtors have to file post-confirmation status reports with the Court every January 15th, April 15th, July 15th, and October 15th until a final decree has been entered.

8.11

817


necessary for successful reorganization; details of the compensation sought; details of any other benefits or consideration to be received, including but not limited to use of vehicles, housing, expense reimbursement, insurance, and pension or profit sharing; and, each individual’s salary and benefit history for the year immediately preceding the filing of the petition. 12. Pre-Petition Financial Statements. Within fifteen (15) days of the petition filing, debtor shall provide the United States Trustee with copies of the debtor’s most recent audited and unaudited financial statements. 13. Federal Income Tax Returns. Within fifteen (15) days of the petition filing, debtor shall provide the United States Trustee with copies of the debtor’s federal income tax returns for the two years prior to the filing. 14. Change of Address. The debtor must notify the United States Trustee, in writing within 10 days, of any change of address or telephone number of the debtor. The debtor must also file with the Clerk of the Bankruptcy Court a change of address form. 15. United States Trustee Quarterly Fees. Debtors in Chapter 11 cases must pay a quarterly fee to the United States Trustee Program for each calendar quarter, or portion thereof, between the date of filing the petition and the date the court enters a final decree closing the case, dismisses the case or converts the case to another chapter in bankruptcy. The quarterly fee is calculated by totaling the debtor’s disbursements as reported on the Monthly Operating Reports for the three-month calendar quarter, according to the following chart. The quarterly fee amount will be estimated if disbursements for all of the months of a calendar quarter that the case is open have not been reported to the United States Trustee. The estimated fee is based on, a) reported disbursement history, b) initial financial data submitted when the case was filed, or c) an estimation done by the United States Trustee office. If you calculated the fee to be less than the estimated quarterly fee, you must submit the reports supporting your estimation to the United States Trustee. A minimum fee of $325.00 is due even if there are no disbursements during a calendar quarter. There is no proration of the fee.

TOTAL QUARTERLY DISBURSEMENTS QUARTERLY FEE $0 to $14,999.99 $15,000 to $74,999.99 $75,000 to $149,999.99 $150,000 to $224,999.99 $225,000 to $299,999.99 $300,000 to $999,999.99 $1,000,000 to $1,999,999.99 $2,000,000 to $2,999,999.99 $3,000,000 to $4,999,999.99 $5,000,000 to $14,999,999.99 $15,000,000 to $29,999,999.99 $30,000,000 or more

$325.00 $650.00 $975.00 $1,625.00 $1,950.00 $4,875.00 $6,500.00 $9,750.00 $10,400.00 $13,000.00 $20,000.00 $30,000.00

818


Quarterly fees are due no later than one month following the end of each calendar quarter. Failure to pay quarterly fees may result in the conversion or dismissal of the case. Payment of that quarter’s fees and any past due fees and interest, if applicable, must be made before the effective date of a confirmed Plan of Reorganization and quarterly fees will continue to accrue until entry of the final decree, or until the case is converted or dismissed. Failure to pay these fees may result in a motion by the United States Trustee to convert the case to a Chapter 7 case. The debtor will receive a bill or statement from the Executive Office for the United States Trustees, Washington, D.C., for each calendar quarter, prior to the payment due date. A check for the quarterly fee, made payable to “United States Trustee”, should be mailed with the tear-off portion of the statement form to: United States Trustee Payment Center P.O. Box 70937 Charlotte, NC 28272-0937 The address shown above is a lockbox at a bank. It may NOT be used for service of process, correspondence or any purpose other than payment of quarterly fees. Any other correspondence or documents sent to the lockbox other than the payment form will be destroyed. The debtor is responsible for timely payment of the quarterly fee. Failure to receive a bill from the Executive Office for the United States Trustees does not excuse the debtor from timely payment. Failure to pay the quarterly fee is cause for conversion or dismissal of the Chapter 11 case pursuant to 11 U.S.C. §1112(b)(4)(K) (for cases filed on or after October 17, 2005) or 11 U.S.C. §1112(b)(10) (for cases filed before October 17, 2005). 16. Interest Assessment on Unpaid Quarterly Fees. Pursuant to 31 U.S.C. §3717, the United States Trustee Program will begin assessing interest on unpaid Chapter 11 quarterly fees charged in accordance with 28 U.S.C. §1930(a) effective October 1, 2007. Interest assessed on past due amounts first appeared on the October 2007 statements. The interest rate assessed is the rate in effect as determined by the Treasury Department at the time your account becomes past due. If payment of the full principal amount past due is received within thirty (30) days of the date of the notice of initial interest assessment, the interest assessed will be waived. 17. Quarterly Fees After Confirmation of Plan. Quarterly fees continue to accrue after the Plan of Reorganization has been confirmed. After confirmation, the debtor is required to file Post-Confirmation Operating Reports, and to continue to pay quarterly fees following subject to the same payment guidelines outlined in Paragraph 15 and 16 above until a Final Decree is entered by the court or the case is dismissed or converted to another chapter. 18. Additional Notice Requirements. The United States Trustee must be advised immediately of any significant change in debtor’s business. Significant changes include, but are not limited to, casualty or theft losses,

8.11

819


changes in insurance coverage, or allegations of violations of laws, ordinances, or regulations, including but not limited to the failure to pay taxes, which could affect the continued operation of the debtor’s business. 19. Waiver of Modification of Reporting Requirements. The reporting requirements of the United States Trustee’s office may be waived or modified only after a request in writing demonstrating sufficient cause for the requested action, and specifying what alternative is to be provided (i.e., the form and detail) for reporting on that estate. No waiver or modification shall be effective unless in writing and signed by the United States Trustee or an authorized delegate. 20. Disclosure of Intent to Use Taxpayer Identifying Number. Pursuant to the Debt Collection Improvements Act of 1996, Public Law 104-134, Title III, §31001(i)(3)(A), 110 Stat. 1321-365, codified at 31 U.S.C. §3701, the United States Trustee intends to use the debtor’s Taxpayer Identifying Number (TIN) as reported by the debtor or debtor’s counsel in connection with the Chapter 11 bankruptcy proceeding for the purpose of collecting and reporting on any delinquent debt, including Chapter 11 quarterly fees and interest, if applicable, that are owed to the United States Trustee. The United States Trustee will provide the debtor’s TIN to the Department of Treasury for its use in attempting to collect overdue debts. Treasury may take the following steps: (1) submit the debt to the Internal Revenue Service Offset Program so that the amount owed may be deducted from any payment made by the federal government to the debtor, including but not limited to tax refunds; (2) report the delinquency to credit reporting agencies; (3) send collection notices to the debtor; (4) engage private collection agencies to collect the debt and (5) engage the United States Attorney’s office to sue for collection. Collection costs will be added to the total amount of the debt.

AMENDMENTS TO OPERATING REQUIREMENTS and SOLICITATION OF COMMENTS AND SUGGESTIONS The United States Trustee reserves the right to revise, modify or amend these guidelines and requirements from time to time, and as is appropriate in an individual case. Comments or suggestions regarding these guidelines or other policies and procedures of the Office of The United States Trustee are sought and appreciated and should be directed to the United States Trustee for Region 2 at the address shown below: DIANA G. ADAMS UNITED STATES TRUSTEE REGION 2 33 Whitehall Street, 21st Floor New York, New York 10004-2112

820 8.12


SEC Reporting

Objective. Section 8.16(b) of Volume 1 of Bankruptcy and Insolvency Accounting describes SEC Release No. 9660, dated June 30, 1972, entitled Application Of The Reporting Provisions Of The Securities Exchange Act of 1934 To Issuers Which Have Ceased Or Severely Curtailed Operations. The Release was supplemented with Staff Legal Bulletin No. 2, dated April 15, 1997. The Legal Bulletin is included here in its entirety. Exhibit 13-3A DIVISION OF CORPORATION FINANCE SECURITIES AND EXCHANGE COMMISSION Staff Legal Bulletin No. 2 (CF) ACTION: Publication of CF Staff Legal Bulletin DATE: April 15, 1997 SUMMARY: This staff legal bulletin provides the Division of Corporation Finance views on requests to modify the Securities Exchange Act of 1934 periodic report issuers that are either reorganizing or liquidating under the provisions of the United States Bankruptcy Code. SUPPLEMENTARY INFORMATION: The statements in this legal bulletin repl the views of the Division’s staff. This bulletin is not a rule, regulation, or stater the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content. I. Background Issuers are required to file current and periodic reports with the Commission pursuant to Sections 13(a)1 or 15(d)2 of the Exchange Act3 if they have: 1. securities listed on a national securities exchange;4 2. securities registered under Section 12(g)5 of the Exchange Act; or 3. a registration statement that has become effective under the Securities Act, 1933.6 In June 1972, the Commission published Exchange Act Release No. 9660, which addressed how the Exchange Act reporting requirements apply to “[i]ssuers which ceased or severely curtailed their operations.” In the release, the Commission emphasized the importance of Exchange Act reporting in preserving free, fair, and info securities markets. The Commission stated, however, that “when not inconsistent with the protection of investors, [it] would modify the reporting requirements a apply to particular issuers.” 1 15

U.S.C. 78m(a). U.S.C. 78o(d). 3 15 U.S.C. 78a et seq. 4 See Section 12(b) of the Exchange Act (15 U.S.C. 78l(b)). 5 15 U.S.C. 78l(g). 6 5 U.S.C. 77a et seq. 2 15

8.12

SEC Reporting

821

Companies in bankruptcy are not relieved of their reporting obligations. Neither the United States Bankruptcy Code7 nor the federal securities laws provide an exernal from Exchange Act periodic reporting for issuers that have filed for bankruptcy, release, however, the Commission expressed the general position that, with reson issuers subject to the jurisdiction of the Bankruptcy Court, it generally would a reports which “differ in form or content from reports required to be filed under change Act.” The release also states that, in deciding whether to accept modified Exchange A ports, the Commission will consider the following: (1) how difficult it is for the to obtain the information necessary to complete those reports;8 (2) the issuer’s financial condition; (3) the issuer’s efforts to advise its security holders and the public of financial condition and activities; and (4) the nature and extent of the trading in issuer’s securities. The release provides the Commission’s general position on accepting modified exchange Act reports from issuers subject to the jurisdiction of the Bankruptcy Court. An issuer relying on that general interpretive guidance should take all steps possible to inform its security holders and the market of its on-going financial condition and the status of its bankruptcy proceedings, including filing any available information with the Commission. II. Requests for Modified Exchange Act Reporting An issuer in bankruptcy may request a “no-action” position from the Division that applies the positions in the release to the issuer’s facts.9 In providing a no-action position from the Division determines whether modified reporting is consistent with the protection of investors. In its request, the issuer should present a clear demonstration of its inability to continue reporting, its efforts to inform its security holders and the market, and the absence of a market in its securities. Requests often do not provide all of the information necessary for the Division’s analysis. This staff legal bulletin identifies factors the Division considers when acting on these requests. This guidance will help issuers prepare requests and make the process more efficient and less costly. III. Information Required in Requests A. Information Regarding Disclosure of Financial Condition The first factor the Division considers is whether the issuer made efforts to inform its security holders and the market of its financial condition. The Division also looks at the issuer’s Exchange Act reporting history. The request should include the following information. 1. Whether the issuer complied with its Exchange Act reporting obligations before its Bankruptcy Code filing. Because the issuer’s efforts to inform the market of its financial condition are important, an issuer submitting a request should have been current in its Exchange 7 11

U.S.C. 101 et seq. Exchange Act Rule 12b-21. 9 The Division has granted nine no-action requests since January 1995. E.g., Comptronix Corporation (April 4, 1997); Cray Computer Corporation (May 16, 1996); U.C.H. Corporation (May 10, 1996); F&M Distributors, Inc. (May 1, 1996). 8 See

822


Act reports for the 12 months before its Bankruptcy Code filing.10 Accordingly, the issuer should discuss its Exchange Act reporting history for that period. 2. When the issuer filed its Form 8-K announcing its bankruptcy filing; whether the issuer made any other efforts to advise the market of its financial condition. The Division considers the timeliness of the issuer’s Form 8-K announcing its bankruptcy filing when determining whether to grant the request.11 The Division does not have a specific, objective test concerning the timing of the Form 8-K filing. However, the issuer should state the date the Form 8-K was due and filed. If the issuer filed the Form 8-K after the due date, it should explain why. The issuer also should discuss any other efforts that it made to inform its security holders and the market of its financial condition. 3. Whether the issuer is able to continue Exchange Act reporting; whether the information in modified reports is adequate to protect investors. The issuer should discuss the reasons why it is unable to continue Exchange Act reporting. The request should discuss specifically: (1) whether the issuer has ceased its operations or the extent to which the issuer has curtailed operations; (2) why filing periodic reports would present an undue hardship to the issuer; (3) why the issuer cannot comply with the disclosure requirements; and (4) why the issuer believes granting the request is consistent with the protection of investors. Management of the issuer also should represent, if true, that: (1) the filing of periodic reports would present an undue hardship; and (2) the information contained in the reports filed with the Bankruptcy Court pursuant to the Bankruptcy Code is sufficient for the protection of investors while the issuer is subject to the jurisdiction of the Bankruptcy Court. B. Information Regarding the Market for the Issuer’s Securities The Division also considers the nature and extent of trading in the issuer’s securities. The issuer should discuss in detail the market for its securities. Trading of the issuer’s securities on a national securities exchange or the NASDAQ Stock Market is, by its sufficient evidence that there is an active market for those securities. The Division will not issue a favorable response to a request for modification of Exchange Act reporting for those securities.12 Issuers that do not have securities traded on a national securities exchange or the NASDAQ Stock Market should quantify the effect of the

10 Focus

Surgery, Inc. (October 3, 1996). 3 of Form 8-K requires the issuer to file a current report on that form within 15 calendar days of specified events related to a bankruptcy filing. 12 If the issuer remains current in its Exchange Act reporting requirements until trading on a national securities exchange or the NASDAQ Stock Market stops, it may then request modified reporting. F&C International, Inc. (October 15, 1993). 11 Item

8.12

SEC Reporting

823

Bankruptcy Code filing on the trading in the issuer’s securities.13 This information should demonstrate that there is minimal trading in the securities.14 The issuer should state the number of market makers for its securities. The issuer should provide detailed information regarding the number of shares traded and the number of trades per month for each of the three months before the issuer’s Bankruptcy Code filing and each month after that filing.15 General statements in the request that trading has been “minimal” or “insignificant” are not sufficient to enable the Division to reach a conclusion on the request. An unequivocal statement that there is “no trading” in the issuer’s securities is sufficient. C. The Timing of the Issuer’s Request for Modified Reporting An issuer should submit its request promptly after it has entered bankruptcy, not when it is preparing to emerge from bankruptcy.16,17 The Division will consider a request as submitted “promptly” if it is filed before the date the issuer’s first periodic report is due following the issuer’s filing for bankruptcy.18 IV. Positions Taken by the Division in Granting Requests A. Reports Required While Bankruptcy Proceedings Are Pending Generally, the Division will accept, instead of Form 10-K and 10-Q filings, the monthly reports an issuer must file with the Bankruptcy Court under Rule 2015.19 The issuer must file each monthly report with the Commission on a Form 8-K within 15 calendar days after the monthly report is due to the Bankruptcy Court. Notably, the relief given applies only to filing Forms 10-K and 10-Q.20 The issuer still must satisfy all other provisions of the Exchange Act, including filing the current reports required by Form 8-K and satisfying the proxy, issuer tender offer and going-private provisions.21 13 An issuer’s securities are not considered to be “traded” on a national securities exchange or the NASDAQ Stock Market if: (1) those securities have been delisted; or (2) trading in those securities on those markets has formally been suspended. 14 E.g., Sea Galley Stores, Inc. (March 24, 1995) (tabular presentation demonstrated decreased trading volume in the issuer’s securities). 15 If national securities exchange or NASDAQ Stock Market trading stopped during one of these months, the issuer should show separately within that month the information for the periods before and after trading stopped. 16 E.g., Numerica Financial Corporation (April 1, 1996) (noting that no transfers of issuer stock occurred for a two-year period and that transfer agent was given instructions to prohibit further transfers); F&M Distributors, Inc., supra, and Focus Surgery, Inc., supra (stating there was no trading in the issuer’s stock). 17 Selectors, Inc. (September 18, 1990) and AorTech, Inc. (September 14, 1990). 18 Focus Surgery, Inc., supra. The staff also will consider a request to be submitted “promptly” if the issuer is current in its Exchange Act reporting after filing its Bankruptcy Code petition and through the date of its request. United Merchants and Manufacturers, Inc. (November 19, 1996). 19 Fed. R. Bankr. P. 2015. 20 If, as a result of a “hardship,” an issuer wants to file in paper format rather than electronically on EDGAR, it should contact the Division’s Office of EDGAR Policy at (202) 942-2940. 21 Transactions in the issuer’s securities also continue to be subject to the requirements of the Exchange Act, including the tender offer and short-swing profit provisions.

824


Issuers reorganizing under the jurisdiction of the Bankruptcy Court must file a Form 8-K to disclose any material events relating to the reorganization. Issuers liquidating under the jurisdiction of the Bankruptcy Court must file a Form 8-K to disclose when any liquidation payments will be made to security holders, the amount of any liquidation payments, the amount of any expenses incurred, and any other material relating to the liquidation.22 B. Reports Required upon Emergence from Bankruptcy 1. An issuer that is reorganized under its bankruptcy plan When an issuer’s reorganization plan becomes effective, the issuer must file an appropriate Form 8-K. That Form 8-K should include the issuer’s audited balance sheet. From then on, the issuer must file Exchange Act periodic reports for all periods that begin after the plan becomes effective.23 Any post-reorganization filings under the Securities Act or the Exchange Act must include audited financial statements prepared in accordance with generally accepted accounting principles for all periods for which audited financial statements are required even though the issuer may have been subject to bankruptcy proceedings during some portion of those periods.24 2. An issuer that is liquidated under its bankruptcy plan After the issuer’s liquidation plan becomes effective, the issuer must continue to disclose material events relating to the liquidation on Form 8-K. At the time the liquidation is complete, the issuer must file a final Form 8-K to report that event.25 C. Effect on Short-Form Registration, Rule 144 and Regulation S An issuer that has filed modified reports would not be considered “current” in its Exchange Act reporting, with respect to those reports due while its bankruptcy proceedings were pending, for purposes of: (1) determining eligibility to use Securities Act Form S-2 or S-3; (2) satisfying the current public information requirement of Securities Act Rule 144(c)(1); or (3) satisfying the reporting issuer definition of Rule 902(1) of Regulation S. D. Availability of Rule 12h-3 Exchange Act Rule 12h-3 provides a means to suspend an issuer’s obligation to file periodic reports under Section 15(d) of the Exchange Act. The Division has taken the position that modified Exchange Act reporting in accordance with a grant of a request could be sufficient for purposes of meeting the reporting requirement of Rule 12h-3.26 Accordingly, an issuer that otherwise satisfies the conditions of Rule 12h-3 may suspend reporting upon emergence from its bankruptcy proceedings if it has been 22 BSD

Bancorp, Inc. (March 30, 1994); Cray Computer Company, supra; I.C.H. Corporation, supra. Restaurants, Inc. (June 4, 1993); Sea Galley Stores, Inc., supra; Diversified Industries, Inc., supra. 24 Any requests for relief from financial statement obligations should be sent to the Division’s Office of Chief Accountant. 25 E.g., Cray Computer Company, supra; I.C.H. Corporation, supra. 26 Union Valley Corporation (November 2, 1993). 23 Famous

8.12

SEC Reporting

825

granted relief in response to a request and has satisfied the conditions of that grant. A dresses what the Commission will consider in an issuer’s “no-action” request, which is summarized as follows: 1. Whether the issuer made efforts to inform its security holders and the market of its financial condition prior to the bankruptcy filing 2. Whether the issuer complied with and was current in its Exchange Act reporting obligations before the chapter 11 filing 3. Timeliness of the issuer’s Form 8-K filing related to the bankruptcy proceedings 4. Whether the issuer has ceased its operations or the extent to which the issuer has curtailed operations

826 8.13


Pro Forma Financial Statements and Projections

Objective. Section 8.28 of Volume 1 describes the importance of developing pro forma financial statements to understand and evaluate a proposed chapter 11 plan. This example of a pro forma balance sheet and operating projections shows specifically (a) a pro forma balance sheet that does not involve the adoption of fresh-start accounting because there was no change of ownership in this proposed plan; (b) an explanation of the adjustments made from the preconfirmation balance sheet to the pro forma postconfirmation balance sheet; (c) the cash flow and (d) the income projections for the next five years; (e) the projected balance sheet and (f) the projected statement of changes in cash at the end of each fiscal year for the next five years; and (g) the notes to the financial projections. Cumberland Farms, the example company, gave its pro forma statements and projections these titles: (a) (b) (c) (d) (e) (f) (g)

Pro Forma Balance Sheet upon Emergence. Notes to Pro Forma Balance Sheet upon Emergence. Projected Sources and Uses of Cash. Projected Income Statement (Five years). Projected Balance Sheet (Five years). Projected Statement of Changes in Cash (Five years). Notes to Financial Projections.

For a pro forma balance sheet reflecting fresh-start accounting see 13.1.

8.13

827


(a) Pro Forma Balance Sheet upon Emergence CUMBERLAND FARMS, INC. PRO FORMA BALANCE SHEET UPON EMERGENCE (in millions of dollars) 9/30/03 Projected Balance Sheet Before ASSETS Current Assets Cash Accounts Receivable—Net Inventory (FIFO Basis) Less: LIFO Reserve Other Current Assets Total Current Assets Property and Equipment, Net Prepaid Insurance/Bonds Tax Escrow Investment in Gulf LP Other Assets Total Assets LIABILITIES AND EQUITY Current Liabilities Accounts Payable and Accrued Liabilities Current Portion Restructured Debt Accrued Interest Total Current Liabilities Prepetition Secured Debt Other Prepetition Liabilities Restructured Debt Deferred Credits and Other Total Liabilities Stockholders Equity (Deficit): FIFO Basis Less: LIFO Reserve Stockholders Equity (Deficit) Total Liabilities and Stockholders Equity

Adjustments on Emergence

After

$25.9 41.5 58.5 (26.0) 12.6 112.5 244.4 31.1 0.0 0.0 30.1 $418.1

($9.9) (2)(4) (27.8) (1)

18.8 (1) 1.3 (1)(3) ($30.5)

$16.0 13.7 58.5 (26.0) 12.6 74.8 231.5 31.1 0.0 18.8 31.4 $387.6

$33.7 0.0 27.4 61.1 287.5 70.1 0.0 4.6 423.3

$7.0 (4) 11.6 (3) (27.4) (3)(2) (8.8) (287.5) (1)(2)(3) (70.1) (1)(2)(3) 322.5 (3) 8.4 (3)(4) (35.5)

$40.7 11.6 0.0 52.3 0.0 0.0 322.5 13.0 387.8

20.8 (26.0) (5.2) $418.1

5.0 (2)(4)

25.8

5.0 ($30.5)

(0.2) $387.6

(37.7) (12.9) (1)

See accompanying notes for explanation of adjustments upon emergence from bankruptcy.

828


(b) Notes to Pro Forma Balance Sheet upon Emergence CUMBERLAND FARMS, INC. NOTES TO PROFORMA BALANCE SHEET UPON EMERGENCE (in millions of dollars) Debits (1) Gulf/Joint Venture Transaction Repayment of Secured Debt Investment in Gulf L.P. Intangibles—Net Property & Equipment, Net Accounts Receivable (2) Cash Payments upon Emergence Repayment of Secured Debt Repayment of Unsecured Debt Single Payment Distribution Repayment of Accrued Interest Cancellation of Accrued Interest Gain on Cancellation of Accrued Interest Gain on Single Payment Distribution Cash (3) Reclassify Restructured Debt, Accrued Interest, and Restructuring Expenses Reclassify Secured Debt Reclassify Unsecured Debt Reclassify Accrued Interest to LT Debt Reclass Restructuring Expenses Reserve Reclassify Other Liabilities Current Maturities of Restructured Debt Reclassify Restructured Debt (4) Gulf Joint Venture Trade Credit, Shareholder Tax Agreement and Lessee Dealer Security Funds Cash Shareholder Tax Distribution Gulf J.V. Trade Credit Lessee Dealer Security Funds

Credits

$27.8 18.8 ($5.9) (12.9) (27.8) 9.2 8.0 3.2 0.1 4.5 (4.5) (1.3) (19.2)

249.9 58.8 22.8 7.2 (5.2) (11.6) (321.9)

9.3 0.8

SUMMARY OF CASH ACTIVITY UPON EMERGENCE: Sources of Cash: Uses of Cash: Cash at September 30, 2003 25.9 Repay secured debt Gulf Joint Venture 27.8 Repay unsecured debt Trade credit 7.0 Shareholder tax distribution Dealer deposits 3.1 63.8

(7.0) (3.1)

(37.1) (9.9) (0.8) (47.8)

8.13

829


(c) Projected Sources and Uses of Cash CUMBERLAND FARMS, INC. PROJECTED SOURCES AND USES OF CASH FROM MAY 1, 2003 THROUGH SEPTEMBER 30, 2003 PRE-EMERGENCE (in millions) Balance April 30, 2003 Net Income (Loss) Plus: Depreciation & Amort. Plus: Interest Expense Less: Gains on asset sales Cash from operations Asset Sale Proceeds Pennsylvania Turnpike Other Additional Trade Credit Bonding and Insurance payments Capital Expenditures Adequate Protection and principal payments from asset sales Other, net Projected cash balance at emergence September 30, 2003

$45.3 (1.2) 6.0 11.6 (2.0) 14.4 9.7 2.0 7.0 (19.5) (11.0) (20.7) (1.3) $25.9

830

Net sales and other revenues Cost of sales GROSS PROFIT Operating expenses OPERATING INCOME OTHER INCOME (EXPENSE): Interest expense Other income—net Equity in Gulf L.P. earnings Reorganization credits (charges) Gains on property sales NET OTHER EXPENSE INCOME BEFORE TAXES Provision for state taxes NET INCOME

$1,203.6 (907.5) 296.1 (263.2) 32.9 (25.5) 0.9 (1.8) 5.8 11.7 (8.9) 24.0 (1.0) $23.0

$1,070.5 (755.1) 315.4 (288.1) 27.3 (27.0) 0.7 0.0 (6.0) 8.8 (23.5) 3.8 (0.7) $3.1

(24.7) 0.9 4.6 0.0 12.7 (6.5) 29.1 (1.3) $27.8

$1,223.8 (919.9) 303.9 (268.3) 35.6

(23.5) 0.9 9.7 0.0 7.5 (5.4) 33.4 (1.6) $31.8

$1,246.9 (934.4) 312.5 (273.7) 38.8

2006

2005

2003

2004

Post-Emergence

Fiscal Year Ended September 30 Pre-Emergence

(d) Projected Income Statement (Five Years) CUMBERLAND FARMS, INC. PROJECTED INCOME STATEMENT (in millions of dollars)

(22.5) 1.0 11.9 0.0 6.5 (3.1) 38.1 (1.9) $36.2

$1,265.0 (944.2) 320.8 (279.6) 41.2

2007

(22.3) 1.0 14.1 0.0 2.4 (4.8) 34.9 (1.7) $33.2

$1,294.1 (963.7) 330.4 (290.7) 39.7

2008

831

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued liabilities

ASSETS Current Assets Cash Accounts receivable—net Inventory (FIFO basis) Less: LIFO Reserve Other current assets Total Current Assets Property and equipment, net Prepaid insurance/bonds Tax escrow Investment in Gulf LP Other assets Total Assets

(e) Projected Balance Sheet (Five Years) CUMBERLAND FARMS, INC. PROJECTED BALANCE SHEET (in millions of dollars)

$33.7

$25.9 41.5 58.5 (26.0) 12.6 112.5 244.4 31.1 0.0 0.0 30.1 $418.1

$44.9

$20.6 13.9 59.2 (26.0) 12.5 80.2 225.9 31.1 0.8 17.1 30.2 $385.3

$44.9

$21.1 14.2 59.0 (26.0) 12.5 80.8 219.6 31.1 2.4 21.6 30.0 $385.5

$45.0

$19.5 14.4 58.9 (26.0) 12.5 79.3 214.2 31.1 0.6 30.3 30.9 $386.4

2006

2005

2003

2004

Post-Emergence

Pre-Emergence

Fiscal Year Ended September 30

$44.8

$20.2 14.7 58.4 (26.0) 12.5 79.8 208.9 31.1 0.6 36.4 30.8 $387.6

2007

(Continued )

$45.0

$23.6 15.0 58.4 (26.0) 12.5 83.5 206.1 31.1 0.6 40.2 31.2 $392.7

2008

832 11.4 2.1 58.4 — — 299.6 11.9 369.9 41.4 (26.0) 15.4 $385.3

0.0 27.4 61.1 287.5 70.1 0.0 4.6 423.3 20.8 (26.0) (5.2) $418.1

67.7 (26.0) 41.7 $385.5

11.8 2.0 58.7 — — 274.3 10.8 343.8

The accompanying notes to the projected financial statements are an integral part of this statement.

Current portion restructured debt Accrued interest Total Current Liabilities Prepetition secured debt Other prepetition liabilities Restructured debt Deferred credits and other Total Liabilities Stockholders equity (deficit): FIFO basis Less: LIFO reserve Stockholders Equity (Deficit) Total Liabilities and Stockholders Equity

90.2 (26.0) 64.2 $386.4

14.0 1.9 60.9 — — 251.3 10.0 322.2

2006

2005

2003

2004

Post-Emergence

Pre-Emergence


113.4 (26.0) 87.4 $387.6

13.7 1.8 60.3 — — 230.0 9.9 300.2

2007

134.8 (26.0) 108.8 $392.7

4.5 1.8 51.3 — — 222.6 10.0 283.9

2008

833

Net income before interest Add: Depreciation and amortization Less: Equity in Gulf LP earnings Less: Gains on property sales Net operating cash flows Changes in working capital Net cash provided by operations Cash flows from investing activities Capital expenditures Investment in Gulf L.P. Deposits/bonds/other assets Proceeds from asset sales Tax escrow from asset sales Tax distributions

$48.5 14.1 1.8 (11.7) 52.7 10.2 62.9 (14.8) 0.0 1.2 18.0 (0.8) (2.3) 1.3

$30.0 15.5 0.0 (8.8) 36.7 6.5 43.2 (16.6) 0.0 (14.4) 28.9 0.0 0.0 (2.1)

(16.5) 0.0 0.3 19.6 (1.6) (1.5) 0.3

$52.4 15.8 (4.6) (12.7) 50.9 0.0 50.9 (16.3) 1.0 (0.9) 11.6 1.7 (9.3) (12.2)

$55.3 17.8 (9.7) (7.5) 55.9 0.0 55.9

2006

2005

2003

2004

Post-Emergence

Fiscal Year Ended September 30 Pre-Emergence

(f) Projected Statement of Changes in Cash (Five Years) CUMBERLAND FARMS, INC. PROJECTED STATEMENT OF CHANGES IN CASH (in millions of dollars)

(18.1) 5.8 0.1 9.9 0.0 (12.8) (15.1)

$58.5 19.9 (11.9) (6.5) 60.0 0.1 60.1

2007

(Continued )

(20.4) 10.3 (0.3) 3.7 0.0 (11.7) (18.4)

$55.4 21.9 (14.1) (2.4) 60.8 (0.1) 60.7

2008

834 (39.5) — (27.0) 13.9 (52.6) (11.5) 37.4 $25.9

(22.4) (21.2) (25.5) (0.4) (69.5) (5.3) 25.9 $20.6

(24.9) — (24.7) (1.1) (50.7) 0.5 20.6 $21.1

The accompanying notes to the projected financial statements are an integral part of this statement.

Net change in cash Beginning cash balance Ending cash balance

Cash flows from financing activities Principal payments Transactions at emergence Interest expense Other liabilities

(20.8) — (23.5) (1.0) (45.3) (1.6) 21.1 $19.5

2006

2005

2003

2004

Post-Emergence

Pre-Emergence


(21.7) — (22.5) (0.1) (44.3) 0.7 19.5 $20.2

2007

(16.6) — (22.3) 0.0 (38.9) 3.4 20.2 $23.6

2008

8.13


835

(g) Notes to Financial Projections CUMBERLAND FARMS, INC. NOTES TO FINANCIAL PROJECTIONS 2003 THROUGH 2008 1. Introduction As a condition to confirmation of a plan of reorganization, section 1129 of the Bankruptcy Code requires, among other things, that the bankruptcy court determine that confirmation is not likely to be followed by the liquidation or need for further financial reorganization of the debtor. In connection with the development of the Plan, and for purposes of determining whether the Plan satisfies this feasibility standard, the Debtor has analyzed the ability of the Company to meet future obligations under the Plan with sufficient liquidity and capital resources to conduct its business. In this regard, the Debtor has developed, and periodically refined its business plan and prepared certain projections of the Debtor’s operating profit, cash flow, and certain other items for the period from October 1, 2002 through September 30, 2008 (the “Projection Period”). These six years are presented because the Debtor’s mandatory cash requirements after September 30, 2008 are expected to be substantially reduced as a result of having repaid the Class 12 Unsecured Creditors, the priority and secured tax claims, IBJTC and Chevron. In addition, the mandatory capital expenditures to upgrade and replace steel UST’s are expected to be substantially complete by the end of such period. The portion of such projections that the Debtor believes to be material and various assumptions underlying these forecasts (collectively, the “Projection”) are summarized below. The financial information included in the Projection reflects the Debtor’s judgment as to the information that is material under the circumstances. The Projection should be read in conjunction with the assumptions, qualifications, and explanations set forth herein. The Debtor does not generally publish its business plans and strategies or make external projections or forecasts of its anticipated financial positions or results of operations. Accordingly, the Debtor does not anticipate that it will, and disclaims any obligation to, furnish updated business plans or forecasts to holders of Claims or Interests prior to the Effective Date, or stockholders or creditors after the Effective Date or otherwise make such information public in the future. 2. Basis of Presentation The Projections have been prepared on the assumption that the Debtor will continue to report on a September 30 fiscal year, and that the Effective Date is October 1, 2003. The Pro Forma Balance Sheet as of the Effective Date presents: (a) the forecasted financial position of CFI prior to the assumed confirmation and consummation of transactions contemplated by the Plan; and (b) adjustments to such financial position required to reflect confirmation and the consummation of the transactions contemplated by the Plan.

836


The projected financial statements as of September 30, 2004 through 2008, and for the fiscal years then ending, present the projected financial position of CFI, after giving effect to the confirmation and consummation of the transactions contemplated by the Plan, as of the end of each fiscal year included in the Projection Period. 3. Principal Assumptions The Debtor’s business plan and the Projections reflect numerous assumptions with respect to the anticipated future performance of the Debtor, industry performance, general business and economic conditions, and other matters, most of which are beyond the control of the Debtor. The Debtor expects to continue to evaluate and revise its business plan from time to time. Unanticipated events and circumstances may affect the actual financial results of the Debtor. For the reasons set forth above, while the Projection is necessarily presented with numerical specificity, the actual results achieved by CFI throughout the Projection Period will vary from the forecasted results. These variations may be material. Accordingly, no representation can be, or is being made by the Debtor or the Debtor’s professionals with respect to the accuracy of the Projection or the ability of the Debtor to achieve the projected results. See “Risk Factors to be Considered” for a discussion of certain factors that may affect the future financial performance of the Company and of various risks associated with the Plan. While the Debtor believes that the assumptions underlying the Projection for the Projection Period, considered on an overall basis, are reasonable in light of current circumstances, no assurance can be, or is being, given that the Projection will be realized. As indicated below, the business plan on which the Projection is based assumes, among other things, improvements in the Debtor’s results of operations during the remainder of fiscal year 2003, as compared to fiscal year 2002, and further improvements in results of operations during the remainder of the Projection Period. Holders of Claims and Interests are required, however, to make their own determinations as to the reasonableness of such assumptions and the reliability of the Projection in reaching their determinations of whether to accept or reject the Plan. The principal assumptions used in preparing the Projection include the following: a. Plan Terms The Projection assumes confirmation in accordance with the terms of the Plan, and that all transactions contemplated by the Plan will be consummated by the Effective Date. The Projection assumes that holders of $3.1 million of general unsecured claims make the Single Payment Election. Depending on how many of these holders make Single Payment Election, the Debtor’s postconfirmation cash balance may be up to $1.5 million higher than the amount shown in the Pro Forma Post-Emergence Balance Sheet. b. Amount of Claims The Projection assumes that the ultimate Allowed Claims in each Class are in the amounts estimated in Exhibit J and that certain balances due to affiliates are constructively subordinated.

8.13


837

c. General Economic Conditions The Projection was prepared on the assumption that the current recession in the northeastern United States and Florida, will continue to ease during the latter part of fiscal year 2003, with market economic expansion lasting throughout the Projection Period. Cumberland Farms has been negatively impacted by the prolonged recession and acute inventory shortages. C-Store sales levels are assumed to rebuild through 2003 to same store sales levels achieved in 2000, and then to grow annually by 3.5% thereafter for inflation and market growth. Retail gasoline volumes have already returned to 2000 levels, and are forecasted to increase annually, on a same station basis, by 2%, reflecting market consolidation and upgraded gasoline presentation and facilities. Pursuant to the Joint Venture Agreement, sales of wholesale petroleum products to lessee dealers, which are currently being made by Catamount under an interim supply agreement, will revert to the Debtor on the Effective Date. When compared to 2003, which includes no such sales, gross revenues and gasoline volumes are projected to conservatively increase by $126 million, or 180 million gallons, in 2004. After giving effect to this change, gross revenues are expected to increase by an average of 1.5% per year through 2008 reflecting inflationary and volume growth offset by a lower number of stores and stations. d. General Operating Assumptions The Projection does not contemplate the opening of any new C-Stores although approximately 100 stores and 380 stations are assumed to be remodeled or upgraded in connection with replacing existing UST’s. Approximately 20 stores and 7 stations are assumed to close annually as CFI disposes of certain underperforming locations. C-Store gross margin percentage is expected to improve slightly as greater fee income from money orders and lottery is realized. Gasoline gross margin in cents per gallon is expected to remain at current levels. Net operating expenses, on a same store basis, are expected to increase by approximately 3% per year. Forecasted 2004 operating expenses are projected to be substantially lower than 2003 levels as $32 million of Gulf Division operating expenses are expected to be transferred to the Gulf Joint Venture. Additionally, approximately $3.2 million of costs and expenses have been eliminated as a result of 2003 divestitures of unprofitable operations, including the Pennsylvania Turnpike retail gasoline operations. e. Capital Expenditures Annual capital expenditures are significant and are related closely to CFI’s obligation to upgrade its UST’s. A detailed analysis of the capital expenditure requirements for upgrading underground storage tanks and stations is in Section III.E. f. Income Taxes The Debtor’s status as an S Corporation means that its tax attributes, including approximately $71 million of cumulative net operating losses and suspended losses at September 30, 2002 before reduction for cancellation of indebtedness, are passed through to its shareholders. The Projection also assumes that

838


such benefits will be made available to the Company by the shareholders pursuant to a shareholder tax agreement. The Projection also assumes that the confirmation of the Plan will cause an estimated $6 million reduction of such tax attributes and that a further $10 million will be used to offset prior year income associated with potential tax audit adjustments. These assumptions were made for ease of preparation of these Projections and do not reflect the Debtor’s expectations regarding the eventual tax treatment of this reorganization. See “Certain Federal Income Tax Consequences of the Plan.” The Projections also assume an effective federal and state combined income tax rate of 37% which considers the impact of the capital gains tax rate, currently 28%. In addition to the above utilization of the net operating losses, the Projection includes a $3.8 million cash reserve for distributions to shareholders for potential audit adjustments associated with open tax audit years. g. Trade Credit The projection assumes that the Company will obtain $17 million of secured and unsecured trade credit prior to or shortly after the Effective Date, including $7 million from the Joint Venture and as a result of reestablishing milk and excise tax bonds, and the secured trade credit proposal. h. Property and Equipment The Debtor believes that the value of its real estate holdings significantly exceeds the net book value in the accompanying financial statements. Asset sales have only been forecasted to the extent of current contracts for asset sales and asset sales levels needed to achieve the debt reduction targets in the Plan. The Debtor’s Business Plan has incorporated the impact of closing more than 120 C-Stores and 35 gasoline stations over the period 2003 through 2008, in addition to the potential sale of approximately 190 non-operating sites. The Projections anticipate that $92 million of asset sales will result during this period, of which $28 million have already been consummated. Two major assets aggregating $8 million are under contract and are projected to close in the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004. Management believes that the targeted asset sale levels can be achieved without significantly impacting projected operating earnings. i. Equity in Gulf Joint Venture The Projections assume that CFI will recognize, on the equity basis of accounting, two-thirds of the projected operating income and losses of the Gulf Joint Venture, and that excess cash flow of the Joint Venture is distributed annually to its partners, after required debt service and capital expenditures. j. Other Matters No receipts have been projected to be received from the proposed sale of the Come-by-Chance Refinery. Any such receipts would lower the Debtor’s secured indebtedness. The Projection includes $19.5 million in fiscal 2003 to fund the Company’s insurance and bonding requirements. Prepaid insurance and bond deposits are included in Other Assets in the Debtor’s historical financial statements.

8.14

839

Excerpts from Report

8.14 Excerpts from Report on “Investigation of Related Party Transactions and Perquisites” Objective. Section 8.28 of Volume 1 of Bankruptcy and Insolvency Accounting describes how special audits may be made by accountants and financial advisors to analyze all transactions between the debtor and related parties, such as companies controlled, officers and directors, relatives of principal officers’ families, and so on. Reproduced below are excerpts from a report for the creditors’ committee of Food Fair Inc. and J. M. Fields, Inc. The total report was over 600 pages. October 15, 1979 The Official Creditors’ Committees Food Fair, Inc. and J. M. Fields, Inc. Debtors in Possession 3175 John F. Kennedy Boulevard Philadelphia, Pennsylvania 19101 Dear Sirs: On December 8, 1978, by Order of the Bankruptcy Court in the Southern District of New York, signed by the Honorable John J. Galgay (the Court), Price Waterhouse & Co. was retained as the accountants to your Committees with the general charge “to conduct an investigation into the affairs, actions and conduct of the Debtors.” On January 5, 1979, the Court, among other charges, specifically ordered Price Waterhouse & Co. to perform “a review and analysis of any and all transactions by, between or among the debtor and companies controlled by or related to the Debtor or present and former officers or directors of the Debtor or in which such present and former officers or directors may have an interest or in which other members and relatives of the Friedland or Stein families may have an interest, as well as any and all transactions by, between or among the Debtor, its subsidiaries or affiliates and stockholders of the Debtor within the period of five years prior to the filing of the Chapter XI petitions and the continuing period subsequent thereto.” This specific charge will in the accompanying report be referred to as the investigation of transactions with related parties. This report on our investigation of transactions with related parties is comprised of three parts. The background to, general information about, and the procedures we employed in the investigation are described in Part I. Part II contains our findings concerning transactions with parties deemed to be related. The inclusion of a report on investigation of a related party transaction in Part II is not indicative that the transaction involved wrongdoing or resulted in detriment to the Debtor. Part III contains our findings on perquisites received by both related parties and prior management. The report should be read in its entirety. The procedures we followed did not constitute an examination in accordance with generally accepted auditing standards. The findings are derived from information obtained from many and varied sources which often were not, and could not, be subjected to independent audit and verification procedures.

840


Throughout the investigation, we made numerous requests for the help of the management and employees of the company and we are grateful for the cooperation received. PRICE WATERHOUSE & CO. PART I BACKGROUND, GENERAL INFORMATION AND PROCEDURES EMPLOYED A. Events Leading to the Investigation of Related Party Transactions at Food Fair: The August 21, 1978, issue of Forbes magazine contained an article entitled “Is All Fair at Food Fair?” which contained allegations unfavorable to the then management of Food Fair (referred to hereafter as Food Fair, the Debtor or the Company—including J. M. Fields, Inc., and all subsidiaries and divisions). As a result of the Forbes article, the Audit Committee of the Board of Directors of the Company (comprised of Messrs. William P. Davis III, Willard S. Boothby, Jr., and W. Paul Stillman) resolved to conduct an investigation into the matters set forth in the magazine article with the assistance of independent counsel and accountants. The Philadelphia law firm of Dechert, Price & Rhoads (DP&R) was selected by the Committee as its independent counsel and the accounting firm of Coopers & Lybrand (C&L) was selected as special accountants. On August 29, 1979, the Audit Committee resolved that the scope of the project included, among other things, “an investigation and analysis of all transactions during the last five years” with related parties. On September 27, 1978, DP&R was replaced as counsel by the Philadelphia law firm of Ballard, Spahr, Andrews & Ingersoll. On October 2, 1978, Food Fair, Inc., J. M. Fields, Inc. and various other related companies filed petitions for an arrangement under Chapter XI of the Bankruptcy Act. The three members of the Audit Committee resigned as Directors of the Company on October 4, 1978, “because of their inability to devote sufficient time to carry out their responsibilities as Directors of the Company under its present circumstances.” At that time, the Audit Committee’s investigation of related party transactions ceased. The Audit Committee was not reconstituted by the Debtor until the spring of 1979. The October 30, 1978, issue of Forbes magazine contained another article concerning the Debtor entitled “A $2.5 Billion Tale of Woe” which made additional allegations unfavorable to the then management of the Company. On November 13, 1978, Jack M. Friedland resigned as both an officer and a director of the Company, and Samuel Friedland, Louis Stein, Hess Kline, and Herman Silver resigned as directors of the Company. B. The Creditors’ Committees’ Investigation: On November 29, 1978, Official Creditors’ Committees (the Committees) of Food Fair, Inc. and J. M. Fields, Inc. were designated by the Court. In an application to the Court by the Committees on December 5, 1978, it was stated that “at consolidated meetings of the Official Creditors’ Committees held on November 22, 1978, and December 1, 1978, it was determined that the

8.14


841

Official Creditors’ Committees’ desire [was] to employ Price Waterhouse & Co. . . . to assist the Official Creditors’ Committees in their proceedings, pursuant to Rule 11-22 of the Rules of Bankruptcy Procedures.” The application further stated that “as a result of allegations made prior to the filing of the Petitions for Arrangement by the Debtors, and as a result of the apparent intertwined relationship [among] the Debtors, members of the Friedland family, and other companies associated with the Debtors and/or the Friedland family, the Official Creditors’ Committees believe that a thorough investigation into the affairs, actions and conduct of the Debtors is required. In addition, the Official Creditors’ Committees believe that the retention of an independent certified public accounting firm is necessary for the services that may be requested by the Official Creditors’ Committees.” The January 5, 1979, Order of the Court, quoted in the cover letter appearing at the beginning of this report, generally describes our charge for the investigation. The Audit Finance Subcommittee (the Subcommittee) of the Committees was established in January 1979 to, among other duties, advise and direct as necessary, the services being provided by us. During the course of our investigation of transactions with related parties, we met frequently with the Subcommittee and presented reports on our progress as requested. The Subcommittee provided direction to the investigation as it became necessary and, from time to time, requested that specific tasks be performed. Copies of draft reports on investigation of individual related party transactions were distributed at the request and on the authorization of the Subcommittee to the members of the Committees, their counsel, the Court, the Debtor, and the Debtor’s counsel.

C. Retention of Special Counsel: The complexities of the investigation resulted in our requesting the Committees to approve the retention of special counsel. After consultation with cocounsel to the Committees, Marcus & Angel, P.C. and Otterbourg, Steindler, Houston & Rosen, P.C. (hereafter referred to jointly as counsel), it was determined that separate and independent counsel should be chosen who would have no responsibilities for any matters in the proceeding other than those related solely to the investigation of related party transactions. The Philadelphia law firm of Pepper, Hamilton & Scheetz (PH&S) was retained as our Special Counsel. By Court Order of March 22, 1979, PH&S was authorized “to render legal services to Price Waterhouse & Co. in its capacity as accountants for the Official Creditors’ Committees herein in connection with the investigation of Price Waterhouse & Co. into the affairs, actions and conduct of the Debtors.” In the course of our investigation a number of matters arose where the aid of counsel for the Committees was requested. These included matters of liaison with the Committees, obtaining formal orders from the Court, the issuance of subpoenas, and providing office space for the taking of depositions. We and our special counsel wish to express our appreciation to Messrs. Marcus & Angel and Otterbourg, Steindler, Houston & Rosen for their cooperation and help in these and other matters.

842


D. The Securities and Exchange Commission (SEC) Investigation: In January 1979, the staff of the SEC advised us, counsel to the Committees, and the Debtor, that they had opened an investigation of the Company pursuant to a formal order of the Commission and that they required current access to the information being obtained by us. On March 14, 1979, and again on May 29, 1979, the SEC served subpoenas duces tecum on us pursuant to Section 20(a) of the Securities Act of 1933 and Section 21(a) of the Securities Exchange Act of 1934 requiring us to produce “all information and documents received” pursuant to our investigation of related party transactions. In compliance with the SEC subpoenas, our working papers, draft reports on investigation of individual related party transactions, and all other documents relating to our investigation were made available to the SEC staff for their review. The SEC requested and received copies of selected documents and working papers from our files. Requests by the SEC for copies of Company documents which were included in our files were relayed to the Company’s house counsel for their compliance therewith, as agreed among Food Fair, the SEC and us. On March 30, 1979, Special Counsel requested access to the files of the SEC relating to their investigation of the Company. The request was made in order to expedite and aid our investigation, eliminate duplication of effort, avoid current and future delays to the investigation, etc. We offered to maintain the confidentiality of the information obtained from the SEC. The SEC declined to grant the requested access. The SEC has not issued any reports on the findings of its investigation. Information may subsequently be disclosed by the SEC which may affect the findings contained in Parts II and III of this report. E. The Federal Grand Jury Subpoena: In August 1979, we received a subpoena duces tecum from the United States District Court for the Eastern District of Pennsylvania in which we were ordered to testify before the Grand Jury and produce “all reports and/or memoranda prepared in connection with the reorganization proceedings filed on behalf of Food Fair, Inc., including any reports and/or memoranda regarding possible conflicts of interest by corporate officers and/or employees of Food Fair, Inc.” In compliance therewith, we supplied the Grand Jury with copies of draft reports on investigation of individual related party transactions completed at that time. F. The Company’s Auditors: Laventhol & Horwath (L&H) were the Company’s independent accountants through the completion of the examination of the consolidated financial statements for the fifty-two week period ended July 29, 1978. In their March 9, 1979, report thereon, L&H disclaimed an opinion with respect to such financial statements because of, among other things, the significance of the restriction of the scope of their examination imposed by management regarding “application of all the audit procedures prescribed in Statement on Auditing Standards No. 6—Related Party Transactions,” a publication of the American Institute of Certified Public Accountants.

8.14


843

L&H cooperated with our investigation and the investigation was started, but not completed, by the Company’s Audit Committee which employed C&L as special accountants. L&H provided access to the audit working papers relating to their examinations of the Company’s financial statements for the five years from 1975 through 1978. The first four years were reviewed by C&L in connection with their investigation and we were given access to C&L’s files pertaining to that work. We were given access to and reviewed the 1978 L&H working papers regarding the related party transaction work they performed. Our efforts in this regard were intended solely to seek information regarding known, alleged, or suspected related party transactions. G. Descriptions of Related Parties: For purposes of the investigation and this report, related parties are individuals or entities who did business with the Company (including any affiliate, joint venture, or subsidiary thereof) and who were or might have been in a position (through directorships, officerships or employment with the Company, family relationships, business arrangements, stockholdings, personal relationships, etc.) to influence persons at the Company who were responsible for or had control over Company business arrangements and transactions during the period covered by the investigation. Except as specifically stated in this report, the inclusion of the name of any person or entity in this report is not intended to and should not give rise to any inference that such person could or did influence persons at the Company who were responsible for or had control over Company transactions. H. Condition of the Records: The firm of Touche Ross & Co. was retained by the Debtor to provide certain services to the Debtor including a request, as described in the Annual Report 1978, to “determine the effects of certain 1978 fiscal year adjusting journal entries on previously reported unaudited quarterly financial information.” The Touche Ross & Co. report stated that there were “deficiencies in internal accounting control during 1978 . . .” and that “reconstruction of available records to appropriately restate previously reported financial results may be impossible.” We encountered deficiencies in the Debtor’s records and internal controls during the entire period covered by our investigation. I. Organization and Conduct of the Investigation: The investigation was conducted in two phases. The initial phase involved a search to identify who the related parties were and what, if any, transactions between them and the Debtor had occurred. The second phase was the investigation of the related party transactions identified in the search phase. The two phases were being performed concurrently during most of the period during which the investigation was being conducted. The direction of the overall investigation, the procedures considered appropriate in the circumstances, the detailed scope of the investigation of each individual related party transaction, etc., were established by us with consultation at various stages of the process with the Subcommittee, the Committees, their counsel, the Debtor and its counsel, and the Court.

844


J. Search Phase: The sole formal company procedure for identifying transactions with related parties during the period under investigation was a questionnaire circulated to Company officers and directors by Stein Rosen and Ohrenstein (SRO), outside general counsel, in connection with the preparation of the Company’s annual proxy material. The application of these procedures resulted in the disclosure of certain related party transactions in proxy material filed with the SEC during the years 1974 to 1977. The information requested in the questionnaires was limited in scope to information required to be disclosed in a proxy statement and did not supply company management or Board of Directors with comprehensive information on the existence of related party transactions or conflicts of interest situations. Food Fair itself did not have a written comprehensive corporate conflicts-ofinterest policy. J. M. Fields executives, however, were required annually to sign a conflict-of-interest statement. A letter was sent to suppliers annually around Christmas time stating that employees were not permitted to accept gifts from vendors or suppliers. In the absence of a record maintained by the Company of related party transactions and conflicts-of-interest situations identified and reported by a system of procedures or accounting controls designed for that purpose, we had to develop that record through our search effort. Among the procedures we performed during the search phase of our investigation were the distribution of questionnaires designed to gather information from current and former officers, directors and employees of the Company and current and former vendors and suppliers; and extensive reviews of large volumes of Company files and records including, but not limited to: (a) cash disbursement and receipt records; (b) personnel files; (c) legal department files; (d) purchasing department records; (e) vendor correspondence files; and (f) real estate department records and files. Our search efforts identified 115 transactions or relationships which warranted investigation because there was an appearance of a related party being involved. K. Investigative Phase: The investigation of each transaction identified in the search program as apparently being with a related party was generally performed in two stages. The first, or internal phase, involved gathering facts and documentation using resources available within the Company. The second, or external phase, involved gathering facts and documentation from sources external to the Company including, but not limited to, records obtained by subpoena and the deposition under oath of current and former employees, officers and directors of the Company, and current and former vendors and suppliers and other third parties. In this process, of the 115 transactions or relationships identified in the search phase, 60 were found, in the investigative phase, not to involve transactions or relationships between related parties and the Company, and reports thereon are not included herein in Part II. L. Distribution of Questionnaires: Three different questionnaires were designed and distributed to individuals, suppliers and vendors, and banks.

8.14


845

A questionnaire requesting information concerning related party activities was distributed to 774 current and former officers, directors, and employees of the Company. The questionnaire offered recipients the option of responding in writing, orally, or by requesting a conference with us. On advice from their counsel, defendants in lawsuits instituted prior to the filing for protection under Chapter XI declined to cooperate with the investigation by not completing, in whole or in part, the questionnaire. In addition, counsel for these individuals informed us that they had advised their clients not to discuss any matters with us which might relate to pending litigation. A questionnaire was developed and sent to 228 vendors who did business with the company during the period under investigation. The primary purpose of this questionnaire was to obtain information concerning the relationships between vendors and the brokers representing them on sales to the Company. Distribution of the questionnaire was made to all vendors who used the brokerage companies identified as related parties in our search program and to a number of vendors selected at random. Another questionnaire was developed and distributed to 82 banks in connection with the review for perquisites. The banks were requested to provide information regarding loans made to current and former Company directors, officers, and employees or members of their families. M. Use of Subpoenas: During the investigation, we made use of the subpoena power available under Section 205 of the Bankruptcy Act thirty-five (35) times in order to obtain access to individuals and/or records of former or current directors, officers, employees, vendors, suppliers or others. N. Review of Board of Directors and Committee Minutes: We reviewed the minutes of the Company’s Board of Directors and Committees of the Board of Directors for the period October 1973 through October 1978 and have included in the individual reports information as to whether a reference to the transaction discussed in such report appears in any of such minutes. The fact that a report does not contain a reference that a transaction or relationship appears in such minutes is not intended to imply and should not be taken to infer that there was any legal or ethical requirement that such transaction should have been considered by the Board of Directors or any such Committee of the Board of Directors. Additionally, it should be recognized that matters may have been considered by the Board or such Committees and not have been referred to in the minutes.

9 Accounting Services for the Debtor-in-Possession or Trustee: Part 2 9.1

Business Plan

Objective. Section 9.3 of Volume 1 of Bankruptcy and Insolvency Accounting explains why the business plan is one of the most important documents created during the postpetition period. The hypothetical example below contains excerpts from a business plan developed for a fictitious company, Company ABC, in a chapter 11 case under the Bankruptcy Code. Two business plans were prepared by this company—one for retail operations and the other for nonretail operations. Included in this example are a management summary, three parts of an operations review ((1) introduction, (2) manufacturing division summary, and (3) analysis of the beverage company), and part of an analysis of a division that was liquidated while keeping the centralized purchasing function for produce. The plan developed for each of the operating units consists of (1) an overview of the nature of this unit’s activities, (2) past operating results, (3) operating capital requirement, (4) risks and alternatives, and (5) conclusions. The report issued was the result of a top-down review of all operations performed early in the case to identify operations that should be terminated or those that had potential to be part of “New Company ABC.” Specific criteria were developed that are followed by the operations review summary in order to allow the company to make judgments about each individual operation. Subsequent studies would be necessary to demonstrate the feasibility of the Plan of Reorganization eventually proposed by Company ABC.

I. MANAGEMENT SUMMARY Purpose and Scope The attached Business Plan for the manufacturing and produce nonretail operations was prepared by Company ABC management to:

r Present the decisions which management has made for restructuring the Company and making it strong, viable, and profitable.

r Provide financial projections for the nonretail business operations which management has decided to retain. 847

848

Accounting Services for the Debtor-in-Possession or Trustee: Part 2

r Describe the decision-making process and the rationale underlying each of management’s decisions.

r Document the significant analyses that were undertaken as a part of the decision-making process. Management has completed its reviews of the manufacturing and produce operations and has decided to retain all of the manufacturing operations and the produce operations in Florida as well as WW Produce and KL Packing. The other produce operations were entirely dependent on the New York and Philadelphia retail volumes. As a result of the recent retail dispositions, these operations have been discontinued. Their respective assets were relatively insignificant. Further, the potato farming operations are being discontinued. The related assets, primarily real estate, will be sold. Management, as of this date, is not yet prepared to review its decisions with respect to the meat division and other nonretail operations. As decisions on these operations are made and related planning is completed, management will make available comparable analyses and documentation, similar to those included in this document, supporting its decisions. Planning Process Initially, two sets of projections of future operating results were prepared by division management in the two nonretail divisions. One set of projections, the expected projections, assumed a continuation of recent operating trends based on the retail operations projections, inventory levels, cash availability, credit terms, and no additional financing. The alternative, or improved projections, assumed a return to normal service and inventory levels based on the improved retail operations projections and outside sales programs. Projections were prepared by the respective company personnel and reviewed by division management. In each case, the detailed assumptions underlying each set of projections were subjected to review and challenge. After the projections had been reviewed and finalized, they were submitted to senior management for review. In each case, the projections were subsequently modified, as appropriate, to reflect the impact of any decisions made by senior management. II. OPERATIONS REVIEW INTRODUCTION Purpose The review of various Company ABC nonretail operating entities has been undertaken to:

r Assess the impact on these nonretail operations resulting from the recent retail dispositions.

r Identify opportunities for short-term improvement, primarily in the areas of:

9.1

849

Business Plan

Sales Marketing Cash flow Cost and expenses Overhead Management r Quantify the prospects for short-term contribution to corporate profitability. r Assess the long-term fit and potential for these operations within the restructured company. Scope The nonretail operations for which reviews have been undertaken to date include:

r Manufacturing Division r WW Produce r Meat Processing Division (not completed) Methodology Reviews were conducted on-site with operating management and at corporate headquarters with Supermarket Division, nonretail, and corporate management personnel. Areas of focus included:

r r r r r r

Historical and projected operating performance and results Sales mix and customers Marketplace and competition Operating capital requirements Business risks Other areas of importance to the operations

The results of the operations reviews have been included in this section of this document. MANUFACTURING DIVISION SUMMARY Overview The Manufacturing Division is comprised of four major operating companies: 1 2 3 4

BD Beverage—Manufacturer of carbonated and noncarbonated beverages LR and Sons—Distributor of paper and packing material RZ Coffee—Manufacturer of roasted and ground coffee WY Tea—Manufacturer of tea bags

850


In addition to these operating companies, the Manufacturing Division has a number of smaller active and inactive operations that have not been included in the scope of the review of the Division. Detailed reports for the four major companies follow this summary. [Only limited information from BD Beverage is included here.] The Division is under the overall supervision of the Vice President for Manufacturing. Reporting to the Vice President is a Director of Purchasing, a Sales Director, a Divisional Controller, and three Divisional Managers responsible for each of the operating entities. Accounting for the Division is performed by its own Accounting Group. The companies currently sell and ship products to Company ABC and several outside customers. The geographic market area serviced by the companies extends along the east coast from New England to Miami, FL, and as far west as Iowa. The historical and projected percentage relationship of Company ABC and outside customer sales for the Division are as follows: Sales to Company ABC 20X0 20X1 20X2 20X3 20X4 20X5 20X6

Outside

Actual percentage 71 71 69 59 51 Projected percentage 43 37

29 29 31 41 49 57 63

The primary reasons for the reduction of the percent of sales to Company ABC are the recent retail dispositions and the projected increase of outside sales. The Manufacturing Division has, in the past, placed little emphasis on the generation of outside business through the use of brokers. Until recently, only six brokers were being utilized by the Division. With the loss of Company ABC sales due to recent retail dispositions, significant emphasis is now being placed on replacement of this business through outside accounts. This emphasis is being accomplished through the establishment of a broker network for the Division’s key marketing areas. It is expected that within three months a total of twenty brokers will be representing the Division from as far south as Jacksonville, FL, to as far north as Buffalo, NY, and west to Chicago, IL. The Division has been affected negatively in two primary areas as a result of chapter 11:

9.1

851

Business Plan

r Sales The Division has lost a significant percent of Company ABC sales due to the dispositions as specified previously. [To date, two major outside accounts have been lost; indications are that the remainder of the outside business is stable. r Supply/Credit Impact Supply problems resulted in a one-week shutdown in the BD Beverage Company in early October. Cash/credit constraints have prohibited taking long positions in the coffee, tea, and sugar future markets. However, given present market conditions, management indicates no long positions are required, and potential exposure to future swings is not considered significant in the short term. Credit terms have been restricted by many vendors, and cash before delivery is being required in a number of cases. Raw material supplies are not significantly short at present; because future Company ABC sales are projected to decline, the near-term demand for raw materials should not cause shortage problems. Operating Results The Manufacturing Division has been and is expected to continue to be a profitable operating entity. Pretax profits for Fiscal Years 20X0 through 20X4 are summarized below:

BD Beverage LR and Sons RZ Coffee WY Tea Division Total

20X0

20X1

20X2

20X3

20X4

5 Year Total

$1,190 698 562 325 $2,775

$1,670 842 742 567 $3,821

$1,095 745 1,291 530 $3,661

$ 659 400 1,877 808 $3,744

$ 651 304 1,194 1,058 $3,207

$ 5,265 2,989 5,666 3,288 $17,208

For Fiscal Year 20X5, unaudited net profit through January 13, 20X5, was reported as $680,000 on sales of $18.0 million. For the remainder of the fiscal year, operating results have been projected on two different projection methodologies: 1 Expected—Assumes Supermarket Division expected projections and no improvement in outside sales. Additionally, Company ABC purchases of paper supplies presently not purchased through LR and Sons are assumed to be recaptured immediately. 2 Improved—Assumes Supermarket Division improved projections and improvement in outside sales resulting from broker activity. Additionally, Company ABC purchases of paper supplies presently not purchased through LR and Sons are assumed to be recaptured immediately. A summary of the Fiscal Year 20X5 projected operating results is provided below (000’s):

852


Net Profit

Total fiscal year % of sales

Expected

Improved

$1,335 3.6

$1,381 3.7

Fiscal Year 20X6 operating results have been projected based on:

r Supermarket Division projections for Fiscal Year 20X6 r Improved Fiscal Year 20X5 Manufacturing Division projections r Increased outside sales through brokers Fiscal Year 20X6 projected net profit for the Division is approximately $2 million (4.3 percent) on sales of $47.5 million. Operating statements for the Division for Fiscal Years 20X5 (expected and improved) and 20X6 are provided on the following pages. MANUFACTURING DIVISION BD BEVERAGE COMPANY Overview The BD Beverage Company is a manufacturer of a full line of carbonated and noncarbonated beverages. Additionally, the Company provides packing (tolling) services for various national soft drink brands. The Company currently sells and ships products to Company ABC and several outside customers. The geographic market area serviced by the company extends along the eastern seaboard from New England to as far south as Jacksonville, FL. Sales to Company ABC’s Jacksonville region were added in December 20X4, and provided a partial offset to business lost through the recent retail dispositions. The Miami region is presently not serviced by the Company because of unfavorable transportation rates, which do not permit a competitive transfer price. The historical and projected percentage relationships of Company ABC and outside customer sales are as follows: Sales to Company ABC 20X0 20X1 20X2 20X3 20X4 20X5 20X6

Outside

Actual percentage 68 68 67 68 52 Projected percentage 52 38

32 32 33 32 48 48 62

9.1

Business Plan

853

As stated previously, the primary reasons for the reduction of the percent of sales to Company ABC are the recent retail dispositions and projected increases in outside sales. There has been little emphasis in the past on the generation of outside business through the use of brokers. Only two brokers were being used to represent the Company in obtaining outside sales. Other outside sales were obtained through in-house sales activity. With the net loss of approximately 69 percent of the plant’s Company ABC volume through the retail dispositions, significant emphasis is now being placed on expanding business through outside accounts. This emphasis is being accomplished through the establishment of a broker network for the plant’s key marketing areas. During January, four new brokers were added in Albany and Syracuse, New York; Buffalo and Rochester, New York; Northern New Jersey; and Metropolitan New York. Through the National Food Brokers Association, management is currently in the process of interviewing potential brokers for representation in key areas, such as Boston, MA; Pittsburgh, PA; Washington, DC; Richmond, VA; Jacksonville, FL; Chicago, IL; and Atlanta, GA. These are key areas where major supermarket chains, wholesalers, distributors, and food service operators are located. It is expected that, within three months, a total of 20 brokers will be representing the Company. In addition, negotiations are currently in effect with FN Stores, ST Supermarkets, and CL Stores in Norfolk, VA. Primary competitors in the geographic market area include both national bottlers and regional private-label bottlers. Although the Company is presently one of the smaller regional bottlers in the market area, it has a number of advantages that enable it to compete effectively. Primary competitive advantages include:

r Full line manufacturing/bottling operation: r 4 sizes—12-, 28-, and 64-ounce bottles and 16-ounce cans. r 10 flavors, 16 brands. r Good quality, competitively priced product. r Efficient/cost-effective operations: r Fully automated line operation from pallet unloading to pallet loading. r Capability of running three operation lines concurrently. r Utilizes one of the most efficient, lowest-cost glass packaging systems available to the industry.

r Modern, well-maintained equipment.

r Available capacity to expand business and provide production/shipping flexibility. The primary competitive disadvantages faced by the Company include:

r Significantly larger competitors with proven sales and marketing history. r The current lack of an established, effective broker network to develop outside sales.

r Unfavorable trucking rates particularly to the Miami, FL, area.

854


The primary impact of chapter 11 on the Company has been in the areas of Company ABC sales and supply/credit disruptions:

r Sales impact: r Loss of almost 69 percent of Company ABC sales as a result of retail dispositions.

r Addition of Jacksonville sales in December 20X4, to partially offset the sales loss.

r Supply/credit impact: r Inability to obtain glass due to payables problems resulted in one week shutdown in early October 20X4.

r Two of the three major glass suppliers continue to sell glass supplies only on a cash-before-delivery basis. Operating Results The Company has been and is expected to be a profitable operating entity, though trending downward in recent years. For the Fiscal Years 20X0 through 20X4, its sales and net profits were as follows (000’s omitted): Year

Sales

Net Profit

Percent of Sales

20X0 20X1 20X2 20X3 20X4

$12,108 14,185 10,964 10,402 10,340

$1,190 1,670 1,095 659(1) 651(1)

9.8 11.8 10.0 6.3 6.3

(1) Key factors significantly affecting net profit in these years included transportation rate increases (impact of $200,000/yr) which could not be passed through if competitive prices were to be maintained, and loss of glass supplier rebates ($150,000/yr). For Fiscal Year 20X5, net profit for the 24 weeks ending January 13, 20X5, was $185,000 on sales of $4.2 million. For the remainder of the fiscal year, operating results have been projected by management, based on two different projection methodologies: 1 Expected projection methodology—assumes Supermarket Division expected projections for Fiscal Year 20X5 and no additional outside sales, except those known at this time, which include Chain X and Chain Y. 2 Improved projection methodology—assumes Supermarket Division improved projections for Fiscal Year 20X5 and partial effect of broker sales efforts. A summary of the Fiscal Year 20X5 projected operating profits is provided below (000’s omitted):

9.1

855

Business Plan

Net Operating Profit

Total fiscal year 20X5 (percentage of sales) August 1, 20X4–January 13, 20X5 (actual) February 10, 20X5–July 28, 20X5 (projected)

Expected

Improved

$203 2.4% $185 $ 18

$218 2.5% $185 $ 33

Fiscal Year 20X6 operating results have been projected based on:

r r r r

Supermarket projections for Fiscal Year 20X6 Improved Fiscal Year 20X5 BD Beverage projections A full year impact of Chain X and Chain Y sales An increase in sales of approximately 17 percent over Fiscal Year 20X9 total sales as a result of additional broker efforts

Fiscal Year 20X6 projected net profit is $495,000 based on sales of $12.4 million. Total assets on the Company’s books as of January 13, 20X5, were approximately $5.2 million including:

r Accounts receivable of $2.0 million: r Outside customers receivables—$.8 million r Company ABC and Affiliates receivables—$1.2 million r Inventory—$1.2 million r Capital facilities and equipment (net)—$1.4 million Based on book assets as of July 29, 20X4, the Fiscal Year 20X4 return on assets was 15.8 percent; return on Company ABC investment for the same period was 23.6 percent. Intercompany payables and receivables were eliminated for these calculations. Operating Capital Requirements No incremental working capital or major capital improvement is required for 20X5 or 20X6. Risks Primary downside risks associated with the Company include:

r Potential inability of brokerage entities to obtain significant increase in outside volume.

r Exposure to significant swings in sugar prices due to short commodity market position: r Management believes that exposure is minimal given current market conditions. r Management is investigating the potential for new sugar formulation to reduce costs. Significant swings in the price of sugar could materially affect operating results, particularly if sugar substitution is not feasible.

856


r Potential impact on profits from loss of key outside account(s) given relatively small number of existing outside customers.

r Potential impact of environmental restrictions on certain packaging types. Primary upside considerations include:

r Business fit with Company ABC: r Vertical integration provides Company ABC with supply and capacity availability without credit restrictions; the Company is provided with a stable sales base and potential growth primarily through sales to Miami, should favorable trucking rates be negotiated. r The Company is projected to continue to provide positive cash flow and net profits with minimal downside risk of loss and no significant capital requirements. r The Company provides good quality, competitively priced products which can be used effectively for supermarket promotional purposes. r The Company has experienced management, knowledgeable in the business. r Minimal dilution of corporate management time is required to operate the business. r Growth and profit potential appears significant, given plant capacity availability, operating efficiency, equipment conditions, and the development of a broad-based, experienced broker network to aggressively pursue outside sales. r Return on investment is reasonable. Disposition considerations:

r Potential disposition value of the Company has not been quantified. Key disposition issues identified include: r Elimination of supply/credit source for Company ABC stores. r Valuation basis—Current earnings stream vs. potential earnings stream at normal capacity or valuation based on new plant construction costs. r Timing/salability—Current profitability and projected continued improvement provide opportunity to optimize sale timing and sale price if disposition is considered. Conclusions BD Beverage is a stable modern operating company with significant potential growth and profitability and minimal risk of significant loss in the future. The Company provides a good business fit with Company ABC:

r r r r

Vertical integration benefits Minimal capital required over next two years Minimal corporate management attention required Competitively priced, high-quality product

9.1

857

Business Plan

Development of outside business should be aggressively pursued and monitored closely. PRODUCE OPERATIONS DIVISIONS WW PRODUCE GROUP (Only selected parts of the analysis for these divisions are included in this excerpt.) Risks and Alternatives The following alternative courses of action with salient factors pro and con, have been identified for the produce operations:

r For the closed tomato, spinach, and salad packing operations: r Establish a new customer base and reopen the operation: r Lack of expected success in soliciting former competitors in an ongoing mode.

r Cost of implementation would be a substantial cash outflow. r Cost of supplying outside chains would be higher than for a related chain due to time and expense of dealing with a greater number of “customers” and the absence of customer “loyalty” in the face of temporary price or quality fluctuations. r Hold the processing facility idle, but for sale at an attractive price: r Cost to hold estimated at $80,000 through July 28, 20XX. r Idle state not conducive to high price. r Realizable proceeds estimated at $200,000. r Timing not known. r Sell facility at auction or at forced-sale price: r Timing not known. r Realizable proceeds not known. r For the ongoing farming and buying operations: r Potato farm: r Retain and operate with attendant logistical management difficulty subject to market fluctuations. r Lease to farm and plant operation. r Sell at auction (price not estimated). r Sell through listing agent(s) (price estimated at $900,000 for both farm and pack house). r Buying function: r Maintain as a separate profit center (intercompany sales). r Maintain as a cost center. r Combine with merchandising functions: r At corporate level. r At regional level. r Delegate duties to regional buyers. The question of whether produce buying should continue to be a centralized or regional operation of the restructured company is central to the issue of whether any WW Produce personnel will continue functioning as corporate buyers for the chain.

858


That produce operations can be considered to have been a successful aspect of the Company is evidenced by the perception of high quality that consumers had for the produce department of PP stores and the reported profitability of the WW Produce segments. Produce operations management attributes a large measure of this success to centralized buying, which they feel is conducive to effective management of the complex produce supply network. Unlike groceries, produce buying involves the interaction of many independent entities handling a product with high perishability. Besides the produce shipper, brokers, specialized carriers, and government inspectors enter into most purchase transactions. These suppliers are generally smaller and represent a more fragmented supply source than those of the other supermarket lines. This has been confirmed by senior Supermarket Division management. Other advantages to centralized produce procurement include:

r Facilitates maintenance of uniformly high-quality standards throughout the chain.

r Enforces maintenance of gross profit levels above supermarket averages. r Enhances communication of timely information from a variety of supply and industry sources.

r Avoids possible competitive bidding in marketplace by various supermarket regions.

r Maintains a high profile in the produce marketplace, resulting in superior product quality—(the wholesaler image of the present operation communicates the need for higher-quality product more than does the chain-store image of decentralized buying). Possible disadvantages of centralized produce buying include:

r Increased difficulty in quantifying the operation for: r Goal setting. r Performance measurement. r Output per unit of cost. r Potential duplication of effort in dealing with local produce sources because local shippers frequently are best utilized with noncentralized or local buying. Conclusion As of February 8, 20XX, WW Produce management had reached the conclusion that obtaining a new customer base for resumption of packing operations was not feasible. Preparations were then begun to terminate all but three to four key buyers and to arrange for disposition of the business assets with corporate management. The remaining buyers would then be prepared to function at the corporate level in a centralized produce-buying operation. The concept of a three- or four-person centralized buying staff was independently discussed with the regional managers in Baltimore, Jacksonville, and Miami, to assess both the necessity for centralization and the impact on local produce buying. All agreed that a centralized operation was essential to the bulk of produce buying for the chain and that the proposed staffing would have no impact on their local buying operations.

9.2

Motion for Protective Order Authorizing Debtor to File

859

The major points of resolution now include:

r Produce buying results depend on supermarket volume. r Liquidation proceeds yet to be determined: r $500,000–$1,000,000 approximation of management (includes real estate carried in other divisions or entities).

r Book values of real estate. r Collateralization assets.

r Corporate buying format for produce: r Centralized. r Cost center with some outside sales potential. r Centralized control of: r Technical aspects. r Quality control. r Market information. r No capital requirements: r Cost probably lower than the alternatives. r Minimal corporate management attention required. 9.2 Motion for Protective Order Authorizing Debtor to File Part of Business Plan Under Seal Objective. Section 9.3 of Bankruptcy and Insolvency Accounting states that often data related to a business plan are filed under seal because of the confidential nature of information in the plan. Following is an example of a motion for a protective order authorizing the debtor to file certain exhibits including part of the business plan under seal. IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) ) DURA AUTOMOTIVE SYSTEMS, ) ) INC., et al.,1 ) Debtors. ) ) ) ) ) ) In re:

Chapter 11 Case No. 06-11202 (KJC) Jointly Administered Hearing Date (Requested): May 13, 2008 at 10:00 a.m. (EDT) Objection Deadline (Requested): May 12, 2008 at 12:00 p.m. (noon) (EDT)

1 The “Debtors” comprise the entities set forth in the Order Pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure Directing Joint Administration of the Debtors’ Chapter 11 Cases, entered on October 31, 2006 [Docket No. 68].

860


MOTION FOR ENTRY OF A PROTECTIVE ORDER AUTHORIZING THE DEBTORS TO FILE CERTAIN EXHIBITS IN SUPPORT OF PLAN CONFIRMATION UNDER SEAL The above-captioned debtors and debtors in possession (collectively, the “Debtors”) hereby move the Court for the entry of an order pursuant to sections 105 and 107 of the Bankruptcy Code and Fed. R. Banker. P. 9018 authorizing them to offer certain proprietary and confidential exhibits as evidence in support of confirmation, under seal: (i) the Debtors’ detailed February 2008 Revised Business Plan Presentation; and (ii) the detailed backup information included in the Debtors’ valuation report; (collectively, the “Confidential Hearing Exhibits”). The Debtors will offer the Confidential Hearing Exhibits as Exhibits 15 and 18 in support of confirmation of their The Debtors’ Revised Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code [Docket No. 3023] (as subsequently amended, the “Revised Plan”). Jurisdiction 1. The court has jurisdiction over this motion under 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue of these proceedings and this motion in this district is proper under 28 U.S.C. §§ 1408 and 1409. 2. The statutory bases for the relief requested herein are sections 105 and 107(b) of chapter 11 of the United States Code, §§ 101–1532 (as amended, the “Bankruptcy Code”) and Fed. R. Bankr. P. 9018. Background 3. On October 30, 2006 (the “Petition Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”). The Debtors are operating their businesses and managing their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The U.S. Trustee appointed an Official Committee of Unsecured Creditors (the “Creditors’ Committee”) on November 8 and 9, 2006. No trustee or examiner has been appointed in these Chapter 11 Cases. 4. On August 22, 2007, the Debtors filed the Original Plan [Docket No. 1702] and the corresponding disclosure statement (as amended and modified, the “Original Disclosure Statement”) [Docket No. 1703]. The Debtors subsequently engaged in weeks of negotiations with their various creditor constituencies regarding the terms of the Original Plan. Those negotiations culminated in a global resolution of various issues among the Debtors, the Committee, and the Senior Notes Indenture Trustee, all of which was predicated on confirmation of the Original Plan, as modified. Unfortunately, the Original Plan did not come to fruition, and the Debtors began negotiating with certain creditor groups a revised plan that could be financed in the currently challenging credit markets.

9.2


861

5. On March 6, 2008, after several weeks of negotiations, the Debtors reached agreement with their key creditor constituencies, including the Committee and the Second Lien Group, on the key terms of a revised economic deal regarding creditor recoveries for the Class 2 Second Lien Facility Claims, the Class 3 Senior Note Claims and the Class 5 Other General Unsecured Claims. On March 7, 2008, the Debtors filed the Revised Plan, which incorporated those key terms [Docket No. 2922]. On April 4, 2008, the Court entered an Order (A) Approving Revised Disclosure Statement, (B) Fixing the Voting Record Date, (C) Scheduling Certain Hearing Dates and Deadlines in Connection with the Proposed Confirmation of the Debtors’ Joint Revised Plan of Reorganization, and (D) Approving the Revised Solicitation Procedures and Form of Solicitation Package and Notices (the “Scheduling and Disclosure Statement Order”) [Docket No. 3069]. 6. Pursuant to the Scheduling and Disclosure Statement Order, the Debtors have successfully solicited their Revised Plan. Moreover, the Court has fixed May 13, 2008, at 10:00 a.m. (Eastern Daylight Time), as the date and time for a hearing to consider confirmation of the Revised Plan and any objections thereto. The Court also provided that the Debtors were to proffer their witnesses and exhibits for that confirmation hearing on or before May 9, 2008, and the Debtors have done so by filing their exhibit and witness lists with this Court, and by providing copies of those lists and of the documents they seek to introduce to the Committee and to objector J.W. Korth. Relief Requested 7. By this motion, the Debtors seek entry of an order, pursuant to sections 105(a) and 107(b) of the Bankruptcy Code and Fed. R. Bankr. P. 9018, authorizing them to file the Confidential Hearing Exhibits under seal. Basis for Relief Requested 8. Section 107(b) of the Bankruptcy Code provides bankruptcy courts with the power to issue orders that will protect entities from potential harm that may result from the disclosure of certain confidential information. This section provides, in relevant part: On request of a party in interest, the bankruptcy court shall, and on the bankruptcy court’s own motion, the bankruptcy court may: (1) protect an entity with respect to a trade secret or confidential research, development, or commercial information; or (2) protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title. 11 U.S.C. § 107(b). 9. Fed. R. Bankr. P. 9018 defines the procedures by which a party may move for relief under section 107(b) of the Bankruptcy Code, providing that: [o]n motion or on its own initiative, with or without notice, the court may make any order which justice requires (1) to protect the estate or any

862


entity in respect of a trade secret or other confidential research, development, or commercial information. . . .

Fed. R. Bankr. P. 9018. Local Rule 5003-1(b) additionally provides, in relevant part, that “[a]ny party who seeks to file documents under seal must file a motion to that effect with the Clerk.” Del. Bankr. L.R. 5003-1(b). 10. The protective order sought herein is the least intrusive means of achieving the goal of protecting the integrity of the judicial process, protecting confidential and commercially sensitive information, and fostering the creation of a full and fair record for the court’s adjudication of disputes. In re 50-Off Stores, 213 B.R. 646, 659 (Bankr. W.D. Tex. 1997) (“The sealing device permits the court to do its job fully, permitting both a full inquiry and assuring the protection of the asset the cause of action represents.”). 11. Indeed, it is a long-standing practice in the federal courts for relevant evidence to be received at trial in camera, so as to protect the non-public character of qualified material while allowing the court to perform its adjudicative functions. See John T. Lloyd Lab., Inc. v. Lloyd Bros. Pharmacists, Inc., 131 F.2d 703, 707 (6th Cir. 1942) (trial court ordered to receive evidence in trade secret litigation in camera); Standard & Poor’s Corp. v. Commodity Exch., Inc., 541 F. Supp. 1273, 1276 (S.D.N.Y. 1982) (closure of part of trial may be ordered to preserve trade secret confidentiality and avoid irreparable harm). 12. Unlike its counterpart in Rule 26(c) of the Federal Rules of Civil Procedure, section 107(b) of the Bankruptcy Code does not require an entity seeking such protection to demonstrate “good cause.” See, e.g., Video Software Dealers Ass’n v. Orion Pictures Corp. (In re Orion Pictures Corp.), 21 F.3d 24, 28 (2d Cir. 1994); Phar-Mor, Inc. v. Defendants Named Under Seal (In re Phar-Mor, Inc.), 191 B.R. 675, 679 (Bankr. N.D. Ohio 1995). Rather, if the material sought to be protected satisfies one of the categories identified in section 107(b), “the court is required to protect a requesting party and has no discretion to deny the application.” Orion Pictures Corp., 21 F.3d at 27. 13. Section 107(b) requires courts to protect confidential commercial information. In re Frontier Group, LLC, 256 B.R. 771, 773 (Bankr. E.D. Term. 2000). Another court in this district has defined commercial information as “information which would result in ‘an unfair advantage to competitors by providing them information as to the commercial operations of the debtor,’” the disclosure of which “[must] reasonably be expected to cause the entity commercial injury,” and “is so crucial to the operations of the entity seeking the protective order that its disclosure will unfairly benefit that entity’s competitors.” In re Alterra Healthcare Corp., 353 B.R. 66, 75 (Bankr. D. Del. 2006) (MFW) (internal citations omitted). 14. The Debtors respectfully submit that the information contained in the Confidential Hearing Exhibits satisfies section 107(b). It includes

9.2


863

confidential commercial information relating to the Debtor’s operational restructuring strategy, current and future sales expectations (including by customer), and specific non-public information about planned strategic initiatives involving production operations and sales initiatives. The public disclosure of information in the Confidential Hearing Exhibits would materially affect relations with workers and ongoing customer negotiations, as well as providing an unfair advantage to competitors, customers and suppliers. The Debtors therefore seek to protect such commercially sensitive information, while still building the evidentiary record required by the court and the objectors to the Revised Plan. 15. Additionally, the Debtors respectfully submit that filing the Confidential Hearing Exhibits under seal will not prejudice any party. The Debtors have described the salient features of the Confidential Hearing Exhibits in the Disclosure Statement. Further, copies of the Confidential Hearing Exhibits have already been made available (or will be) to counsel for the Debtors’ major creditor constituencies, and to objector J.W. Korth under the terms of a confidentiality agreement. 16. The Debtors propose that the Confidential Hearing Exhibits and their contents remain confidential, be filed under seal, and be served on and made available only (under confidentially agreements) to: (a) the Office of the United States Trustee for the District of Delaware; (b) counsel to the Creditors’ Committee; (c) counsel to the agents for the Debtors’ prepetition and postpetition lenders; (d) counsel to the Second Lien Committee; (e) counsel for objectors to the Plan; and (f) such other parties as may be ordered by the court or agreed to by the Debtors. Notice 17. No trustee or examiner has been appointed in the Reorganization Cases. The Debtors have provided notice of this motion to: (a) the United States Trustee for the District of Delaware; (b) counsel to the Creditors’ Committee; (c) counsel to the agent for the Debtors’ postpetition secured lenders; (d) counsel to the agent to the Debtors’ prepetition second lien secured lenders; (e) counsel to the Second Lien Committee; (f) counsel for objectors to the Plan; and (g) those parties requesting notice pursuant to Rule 2002 of the Federal Rules of Bankruptcy Procedure. No Prior Request 18. No prior motion for the specific relief requested herein has been made to this or any other court. WHEREFORE, the Debtors respectfully request the entry of an order, substantially in the form attached hereto as Exhibit A, (a) authorizing the Debtors

864


to file the Confidential Hearing Exhibits under seal, and (b) granting such other and farther relief as the court deems appropriate. Dated: May 9, 2008 Wilmington, Delaware Respectfully submitted, Daniel J. DeFranceschi (Bar No. 2732) Jason M. Madron (Bar No. 4431) RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: (302) 651-7700 -andKIRKLAND & ELLIS LLP Marc Kieselstein, P.C. Paul M. Basta Roger J. Higgins Michael B. Slade 200 East Randolph Drive Chicago, Illinois 60601 Telephone: (312) 861-2000 COUNSEL FOR THE DEBTORS AND DEBTORS-IN-POSSESSION

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865

EXHIBIT A Proposed Order IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE


) ) ) ) ) ) ) ) )

Chapter 11 Case No. 06-11202 (KJC) Jointly Administered Re: Docket No.

PROTECTIVE ORDER AUTHORIZING THE FILING OF CERTAIN EXHIBITS IN SUPPORT OF PLAN CONFIRMATION HEARING UNDER SEAL Upon the motion (the “Motion”)2 of the Debtors for entry of a protective order authorizing the Debtors to file (i) the February 2008 Revised Business Plan Presentation; and (ii) the detailed backup information for the Debtors’ Valuation Report (collectively, the “Confidential Hearing Exhibits”) under seal, and it appearing that the relief requested is in the best interest of the Debtors’ estates; and it appearing that this court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334; and it appearing that this proceeding is a core proceeding pursuant to 28 U.S.C. § 157; and it appearing that venue of these proceedings and the Motion in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409; and notice of the Motion and the opportunity for a hearing on the Motion were appropriate under the particular circumstances, and no other or further notice need be given; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED, that the Motion is granted; and it is further ORDERED, that pursuant to section 107(b) of the Bankruptcy Code and Fed. R. Bankr. P. 9018, the Debtors are authorized to file the Confidential Hearing Exhibits under seal; and it is further ORDERED, that the Confidential Hearing Exhibits shall remain confidential and shall be served on and made available only to: (a) the Office of the United States Trustee for the District of Delaware; (b) counsel to the Creditors’ Committee; (c) counsel to the agents for the Debtors’ prepetition and postpetition 1 The “Debtors” comprise the entities set forth in the Order Pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure Directing Joint Administration of the Debtors’ Chapter 11 Cases, entered on October 31, 2006 [Docket No. 68]. 2 Capitalized terms used but not defined herein shall have the same meaning given to them in the Motion.

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lenders; (d) counsel to the Second Lien Committee; (e) counsel for objectors to the Plan; and (f) such other parties as may be ordered by the court or agreed to by the Debtors; and it is further ORDERED, that the Debtors are authorized to take all actions necessary to effectuate the relief granted pursuant to this order in accordance with the Motion, including requiring any parties-in-interest requesting additional information about the Confidential Hearing Exhibits to submit to confidentiality agreements before the Debtors, in their sole discretion, determine whether to provide such additional information; and it is further ORDERED, that notwithstanding the possible applicability of Fed. R. Bankr. P. 6004(g), 7062, 9014 or otherwise, the terms and conditions of this order shall be immediately effective and enforceable upon its entry; and it is further ORDERED, that this court shall retain jurisdiction to hear and determine all matters arising from the implementation of this order. , 2008 Dated: May Wilmington, Delaware The Honorable Kevin J. Carey United States Bankruptcy Judge 9.3 Valuation and Financial Projections Objective. Section 9.4 of Bankruptcy and Insolvency Accounting discusses the importance of preparing projections of future operations to show that the Plan of Reorganization is feasible. These projections are developed in conjunction with the business plan and are crucial in determining the long range prospects for the company. They are used to determine the value of the business as a going concern and the interest creditors and stockholders have in the reorganized company. Reproduced below is an example of projected financial information taken from a disclosure statement issued by Dura Automotive Systems, Inc. VALUATION ANALYSIS AND FINANCIAL PROJECTIONS A. VALUATION OF THE REORGANIZED DEBTORS. 1. Introduction. In conjunction with formulating the Plan, the Debtors have determined that it is appropriate to estimate the Reorganized Debtors’ going concern value post-confirmation. The Debtors have directed Miller Buckfire to prepare such a valuation. 2. Valuation. Miller Buckfire estimates the total enterprise value of the Reorganized Debtors to be between approximately $540 million and $660 million, with a mid-point of approximately $600 million, as of an assumed Effective Date of November 1, 2007. The range of equity value, which takes into account the total enterprise value less estimated net debt outstanding as of an assumed Effective Date of November 1, 2007, was estimated by Miller Buckfire to be between $356 million and $472 million, with a mid-point of approximately $414 million. The values are based upon information available to, and analyses

9.3

Valuation and Financial Projections

867

undertaken by, Miller Buckfire as of August 2007. This estimated total enterprise value reflects, among other factors discussed below, the Debtors’ income statements and balance sheets, current financial market conditions and the inherent uncertainty today as to the achievement of the Debtors’ financial projections prepared by the Debtors and AlixPartners and more fully set forth in Article XVI.B of this Disclosure Statement and Exhibit H attached hereto. The foregoing valuation also reflects a number of assumptions, including a successful reorganization of the Debtors’ businesses and finances in a timely manner, achieving the forecasts reflected in the financial projections, the amount of available cash, market conditions and the Plan becoming effective in accordance with its terms on a basis consistent with the estimates and other assumptions discussed herein. The estimates of value represent hypothetical enterprise values of the Reorganized Debtors as the continuing operator of its business and assets, and do not purport to reflect or constitute appraisals, liquidation values or estimates of the actual market value that may be realized through the sale of any securities to be issued pursuant to the Plan, which may be significantly different than the amounts set forth herein. Such estimates were developed solely for purposes of formulation and negotiation of the Plan and analysis of implied relative recoveries to creditors thereunder. The value of an operating business such as the Debtors’ business is subject to uncertainties and contingencies that are difficult to predict and will fluctuate with changes in factors affecting the financial condition and prospects of such a business. In preparing the estimated total enterprise value, Miller Buckfire: (a) reviewed certain historical financial information of the Debtors for recent years and interim periods; (b) met with certain members of senior management of the Debtors to discuss the Debtors’ operations and future prospects; (c) reviewed publicly available financial data and considered the market values of public companies deemed generally comparable to the operating businesses of the Debtors; (d) considered certain economic and industry information relevant to the Debtors’ operating businesses; (e) reviewed certain analyses prepared by other firms retained by the Debtors; and (f) conducted such other analyses as Miller Buckfire deemed appropriate. Although Miller Buckfire conducted a review and analysis of the Debtors’ businesses, operating assets and liabilities, and business plans, Miller Buckfire relied on the accuracy and completeness of all: (a) financial and other information furnished to it by the Debtors and by other firms retained by the Debtors and (b) publicly available information. No independent evaluations or appraisals of the Debtors’ assets were sought or were obtained in connection therewith. In performing its analysis, Miller Buckfire used the discounted cash flow and comparable public companies trading multiples methodologies. The valuation multiples and discount rates used by Miller Buckfire to arrive at the going concern value of the Debtors’ business were based on the public market valuation of selected public companies deemed generally comparable to the operating businesses of the Debtors and general capital market conditions. In selecting such comparable companies, Miller Buckfire considered factors such as the nature of the comparable companies’ businesses, assets and capital structures, as well as such companies’ current and projected operating performance relative to the Debtors.

868


An estimate of total enterprise value is not entirely mathematical, but rather involves complex considerations and judgments concerning various factors that could affect the value of an operating business. Moreover, the value of an operating business is subject to uncertainties and contingencies that are difficult to predict and will fluctuate with changes in factors affecting the financial conditions and prospects of such a business. As a result, the estimate of total enterprise value set forth herein is not necessarily indicative of actual outcomes, which may be significantly more or less favorable than those set forth herein. Because such estimates are inherently subject to uncertainties, neither the Debtors, Miller Buckfire, nor any other person assumes responsibility for their accuracy, but the Debtors believe the estimates have been prepared in good faith based on reasonable assumptions. Depending on the results of the Debtors’ operations or changes in the financial markets, Miller Buckfire’s valuation analysis as of the Effective Date may differ from that described herein, and such differences could be material. In addition, the valuation of newly issued securities is subject to additional uncertainties and contingencies, all of which are difficult to predict. Actual market prices of such securities at issuance will depend upon, among other things, prevailing interest rates; conditions in the financial markets; the anticipated initial securities holdings of prepetition creditors, some of which may prefer to liquidate their investment rather than hold it on a long term basis; and other factors that generally influence the prices of securities. Actual market prices of such securities also may be affected by the Chapter 11 Cases or by other factors not possible to predict. Accordingly, the total enterprise value estimated by Miller Buckfire does not necessarily reflect, and should not be construed as reflecting, values that will be attained in the public or private markets. The total enterprise value ascribed in the analysis does not purport to be an estimate of the post reorganization market trading value. Such trading value may be materially different from the total enterprise value ranges associated with Miller Buckfire’s valuation analysis. Indeed, there can be no assurance that a trading market will develop for the New Common Stock. Furthermore, in the event that the actual distributions in these Chapter 11 Cases differ from those the Debtors assumed in their recovery analysis, impaired classes claims holders’ actual recoveries could be significantly higher or lower than estimated by the Debtors. B. FINANCIAL PROJECTIONS The Debtors have developed a set of financial projections, which are summarized in Exhibit H hereto. The Debtors prepared the projections in good faith, based upon estimates and assumptions made by the Debtors’ management, which the Debtors believe to be reasonable. The estimates and assumptions in the projections may not be realized, and are inherently subject to uncertainties and contingencies. They also are based on factors such as industry performance, general business, economic, competitive, regulatory, market and financial conditions, all of which are difficult to predict and generally beyond the Debtors’ control. Because future events and circumstances may well differ from those assumed and unanticipated events or circumstances may occur, the Debtors expect that the actual and projected results will differ and the actual results may be materially

9.3

Valuation and Financial Projections

869

greater or less than those contained in the projections. The Debtors cannot make any representations concerning the accuracy of the projections or the Reorganized Debtors’ ability to achieve the projected results. Therefore, creditors may not rely upon the projections as a guaranty or other assurance of the actual results. Creditors also should not regard the inclusion of projections in this Disclosure Statement as an indication that the Debtors considered or consider the projections to reliably predict future performance. The projections are subjective in many respects, and thus are susceptible to interpretations and periodic revisions based on actual experience and recent developments. The Debtors do not intend to update or otherwise revise the projections to reflect the occurrence of future events, even in the event that assumptions underlying the projections are not borne out. The projections should be read in conjunction with the assumptions and qualifications set forth herein. THE DEBTORS DID NOT PREPARE THE PROJECTIONS WITH A VIEW TOWARDS COMPLYING WITH THE GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. THE DEBTORS’ INDEPENDENT AUDITOR HAS NEITHER COMPILED NOR EXAMINED THE ACCOMPANYING PROSPECTIVE FINANCIAL INFORMATION TO DETERMINE THE REASONABLENESS THEREOF AND, ACCORDINGLY, HAS NOT EXPRESSED AN OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT THERETO. THE DEBTORS DO NOT, AS A MATTER OF COURSE, PUBLISH PROJECTIONS OF THEIR ANTICIPATED FINANCIAL POSITION, RESULTS OF OPERATIONS OR CASH FLOWS. ACCORDINGLY, NEITHER THE DEBTORS NOR THE REORGANIZED DEBTORS INTEND TO, AND EACH DISCLAIMS ANY OBLIGATION TO: (A) FURNISH UPDATED PROJECTIONS TO HOLDERS OF ALLOWED CLAIMS OR EQUITY INTERESTS PRIOR TO THE EFFECTIVE DATE OR TO HOLDERS OF NEW NOTES, NEW COMMON STOCK OR TO ANY OTHER PARTY AFTER THE EFFECTIVE DATE; (B) INCLUDE ANY SUCH UPDATED INFORMATION IN ANY DOCUMENTS THAT MAY BE REQUIRED TO BE FILED WITH THE SEC; OR (C) OTHERWISE MAKE SUCH UPDATED INFORMATION PUBLICLY AVAILABLE. 1. Effective Date and Plan Terms The projections assume that the Plan will be consummated in accordance with its terms and that all transactions contemplated by the Plan will be consummated by the assumed Effective Date. Any significant delay in the assumed Effective Date of the Plan may have a significant negative impact on the operations and financial performance of the Debtors including, but not limited to, an increased risk of inability to meet sales forecasts and higher reorganization expenses. 2. Total Revenue The projections assume that total revenue will be approximately $1,548.0 million in the year ending December 31, 2008. Total revenue for the years from 2009 through 2011 is expected to increase or decrease approximately 0.3% in 2009, 2.3% in 2010, and (1.1%) in 2011. The assumed amounts are based on JD Powers estimates of light vehicle build volumes, the Company’s ability to

870


win and retain content on current and next generation customer platforms and product pricing. 2009 $1,553.2

2010 $1,588.2

2011 $1,570.9

3. Direct Manufacturing Costs The projections assume that direct manufacturing costs (direct manufacturing, labor and material costs) as a percentage of total revenue are 63.5% in the year ending 2008. Direct manufacturing costs for the years 2009 through 2011 as a percentage of total revenue is expected to be: 2009 61.7%

2010 61.8%

2011 62.0%

4. Manufacturing Overhead and Selling, General & Administrative Expense The projections assume that manufacturing overhead and selling, general and administrative expense (excluding depreciation of non rental assets and amortization) as a percentage of total revenue is 28.5% in the year ending 2008. Manufacturing overhead and selling, general and administrative expenses for the years 2009 through 2011 as a percentage of total revenue are expected to be: 2009 29.3%

2010 28.6%

2011 28.4%

5. Interest Expense The projections assume the Debtors will enter into an Exit Credit Facility as described in section XIV(A). Interest expense for the years 2008 through 2011 is expected to be (in millions): 2008 $24.4

2009 $23.4

2010 $23.9

2011 $24.5

6. Income Taxes Due to the Company’s global operating locations the income expense assumed in the projections is based on regional and country specific statutory income tax rates. 7. Net Capital Expenditures Net capital expenditures for the years 2008 through 2011 are expected to be (in millions): 2008 $76.0

2009 $70.2

2010 $62.5

2011 $59.2

9.4

Voting Procedures

871

8. Working Capital Receivables, payables and other working capital accounts are projected according to historical levels with respect to total revenue except for the year 2009. In 2009 the projection assumes the current European factoring agreement expires and is not replaced causing an increase in accounts receivable reflected on the balance sheet. 9. Post Reorganization Debt The projections assume that funded debt at emergence under the Exit Credit Facility will be approximately $275 million as of the Effective Date. 10. Balance Sheet Adjustments The projections assume all debt (excluding capital leases), unsecured claims and preferred equity items are extinguished. In addition, the projections assume the Company will issue $160 million in equity through the Rights Offering and will obtain an Exit Credit Facility which is assumed to have a funded balance of $275 million at the time of emergence. The projections do not estimate the impact of “fresh start” accounting. 9.4

Voting Procedures

Objective. Section 9.9 of Bankruptcy and Insolvency Accounting explains solicitation, that in order to be confirmed, a Plan must be accepted by holders of at least two-thirds in amount and more than half in number of each class of claimants or interest holders allowed to vote that have actually voted to accept or reject the plan under section 1126(c) of the Bankruptcy Code. The process by which the creditors and interest holders vote is called solicitation. Following is an example of voting procedures, including information about the voting package, voting instructions and voting tabulation, as described in the disclosure statement of Dura Automotive Systems, Inc. A. SOLICITATION PACKAGE Kurtzman Carson Consultants LLC (“KCC”), the Debtors’ claims and solicitation agent, will facilitate the solicitation process. Financial Balloting Group (“FBG”) will assist KCC as special voting agent for solicitation of votes of, and communication with, holders of Claims and Equity Interests arising from publicly traded securities, including Senior Notes Claims in Classes 3A and 3B. FBG will also serve as the Rights Offering subscription agent. The following materials constitute the Solicitation Package:

r notice of the Confirmation Hearing; r one or more Ballots and Master Ballots, voting instructions and a return envelope, which are provided only to the holders of Senior Notes Claims in Classes 3A and 3B and Other General Unsecured Claims in Classes 5A, 5B and 5C; r the Subscription Agreement related to the Rights Offering which is provided only to the holders of Senior Notes Claims in Class 3; r a pre-addressed postage pre-paid return envelope; r the Disclosure Statement with all exhibits including the Plan;

872


r a customized letter from the Debtors to the holders in each of the voting classes (tailored to each class) urging them to vote to accept the Plan (the forms of which are attached hereto as Exhibit D); r a letter from the Creditors’ Committee supporting confirmation of the Plan (attached hereto as Exhibit L) r any supplemental solicitation materials the Debtors may file with the Bankruptcy Court; and r the Disclosure Statement Order, which, among other things: (a) approves this Disclosure Statement as containing “adequate information” in accordance with section 1125 of the Bankruptcy Code; (b) establishes the procedures for voting on the Plan; (c) schedules a hearing to consider confirmation of the Plan; and (d) sets the deadline for voting on and for objecting to confirmation of the Plan. The Solicitation Package (excluding the Subscription Agreement) is being distributed to holders of Other General Unsecured Claims as of the Voting Record Date. The Solicitation Package (including the Subscription Agreement) is being distributed to holders of Senior Notes Claims as of the Mailing Record Date. In addition, the Solicitation Package (excluding Ballots, Master Ballots, and the Subscription Agreement) is being distributed to holders of Other Secured Claims, Second Lien Facility Claims, Subordinated Notes Claims, Convertible Subordinated Debenture Claims, and Section 510 Subordinated Claims as of the Voting Record Date out of an abundance of caution, and notwithstanding that such classes are not entitled to vote to accept or reject the Plan. Holders of Other Secured Claims, Second Lien Facility Claims, Subordinated Notes Claims, Convertible Subordinated Debenture Claims, and Section 510 Subordinated Claims will also receive a notice of non-voting status in lieu of a Ballot. Notices of non-voting status will likewise be distributed to holders of Equity Interests. The Solicitation Package (except for Ballots, Master Ballots, and Subscription Agreement) may also be obtained by accessing the Debtors’ website at http://dura.kccllc.net or by requesting a copy from the KCC by writing to Dura Automotive Systems, Inc., c/o Kurtzman Carson Consultants LLC, 2335 Alaska Avenue, El Segundo, CA 90245 or calling (800) 820–0985 (United States) or (248) 844–1600 (International) or by sending an e-mail to [email protected]. B. VOTING INSTRUCTIONS Holders of Other General Unsecured Claims in Classes 5A, 5B and 5C as of the Voting Record Date (i.e. only those who held Other General Unsecured Claims in Classes 5A, 5B and 5C as of the Voting Record Date) are entitled to vote to accept or reject the Plan. They may do so by completing the appropriate Ballot and returning it to KCC in the self-addressed postage-paid envelope provided, as the case may be, by the Voting Deadline. Voting instructions are attached to each Ballot. Holders of Senior Notes Claims in Classes 3A and 3B are also entitled to vote to accept or reject the Plan (i.e. all Senior Notes Claim holders may vote

9.4

873

Voting Procedures

to accept or reject the Plan even if they did not hold their Senior Notes Claims on the Voting Record Date). They may do so by completing the appropriate Ballot (the “Beneficial Owner Ballot”), making an appropriate election, and returning the Beneficial Owner Ballot to their bank, broker or other nominee (each a “Nominee”) with instructions for their Nominee to return the Beneficial Owner Ballot to FBG as part of the Nominee’s Master Ballot and deliver the holder’s Senior Notes position into the appropriate election account at The Depository Trust Company (“DTC”). Senior Noteholders are advised that when they vote to accept or reject the Plan, they must deliver their Senior Notes to their respective Nominees. When they do so, they will be unable to sell or otherwise transfer their positions. If Senior Noteholders do not vote, they may retain their Senior Note positions until after entry of the Confirmation Order. That Order will require Nominees, upon receiving notice from the Debtors to transfer all remaining Senior Notes positions to a holding account pending distributions on account thereof on or after the Effective Date. THE BALLOTS AND/OR THE PRE-ADDRESSED POSTAGE PRE-PAID ENVELOPES ACCOMPANYING THE BALLOTS WILL CLEARLY INDICATE WHETHER THE BALLOT MUST BE RETURNED TO KCC OR THE HOLDERS’ NOMINEE AND WILL CLEARLY INDICATE THE APPROPRIATE RETURN ADDRESS. IT IS IMPORTANT TO FOLLOW THE SPECIFIC INSTRUCTIONS PROVIDED ON EACH BALLOT. EACH BALLOT WILL CONTAIN A PROVISION STATING THAT A VOTING CREDITOR, BY VOTING, ACKNOWLEDGES HIS, HER OR ITS CONSENT TO THE RELEASE, INDEMNIFICATION AND RELEASE PROVISIONS OF THE PLAN, AS FOLLOWS:

BY VOTING, I FURTHER ACKNOWLEDGE THAT I. A VOTE TO ACCEPT THE PLAN IS ALSO A VOTE TO ACCEPT THE RELEASE BY THE HOLDER OF THE DEBTORS, FORMER OFFICERS AND DIRECTORS OF THE DEBTORS, CANADIAN INFORMATION OFFICER, THE BACKSTOP PARTY, DIP LENDERS, FIRST LIEN LENDERS, SECOND LIEN LENDERS, SENIOR NOTES INDENTURE TRUSTEE, THE SUBORDINATED NOTES INDENTURES TRUSTEE, THE CONVERTIBLE SUBORDINATED INDENTURE TRUSTEE, CREDITORS’ COMMITTEE AND MEMBERS THEREOF AND EACH OF THEIR RESPECTIVE REPRESENTATIVES. II. I CAN DECLINE TO CONSENT TO THE RELEASE OF THE DEBTORS, FORMER OFFICERS AND DIRECTORS OF THE DEBTORS, CANADIAN INFORMATION OFFICER, THE BACKSTOP PARTY, DIP LENDERS, FIRST LIEN LENDERS, SECOND LIEN LENDERS, SENIOR NOTES INDENTURE TRUSTEE, THE SUBORDINATED NOTES INDENTURES (continued )

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TRUSTEE, THE CONVERTIBLE SUBORDINATED INDENTURE TRUSTEE, CREDITORS’ COMMITTEE AND MEMBERS THEREOF AND EACH OF THEIR RESPECTIVE REPRESENTATIVES BY NOT VOTING OR VOTING TO REJECT THE PLAN.

Class 5 Other General Unsecured Claims Classes 5A, 5B and 5C Other General Unsecured Claims holders should contact KCC for answers to any questions regarding the procedures and requirements for voting to accept or reject the Plan and for objecting to the Plan. KCC will also provide additional copies of all materials, and oversee the voting tabulation for Classes 5A, 5B and 5C. KCC will also answer questions from holders of Claims in classes not entitled to vote. BALLOTS CAST BY HOLDERS OF OTHER GENERAL UNSECURED CLAIMS IN CLASS 5 ENTITLED TO VOTE MUST BE RECEIVED BY KCC BY THE VOTING DEADLINE, AT THE ADDRESS LISTED ON THE APPLICABLE BALLOT, WHETHER BY FIRST CLASS MAIL, OVERNIGHT COURIER OR PERSONAL DELIVERY. Class 3A and 3B Senior Notes Claims The Senior Notes Indenture Trustee will not vote on behalf of the holders of Senior Notes. Class 3A and 3B Senior Notes holders must submit their own Ballots through their respective Nominees in accordance with the voting instructions summarized below. ADDITIONAL INSTRUCTIONS TO OBTAIN ANSWERS TO ANY QUESTIONS REGARDING SOLICITATION PROCEDURES, PARTIES OTHER THAN CLASS 3 NOTEHOLDERS SHOULD CALL KCC TOLL FREE AT (800) 820–0985 (UNITED STATES); (248) 844–1600 (INTERNATIONAL). HOLDERS OF CLASS 3A AND CLASS 3B SENIOR NOTES CLAIMS MAY AND/OR THEIR NOMINEES CONTACT FBG DIRECTLY, AT (646) 282–1800, WITH ANY QUESTIONS RELATED TO THE SOLICITATION PROCEDURES APPLICABLE TO SECURITY-BASED CLAIMS AND EQUITY INTERESTS. CLASS 3A AND 3B HOLDERS: TO BE COUNTED, CLASS 3A AND 3B BENEFICIAL OWNER BALLOTS MUST BE RETURNED TO THE APPROPRIATE NOMINEE, NOT FBG. BENEFICIAL OWNER BALLOTS SENT DIRECTLY TO FBG WILL NOT BE COUNTED. BENEFICIAL OWNER BALLOTS MUST BE RETURNED TO THE NOMINEE WITH SUFFICIENT TIME FOR THE NOMINEE TO FOLLOW THE PROCEDURES ABOVE AND RETURN PROPERLY COMPLETED MASTER BALLOTS TO FBG. CLASS 3 MASTER BALLOTS CAST ON BEHALF OF HOLDERS OF CLAIMS ENTITLED TO VOTE INDICATING ACCEPTANCE OR REJECTION OF THE PLAN, MUST BE RECEIVED BY FBG NO LATER THAN

9.4

Voting Procedures

875

THE VOTING DEADLINE OF 5:00 P.M., P.T., [ ], 2007. MASTER BALLOTS MUST ATTACH ALL BENEFICIAL OWNER BALLOTS VOTING TO ACCEPT OR REJECT THE PLAN. CLASS 5A, 5B AND 5C: TO BE COUNTED, KCC MUST RECEIVE CLASS 5A, 5B AND 5C BALLOTS INDICATING ACCEPTANCE OR REJECTION OF THE PLAN CAST BY HOLDERS ENTITLED TO VOTE, NO LATER THAN ], 2007. THE VOTING DEADLINE OF 5:00 P.M., P.T., [ HOLDERS MUST CAST THEIR BALLOTS (OR MASTER BALLOTS, AS APPLICABLE) IN ACCORDANCE WITH THE SOLICITATION PROCEDURES DESCRIBED IN FURTHER DETAIL IN ARTICLE XV. OF THIS DISCLOSURE STATEMENT. ANY BALLOT RECEIVED AFTER THE VOTING DEADLINE SHALL NOT BE COUNTED. KCC AND FBG SHALL NOT COUNT ANY BALLOT THAT IS PROPERLY EXECUTED BY THE HOLDER OF A CLAIM, BUT WHICH DOES NOT CLEARLY INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN OR WHICH INDICATES BOTH AN ACCEPTANCE AND A REJECTION OF THE PLAN. CLAIMS HOLDERS MAY CAST ONLY ONE BALLOT FOR EACH CLAIM HELD. BY SIGNING AND RETURNING A BALLOT, EACH CLAIM HOLDER WILL CERTIFY TO THE BANKRUPTCY COURT AND THE DEBTORS THAT THE HOLDER HAS NOT CAST ANY OTHER BALLOTS WITH RESPECT TO SUCH CLAIM OR, IF IT HAS CAST AN EARLIER BALLOT THEN THAT EARLIER BALLOT IS THEREBY SUPERSEDED AND REVOKED. ALL BALLOTS ARE ACCOMPANIED BY SELF-ADDRESSED, POSTAGE PRE-PAID RETURN ENVELOPES. IT IS IMPORTANT TO FOLLOW THE SPECIFIC INSTRUCTIONS PROVIDED ON EACH BALLOT. The Confirmation Hearing Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of the Plan. Section 1128(b) of the Bankruptcy Code provides that any party-in-interest may object to confirmation of the Plan. ], The Bankruptcy Court has scheduled the Confirmation Hearing for [ ] E.T., before the Honorable Kevin J. Carey, United 2007, to take place at [ States Bankruptcy Judge, in the United States Bankruptcy Court for the District of Delaware, located at Marine Midland Building, 824 North Market Street, 5th Floor, Wilmington, Delaware 19801. The Confirmation Hearing may be adjourned from time to time without further notice except for an announcement of the adjourned date made at the Confirmation Hearing or any adjournment thereof. Objections to confirmation of the Plan must be filed and served on the ], 2007, at 4:00 p.m. Debtors, and certain other parties, by no later than [ E.T., in accordance with the Disclosure Statement Order that accompanies this Disclosure Statement. THE BANKRUPTCY COURT MAY NOT CONSIDER OBJECTIONS TO CONFIRMATION OF THE PLAN IF ANY SUCH OBJECTIONS HAVE NOT BEEN TIMELY SERVED AND FILED IN COMPLIANCE WITH THE DISCLOSURE STATEMENT ORDER. The Confirmation Hearing Notice will contain, among other things, the Plan Objection Deadline, the Voting Deadline, and Confirmation Hearing Date. The

876


Debtors will publish the Confirmation Notice in the following publications in order to provide notification to those persons who may not receive notice by mail; The New York Times (National Edition), The Wall Street Journal (National Edition), The Detroit Free Press, The Automotive News (National Edition), The Globe and Mail, and The National Post. Risk Factors Prior to deciding whether and how to vote on the Plan, each holder in a voting class should consider carefully all of the information in this Disclosure Statement, especially the Risk Factors described in Article XVIII hereof. C. RIGHTS OFFERING SUBSCRIPTION In addition to being entitled to vote to accept or reject the Plan, holders of Senior Notes Claims in Class 3A (Rights Offering Participants) are, through the Plan, being offered the opportunity to subscribe for the Rights Offering Shares on a pro rata basis in exchange for a cash payment. The Subscription Agreement will be included in the Solicitation Package that is mailed to Rights Offering Participants. Rights Offering Participants who wish to participate in the Rights Offering are required to, prior to the Voting Deadline:

r Select the Class 3A Voting and Participating in the Rights Offering elec-

r r r r

tion in Item 2.B of the Beneficial Owner Ballot (the Rights Offering Participant must purchase all Allocable Shares available if it makes this election); Sign and return the properly executed Beneficial Owner Ballot to their Nominee; Sign and return the properly executed signature page to the Subscription Agreement (which incorporates the Registration Rights Agreement and Stockholders’ Agreement) to their Nominee; Instruct their Nominee to deliver the Rights Offering Participant’s Senior Notes into the appropriate account established at DTC; and Arrange for their Nominee to make a payment by wire transfer in accordance with the wire transfer instructions provided to the Nominee by the Subscription Agent on or before the Voting Deadline in an amount equal to the Total Subscription Price.

If FBG for any reason does not receive prior to the Voting Deadline from a Rights Offering Participant the materials listed above then that Rights Offering Participant’s subscription rights shall be deemed waived and will forever expire. The Backstop Party shall, pursuant to its obligations under the Backstop Rights Purchase Agreement (attached hereto as Exhibit C), purchase any Rights Offering Shares remaining unpurchased after the Voting Deadline. D. VOTING TABULATION To ensure that a vote is counted, the holders of Claims in Classes 3 and 5 should: (a) complete a Ballot; (b) indicate the holder’s decision to accept or reject

9.4

Voting Procedures

877

the Plan in the boxes provided in the Ballot; and (c) sign and timely return the Ballot to the address set forth on the enclosed prepaid envelope by the Voting Deadline. A holder with Claims in more than one class may receive more than one Ballot and each such Ballot will be coded for the particular class. The Ballot may not be used for any purpose other than to vote to accept or reject the Plan. Accordingly, at the time the Ballot is transmitted, claimants should not surrender certificates, instruments, or other documents representing or evidencing their Claims. 1. Ballots The Ballot does not constitute, and shall not be deemed to be, a Proof of Claim or an assertion or admission of a Claim. Only the following holders of claims in voting classes shall be entitled to vote with regard to such claims: (a) Holders of claims for which proofs of claim have been timely filed, as reflected on the official claims register, as of the close of business on October 3, 2007, with the exception of those claims subject to a pending objection filed before the Voting Deadline, unless such claims are allowed for voting purposes pursuant to a Resolution Event3 outlined in Paragraphs E.6–E.7 of the Solicitation Procedures attached to the Disclosure Statement Order (the “Solicitation Procedures”): provided, however, to the extent that the Debtors have reached a settlement on a claim for which a proof of claim has been timely filed, the terms of such settlement shall govern for purposes of determining the holder of the claim and the amount of the claim; (b) Holders of scheduled claims that are listed in the Debtors’ Schedules, with the exception of those scheduled claims that are listed as contingent, unliquidated or disputed claims (excluding such scheduled claims that have been superseded by a timely-filed proof of claim); and (c) Holders of claims arising pursuant to an agreement or settlement with the Debtors executed prior to the close of business on the Voting Record Date, as reflected in a court pleading, stipulation, term sheet, agreement, or other document filed with the Bankruptcy Court, in an Order entered by the Bankruptcy Court, or in a document executed by the Debtors pursuant to authority granted by the Bankruptcy Court regardless of whether a proof of claim has been filed. 2. Transferred Claims The assignee of a transferred and assigned claim (whether a timely-filed or scheduled claim) shall be permitted to vote such claim only if the appropriate transfer/assignment form has been fully effectuated pursuant to the procedures

3 A resolution event occurs if, prior to the Voting Deadline: (a) an order is entered by the Bankruptcy

Court temporarily allowing such Disputed Claim for voting purposes only pursuant to Bankruptcy Rule 3018(a), after notice and a hearing; (b) a stipulation or other agreement is executed between the holder of the disputed claim and the Debtors resolving such objection and allowing the holder of the disputed claim to vote its claim in an agreed upon amount; or (c) the pending objection to the Disputed Claim is voluntarily withdrawn by the Debtors or overruled by the Bankruptcy Court (each, a “Resolution Event”).

878


dictated by Rule 3001(e) of the Bankruptcy Rules and such transfer is reflected on the claims register on the Voting Record Date. 3. Computing the Claim Amount In tabulating votes, the following hierarchy shall be used to determine the Claim amount associated with each creditor’s vote: (a) The claim amount settled and/or agreed upon by the Debtors prior to the Voting Record Date, as reflected in a court pleading, stipulation, term sheet, agreement or other document filed with the Bankruptcy Court, in an Order entered by the Bankruptcy Court, or in a document executed by the Debtors pursuant to authority granted by the Bankruptcy Court. (b) The claim amount allowed (temporarily or otherwise) pursuant to a Resolution Event under the procedures set forth in Procedures Paragraphs E.6–E.7 of the Solicitation Procedures; (c) The claim amount contained on a proof of claim that has been timely filed by the relevant bar date (or deemed timely filed by the Bankruptcy Court under applicable law), except: r Proofs of claim timely filed with unliquidated or unknown amounts will count for satisfying the numerosity requirement of section 1126(c) of the Bankruptcy Code and the unliquidated or unknown amount portion of the Claim that will count in the amount of $1.00 solely for the purposes of satisfying the dollar amount provisions of section 1126(c); and r The claim amount set forth in a court pleading, stipulation, term sheet, agreement, or other document filed with the Bankruptcy Court as referenced in D.2.a of the Solicitation Procedures, controls over a claim amount contained in a proof of claim; (d) The claim amount listed in the Debtors’ Schedules, provided that such claim is not scheduled as contingent, disputed or unliquidated; and (e) In the absence of any of the foregoing, zero. The claim amount established pursuant to Paragraph E.2 in the Solicitation Procedures shall control for voting purposes only, and shall not constitute the Allowed amount of any Claim. The general tabulation procedures are set forth in Paragraph E.3 of the Solicitation Procedures. Ballots received after the Voting Deadline in connection with the Debtors’ request for Confirmation of the Plan may not be counted. In connection with any Class 5 votes, the method of delivery of the Ballots to be sent to KCC is at the election and risk of each holder of a Claim. In connection with any Class 3 votes, the risk of nondelivery by a Nominee with respect to a Class 3 Senior Notes Claims Ballot lies with the Claimant. Except as otherwise provided in the Solicitation Procedures, a Ballot will be deemed delivered only when KCC or FBG actually receives the original executed Ballot (either directly or attached to a Master Ballot as applicable). In all cases, sufficient time should be allowed to assure timely delivery. Delivery of a Ballot by facsimile, e-mail or any other electronic means will not be accepted. No Ballot should be sent to any of the Debtors, any indenture trustee, or the Debtors’ financial or legal advisors. The Debtors expressly reserve the right to amend, at any time and from time to

9.4

Voting Procedures

879

time, the terms of the Plan (subject to compliance with the requirements of section 1127 of the Bankruptcy Code). If the Debtors materially change the terms of the Plan or if they waive a material condition thereto that adversely affects a creditors’ interest under Bankruptcy Rule 3019 they will disseminate additional solicitation materials to such creditor and that, as necessary, extend the solicitation to the extent required by law. If multiple Ballots or Master Ballots are received from the same creditor with respect to the same claims prior to the Voting Deadline, the last Ballot or Master Ballot timely received will be deemed to reflect the voter’s intent and will supersede and revoke any prior Ballot or Master Ballot, provided, however, that once a Nominee has delivered the Senior Notes into the appropriate account at DTC and delivered a duly executed Beneficial Owner Ballot to the Special Voting Agent on behalf of a Beneficial Owner, such Beneficial Owner shall not be allowed to withdraw such Senior Notes from the election accounts provided, further, that such Beneficial Owner may change: (a) its election (including moving its Senior Notes between election accounts); or (b) vote to accept or reject the plan. A person signing a Ballot in its capacity as a trustee, executor, administrator, guardian, attorney in fact, officer of corporations, or otherwise acting in a fiduciary or representative capacity should indicate such capacity when signing and, unless otherwise determined by the Debtors, must submit proper evidence to so act on behalf of a beneficial holder. In the event a designation is requested under section 1126(e) of the Bankruptcy Code, the Court will determine whether any vote to accept and/or reject the Plan cast with respect to that Claim will be counted for purposes of determining whether the Plan has been accepted and/or rejected. Neither the Debtors nor any other person or Entity will be under any duty to provide notification of defects or irregularities with respect to execution or deliveries of Ballots nor will any of them incur any liabilities for failure to provide such notification. The Debtors will file with the Bankruptcy Court, as soon as reasonably practicable after the voting deadline, a voting report (the “Voting Report”). The Voting Report shall, among other things, delineate every Ballot that does not conform to the Voting Instructions or that contains any form of irregularity (each an “Irregular Ballot”) including, but not limited to, those Ballots that are late or (in whole or in material part) illegible, unidentifiable, lacking signatures or lacking necessary information, received via facsimile or electronic mail or damaged. The Voting Report also shall indicate the Debtors’ intentions with regard to such Irregular Ballots.

10 Accounting Services for the Creditors’ Committee

10.1

Sample Report to Creditors’ Committee

Objective. Section 10.13 of Volume 1 of Bankruptcy and Insolvency Accounting describes the review that the accountant must conduct for the creditors’ committee, to ascertain that the financial controls are in place and are being properly followed. An example of a report based on a detailed analysis of the operating statement follows. This draft is furnished solely for the purpose of indicating the form of the letter that we would expect to furnish to the Unsecured Creditors’ Committee of Big Container Corporation in response to their request and the matters expected to be covered in the letter. Based on our discussions with representatives of the Committee, it is our understanding that the procedures outlined in this draft letter are those that they wished us to follow.

Mr. Bill Brown Chairman of the Committee of Unsecured Creditors of Big Container Corporation c/o Kentucky Corporation 1 Thomas Way Lexington, KY

We have performed the procedures enumerated below with respect to (1) the operating statement of Big Container Corporation (“Big Container”) as filed June 30, 20X7 which covers the period April 24, 20X7 to May 31, 20X7 and (2) extrapolating operating results for the months of June and July, 20X7. These procedures were performed solely to assist you in evaluating the reasonableness of Big Container’s interim operating statements for the period of April 24, 20X7 to May 31, 20X7 and our report is not to be used for any other purpose. We make no representation as to the sufficiency of these procedures for your purposes. Schedule I presents the financial report of Big Container for the period of April 24, 20X7 through May 31, 20X7 which was provided to the Committee 881

882

Accounting Services for the Creditors’ Committee

by Big Container; Schedule II presents unaudited amounts provided by Big Container adjusted as follows: Case I—Reflects adjustments made as the result of the procedures performed which are enumerated below. Case II—Adjusts Case I to reflect a gross profit margin to a percentage determined by Stifford Corporation (“Stifford”). All the information presented herewith has been compiled from documentation supplied to us by Big Container as well as from interviews, discussions with employees of Big Container, CH & Company (Stifford’s Accountants), G&F (Big Container’s Accountants), and our reading of the interim operating statement for the period of April 24, 20X7 to May 31, 20X7 filed with the Bankruptcy Court. For purposes of our agreed-upon procedures of necessity we accepted as accurate the financial records of Big Container. Except as noted below, we did not examine corroborating evidential matter such as checks, invoices, minutes, confirmations, written confirmations, or other support documents nor did we agree information back to the supporting subsidiary ledgers. The procedures we performed related to the period April 24, 20X7 to May 31, 20X7 as reflected in Schedule I were as follows: 1 CASH—We obtained Big Container’s bank statements as of May 31, 20X7 and the bank statement reconciliation prepared by Big Container personnel. We compared cash balance per bank statement to cash balance per the interim operating statement. The reconciling items consisted of outstanding checks and petty cash of $2,500. No tests were performed on petty cash. We verified that the outstanding checks as of May 31, 20X7, cleared the bank in June, 20X7 or were still shown as outstanding on the June 30, 20X7 reconciliation. Outstanding checks from May 20X7 not cleared in June 20X7 totaled $2,287. The reconciled amount of Cash on hand at May 31, 20X7 was $428,263 as presented on Schedule I. 2 NET SALES—We obtained Big Container’s gross sales journal, randomly selected two sales invoices from each bill date during the period April 24, 20X7 to May 31, 20X7 on which invoices were rendered, and agreed 4% of sales journal entries to sales invoices. The invoices selected agreed to amounts recorded without exception. 3 COST OF GOODS SOLD—We attempted to analyze Big Container’s calculation for cost of goods sold but were unable to verify purchases and beginning and ending inventory. We performed alternative testing to determine an approximate gross margin percentage. From the sales invoices that we selected in the previous procedure, we selected and costed out one item from each invoice. Inventory cost was obtained from Big Container’s inventory listing of product costs. This procedure resulted in 1.4% of sales being tested and showed a 11.3% gross profit margin which has been used as the adjusted gross margin percentage in Case I. 4 MANAGEMENT SALARY AND PAYROLL EXPENSE—We reviewed supporting documents for the period April 23, 20X7 to May 31, 20X7 to determine if the expense was properly stated on Schedule II.

10.1


883

5 RENT EXPENSE—We reviewed prior year’s expense and supporting schedules for the period April 24, 20X7 to May 31, 20X7 and compared to the expense on Schedule II. An adjustment is reflected in “Schedule II” (Cases I and II) to reflect the fact that the “as provided” column did not include amounts for the period April 24, 20X7 to April 30, 20X7. 6 UTILITIES EXPENSE—We reviewed utility bills for the period April 24, 20X7 to May 31, 20X7 to determine if the expense was properly stated on Schedule II. An adjustment is reflected in “Schedule II” (Cases I and II) to reflect the fact that the “as provided” column did not include amounts for the period April 24, 20X7 to April 30, 20X7. 7 PROPERTY TAXES—We reviewed source documents for the period April 24, 20X7 to May 31, 20X7 to determine if the expense was properly stated on Schedule II. An adjustment is reflected in “Schedule II” (Cases I and II) to reflect the fact that the “as provided” column did not include amounts for the period April 24, 20X7 to April 30, 20X7. 8 INTEREST EXPENSE—We recalculated Stifford’s interest billing for the period April 24, 20X7 to May 31, 20X7 to determine if the expense was properly stated on the interim operating statement. An adjustment is reflected in “Schedule II” (Cases I and II) to reflect the fact that the “as provided” column did not include amounts for the period April 24, 20X7 to April 30, 20X7. 9 INSURANCE EXPENSE—We reviewed insurance bills for the period April 24, 20X7 to May 31, 20X7 to determine if the expense was properly stated on the interim operating statement. This expense appears to be properly accrued. 10 DEPRECIATION EXPENSE—Big Container obtained an appraisal from M. A. Company, Inc. dated May 14, 20X7 which states assets at an appraised value of $1,354,172. Using the M. A. value and assuming a five year asset life we have estimated a depreciation amount of $27,454 to provide for this expense for the period of April 24, 20X7 to May 31, 20X7 (or an annualized amount of $270,834). 11 Because of the unavailability of financial information on outside services and contractors, supplies, repairs and maintenance, advertising, auto expense, delivery, travel and entertainment, and interest income on repo agreements we used Big Container’s amounts without adjustment as listed in the “as provided” column of Schedule II. Schedule III presents unaudited amounts for June and July, 20X7 provided by Big Container adjusted as described below. The procedures we performed related to the period of June and July, 20X7 were as follows: TOTAL REVENUE—We used the revenue amount as provided by Big Container for the month of June, 20X7. We used the revenue amount for the first twenty-four days in July, 20X7 as provided by Big Container and extrapolated that amount to derive a revenue figure for the month of July, 20X7. COST OF SALES—Revenue multiplied by the gross margin as derived in procedure 3 above has been used in determining amounts of cost of sales for the months of June and July, 20X7.

884


OPERATING EXPENSES—EXCLUDING DEPRECIATION—We used the operating expenses excluding depreciation as provided by Big Container for the month of June, 1987. Big Container did not provide operating expenses for the month of July, 1987. We used the operating expense for June, 20X7 in July, 20X7. DEPRECIATION EXPENSE—We used a depreciation amount as derived in procedure 10 above for the months of June and July, 20X7. Related party transactions were examined by reviewing accounts payable ledger sheet for Slippery Company to determine the amount of purchases made from and payments made to Slippery Company for the period of November 1, 20X6 to June 30, 20X7. These amounts are summarized on Schedule IV. Schedules I, II, III and IV omit all the disclosures (and the balance sheet and the statement of changes of financial position) required by the generally accepted accounting principles. If the omitted disclosures were included in the accompanying schedule, they might influence users’ conclusions about the financial condition of Big Container. Accordingly the accompanying schedules are not designed for those who are not informed about such matters. Because the above described procedures do not constitute an examination made in accordance with generally accepted auditing standards, we do not express an opinion on the Schedules I, II, III and IV. Had we performed additional procedures or had we made an examination of the financial statements of Big Container in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. This report relates only to the Schedules I, II, III and IV specified above and does not extend to any financial statements of Big Container, taken as a whole. July, 20X7 SCHEDULE I BIG CONTAINER CORPORATION CASH RECEIPTS AND DISBURSEMENTS Cash on Hand Start of Period Receipts Disbursements Surplus/(Deficit)

$

132,197 4,229,055 (3,932,989) $ 428,263

Cash on Hand End of Period (1)

$

428,263

885

See accompanying notes.

Total Revenue (Sales) (2) Cost of Sales (3) Gross Profit Operating Expenses: Management Salary (4)(A) Payroll Expense (4)(A) Outside Services & Contractors (12)(E) Supplies (Office & Operating) Repairs & Maintenance Advertising Auto Expense Delivery Accounting & Legal (B) Rent (5) Telephone (6) Travel & Entertainment Utilities (6) Insurance (6)(C) Taxes (Real Estate, Property, etc.) (7)(D) Interest (8) Depreciation (10) Total Operating Expenses Net Profit/(Loss) from Operations Interest Income on Repo Agreements Total Nonoperating Income/Expenses Net Profit/(Loss) 1% 7% 1% 0% 0% 0% 0% 1% 0% 2% 0% 1% 0% 1% 0% 2% 0% 16% 50% 0% 0% 50%

23,456 228,729 42,316 12,650 10,519 319 123 45,863

581,349 1,561,354 473 473 1,561,827

58,638 11,320 16,654 8,277 45,411 8,200 68,874

100% 31% 69%

3,123,692 980,989 2,142,703

As Provided

72,320 13,961 16,654 10,208 45,411 10,113 84,944 27,454 645,040 (286,780) 473 473 (286,307)

23,456 228,729 42,316 12,650 10,519 319 123 45,863

3,123,692 2,765,432 358,260

Case 1 Adjusted

SCHEDULE II BIG CONTAINER CORPORATION

1% 7% 1% 0% 0% 0% 0% 1% 0% 2% 0% 1% 0% 1% 0% 3% 1% 18% −9% 0% 0% −9%

100% 89% 11%

72,320 13,961 16,654 10,208 45,411 10,113 84,944 27,454 645,040 (239,925) 473 473 (239,452)

23,456 228,729 42,316 12,650 10,519 319 123 45,863

3,123,692 2,718,577 405,115

Case 2 Adjusted

1% 7% 1% 0% 0% 0% 0% 1% 0% 2% 0% 1% 0% 1% 0% 3% 1% 18% −8% 0% 0% −8%

100% 87% 13%

886


NOTES TO SCHEDULE II (A) Includes wages earned during the period April 24, 20X7 through May 31, 20X7 and related employer FICA expenses of $18,594 and unemployment tax of $9,075. (B) Big Container has indicated that the charges for accounting and legal services related to the bankruptcy and related matters will be borne by the parent, Slippery Company. We have been told these items will not be charged or allocated to Big Container by the parent. We have also been told that the parent bears all charges for computer processing done for Big Container. (C) Insurance expense is based on actual expense for the period less amount of health insurance reimbursed by employees to Big Container for the period of April 24, 20X7 through April 30, 20X7. As of May 1, 20X7, Big Container no longer provides health insurance benefits. (D) Property taxes are based on historical 20X6 property tax bills without any anticipated tax increases. (E) Big Container has represented that this item is sales commissions.

SCHEDULE III BIG CONTAINER CORPORATION Extrapolated June Total Revenue (Sales) Cost of Sales Gross Profit Operating Expenses Excluding Depreciation Depreciation Expenses Total Operating Expenses Net Profit/(Loss) from Operations Net Profit/(Loss)

Extrapolated July

$1,250,000 1,108,750 141,250

100% 89% 11%

$1,033,333 916,567 116,766

100% 89% 11%

450,000 22,569 472,569 (331,319) (331,319)

36% 2% 38% −27% −27%

450,000 22,569 472,569 (355,802) (355,802)

44% 2% 46% −34% −34%

Revenue of 800,000 for the period of July 1, through July 24, 20X7 was provided by Big Container. 800,000 × (31/24) = 1,033,333

10.1

887


SCHEDULE IV BIG CONTAINER CORPORATION TRANSACTIONS WITH SLIPPERY COMPANY Month-Year Nov-X6 Dec-X6 Jan-X7 Feb-X7 Mar-X7 Apr-X7 May-X7 Jun-X7 Total

Purchases from Slippery $ 16,455 37,221 20,200 0 11,344 15,980 216,718 97,508 $415,426

Payments Made to Slippery $

0 0 0 31,427 40,533 53,061 143,879 142,274 $411,174

Note that $145,295 of 20X7 purchases made from Slippery were for inventory purchases from suppliers that would not sell to Big Container directly. Note that there was a zero balance due to Slippery at 4-23-X7.

11 Valuation of a Business in Bankruptcy Proceedings

11.1

Selection of Interest Rate for Valuation?

Objective. Section 11.7 of Volume 1 of Bankruptcy and Insolvency Accounting explains the Section 1129(b) provisions which permit courts to confirm chapter 11 plans not accepted by creditors if it is determined the plan is fair and equitable to dissenting classes. In determining the value for the purposes of a cram down, often the focus is on the interest rate to use to analyze whether the plan provides current and future payments with value equal to that of the collateral. An example of a declaration by a financial advisor regarding selection of the interest rate is presented below. ALAN J. BOT, Esq., Bar No. 131805 SULLIVAN, MCDONALD, MIDDENDORF, BRODY & BOT 1200 THIRD AVENUE, SUITE 1405 SAN DIEGO, CA 92101 Telephone: (619) 232-1400 Facsimile: (619) 232-1416 Attorneys for Glendale Federal Bank UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF CALIFORNIA In re

Case No. SA 93-04516-All

FALLBROOK-EASTGATE, LTD., a California Limited Partnership

CHAPTER 11 DECLARATION OF M. FREDDIE REISS RE: DEBTOR’S PLAN OF REORGANIZATION

Debtor. DATE: April 18, 1994 TIME: 10:00 a.m. DEPT: TWO JUDGE: ADLER

889

890

Valuation of a Business in Bankruptcy Proceedings

DECLARATION OF M. FREDDIE REISS I. M. FREDDIE REISS, the undersigned, declare and state as follows: 1. I have personal knowledge of the matters set forth herein and would and could competently testify to the same if called and sworn as a witness in this matter. 2. This Declaration is being filed in analysis of the “DEBTOR’S SECOND AMENDED PLAN OF REORGANIZATION” (the “Plan”) filed herein on behalf of Fallbrook-Eastgate, Ltd., a California Limited Partnership, the Chapter 11 Debtor and Debtor in Possession (“Eastgate” or “Debtor”). 3. I am the partner in charge of the Western Region Corporate Recovery Practice for Price Waterhouse (“PW”). PW has been employed as an outside consultant for Glendale Federal Bank (“Creditor” or “Glendale”) for the purpose of providing real estate consultation and expert witness assistance in connection with the evaluation of the plan of reorganization as submitted by the Debtor. The Price Waterhouse Corporate Recovery Practice group deals exclusively with workouts, turnarounds, and bankruptcy reorganizations. I personally have had and continue to have extensive and diversified experience in real estate matters including residential, commercial, and industrial properties, in various stages of development ranging from raw, unentitled land to operating properties. I am personally quite familiar with the availability, pricing, and terms of debt and equity financing for real estate projects and ventures, including underwriting criteria and procedures for conventional development and acquisition loans and permanent loans similar to the Debtor’s. I have been extensively involved with one of the largest private real estate developers in the country, whose primary focus was the acquisition and development of residential projects. I have also been involved in valuations, market and cost analyses, financial projections, and similar matters. A true and correct copy of my resume is attached hereto as Exhibit “A,” and incorporated herein by this reference. 4. PW was engaged as a consultant for the Creditor on or about March 3, 1994. At all times, I have been the partner in charge of this engagement. I have directed all aspects of this engagement based on my years of experience working with troubled companies and real estate assets. Various members of Price Waterhouse’s Corporate Recovery Practice and Real Estate Consulting groups having additional expertise in real estate, real estate financing, and other matters which I deemed necessary or beneficial to the formulation of my opinions and conclusions were utilized by me. I independently and critically reviewed the work product of my staff making certain that the data upon which I was to rely was sufficient and based upon sound assumptions. I would review and direct further work, refinements, and adjustments until I reached the point where I felt that I had a reliable foundation for my opinions and conclusions. In addition, my staff and I also met with the Creditor and Creditor’s counsel, surveyed third-party lenders and consulted with other third parties to

11.1


891

gain a complete and reliable understanding of the project, the matters involved, and information relevant to competition and vacancy rates in the subject property’s market area, market rental rates, availability and terms of financing, and similar information relevant to developing opinions and conclusions as to the reliability of the Debtor’s information and overall viability and feasibility of the Plan. Purpose of Declaration 5. This declaration will: (a) Describe the scope of services PW has performed for Glendale; (b) Describe the nature of the Southern California real estate market, and specifically the real estate market surrounding the subject property in Fallbrook, California; (c) Address the viability and feasibility of the Debtor’s proposed commitments under the Plan; (d) Address the availability and terms of financing available for a project similar to the subject property; (e) Identify and explain the support for opposition to key assumptions utilized in the Debtor’s financial projections as attached to the Third Amended Disclosure Statement. Scope of Services Provided 6. Price Waterhouse’s Corporate Recovery Group was retained by the Creditor to serve as financial and real estate consultants. Specifically, I have conducted my own research and have analyzed research performed by other employees of PW relating to: (a) The reasonableness of the operating cash flow projections presented by the Debtors in the Disclosure Statement; (b) The reasonableness of the rates projected for the Eleventh District Cost of Funds Index (“COFI”) presented by the Debtors in the Disclosure Statement; and (c) The reasonableness of the interest rate the Debtor proposes to pay Glendale on its secured claim. 7. In connection therewith, Price Waterhouse has devoted considerable time and effort analyzing the financial projections prepared by the Debtor. We have also interviewed various lenders from savings & loan associations and other credit institutions which would typically provide financing for a project similar to the subject property. In addition, we have gathered relevant historical and current market information regarding competing properties in the subject’s market area, Fallbrook, California, including market rental rates and vacancy rates from independent third parties. Finally, we inspected the subject property and all of the competing properties in the market area. 8. In connection with the consultation services provided by PW, the following materials amongst others were reviewed: (a) The Debtors’ Second Amended Plan of Reorganization;

892


(b) The Debtors’ Third Amended Disclosure Statement, including the Debtors’ Cash Flow Projections attached thereto; (c) An appraisal prepared for the Debtor by Dennis B. Cunningham, MAI, dated October 14, 1993; (d) An appraisal prepared for Glendale’s counsel by The Heath Group dated October 27, 1993; (e) Historical information regarding the Eleventh District Cost of Funds Index; (f) Rental Trends published by Market Profiles of San Diego for the month of March 1994; (g) Debtor-in-Possession Monthly Operating Report No. 11 for the month ending February 28, 1994; (h) Interviewed Pete Barbot, Section Head of Project Management for Navy and Marine Housing–Southwestern Division. Summary of Conclusions 9. The conclusions stated below are based upon the analyses performed which are described in paragraphs 11 to 44 below: (a) The Debtor’s cash flow projections, as stated in the Disclosure Statement, are a “best case” scenario and subject to the slightest sensitivity adjustment in inflation or interest rates. Also, the Debtor’s projected cash flows, included in Exhibit D of the Disclosure Statement, include three errors: (1) The Debtor’s cash flows do not include the Partnership Management Fee discussed in the Disclosure Statement on page 33, line 12; (2) The Debtor’s cash flows do not reflect the payment of the unsecured claims; and (3) The year-to-year percentage change in revenues and expenses per the Debtor’s cash flow projections do not agree with the Debtor’s stated inflation rates. For example, the Debtor states that 1994 expenses are projected to increase 5% over 1993 actual expenses. However, the 1994 expenses per the Debtor’s cash flow projections decrease 1.84% from 1993 actual expenses; (b) The Debtor’s inflation rates utilized in the cash flow projections are unlikely to occur; (c) The Debtor’s proposed interest rate margin of 2.25% is grossly inadequate based upon the extremely high loan-to-value ratio, the insufficient debt-service coverage ratio and the nature and quality of the collateral. The appropriate margin, utilizing the Villa Diablo formula approach, is a minimum of 4.75% over COFI for an interest rate of 8.43% as of April 7, 1994. For comparison, utilizing the weighted average cost of capital approach, the calculated margin is 5.15% to 6.65% over COFI for an interest rate of 8.83% to 10.33% as of April 7, 1994;

11.1


893

(d) When appropriate interest and inflation rates are used, significant negative cash flows after payment of debt service and unsecured claims are projected; (e) The New Value contribution is insufficient for the financial risk of default, which is high. 10. Based upon the analyses performed by PW, in my opinion, the Debtor’s Plan of Reorganization is not feasible since the property and estate will have insufficient funds to pay its obligations. Project Description 11. Fallbrook-Eastgate is a 101-unit apartment complex located in Fallbrook, California. The complex contains 24 one-bedroom units of approximately 600 square feet, 76 two-bedroom units of approximately 950 square feet and one three-bedroom unit which is provided as living quarters for the on-site property manager. In addition, one of the one-bedroom units is also provided as living quarters for an on-site groundskeeper/maintenance manager. Therefore, 23 one-bedroom units and 76 two bedroom units are available to the public for rental. Per the testimony of Joe Caracciolo, there were 9 units vacant as of March 24, 1994. Fair Market Value of Real Property and Amount of Glendale Claim 12. PW understands that matters related to the fair market value of the real property and the amount of Glendale’s claim have not been resolved. a. Real Property Value Fallbrook-Eastgate contends that the present fair market value of the real property is $2,720,000, while Glendale contends that the present fair market value of the real property is $3,250,000. Additionally, Glendale asserts a security interest in all rents, issues, and profits of the real property as separate collateral. b. Glendale’s Claim Exhibit B hereto contains a summary of Glendale’s claim provided to PW by Glendale’s counsel. The amount of Glendale’s secured claim is dependent upon the fair market value determined for the real property by the Court. In addition, there is dispute regarding the application of LMA credits (as defined in the Disclosure Statement, page 6) and post-petition payments made by the Debtor. PW has based the analyses discussed below upon the following assumptions regarding Glendale’s claim: (1) Debtor Proposed Loan: (a) Fair market of Real Property, and therefore postconfirmation secured claim of Glendale, is $2,720,000; (b) Glendale’s post-confirmation secured claim is reduced by: (i) Principal payment of $50,000 upon Plan confirmation; and (ii) Application of post-petition payments of $158,033 received through April 8, 1994;

894


(c)

Therefore, Glendale’s post-confirmation secured claim is $2,511,967; (d) Glendale’s post-confirmation unsecured claim is $1,716,814. (2) Creditor Proposed Loan: (a) Fair Market of Real Property, and therefore postconfirmation secured claim of Glendale, is $3,250,000; (b) Glendale’s post-confirmation secured claim is reduced by principal payment of $50,000 upon Plan confirmation; (c) Therefore, Glendale’s post-confirmation secured claim is $3,200,000; (d) Glendale’s unsecured claim is reduced to $1,011,881. PW has not taken into consideration the impact of the dispute regarding the LMA credits in this analysis. 13. The two proposed loans depicted were selected to present a “best case” scenario in terms of the Debtor (i.e., debtor proposed loan, which provides for a lower secured claim and a “worst case” scenario. Each of these scenarios is presented in PW’s analyses of the Debtor’s Plan of Reorganization discussed below. Debtors’ Cash Flow Projections 14. The feasibility of the Debtor’s Plan of Reorganization depends upon the accuracy of numerous assumptions and the occurrence of several speculative future events. PW has investigated the reasonableness of these assumptions and, to test the reasonableness of the Plan, has prepared various analyses to evaluate the impact of changes in certain assumptions made by the Debtor on the cash flows projected by the Debtor. These analyses are described more fully below. In each of these analyses, PW has assumed a Plan Confirmation Date of July 1, 1994. The cash flows for July 1, 1994 through December 31, 1994 were calculated simply by taking one-half of the full year estimated operating results. 15. Contained in Exhibit C is a restatement of the Debtor’s cash flow projections (as shown in the Third Amended Disclosure Statement, Exhibit D). This Exhibit reflects the Debtor’s assumptions regarding the operating revenues and expenses of the property, estimated Eleventh District Cost of Funds Index rates (“COFI”) during the period of the Plan and the Debtor’s proposed margin over COFI to be paid on the Glendale claim, with two corrections to accurately reflect the Plan proposed by the Debtor: (a) The Debtor indicates in the Third Amended Disclosure Statement (page 33, line 12) that the General Partner of the Reorganized Debtor will be paid a monthly Partnership Management Fee of 2% of gross rents collected or $1,000 per month, whichever is less. This expense does not appear in the Debtors’ cash flow projections. (b) The Debtor’s cash flow projections do not reflect the payment of the unsecured claims as detailed in the Third Amended Disclosure

11.1

16.

17.

18.

19.


895

Statement. The cash flow projections shown in Exhibit C reflect the impact of including the payment of the unsecured claims. The Debtor’s net cash flows for the period 1994 through 1998, adjusted for the errors described in paragraph 15 above and assuming the Debtor’s proposed loan and utilizing the Debtor’s proposed interest rate, are $82,076, while assuming the Creditor’s proposed loan and the Debtor’s proposed interest rate, the net cash flows are a negative $76,473. The Debtor states in the Third Amended Disclosure Statement on page 24, lines 1–4, “The assumptions and projections [utilized in the Debtors’ cash flow projections] are based upon a ‘best case’ scenario and assumes a vacancy rate; [sic] any fluctuation in market competition, increase in costs, or other changes will effect [sic] the future operations and financial conditions of the debtor.” Moreover, upon review of the Debtor’s assumptions regarding the property’s operating cash flows, PW has found the following operating cash flow assumptions to be unreasonable and unfounded: (a) Expense Inflation Rates In the Disclosure Statement Exhibit D, the Debtor states that the expense inflation rate is estimated to be 5.00% over 1993 actual expenses. However, as shown in Exhibit D, the Debtor’s projected 1994 operating expenses (excluding property taxes, the Partnership Management Fee and the Property Management Fee, which is based on gross revenues) are 1.84% lower than 1993 actual operating expenses (5% lower if property taxes and property management fees are included). (b) Revenue Inflation Rates In the Disclosure Statement Exhibit D, the Debtor does not state a revenue inflation rate for 1994. The calculated revenue inflation rate on Effective Gross Income for 1994, as shown in Exhibit D, is projected to be 6.03% over 1993 actual Effective Gross Income. While the Debtor states in the Disclosure Statement that income is projected to increase 4% over 1994 projected income and 5% for 1996–1998, the increase in per unit rental rates per the Debtor’s cash flows for the years 1995 through 1996 ranges from 3.98% to 4.79%. Even though the Debtor has utilized lower increases in the rental rates than stated, these rates of growth appear to be unfounded based upon historical data available. The subject property’s quoted gross rental rates as of March 1994 have declined from the rental rates in March 1990. In fact, the net rental revenues have decreased from $516,147 in 1991 to $505,710 in 1993. Adjusting the Debtor’s cash flows to reflect his stated inflation rates of 5% in 1994 over actual expenses, 4% in 1995 and 5% for 1996–1998 significantly impacts the total net cash flows. Exhibit E is similar to the cash flows presented in Exhibit C except for the inflation rates referred to above. This adjustment causes a significant decrease in cash flows. The total cash flows from 1994 through 1998 are $23,492 assuming the Debtor’s proposed loan and interest rate and a negative $135,056 assuming the Creditor’s proposed loan and the Debtor’s proposed

896


interest rate. UTILIZING THE DEBTOR’S OWN STATED INFLATION RATES, THE TOTAL NET CASH FLOW FOR THE PERIOD JULY 1, 1994 THROUGH DECEMBER 31, 1998 DECREASES UNDER THE DEBTOR’S PROPOSED LOAN BY $58,584 TO $23,492 WHILE UNDER THE CREDITOR’S PROPOSED LOAN THE NET CASH FLOW DECREASES BY $58,584 TO A NEGATIVE $135,056. 20. As previously stated, the Debtor’s assumed inflation rates of 5% appear unreasonable and unfounded. Exhibit F is similar to the cash flows presented in Exhibit C except the revenue and expense inflation rates are adjusted for 1994 to reflect a 3% increase over 1993 actual revenues and expenses (excluding property taxes) with increases in 1995 through 1998 of 3% over the previous years. ADJUSTING THE INFLATION RATES TO 3% IN THE DEBTOR’S OPERATING CASH FLOW PROJECTIONS, THE PROPERTY PRODUCES NEGATIVE CASH FLOWS DURING THE PERIOD 1994–1998. The total net cash flows for the period July 1, 1994 through December 31, 1998 are a negative $344 assuming the Debtor’s proposed loan and a negative $158,893 assuming the Creditor’s proposed loan. PW Projected COFI Rate and Market Rate of Interest 21. The cash flows presented in Exhibit G are prepared utilizing the Debtors’ operating projections, adjusted for the errors described in Paragraph 15 above, with two changes—the COFI rate during the period of the Plan and an appropriate margin over COFI. PW has prepared an analysis of the appropriate margin over COFI based upon Villa Diablo, presented in paragraphs 29 through 44 below, in which I have concluded that the appropriate margin is no less than 4.75%. The cash flows in Exhibit G are prepared with a margin of 4.75% over COFI and the following PW projected COFI rates, based upon PW’s analysis performed in paragraphs 25 through 28 below (as compared to rates used by the Debtor):

1994 1995 1996 1997 1998

PW

Debtor

3.93% 4.43% 4.93% 5.43% 5.93%

3.85% 3.85% 5.00% 5.50% 6.00%

∗

Reflects estimated average rate for the period July 1, 1994 through December 31, 1994.

22. As shown in Exhibit G, the Debtor’s operating cash flow projections, adjusted as described in paragraph 15 above and utilizing the PW projected COFI rates and margin outlined in paragraph 21 above, PRODUCE A NEGATIVE NET CASH FLOW UNDER BOTH THE DEBTOR’S PROPOSED LOAN AND THE CREDITOR’S PROPOSED LOAN IN EACH OF THE YEARS OF THE PLAN. The net cash flows using the Debtor’s

11.1

897


inflation rates and the Creditor’s interest rates produces a negative cash flow of $167,433 assuming the Debtor’s loan and a negative cash flow of $394,322 assuming the Creditor’s loan. 23. Incorporating a more reasonable inflation rate of 3% for all years in the Plan and utilizing the Debtor’s operating assumptions, adjusted only for the objective errors described in paragraph 15, and my opinion of the projected COFI rate and appropriate margin, the property cash flows are significantly negative. As shown in Exhibit H, the total net cash flows are a NEGATIVE $249,851 assuming the Debtor’s proposed loan and a NEGATIVE $476,740 assuming the Creditor’s proposed loan. 24. The table below summarizes the five financial analyses PW has performed based upon the inflation and interest rate assumptions utilized: Net Cash Flow 1994–1998 Inflation Rate Assumptions

COFI and Margin Assumptions

Varies∗ 5% 3% Varies∗ 3%

Debtor Debtor Debtor Creditor Creditor

Debtor Proposed Loan

Creditor Proposed Loan

Exhibit Reference

$82,076 $23,492 ($3441) ($167,433) ($249,851)

($76,473) ($135,056) ($158,893) ($394,322) ($476,7401

C E F G H

∗

The inflation rates for revenues and expenses vary by line item and for each year in the Debtor’s cash flow projections in Disclosure Statement Exhibit D.

Eleventh District Cost of Funds Index 25. Under the Plan, the Debtor is obligated to pay interest to Glendale on its secured claim at a rate which is based on the Eleventh District Cost of Funds Index (“COFI”). This is a variable interest rate index and it changes monthly. In the Debtor’s cash flows, the Debtor has projected the following COFI rates for each of the years in the Plan: 1994 1995 1996 1997 1998

3.85% 3.85% 5.00% 5.50% 6.00%

26. As shown in Exhibit I-1, COFI has changed by more than 0.50% in every year except three over the past thirteen years, and the average rate of change has been 1.02% per annum. Thus our projected change of 0.50% per annum is even less than historical expectations. The above estimates assume that the average COFI rate for the period July 1, 1994 through December 31, 1994 increases 0.25% from its rate as of March 1994 of 3.68%, then increases by 0.50% each year thereafter. Also, by

898


1998 we are assuming a rate of just 5.93%, which is comparable to the Debtor’s projected COFI rate. 27. COFI is a “lagging” rate, that is, changes in the COFI rate usually lag behind changes in general market interest rates by three to six months. Thus forecasting the future COFI rate is not simply guesswork—it is a function of recent historical and current rates of interest. The federal government has recently increased the Federal Funds rate two times, each by 0.25%, for a total increase in the Federal Funds rate of 0.50% in the past few months. As shown in Exhibit I-2, yields on one year Treasury Notes, reflecting what has happened to interest rates in general, have increased from 3.22% to 4.82% during the period September 1993 to April 5, 1994. Because COFI is a lagging rate, increases in the market rates of interest have not yet been reflected by increases in the COFI rate. As shown in Exhibit I-2, the COFI rate has decreased from 3.88% to 3.68% during the period September 1993 through March 1994. 28. Exhibit I-3 presents a historical summary of the COFI rate from 1980 through 1993. From 1980 through 1993, the average COFI rate for each year ranged from a low of 4.12% to a high of 11.90%. The COFI rate as of March 1994 was 3.68%, its lowest rate since the Index was first promulgated thirteen years ago. Again, the rate as of March 1994 does not reflect the increases in interest rates which have recently occurred. Nonetheless, the Debtor assumes that the COFI rate will remain fixed at 3.85% for the years 1994 and 1995. Based upon the increases in market interest rates since October 1993, it is not reasonable to project that the COFI rate will stay at these historically all-time low rates throughout the years 1994 and 1995. Market Interest Rate for Loan Proposed in Debtor’s Plan 29. Under the Plan proposed by the Debtor, interest is to be paid to Glendale on its secured claim based upon the COFI rate plus a “margin.” The Debtor proposes a margin of 2.25%. This margin is insufficient to compensate Glendale for its risk and therefore does not provide Glendale with the present value of its claim, as fully described below. 30. In Villa Diablo Associates, 156 B.R. 650 (Bankr. N.D. Cal. 1993), the court held that “the Ninth Circuit has specifically approved the formula approach to determine the current market interest rate for similar loans in the geographical area based upon evidence regarding such rates. From that evidence the court should evaluate the nature and quality of the collateral, the loan to value ratio, the debt coverage ratio, and other relevant risk factors to determine an interest rate the market would assign to the subject loan.” I was the interest rate expert for the prevailing Creditor, Citicorp, in the Villa Diablo case. 31. Exhibit J presents a summary of the formula approach to interest rate derivation as applied by the court in Villa Diablo and as I have applied this methodology to the instant matter. The formula approach begins with the establishment of a “base rate” utilizing the rate on treasury obligations, the prime rate, or some other established index. Similar to the Villa Diablo case, the Debtor proposes to use COFI as its “base

11.1

899


rate.” The COFI rate as of March 1994 was 3.68%. Once the “base rate” is established, it is then adjusted based upon several factors relating to the nature of the loan, the security, and the risk of default. 32. “Center of Gravity”: As stated in Villa Diablo, “this factor examines the manner in which the marketplace structures loans in similar situations, that is, for similar types of properties without taking into consideration the borrower’s status as a Chapter 11 debtor. Stated another way, has the debtor proposed a loan structure consistent with the practices in the market-place? . . . In examining such information, one court sought what is referred to as the “center of gravity” of the commercial real estate loan market. In re Orosco, 77 B.R. 246, 253 (Bankr.N.D.Cal. 1987).” 33. We have performed a survey of five Southern California savings and loan associations regarding the criteria for financing a loan for a property similar to the subject property. A list of the S&L’s contacted is attached hereto as Exhibit K, which list includes the three largest S&L’s in California. Based upon my knowledge and confirmed by our survey, the most likely source of COFI financing for the property is a savings and loan association. The current loan programs offered by these associations generally contained the following underwriting standards: Maximum loan-to-value (“LTV”) Interest rate Minimum debt-service coverage ratio (“DSCR”) Amortization period

65–70% COFI + 2.50% 1.25 30 years

The loan must satisfy the most stringent of the LTV or DSCR criteria, i.e., a lender will loan the lower of the amount permitted by its LTV or DSCR criteria. 34. Based upon my experience and the survey performed by PW, the “center of gravity” for a commercially available loan on a large multifamily property is COFI plus 2.50%. The COFI rate as of March 1994 was 3.68%, therefore the current “center of gravity” for a commercially available loan conforming to the above-described underwriting standards for a property similar to the subject is approximately 6.18%. This is the current rate that would likely be offered a qualified borrower for a similar property having a 65–70% LTV, and a debt coverage ratio of approximately 1.25. Factors Affecting the Base Rate or “Center of Gravity” 35. Whether loan is adequately secured: In the Villa Diablo case, the court stated, “the ‘center of gravity’ rate . . . assumes a loan to value ratio of 70%. This 30% equity cushion protects the lender against the expenses necessarily incurred in the event it must foreclose on the property. The court recognizes that if [the] claim is split into allowed secured and unsecured claims, the allowed secured claim will be fully collateralized at the time of confirmation. However, confirmation does not guarantee performance under the plan. There is at least some risk of future default which would result in [the secured creditor’s] incurring certain costs

900

36.

37.

38.

39.

40.


to realize on its collateral. This could result in [the secured creditor’s] recovery being less than 100% of its allowed secured claim.” The court found that this risk of less than full recovery required an upward adjustment of 100 basis points. As the loan-to-value in this case is very similar to the Villa Diablo case, it is my opinion that an upward adjustment of 75 basis points is appropriate for this risk factor. The quality of the security: As stated by Villa Diablo, “this factor examines the quality of the collateral for the loan not only at the present time, but prospectively during the term of the plan . . . When examining the quality of the security for a loan, underwriters may add or subtract from 25 to 50 basis points to the initial rate which the court has characterized as being at the ‘center of gravity’ of the real estate loan market.” The property is located near Camp Pendleton, a marine base located at the northern end of San Diego County. Due to the subject property’s proximity to the base, a significant portion of the tenants are military personnel. In 1993, Camp Pendleton completed construction of approximately 811 housing units. As a result of the completion of the units in 1993, the vacancy rate at the subject property increased to 20% per the Debtor’s appraisal. To date in 1994 Camp Pendleton has completed an additional 400 units, awarded a contract to build 374 units which are expected to be completed in March 1995 and is planning an additional 196 units for completion in 1996. The continued expansion of housing facilities at Camp Pendleton will impact the Debtor’s ability to maintain occupancy and increase rental rates. The subject property, which opened in 1975, is considered of average quality while “physical inspection of the site revealed that physically, the quality of construction as well as its overall condition showed signs of deferred maintenance” (Debtor’s appraisal, page reference not available). Excluding the subject property, there are approximately 896 units in the market area. Of this, 574 units are much newer and more modern than the subject, having been built since 1985. The Villa Diablo court added 50 basis points for a property which was located in a neighborhood that has had high levels of crime and drug use and concluded that the overall quality of the security was average to poor. In view of the fact that the subject property is vulnerable to outside influences and is relatively inferior to its competition, I add 25 basis points. The risk of default: (a) Motivation to perform: The Villa Diablo court found that where an owner does not have significant equity to protect, there may be a lack of motivation to perform over time. The Villa Diablo court found grounds for an upward adjustment of 75 basis points. Similarly, in the instant case, there is virtually no equity in the property. Under the Debtor’s more favorable proposed loan, the loan-to-value ratio is 93% and the General Partner will have no continuing equity interest in the partnership. In addition, apart from the default that triggered the current bankruptcy, the Debtor has had a series of defaults and prior breaches on this loan. This Debtor has a poor

11.1


901

history of past performance and there is minimal motivation to perform in the future. It is my opinion that there should be an upward adjustment of 50 basis points. (b) Insufficient debt-service coverage: The Villa Diablo court found that the possibility of cash shortfalls in the future due to inadequate cash flow to service the debt required an upward adjustment of 125 basis points. In the Villa Diablo case, the property’s debt-service coverage ratio was approximately 1.00. The debt-service coverage ratio is similar in the instant case, after taking into consideration adjustments to the Debtor’s operating cash flows as described in paragraph 15 above and adjustments to the margin on the loan as described in paragraph 21 above. In addition, the property’s ability to produce a positive cash flow is highly sensitive to projected inflation and interest rates, rental rates have not increased for the past four years and income from the property has been less than projected (see Debtor’s projected 1993 Net Operating Income versus actual). It is my opinion that there should be an upward adjustment of 125 basis points. (c) Effect of confirmation process: As stated in the Villa Diablo opinion; “the confirmation process . . . scrutinizes the risks in a manner similar to that of an underwriter. Because of these stringent requirements . . . the risk of default after confirmation is not as great. . . .” In light of the protection afforded by the confirmation process, the court required a downward adjustment of 50 basis points, which I have reflected in my calculation. 41. Based upon the above calculations utilizing the formula approach (Villa Diablo), it is my opinion that the appropriate margin for either the Debtor’s or Creditor’s proposed loan is 4.75% over the proposed Eleventh District Cost of Funds Index base rate, for a current interest rate of 8.43%. Weighted Average Cost of Capital Approach to Market Interest Rate 42. A second approach to establishing an appropriate interest rate can be calculated by determining the weighted average cost of capital (“WACC”). This approach also starts with the “Center of Gravity” (COFI plus 2.50%) for a loan customarily available in the commercial real estate market. As stated in paragraph 33, the current terms for a loan for a property similar to the subject limit the loan amount to 70% of value. In order to calculate the WACC an appropriate “cost of capital” for the remaining 30% must be ascertained. This 30% is essentially the equity position—it is the investment above that which market lenders are willing to lend. A December 1993 Korpacz survey of apartment investors indicates that the required unleveraged internal rate of return is 10% to 15% with an average of 11.6%. In a leveraged acquisition, similar to the instant case, the required leveraged internal rate of return is higher than required in an unleveraged acquisition. Based upon the Korpacz survey and my opinion, the appropriate internal rate of return required by an investor on this leveraged element is from 15% to 20%.

902


43. Based upon the current COFI rate of 3.68% and the appropriate margin for a 70% loan-to-value loan, the current interest rate for the “debt” portion is 6.18%. Therefore, based upon the WACC approach, the appropriate interest rate is calculated as follows: Required Rate of Return (%)

Percent of Value 70% 30% Weighted Average Cost of Capital

∗ ∗

6.18% 15.00%

= =

4.33% 4.50% 8.83%

44. Utilizing a required rate of return on the equity portion of 20% instead of 15%, the weighted average cost of capital is 10.33%. This indicates that the margin should be 5.15% to 6.65% over COFI. Although these rates exceed that derived by the Villa Diablo approach, they support (and in fact show how conservative is) my Villa Diablo formula approach with its concluded margin of 4.75% over COFI. Clearly, the Villa Diablo approach is the floor for the appropriate interest rate and one would conclude that the WACC approach would be the ceiling. I declare under penalty of perjury of the laws of the United States of America that the foregoing is true and correct. Executed this 8th day of April, 1994, at Los Angeles, California.

M. Freddie Reiss

11.2

11.2

Liquidation Value Under Chapter 7

903


Objective. Section 11.11 of Volume 1 of Bankruptcy and Insolvency Accounting explains that the liquidation value of the business entails a projection of asset recoveries net of estimated expenses. The following two examples illustrate liquidation analysis. The first (a) is a liquidation analysis as presented in the disclosure statement of Revco; the process illustrated was used by Arthur Andersen in estimating liquidation values for Revco. The second (b), a liquidation analysis for Geneva Steel, was an excerpt from Geneva Steel’s disclosure statement. (a) Liquidation Analysis for Revco Topics covered are:

r Description of the liquidation that appeared in the text of the disclosure statement

r Financial advisor or accountant’s report issued on the liquidation analysis r Liquidation values r Notes to the liquidation analysis During 1990 the Revco Debtors sold approximately 700 stores in 18 states. The gross proceeds of the sales of those stores were approximately $182,000,000. (See Section V.A.4.) Based on that experience, it is the Revco Debtors’ opinion that a liquidation of the Revco Debtors’ remaining stores and other assets under chapter 7 of the Bankruptcy Code would produce proceeds substantially less than the going-concern value of the Reorganized Companies. The “liquidation value” of the Revco Debtors would consist primarily of the proceeds from a sale of the Revco Debtors’ assets by a chapter 7 trustee and any recoveries by the Revco Debtors in the LBO Litigation. The proceeds from a chapter 7 liquidation that would be available to all holders of unsecured claims would be reduced by the costs and expenses of liquidation and litigation, post-petition debt secured by superpriority liens, and secured claims that did not lose their security in the LBO Litigation to the extent of the value of their collateral. Costs of liquidation under chapter 7 of the Bankruptcy Code would include the fees of a trustee and of counsel and other professionals (including financial advisors and accountants) retained by the trustee, asset disposition expenses, and claims arising from the operation of the Revco Debtors’ business during the chapter 7 case. The liquidation itself could trigger certain priority claims, such as claims for severance pay, and could accelerate other priority payments that otherwise would be due in the ordinary course of business. Priority claims would be paid in full out of the liquidation proceeds before the balance would be made available to pay unsecured claims or to make any distributions in respect of interests. A chapter 7 liquidation analysis is set forth in Exhibit C to this Disclosure Statement. This analysis is provided solely to disclose to holders of claims and interests the effects of a hypothetical chapter 7 liquidation of the Revco Debtors, subject to the assumptions set forth in the analysis. The analysis

904


makes no allowance for the LBO Litigation or potential preference claims. In confirming the Revco Plan, the Bankruptcy Court will decide whether the Revco Plan provides a greater recovery for creditors and interest holders than a liquidation of the Revco Debtors under chapter 7. In doing so, the Bankruptcy Court will make its own finding as to the liquidation value of the Revco Debtors.

(b) Report of Independent Public Accountants ARTHUR ANDERSEN & CO. 1345 Avenue of the Americas New York, New York 10105 To Revco D.S., Inc. and Subsidiaries: We have compiled the accompanying Liquidation Analysis (the “Analysis”) for Revco D.S., Inc., M.S.C. of East St. Louis, Inc., M.S.C. of East St. Louis (a partnership), Pharmacy Holding, Inc., Retrac, Inc., Revco Convalescent Aids, Inc., Revco Discount Drug Centers, Inc. (a Michigan corporation), Revco Discount Drug Centers, Inc. (an Ohio corporation), Revco Discount Drug Centers of Cincinnati, Inc., SOPCO, Inc., White Cross Stores, Inc., No. 14 and Bunin Enterprises, Inc. (the “Revco Debtors”). The Analysis presents management’s estimated net value of the Revco Debtors’ assets, if the Revco Debtors were to be liquidated under the provisions of chapter 7 of the United States Bankruptcy Code, and the application of net proceeds of this liquidation among the Revco Debtors’ creditors. In order to confirm a plan of reorganization the Bankruptcy Court must independently determine that the plan is in the best interest of all classes of creditors and equity security holders impaired by the plan. The “best interests” test requires that the Bankruptcy Court find that the plan provides to each member of each impaired class of claims and interests a recovery which has a value at least equal to the value of the distribution which each such person would receive if the Debtors were liquidated under chapter 7 of the United States Bankruptcy Code. The Analysis and this report were prepared to assist the Bankruptcy Court in making this determination. They should not be used for any other purpose. The presentation utilized in the Analysis is not designed for those who are not informed about such matters. A Compilation is limited to presenting information that is the representation of management and does not include an evaluation of the support for the underlying assumptions. We have not audited the Analysis and, accordingly, do not express an opinion or any other form of assurance on the estimates and assumptions that, although considered reasonable by management, are inherently subject to significant uncertainties and contingencies beyond the control of management. Accordingly, there can be no assurance that the results shown would be realized if the Revco Debtors were liquidated and actual results in such a case could vary materially from those presented. If actual results were lower than those shown, or if the assumptions used in formulating the Analysis were not realized, distributions to each member of each class of claims

11.2

905


could be adversely affected. We have no responsibility to update this report for events and circumstances occurring after the date of this report. ARTHUR ANDERSEN & CO. New York, New York February 13, 1992 (c) Liquidation Analysis Revco D.S., Inc and Subsidiaries Liquidation Analysis (in thousands) As stated in Section X.B of the Disclosure Statement, a liquidation analysis has been prepared to indicate the values which may be obtained by impaired Classes of Claims and impaired Classes of Interests if the assets of the Company were sold pursuant to a chapter 7 liquidation, as an alternative to continued operation of the business and payments under the Plan. The issue of potential recoveries resulting from potential preference claims, fraudulent conveyance litigation, the Salomon claims and the Dworkin Unwind Claims have not been addressed in this Analysis.

Note References I. STATEMENT OF ASSETS Cash Accounts receivable Inventories Prepaid expenses Assets subject to reorganization Property, equipment and leasehold improvements, net Leasehold interests, net Excess of cost over fair value of net assets acquired, net Other assets Total Assets Other Proceeds: Interest Income Costs Associated with Liquidation: Other admin./corp. expenses Trustee fee Net Liquidation Proceeds:

1 2 3 4

Projected Book Value as of May 2, 1992 (Unaudited)

5

162,028 42,615 402,051 10,459 0 177,242

$162,028 28,203 277,728 492 0 78,206

6 7

101,884 534,368

695 0

8

16,563 $1,447,210

11,821 559,173

9 10

$

Estimated Liquidation Value (Unaudited)

12,340

(26,745) (5,448) $539,321

906


II. ALLOCATION OF NET LIQUIDATION PROCEEDS TO SECURED AND PRIORITY CLAIMS (Note 11) Net Liquidation Proceeds:

$ 539,321 Estimated Allowable Claims

Post-petition Chapter 11 Debt Secured by Superpriority Lien: DIP Administrative Expenses—Estimated Carve Out Bank Debt Trade Payables Total Post-petition Secured Administrative Expenses Net Liquidation Proceeds after Post-petition Chapter 11 Debt Secured by Superpriority Lien Class 2—Secured IRB Financings Net Liquidation Proceeds after Secured IRB Financings Pre-petition Secured Debt (Subject to Collateral Trust): Class 3—Bank Term Loan Bank Fees & Expenses Class 4—Secured Debentures Class 6—Schein Obligation Total Pre-petition Secured Debt (Subject to Collateral Trust) Short Fall on Pre-petition Secured Debt (Subject to Collateral Trust) Less Priority Claims: Chapter 11 Administrative Claims (Unsecured) Reclamation Claims Tax Claims Short Fall on Pre-petition Secured Debt (Subject to Collateral Trust) and Priority Claims III. ALLOCATION OF NET LIQUIDATION PROCEEDS TO UNSECURED CLAIMS (Note 12) Short Fall on Pre-petition Secured Debt (Subject to Collateral Trust) and Priority Claims

$ 1,000

21,750 110,676 133,426 405,895

3,095 402,800

312,052 6,000 131,534 0 449,586 (46,786)

$ 78,729 16,945 18,288 113,962 $(160,748)

$(160,748)

907

0 0 $0 $0

0 0 $0 $0

0 0 $0 $0

$0 0

$0

Adjusted Distribution

0

$0

Effect of Subordination

Short Fall on Pre-petition Secured Debt (Subject to Collateral Trust), Priority Claims and Unsecured Claims The accompanying notes are an integral part of this statement.

Class 7—Unsecured 12.125% Note Claims Class 8—General Unsecured Claims Class 10—Senior Subordinated Note Claim Class 11—Subordinated 1996 Note Claims Class 12—Junior Subordinated Note Claims Totals

Claim Classification

Parl Passu Distribution

101,474

227,301

432,521

189,161

$ 51,970

Estimated Allowable Claims

0.0%

0.0%

0.0%

0.0%

0.0%

Recovery %

$(1,163,175)

(101,474)

(227,301)

(432,521)

(189,161)

$(51,970)

Shortfall (If Applicable)

908


(d) Notes to Liquidation Analysis REVCO D.S., INC. AND SUBSIDIARIES In conjunction with developing the Plan included in the Disclosure Statement to which this is an exhibit, management has prepared a Liquidation Analysis (the “Analysis”) which may be helpful to holders of claims and interests in reaching their determination of whether to accept or reject the Plan. The Analysis is based on the assumptions discussed below. The Analysis reflects the Revco Debtors’ estimates of the proceeds they would realize if the Revco Debtors were to be liquidated in accordance with chapter 7 of the Bankruptcy Code. The Analysis is based on Revco’s projected assets as of May 2, 1992. Underlying the Analysis are a number of estimates and assumptions that, although developed and considered reasonable by management, are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of Revco and its management and upon assumptions with respect to liquidation decisions which could be subject to change. Accordingly, there can be no assurance that the values reflected in the Analysis would be realized if the Revco Debtors were, in fact, to undergo such a liquidation. The issue of potential recoveries resulting from potential preference claims, fraudulent conveyance litigation, the Salomon Claims and the Dworkin Unwind Claims has not been addressed in the Analysis. The Analysis assumes a liquidation period of nine months during which a three phase approach to the liquidation will occur. Phase I will entail a two month detailed study and market analysis to determine which stores could be sold on a going concern basis to buyers willing to operate them. The stores to be sold intact would be identified based on performance, a review of the stores’ regional market and the availability of competitive buyers. Phase II would entail a five month period in which the store sale program would take place. The proceeds to be realized on assets from the sale of these stores are based on the factors mentioned above and Revco’s historical experience with its Downsizing Program (see section V.A.4). The Analysis assumes that the liquidation proceeds from stores not identified to be sold on a going concern basis will be realized in a going out of business (“G.O.B.”) sale. At the beginning of Phase II, an eight week G.O.B. program would be instituted to sell inventories and shut down store operations of those stores not in the store sale program. Phase III would entail a two month period after the completion of the store sale program and the G.O.B. program. This period would be needed for an orderly liquidation of all other assets. The Analysis assumes that the stores in the store sale program will be operated on a breakeven cash flow basis during the liquidation period until they are sold. Stores not in the store sale program are assumed to be operated on a breakeven cash flow basis until the G.O.B. program is instituted. Projected negative cash flow incurred by these stores during the G.O.B. sale have been estimated and netted against the proceeds from inventory sales. However, management believes that cash flow could potentially be impaired due to: (i) an

11.2


909

adverse impact on the customers’ perceptions, (ii) disruptions in the employee base, (iii) a loss of vendor support and/or change in terms and promotional programs and (iv) an adverse affect on the relationship with third party carriers. If these and similar factors adversely affect interim operations, negative cash flows could reduce the net liquidation proceeds calculated in the Analysis. Costs that have been specifically identified to the liquidation of individual assets have been netted against their estimated gross liquidation value. All other costs associated with the liquidation are included in “Costs Associated with Liquidation” (see Note 10). In preparing the Analysis, management has considered the potential recoveries resulting from turning virtually all operations over to a liquidator; however, based upon management’s experience in its Downsizing Program and other factors, the approach described above has been estimated to yield greater net proceeds to the estate. The following notes describe the significant assumptions, developed by management, that are reflected in the Analysis. Note 1—Cash The Analysis assumes that subsequent operations during the liquidation period will not affect cash available for distribution except as reflected by the net proceeds generated by liquidating non-cash assets. Note 2—Accounts Receivable Accounts Receivable consists primarily of third party receivables, promotional advertising receivables and insurance claims outstanding. The recovery of third party receivables is based on management’s estimate of collection, given such factors as the aging of the receivables, the time and effort necessary to inquire, research and rebill disputed items and the disruption in Revco personnel available to actively investigate and resolve the accounts. Amounts receivable for promotional advertising efforts and manufacturers’ coupons have been offset against related post-petition payables reflected in the Analysis. The estimate shown represents gross proceeds. Personnel and other expenses incurred to collect the accounts receivable are reflected in the administrative and corporate costs associated with liquidation (see Note 10). Note 3—Inventories The sale of stores on a going concern basis should provide for the disposition of 62% of the over the counter (“OTC”) inventory. The remaining OTC inventory on hand is assumed to be disposed of either under G.O.B. sales, sold to a wholesaler or discarded. Accordingly, for stores included in the G.O.B. program, significant price reductions and promotional advertising are believed to be required to stimulate consumer interest to increase the movement of goods to as much as 2 times current sales volume during the G.O.B. period. The sale of stores on a going concern basis should provide for the disposition of 51% of the pharmaceutical (“Rx”) inventory. The remaining Rx inventory on hand is assumed to be disposed of either under G.O.B. sales, sold to a specialty wholesaler or discarded. Sales volume for Rx inventories is expected

910


to be less sensitive to discount pricing than OTC inventories. No discounts are assumed to be taken on Rx inventory during the G.O.B. program because of pricing constraints and general demand inelasticity. Greater than normal demand could be stimulated for certain maintenance type drugs, but generally, the G.O.B. program is expected to cause a decrease in script count as third party business is assumed to shift away from Revco upon the announcement of the liquidation. Certain operating expenses have been netted against the proceeds from the liquidation of inventories under a G.O.B. sale in the Analysis. These operating expenses are assumed to be incurred only for the stores participating in the G.O.B. program. Store operating expenses, including transportation and distribution costs, are estimated to continue for the liquidation period with certain reductions particularly as such costs relate to operations covered under the G.O.B. program. Retention of personnel through the store sale and the G.O.B. is critical, especially the retention of pharmacists, store and district managers. The Analysis assumes that these employees will be given a bonus as an incentive to stay during the liquidation period. Note 4—Prepaid Expenses Amounts representing prepayments of rent have been offset against store expenses during the liquidation period. Nominal value has been attributed to remaining prepaid expenses in the Analysis to the extent that they represent salable assets. Note 5—Property, Equipment and Leasehold Improvements, Net Property, equipment and leasehold improvements include warehouse structures, land, store fixtures, leasehold improvements, furniture and other equipment. Values for warehouse structures, owned stores and land are based on appraisals and in-house studies which were reviewed and updated to reflect market conditions. The orderly liquidation value is net of the deduction of costs associated with the sale of these assets. The proceeds from store fixtures sold as part of the sale of stores on a going concern basis are estimated based on Revco’s experience with its Downsizing Program. The remaining store fixtures are assumed to have no value. Office fixtures include fixtures in the Twinsburg headquarters facility and Point of Sale and Prescription Access Link hardware equipment. Twinsburg facility fixtures values are estimated based on an appraisal. Management believes that a value can be assigned to the hardware and software systems which represents management’s estimate of what a third party would be willing to pay for Revco’s hardware and software in lieu of acquiring/developing similar assets. Warehouse equipment values are based on appraisals. The appraisals were based on a measure of functional obsolescence and depreciation factors related to technological advances and physical condition. Prescription files are valued under the assumption that in one half of Revco’s local store markets there is sufficient competition among two or more other drug stores for one of the other drug stores to purchase Revco’s

11.2


911

prescription files. One half of the stores that are not sold on a going concern basis are assumed to recover proceeds from the sale of their prescription files to competitors based on prior store closing experiences. The estimated proceeds to be derived from the sale of property have been reduced for an allocation of the cost of maintaining the Corporate Real Estate Department through the anticipated nine month disposition period to coordinate the sales efforts and process paperwork.

Note 6—Leasehold Interests, Net Leasehold interests represent the present value of leases below current market rate, discounted at 15% over the remaining lease life through all option periods. Market value was determined through the appraisal of a statistically selected sample of leases and the results were projected to all leases. It is assumed that proceeds will be recovered from the sale of leasehold interests only for those stores which are not sold as part of the store sales program. The stores sold as part of the store sales program are assumed to have no separate recovery related to their leasehold interests as the value of recovery is assumed to be included in the proceeds received from the remaining assets sold with the store. The estimated proceeds to be derived from the sale of leasehold interests has been reduced for an allocation of the cost of maintaining the Corporate Real Estate Department through the anticipated nine month disposition period to coordinate the sales efforts and handle paperwork. Proceeds from the transfer of the leasehold interests would also be reduced by rent and other carrying costs for the period until disposition.

Note 7—Excess of Cost Over Fair Value of Net Assets Acquired, Net This category represents the goodwill recorded as a result of the leveraged buyout transaction and is assumed to have no value in a liquidation.

Note 8—Other Assets This includes investments, the cash surrender value of officer’s life insurance, and other long term assets. The estimated liquidation value of the Revco’s investment in its captive insurance subsidiary, Twinsurance, is based upon the retained earnings of Twinsurance, which are legally available for dividends to Revco. Certificates of deposit included in investments is specifically pledged for possible claims against pre-LBO directors and officers. Accordingly, Revco considers the investment to have no immediate liquidation value. The liquidation value of the cash surrender value of officer’s life insurance represents the value of key person life insurance policies, net of outstanding loans. Other long term assets include the estimated recovery on utility and liquor deposits and pharmacy student loans.

912


Note 9—Interest Income The payout to the Revco’s creditors is anticipated to occur as quickly as possible. Certain liquidation proceeds will be realized during the store sale program and G.O.B. program, while others will be realized over the balance of the nine month liquidation period. As assets are liquidated the Analysis assumes the proceeds will be invested at an average return of 5%. Note 10—Other Costs Associated with Liquidation These expenses represent the other costs associated with various corporate functions, such as, accounting, tax and risk management that will remain operational throughout the liquidation period, along with other chapter 7 administrative expenses. All functions are assumed to be entirely completed by the ninth month. Certain departments will operate at full strength for a period after the store sales and the G.O.B., phasing out as they complete their duties. Other departments are assumed to be downsized and/or eliminated earlier during the liquidation period. In accordance with section 326 of the Bankruptcy Code, the statutory maximum fee allowed to a Trustee in a chapter 7 liquidation is 3% of monies disbursed. For the purposes of the Analysis, the Trustee Fee is based on 1% of the estimated net liquidation proceeds after administrative/corporate expenses. Note 11—Allocation of Net Liquidation Proceeds to Secured and Priority Claims The allocation of the net liquidation proceeds has been made in accordance with the priorities set forth in the Bankruptcy Code and in accordance with specific orders of the Bankruptcy Court in these cases as they relate to the treatment of certain post petition debt accorded superpriority lien status. The Estimated Allowable Claims are based on the Revco Debtors’ projected liabilities as of May 2, 1992. The Post Petition Chapter 11 Debt Secured by Superpriority Lien are only those debts that conform with the Order Approving Second Amendment to Stipulation and Agreement Regarding Debtor in Possession Financing, Use of Cash Collateral, and Adequate Protection entered on May 9, 1990. The Secured IRB Financings have been paid in full under the assumption that the value of their collateral exceeded the value of their claims. The Pre Petition Secured Debt (Subject to Collateral Trust) is that debt which is subject to the Collateral Trust Agreement. It is assumed that this debt would share in the proceeds on a pari passu basis. For purposes of this Analysis the value of the Schein Obligation has been estimated at $0 even though the obligation extends until 1996. The Priority claims consist of chapter 11 administrative claims (unsecured), reclamation claims and tax claims. The administrative claims include current liabilities, professional fees and an estimate of damages for the rejection of leases assumed by the Revco Debtors post-petition, which would not be sold as part of the store sale program. The amount of damages is based on the present value of rent less an estimate for mitigation.

11.2


913

Note 12—Allocation of Net Liquidation Proceeds to Unsecured Claims It is assumed that the allocation of net liquidation proceeds, if any, would be made in accordance with the priorities set forth in the Bankruptcy Code and in accordance with subordination contracts in these cases. The Estimated Allowable Claims are based on the Revco Debtors’ projected liabilities as of May 2, 1992. The Class 8 General Unsecured claims include estimates for additional claims that would arise upon conversion to a chapter 7 liquidation, such as damages of landlords for the rejection of leases. It is assumed that an initial distribution, if any, would be made pari passu to Classes 7, 8, 10, 11 and 12, that the Bankruptcy Court would enforce and strictly apply subordination rights and that the possible allocation of proceeds due to claims for post petition interest not accrued due to the bankruptcy filing is not addressed. The subordination rights assert that proceeds of the Subordinated Noteholders of Classes 10, 11 and 12, in that order, are subordinated to the Class 7 Unsecured 12.125% Noteholders until their claims are recovered 100% in the event that any liquidation proceeds from an initial distribution would not cover their claims. The Subordinated Noteholders of Class 10 Senior Subordinated Noteholders would then look to the Subordinated Noteholders of Classes 11 and 12.

(e) Liquidation Analysis for Geneva Steel Topics include:

r Estimation of net proceeds r Estimation of costs r Distribution of net proceeds under absolute priority rules

DISCLOSURE STATEMENT EXHIBIT 2 Liquidation Analysis As of October 31, 2000 a) Introduction The Liquidation Analysis was prepared using a valuation of Geneva’s projected assets as of October 31, 2000, and is based upon a number of estimates and assumptions which are inherently subject to significant uncertainties and contingencies beyond the control of Geneva. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE VALUES REFLECTED IN THE LIQUIDATION ANALYSIS WOULD BE REALIZED IF GENEVA WERE, IN FACT, TO UNDERGO SUCH A LIQUIDATION. ACTUAL RESULTS COULD VARY MATERIALLY FROM THOSE SHOWN HERE. A general summary of the assumptions used by management in preparing the Liquidation Analysis follows.

914


b) Estimate of Net Proceeds Estimates were made of the realizable cash proceeds from the liquidation of Geneva’s assets. The liquidation period is assumed to commence on October 31, 2000. Geneva’s fixed assets include liquid iron and steel production facilities, continuous caster, rolling mills, the pipe mill, support equipment, finishing facilities and working capital. Estimates of realizable value for Geneva’s fixed assets are based, in part, on an appraisal performed by MB Valuation Services Inc. dated March 2, 1999. The Liquidation Analysis assumes that in a chapter 7 liquidation Geneva’s fixed assets would have to be sold in pieces with no going concern value. Geneva has also obtained an appraisal of its fixed assets by Enterprise Appraisal Company dated December 2, 1999 that estimates both a fair market value in place and an orderly in-place sale value. The MB Valuation Services, Inc. appraisal also included an estimate of the value of Geneva’s fixed assets if sold in place. All of the estimated values based on either fair market value or an orderly in-place sale are higher than the liquidation value estimated by MB Valuation Services and utilized in the Liquidation Analysis. The Liquidation Analysis assumes that these values are not likely achievable in a chapter 7 liquidation. Estimates of realizable value for real estate are based on an appraisal by Free & Associates dated November 30, 1999. For any other assets, liquidation values are based on assumed recovery levels through a timely disposition. c) Estimate of Costs Estimated costs to liquidate Geneva’s assets include trustee fees, as well as legal and other professional expenses that such a trustee may incur. Additional expenses include obligations and unpaid expenses incurred by Geneva during the Case, such as compensation for attorneys, financial advisors, appraisers, accountants and other professionals, and costs and expenses of members of any statutory committee of unsecured creditors appointed by the U.S. Trustee. Moreover, additional claims would arise by reason of the breach or rejection of obligations incurred and executory contracts or leases entered into by Geneva both prior to and during the Case. d) Distribution of Net Proceeds Under Absolute Priority Rule The claims, expenses, fees and such other claims resulting from the liquidation of Geneva’s assets would be paid in full from the liquidation proceeds before the balance of those proceeds would be made available to pay chapter 11 priority and unsecured claims. Under the absolute priority rule, no junior creditor would receive any distribution until all senior creditors are paid in full, and no equity holder would receive any distribution until all creditors are paid in full. GENEVA HAS DETERMINED, AS SUMMARIZED ON THE FOLLOWING CHART, THAT CONFIRMATION OF THE PLAN WILL PROVIDE EACH CREDITOR AND EQUITY INTEREST HOLDER WITH A RECOVERY THAT IS NOT LESS THAN WOULD BE RECEIVED PURSUANT TO A LIQUIDATION OF GENEVA IN CHAPTER 7.

11.2

915


Summary of Recoveries Claim Description Congress Financial Facility Chapter 7 Liquidation Costs Chapter 11 Priority and Administrative Claims General Unsecured Claims Old Preferred Stock Interests Old Common Stock Interests

Plan

Liquidation

100% N/A 100% 27%–31% 0% 0%

100% 100% 76% 0% 0% 0%

The above chart does not consider that the value of any distributions from a liquidation may not be realized by holders of claims for a substantial period of time. THE LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS THAT MAY BE GENERATED AS A RESULT OF A HYPOTHETICAL LIQUIDATION OF THE ASSETS OF GENEVA. These values have not been subject to any review, compilation or audit by any independent accounting firm. The Liquidation Analysis includes a number of estimates and assumptions that are inherently subject to significant economic, competitive and operational uncertainties and contingencies beyond the control of Geneva. Therefore, there can be no assurance that the assumptions and estimates used in the Liquidation Analysis will be accurate or achieved or that the estimated proceeds from the liquidation will be realized. Similarly, the actual amounts of Claims could vary significantly from Geneva’s estimates. The Liquidation Analysis does not include liabilities that may arise as a result of litigation or other potential claims. Therefore, the actual liquidation value of Geneva could vary materially from the estimates provided herein.

916


LIQUIDATION ANALYSIS ($ in millions)

PROCEEDS FROM LIQUIDATION1 Property, Plant and Equipment Accounts Receivable Inventory Other Assets Proceeds available for distribution ALLOCATION OF PROCEEDS Chapter 11 Administrative and Priority Claims Congress Financial Facility Post-Petition Payables and Accrued Expenses Employee Severance Priority Tax Claims Total Administrative and Priority Claims Chapter 7 Liquidation Costs Liquidation Costs Total Liquidation Costs Proceeds available for payment of general unsecured claims General Unsecured Claims 9.5% Senior Notes 11.125% Senior Notes Accrued Interest General Unsecured Liabilities Potential Liquidation Unsecured Claims Total General Unsecured Claims Proceeds available for distribution to Preferred Equity Preferred Equity Pre-Petition Preferred Dividends Proceeds available for distribution to Common Equity

Oct 31, 2000 Estimated Balance (pre fresh start)

Estimated Recovery

Estimated Liquidation Proceeds

$353.9 67.9 62.1 16.4 $500.3

25.9% 85.0% 60.0% 0.0% 37.3%

$ 91.6 57.7 37.3 – $186.6

$ 97.5

100%

$ 97.5

46.8

75.9%

35.5

20.0 1.7

75.9% 75.9%

15.2 1.3

$166.0

90.1%

$149.5

$ 37.1 $ 37.1

100% 100%

$ 37.1 $ 37.1 $ 0

190.0 135.0 15.4 68.5

0% 0% 0% 0%

– – – –

6.7 415.6

0% 0%

– –

56.0 28.5

0% 0% 0%

– – –

1 Estimated proceeds are based on a liquidation appraisal by MB Valuation Services completed in March 1999. Such estimates assume that Geneva’s fixed assets are disassembled and sold through a liquidation sale. Such analysis assigns no going concern value to Geneva or its assets.

11.2

917


e) Footnotes to Liquidation Analysis 1. Plant and Equipment Plant and Equipment include liquid iron and steel production equipment, continuous caster, rolling mill equipment, the pipe mill and production support equipment. r Liquid Iron and Steel Production—Equipment includes a coke plant, ore handling and sintering facilities, three blast furnaces and a Q-BOP. r Continuous caster—Includes a ladle met facility and caster equipment. r Rolling Mills—Equipment includes soaking pits, 45” slabbing mill, 132” rolling mill, coiling facility, and certain equipment presently not in use such as the 40” blooming mill and a structural mill. r Production Support Equipment—Includes environment control equipment, cranes and hoists, utilities, roll grinding shop, maintenance/shop equipment, mobile equipment, railroad equipment, minor plant equipment, computer equipment, office equipment, foundry equipment, and spare parts. Estimates of realizable value for plant and equipment through a liquidation are based on an appraisal from MB Valuation Services dated March 2, 1999 as summarized below: Asset Category Liquid Iron and Steel Production Continuous Caster Rolling Mill Equipment Pipe Mill Equipment Support Equipment Total Appraised Value

Appraised Value $6.0 6.9 26.2 5.3 9.0 $53.2

2. Property Estimates of realizable value for Geneva’s real estate are based on an appraisal by Free Associates dated November 30, 1999. The recovery on property also includes an estimated liquidation value of water rights of $14 million. 3. Accounts Receivable Accounts receivable include primarily receivables from third parties that are generally received within the normal course of business operations. Based on Geneva’s estimates, the recovery of accounts receivable would be approximately 85%. 4. Inventory Inventory includes raw materials, finished goods and various operating supplies. Based on Geneva’s estimates, the recovery of inventory would be approximately 60%. 5. Other Current Assets Other current assets include deferred tax assets as well as prepaid expenses and a deferred debt asset. Based on Geneva’s estimates, there would be no recovery on these assets.

918


6. Chapter 11 Administrative and Priority Claims Chapter 11 administrative and priority claims include the Congress Financial Facility, post-petition operating payables as well as employee claims and other accruals. r Congress Financial Facility—The Congress Financial Facility is a line of credit with Congress Financial with availability based on a working capital borrowing base secured by inventory, accounts receivable and Geneva’s fixed assets. r Severance—Severance represents Geneva’s estimate of all severance obligations, including obligations under the Workers Adjustment Restraining Notification (WARN) Act. r Post-petition payables and accrued expenses—Post-petition payables and accrued expenses incurred during the chapter 11 case include unpaid professional fees as well as payables incurred postpetition in the normal course of business. 7. Liquidation Costs Liquidation costs include trustee fees and selling costs as well as various employee, environmental, and general and administrative costs associated with the wind down of business operations. Trustee Fees Trustee fees are estimated at $1.8 million. Selling Costs Selling costs represent the professional fees and commissions related to the liquidation of assets. Based on Geneva’s review of the nature of these costs and the outcomes of similar liquidations, selling costs are estimated at $6.2 million over the course of the liquidation period. Environmental Costs Geneva has estimated the costs of the environmental cleanup that would be required in a liquidation. These costs are subject to significant contingencies and uncertainties. Wind Down Costs Wind down costs consist of corporate overhead, occupancy and employee costs to be incurred during the liquidation period. Geneva assumes that the liquidation would occur over a two year period and that such expenses, costs and overhead would decrease over time. Wind down costs include employee retention bonuses required to maintain staff to shut down operations, assist prospective buyers of assets in due diligence and for maintenance/safety. 8. General Unsecured Claims General unsecured claims include pre-petition debt, trade and other payables, accrued expenses, accrued employee compensation, deficiency claims, lease rejection claims and other pre-petition liabilities subject to compromise. This category also includes estimated additional claims which would arise in a liquidation by reason of the breach or rejection of obligations incurred and executory contracts or leases entered into prior to or during the Case.

11.3

Example of Reorganization Value Determined by Discounted Cash Flows

919

11.3 Example of Reorganization Value Determined by Discounted Cash Flows Objective. Section 11.16 of Volume 1 of Bankruptcy and Insolvency Accounting explains discounting cash flows by the cost of capital to estimate the enterprise value of the entity. The enterprise value is made of three components: 1 The present value of cash flows from operations during the period in which cash flows are forecasted. 2 Residual or terminal values that represent the present value of the business attributable to the period beyond the forecast period. 3 The value of assets that will not be needed for operations by the reorganized entity. These assets may consist of excess working capital and assets that will be liquidated as part of the plan. DIP Corporation Reorganization Value Present Value Year 20W9 20X0 20X1 20X2 20X3 20X4 20X5 20X6 20X7 20X8 20X9

Operating Cash Flow

Capital Expenditure

Net Cash Flow

Factor∗

Amount

$413 1,364 1,605 1,637 1,869 1,964 2,141 2,237 2,034 2,140 2,250

$ 0 70 75 85 90 95 100 100 110 110 115

413 1,294 1,530 1,552 1,779 1,869 2,036 2,137 1,924 2,030 2,135

.8696 .7561 .6575 .5718 .4972 .4323 .3759 .3269 .2843 .2472 .2149

$ 359 978 1,006 887 885 808 767 699 547 502 459

Total discounted value of cash flows for 11 years Residual Value: The residual value is based on the assumption that depreciation after the eleventh year will be approximately $100,000. Cash flow 11th and subsequent years Taxes (After considering tax benefit of depreciation) Net cash flow Cost of capital Residual value at the end of the eleventh year Present value of residual value Total reorganization value∗∗ ∗

$7,897

$2,150 500 1,650 −.15 11,000 x.2149

2,364 $10,261

Based on year end values. Included in the reorganization value would be the value of any assets that are not needed by the reorganized company.

∗∗

920


NOTES 1. Introduction Management has formulated a refinancing proposal which is described in Note 3. The projected statement of annual operating results and annual cash flows assuming no deferral of property taxes and no deferral of debt principal payments (the “No Deferral Projection”) is prepared using the assumption that property taxes are paid in the year assessed and the retirement of debt begins in the year that such debt is obtained, both of which are more fully described in Note 3. The projected statement of annual operating results and annual cash flows assuming a three-year deferral of debt principal payments (the “Debt Deferral Projection”), which is more fully described in Note 3, assumes that no debt principal payments will be made in the first three years of such debt being outstanding. The projected statement of annual operating results and annual cash flows assuming a three-year deferral of property taxes and a three-year deferral of debt principal payments (the “Tax and Debt Deferral Projection”) assumes the current year assessed property taxes for the first three years in the No Deferral Projection will be deferred to 20X7, 20X8 and 20X9 and the deferral of debt principal payments during the first three years the debt is outstanding. The accompanying financial projections do not reflect the interest expense, if any, related to any borrowings to fund annual negative cash flows and interest income, if any, related to investment of annual positive cash flows. 2. Summary of Significant Accounting Policies The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the hotel industry. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Such useful lives are twenty-five years for buildings and six years for furniture, fixtures and equipment. 3. Summary of Significant Projection Assumptions As described in Note 1, the projected net annual cash flows before debt service and capital expenditures for the years ending April 30, 20X0 to April 30, 20X9 are the average of the relevant information in the Pannell, McColgan and Schultz studies. The McColgan and Schultz studies were for ten years and the Pannell study was for five years. The projected annual operating but are results for fiscal years 20X5 through 20X9 were not prepared by based on management’s assumption that such years will experience increases of an average of 4.5% each year. Such assumption is based on operations being stabilized by 20X4 and the average Consumer Price Index increases being an average of 4.5% for the fiscal years 20X5 through 20X9. reports were for the periods beginning in 20W9. Because of current The operating results, management believes that its projection for 20W9 is more likely to occur than the first year results reflected in the three studies. Accordingly, the projection for 20W9 is based on the actual operating results for the four months ended August 31, 20W8 and management’s assumptions for the

11.3


921

operating results for the eight months ending April 30, 20W9. Management believes the more likely operating results for the fiscal years 20X0 to 20X9 will be the average of the information included in the Pannell, McColgan and Schultz studies for years 20W9 to 20W8 and, accordingly, have used such information for years 20X0 to 20X9. The Pannell, McColgan and Schultz studies information for fiscal years 20X0 to 20X9 from which the averages were computed is listed on pages 10, 11 and 12 of the summary of significant projection assumptions. Revenues: Room—Room revenues for 20W9 are projected using an occupancy rate of 44.0% and an average daily room rate of $60.94. Room revenues for 20X0 through 20X9 are the average of the room revenue information in the three studies. Food and Beverage—Food and beverage revenues for 20W9 are projected to be 42% of total revenues. Food and beverage revenues for fiscal years 20X0 to 20X9 are the average of the food and beverage revenues information in the three studies. Other—Other revenues are comprised of telephone, retail, amusements, rental and other operating revenues. Other revenues for 20W9 are projected to be 12.6% of total revenue. Other revenues for fiscal years 20X0 to 20X9 are the average of the relevant information in the three studies. Cost of Revenues—Cost of revenues is comprised of the cost of room, food and beverage, and other revenues. The cost of revenues for 20W9 is projected to be 56.7% of total revenues. Cost of revenues for fiscal years 20X0 to 20X9 are the average of the cost of revenue information in the three studies. Expenses: Sales, Marketing and Advertising—Sales, marketing and advertising expenses for 20W9 are projected to be 5.5% of total revenues. Sales, marketing and advertising expenses for fiscal years 20X0 to 20X9 are the average of the sales, marketing and advertising information in the three studies. Management Fees and Franchise Fees—Management fees for 20W9 are projected to be 2.8% of total revenues. There is assumed to be no franchise fees expense for fiscal year 20W9. Management fees and franchise fees for fiscal years 20X0 to 20X9 are the average of the management fees and franchise fees information from the Pannell and McColgan studies. The Schultz study did not separately identify management fees and franchise fees. Schultz grouped management fees in the administrative and insurance expense category and franchise fees in the rooms cost of sales category. Property Operation and Maintenance—Property operation and maintenance expenses for 20W9 are projected to be 6.8% of total revenues. Property operation and maintenance expenses for fiscal years 20X0 to 20X9 are the average of the information from the three studies. Utilities—Utilities expense for fiscal 20W9 is projected to be 8.5% of total revenues. Utilities expense for fiscal years 20X0 to 20X9 is the average of the information from the three studies. Property Taxes—Property tax expenses for the first six years of all three projections include an additional $105,000 which represents the payout over six annual installments of the approximate $630,000 of outstanding property taxes

922


as of November 6, 20W7. Property tax expense for 20W9 in the No Deferral Projection and the Debt Deferral Projection includes a projected amount that approximates the property taxes assessed to the Company for fiscal year 20W8. Such amount, which also includes Tennessee franchise taxes, is $298,356. Property taxes for fiscal years 20X0 to 20X9 in the No Deferral Projection and the Debt Deferral Projection are the average of the information in the three studies. Such average is increased for fiscal years 20X0 to 20X5 by the $105,000 annual amount described above. Property taxes for the Tax Deferral Projection for fiscal years 20X0 to 20X5 include the $105,000 described above with the projected average amount of property taxes for fiscal years 20X0, 20X1 and 20X2 derived from the three studies deferred to fiscal years 20X7, 20X8 and 20X9, respectively. General and Administrative—General and administrative expenses for 20W9 are projected to be 13% of total revenues. General and administrative expenses for fiscal years 20X0 to 20X9 are the average of the information in the three studies. Proposed Refinancing of Debt: The Company proposes to issue tax-exempt bonds with a twenty-year term to bear interest at 8% annually. Payments of interest will be made annually from the beginning of the issue. Payments of principal are assumed to be made beginning the fourth year that the bonds are outstanding in the Debt Deferral Projection and in the Tax and Debt Deferral Projection. Payments of principal are assumed to be made from the beginning of the issue in the No Deferral Projection. It is the interest and principal related to these bonds that are shown and discussed in these projections. Depreciation: A restatement of property and equipment book values to fair value during fiscal 20W9 is assumed as a result of reorganization under chapter 11 protection of the United States Bankruptcy Court. Such restated depreciable property and equipment values are based on the information received in two of the three studies and approximately $12,800,000. Depreciation expense for 20W9 is projected to be approximately $475,000 which is a composite depreciation expense of the historical book values and the restated fair values. Depreciation expense for fiscal years 20X0 to 20X9 is projected to be approximately $947,350 based on the restated fair values. Provision for Income Taxes: The Company has net operating loss carryforwards which are assumed to be available to offset future tax liabilities during the projection period. Actual utilization of these losses will depend upon the final structuring of equity interests and, under certain structures, the utilization of the net operating loss carryforwards might not be available. Reserve for Replacement: The reserve for replacement represents approximately 67% of the reserve for replacement projected amount included in the McColgan study. The remaining projected amount for reserve for replacement is reflected as normal maintenance expenses in property operation and maintenance.

11.3

923


Debtor-in-Possession Projected Statement of Annual Operating Results and Annual Cash Flows Assuming a Three-Year Deferral of Property Tax Payments and a Three-Year Deferral of Debt Principal Payments For the Years Ending April 30, 20X9 to April 30, 20XX 20X9 REVENUES: Room Food and beverage Other Total revenues Cost of Revenues Gross Margin OPERATING EXPENSES: Sales, marketing and advertising Management fees Franchise fees Property operation and maintenance Utilities Property taxes General and administrative Total operation expenses Net annual cash flow before debt service and capital expenditures OTHER EXPENSES: Interest Depreciation Total other expenses Total expenses Income (loss) before income taxes Provision for Income Taxes Net Income (loss) Add Depreciation Expense Less cash contribution to reserve for replacement Less principal portion of bond payments Positive (negative) cash flow

20X0

20X1

20X2

$3,523,085 $4,430,897 $4,912,972 $ 5,576,749 3,263,654 4,171,771 4,576,704 5,116,886 979,514 1,114,042 1,219,447 1,355,843 7,766,253 4,404,700 3,361,553

9,716,710 10,709,123 5,191,669 5,658,512 4,525,041 5,050,611

12,049,478 6,279,481 5,769,997

426,553 220,000

326,310 107,157 145,858

356,112 121,882 161,547

394,529 130,478 182,372

527,455 656,937 105,000 1,012,828

874,594 637,731 105,000 964,756

964,748 699,127 105,000 1,037,228

1,072,628 782,209 429,945 1,140,218

2,948,773

3,161,406

3,445,644

4,133,379

412,780

1,363,635

1,604,967

1,636,618

540,000 475,000 1,015,000 3,963,773 (602,220)

1,080,000 947,350 2,027,350 5,188,756 (663,715)

1,080,000 947,350 2,027,350 5,472,994 (422,383)

1,073,201 947,350 2,020,551 6,153,930 (383,933)

(602,220) 475,000

(663,715) 947,350

(422,383) 947,350

(383,933) 947,350

70,000

75,000

85,000

$(127,220) $ 213,635 $ 449,967

139,829 $ 338,588

See summary of significant projection assumptions and accounting policies.

924


Debtor-in-Possession Projected Statement of Annual Operating Results and Annual Cash Flows Assuming a Three-Year Deferral of Property Tax Payments and a Three-Year Deferral of Debt Principal Payments For the Years Ending April 30, 20X9 to April 30, 20XX 20X3

20X4

20X5

20X6

20X7

20X8

20XX

$ 6,217,561 $ 6,491,350 $ 6,784,448 $ 7,090,970 $ 7,411,410 $ 7,746,447 $ 8,096,751 5,711,268 5,968,775 6,238,123 6,519,730 6,814,162 7,122,004 7,443,875 1,509,563 1,577,435 1,648,180 1,722,127 1,799,420 1,880,215 1,964,671 13,438,392 14,037,560 14,670,791 15,332,827 16,024,992 16,748,666 17,505,297 7,022,672 7,342,198 7,676,089 8,025,291 8,390,509 8,772,488 9,171,998 6,415,720 6,695,362 6,994,702 7,307,536 7,634,483 7,976,178 8,333,299 439,574 136,736 194,158

459,675 140,339 202,631

480,559 146,186 211,342

502,399 152,277 220,428

525,239 158,623 229,905

549,125 165,234 239,792

574,106 172,121 250,105

1,179,522 876,091 450,387 1,270,658

1,230,321 915,862 453,064 1,328,990

1,304,719 957,558 363,141 1,390,142

1,361,059 1,001,169 378,884 1,454,125

1,419,857 1,046,782 698,250 1,521,072

1,481,217 1,094,489 715,417 1,591,124

1,545,253 1,144,389 733,345 1,664,422

4,547,126

4,730,882

4,853,657

5,070,341

5,599,728

5,836,398

6,083,741

1,868,594 1,049,108 947,350 1,996,458 6,543,584 (127,864)

1,964,480 1,024,462 947,350 1,971,812 6,702,694 (7,332)

2,141,055 997,769 947,350 1,945,119 6,798,766 195,936

2,237,195 968,861 947,350 1,916,211 6,986,552 320,984

2,034,755 937,554 947,350 1,884,904 7,484,632 149,851

2,139,780 903,648 947,350 1,850,998 7,687,396 288,782

2,249,558 866,928 947,350 1,814,278 7,898,019 435,280

(127,864) 947,350

(7,332) 947,350

195,936 947,350

320,984 947,350

149,851 947,350

288,782 947,350

435,280 947,350

90,000

95,000

100,000

100,000

110,000

110,000

115,000

296,951 321,597 348,290 377,198 408,505 442,411 479,131 432,535 $ 523,421 $ 694,996 $ 791,136 $ 578,696 $ 683,721 $ 788,499

11.4

11.4

Determination of Value in Chapter 11 Case

925


Objective. Section 11.16(f) of Volume 1 of Bankruptcy and Insolvency Accounting emphasizes that in spite of difficulties in calculating the value of a debtor in bankruptcy, a plan cannot be properly developed unless interested parties have indication of the enterprise value. Valuations based on both the discounted cash flow approach and the market approach based on both guideline companies and the transaction approach were used, among others, are acceptable under the Bankruptcy Code. Excerpts from the valuation reports of Exide by both Blackstone and Jefferies are illustrated below. (a) Expert Report From The Blackstone Group L.P. Exide Technologies Expert Report

r THIS EXPERT REPORT IS PREPARED IN CONNECTION WITH THE PLAN CONFIRMATION HEARING IN THE CHAPTER 11 CASES OF EXIDE TECHNOLOGIES, ET AL., CHAPTER 11 CASE NO. 02-11125(KJC) (JOINTLY ADMINISTERED), UNITED STATES BANKRUPTCY COURT, FOR THE DISTRICT OF DELAWARE, THE HONORABLE KEVIN J. CAREY, PRESIDING. THIS EXPERT REPORT AND THE CONCLUSIONS HEREIN ARE BASED IN LARGE PART ON THE COMPANY’S HISTORICAL RESULTS AND MOST RECENT FINANCIAL PROJECTIONS. r UNLESS OTHERWISE INDICATED, THE ANALYSES CONTAINED HEREIN ARE BASED ON MARKET, ECONOMIC AND OTHER CONDITIONS, AS THEY EXISTED AS OF THE CREATION OF THIS REPORT. I. Summary SUMMARY

r In connection with Exide’s emergence from chapter 11, Blackstone actively solicited private equity interest in the Company. r Beginning January 2003, Blackstone contacted 74 financial sponsors; 35 signed confidentiality agreements. r Seven submitted bids indicating a range of enterprise value of $700 million to $950 million. r Three submitted second round bids indicating a range of enterprise value of $782 million to $950 million. r These second round bids were based on management presentations and significant business due diligence, including plant visits. r Two of the sponsors submitting second round bids identified pension, environmental and Daramic liabilities as issues impacting their thoughts on valuation. r For purposes of this presentation, Blackstone has also estimated the Total Enterprise Value (“TEV”) of Exide as of October 13, 2003, using three separate valuation methods, resulting in a TEV of $950 million to $1,050 million.

926


r At a mid-point TEV of $1.0 billion, the estimated distributable equity value is $512 million, which provides the Prepetition Credit Facility Claims a recovery of 73.0%. r The TEV would have to reach approximately $1.3 billion before unsecured creditors would have the right to receive distributions under the absolute priority rule (see Exhibit E). r Exide Management’s equity allocation under the Company Incentive Plan is 5–10% of the Company’s common equity in the form of stock options. This allocation is consistent with the management equity allocations in other chapter 11 cases. Valuation Summary Implied LTM EBITDAR Multiple

Total Enterprise Value Private Equity Bids

$782

Low

High

4.4x

5.4x

$1,076

5.0x

6.0x

$1,076

5.5x

6.0x

5.7x

7.0x

5.3x

5.9x

$950

Public Comparables

$897

M&A Comparables

$987

Discounted Cash Flow

$1,254

$1,023

Blackstone Valuation

$950

$750

$800

$850

$900

$950

$1,050

$1,000 $1,050 $1,100 $1,150 $1,200 $1,250 $1,300 $ in millions

II. Valuation Analysis Valuation Methodology r The valuation of the Company is based upon a number of assumptions, including: r Restructuring of the Company in a timely manner; r Continued stability of European operations; r Availability of sufficient working capital and trade credit; and r No material changes in the Company’s customer profile and business arrangements. r In preparing the valuation, Blackstone: r Reviewed the Company’s internal business plans and forecasts and other internal financial information and had numerous conversations with senior management; however, Blackstone has neither independently verified nor opined on the Company’s underlying business or strategic decisions. r Analyzed financial results and available information regarding comparable public companies from the automotive and industrial battery industries.

11.4

927


r The “theoretical” valuation was performed using three primary methodologies: r Public Comparables Market EBITDA multiples; r Trailing Market EBITDA multiple of M&A Comparables; and r Discounted Cash Flow. r The “theoretical” valuation performed by Blackstone was further supported by “market” valuations as submitted by three financial sponsors. Public Comparables Market EBITDA Multiple Valuation ($ in millions)

r The Market EBITDA Multiple Method determines the TEV of the Company by applying comparable public company EBITDA trading multiples to the Company’s latest twelve months (“LTM”) trailing EBITDAR.1 Blackstone has applied this to the Company’s LTM EBITDAR as of June 30, 2003. r Market EBITDA multiples are determined by comparing the TEV of publicly traded comparable companies to their trailing twelve months EBITDA. r Blackstone believes the appropriate market EBITDA multiple range is between 5.0x and 6.0x based upon, among other things, the valuations of publicly traded comparable companies. Valuation Range LTM 6/30/03 EBITDAR Market EBITDA Multiple Total Enterprise Value

Low $179.4 5.0x $897.0

High $179.4 6.0x $1,076.4

r See Appendix B for Blackstone’s analysis of comparable companies used to determine market EBITDA multiples. M&A EBITDA Multiple Valuation ($ in millions)

r The M&A EBITDA Multiple Method determines the value of the Company by applying EBITDA multiples from recent merger and acquisition transactions in the automotive and industrial battery industries to the Company’s LTM EBITDAR as of June 30, 2003. r This analysis assumes an M&A EBITDA multiple range between 5.5x and 6.0x based upon, among other things, the comparability of specific M&A transactions including: r EnerSys’ purchase of the Hawker industrial division of Invensys for 7.2x EBITDA; and r JCI’s purchase of Varta’s transportation business for 6.0x EBITDA. 1 Excludes

costs related to restructuring.

928


r Due to lack of natural strategic buyers and anti-trust issues we believe it is unlikely to achieve similar multiples. Valuation Range LTM 6/30/03 EBITDAR M&A EBITDA Multiple Total Enterprise Value

Low $179.4 5.5x $986.7

High $179.4 6.0x $1,076.4

r See Appendix C for Blackstone’s analysis of comparable transactions used to determine M&A EBITDA multiples. Discounted Cash Flow (“DCF”) r A DCF valuation is determined by calculating the present value of the Company’s projection of free cash flows during the forecast period and adding to this the present value of the Company’s terminal value. r Free cash flow is defined as operating profit, plus depreciation and amortization, less unlevered cash taxes, less capital expenditures, and less (plus) changes in working capital. Also deducted from operating profit is the Company’s required pension cash contributions and restructuring costs. r Cash taxes were forecast based upon the Company’s five-year projections. Management’s current assumption is that substantially all the Company’s existing domestic NOL carry forwards will be utilized to shield cancellation of indebtedness income, while the Company will retain the benefit of certain foreign NOL carry forwards.2 Based on the above, the Company has assumed cash tax rates of 38% and 25% in North America and Europe/ROW, respectively, for valuation purposes. There is a possibility that the basis in the Company’s depreciable assets in North America will be reduced as a result of COD income, thereby increasing the effective tax rate. r Capital expenditures are as projected in the five-year projections and are based on the level of capital needed to fund the business as well as to fund initiatives. r Pension cash needs of $149.2 million over the forecast period (including amounts expensed of $84.0 million). r One-time cash restructuring costs of $97.0 million related to head count reduction, plant closures and other initiatives are included over the forecast period. r Blackstone estimated the terminal value by applying a Market EBITDA Multiple to the FY 2008 EBITDA. r Blackstone used an EBITDA multiple range of 5.0x to 6.0x. r The annual cash flows and terminal value were discounted back to September 30, 2003 at an appropriate weighted average cost of capital (“WACC”). 2 Further,

it has been assumed that there will be no tax liability resulting from the forgiveness of any existing indebtedness.

11.4

929


r The WACC was determined using Blackstone’s estimate of an appropriate pro forma capital structure. Free cash flows and the terminal value were discounted using a range of WACCs from 15% to 17%. See Appendix D for Blackstone’s WACC analysis. Free Cash Flow ($ in millions) 6 Months Ended March 31, 2004 Net Revenue Operating Income(1) Plus: Depreciation and Amortization Less: Cash Taxes(2) Less: Capital Expenditures Less: Existing Liability / Legacy Cost(3) Less: Changes in Working Capital(4) Less: Cash Restructuring / Severance Costs Less: Pensions Free Cash Flow

Fiscal Year Ended March 31, 2005

2006

2007

2008

$1,248.5 84.0

$2,428.0 162.2

$2,530.0 194.0

$2,643.2 208.5

$2,768.4 222.0

43.5 (11.6) (30.8)

78.7 (41.1) (60.0)

74.5 (56.0) (60.0)

74.5 (60.9) (60.0)

74.5 (65.5) (60.0)

(20.5)

(20.7)

(13.1)

(13.1)

(13.1)

11.0

9.9

(8.7)

(18.5)

(24.1)

(21.7) 2.4 $56.4

(45.3) (25.9) $57.9

(13.5) (18.2) $99.0

(0.8) (20.3) $109.3

(0.8) (3.2) $129.8

(1)

Excludes chapter 11 related expenses, including KERP, Alix Partners and other restructuring professional fees. (2) Assumed to be 38% of EBIT in North America, 25% of EBIT in Europe/ROW. (3) Includes cash legal and environmental costs, as well as Daramic penalty payments. (4) Includes changes in inventory, accounts receivable, accounts payable, employee medical and warranty accruals.

Discounted Cash Flow to September 30, 2003 ($ in millions)

r While the Company is projected to generate significant improvements in EBITDA, its free cash flow is negatively affected by a number of considerable cash outflows, including: r One-time cash costs to fund restructuring initiatives; r Cash required to fund its pension plans; r Large capital expenditures; and r Legacy restructuring expenses. r Offsetting significant cash outflows are positive changes in working capital during the post-emergence period, which reflect an expected return to normalized credit terms.

930

Based on $296.5M of EBITDAR in FY 2008.

$312.8 305.5 298.6 291.9 285.4

14.0% 15.0% 16.0% 17.0% 18.0%

(1)

Present Value of Cash Flows

WACC

Free Cash Flow

$822.0 790.4 760.2 731.4 703.9

5.0x $904.2 869.4 836.2 804.5 774.3

5.5x

6.0x

2005 $57.9

$986.5 948.4 912.2 877.6 844.7

Present Value of Terminal Value Terminal EBITDA Multiple(1)

2004 $56.4

6 Months Ended March 31,

2007 $109.3

2008 $129.8

$1,134.8 1,095.9 1,058.7 1,023.2 989.3

5.0x

$1,217.0 1,174.9 1,134.8 1,096.4 1,059.7

5.5x

$1,299.2 1,254.0 1,210.8 1,169.5 1,130.0

6.0x

Total Enterprise Value Terminal EBITDA Multiple(1)

2006 $99.0

Fiscal Year Ended March 31,

931

51%–67% 33%–49% 60%

$255–$500M

51%–100% 0%–49% 68%

Equity Investment: Equity Ownership %: Sponsor: Pre-petition Lenders: Recovery to Banks:(4)

51%–75% 25%–49% 54%

$425M Exit Facility (Funded) $39M Capital Leases / Other Debt $75M New Notes $425M Assumed Liabilities $268M Common Equity $137–$200M

r

EBITDA of $177M; “normalized” bid of $782M excluding assumed liabilities of $425M(2) (4.4x EBITDA) Banks receive combination of cash, equity and notes (if exit facility of $500M is not attained) with total value of $396M

r 1.2B bid based on 6.8x FY03

6/25/03

Firm #3

(2)

Reduced by $30 million for cash environmental, pension and Daramic supply contract costs. Includes pension of $280 million, OPEB of $27 million, environmental liabilities of $78 million, Daramic commitments of $40 million. (3) As per term sheet, borrowings under the senior facility at emergence are $450 million, with no borrowings outstanding under capital leases or other debt (require further clarification). (4) Based on total claim of $738 million.

(1)

$304M Exit Facility (Funded) $94M DM Notes $37M Capital Leases / Other Debt $141M New Subordinated Debt $300M Common Equity $150–$200M

r

r

Adjusted EBITDA of $147M (see next page)(1) DM Notes assumed rather than refinanced Banks’ recovery to include $150–$200M cash, $141M seller note and $100–$150M equity

r 875M bid based on 6.0x FY03

6/20/03

$450M Funded Debt(3) $500M Common Equity

receive pro rata share of common stock (up to 49%) or pro rata share of $500M in cash

r Banks have option to

100% of common equity

r Offer to purchase up to

FY03 EBITDA of $177M

r 950M bid based on 5.4x

6/20/03

Firm #2

Pro Forma Capital Structure:

Transaction Summary:

Date Received:

A summary of the three bids received is shown below. ($ in millions) Firm #1

Overview of Bids

A. Summary of Private Equity Bids

Appendices

932

(4)

(3)

(2)

(1)

$500.0

$255.0 — 245.0 — — $500.0 738.0 67.8% — — — $500.0 738.0 67.8%

50.1% 49.9%

100.0% 0.0%

51.0% 49.0% $150.2 140.6 149.8 — — $440.6(4) 738.0 59.7%

$177.0 4.9x 875.0

$147.0(1) 6.0x 875.0 303.6 93.8 — 37.0 140.6(2) — $575.0 300.0

$177.0 5.4x 950.0 450.0 — — — — — $450.0 500.0

$200.0 140.6 100.0 — — $440.6 738.0 59.7%

66.7% 33.3%

“Normalized”

Firm #2 Offer

Firm #1

$137.0 75.0 131.0 15.0 37.5 $395.5 738.0 53.6%

51.1% 48.9%

$177.0 6.8x 1,207.0 425.0 — 425.0 39.1 75.0(3) (25.0) $939.1 267.9

Offer

Reduces $177mm of FY 2003 EBITDA by $30mm for cash environmental, pension and Daramic supply contract costs. Distribution of seller note or cash from issuance of high yield notes. Assumes Exit Facility of $500mm cannot be raised, so supplemental $75 debt issuance is pursued. Term sheet states distribution of value to banks and unsecureds would equal $425mm, for a recovery of 57.6%.

EBITDA EBITDA Multiple Total Enterprise Value Exit Facility DM Notes Assumed Liabilities Capital Leases and Short-Term Debt New Subordinated Debt to Lenders Less: Cash Total Net Debt Equity Value Ownership Sponsor: Lender: Distribution to Lenders Cash New Debt Common Stock Excess Cash Asset Sale Proceeds Total Distribution Pre-Petition Claim % Recovery

($ in millions)

Bid Economics

$200.0 75.0 68.0 15.0 37.5 $395.5 738.0 53.6%

74.7% 25.4%

$177.0 4.4x 782.0 425.0 — — 39.1 75.0 (25.0) $514.1 267.9

“Normalized”

Firm #3

933

Industrial Comparables C&D Technologies

Delphi Automotive Systems

Automotive Comparables Johnson Controls Inc.

Company

20.47

9.03

$103.10

Stock Price (10/10/03)

($ in millions, except per share amounts)

Summary

B. Comparable Company Analysis

526.8

5,059.5

$9,353.2

Equity Value

550.7

6,958.5

$11,805.0

Total Enterprise Value (TEV)

10.5x

4.0x

7.0x

TEV/LTM EBITDA

North American producer of integrated network power reserve systems.

Supplies seating systems, interior systems and batteries to the automotive industry. Also provides building control systems. Supplies batteries to the automotive industry.

Business Description

934

JCI DPH CHP

Johnson Controls Inc. Delphi Automotive Systems C&D Technologies

Johnson Controls Inc. Delphi Automotive Systems C&D Technologies Exide Technologies

$21,864.5 27,693.0 326.1 2,390.7

Revenue


LTM Operating Performance

Ticker

Company


Valuation Multiples

$1,680.8 1,751.0 52.5 179.6

EBITDA

$103.10 9.03 20.47

Stock Closing Price (10/10/03)

7.7% 6.3% 16.1% 7.5%

EBITDA Margin

$9,353.2 5,059.5 526.8

Equity Market Value

$1,145.9 741.0 29.6 74.3

EBIT

5.2% 2.7% 9.1% 3.1%

EBIT Margin

0.5x 0.3x 1.7x

TEV/LTM Revenue

LTM

$11,805.0 6,958.5 550.7

Total Enterprise Value

$ 699.9 1,036.0 5.4 49.4

CapEx

7.0x 4.0x 10.5x

TEV/LTM EBITDA

3.2% 3.7% 1.7% 2.1%

% of Revenue

10.3x 9.4x 18.6x

TEV/LTM EBIT

$6.34 0.69 0.65 NM

EPS

16.3x 13.1x 31.5x

Stock Price/LTM EPS

11.4

935


Johnson Controls, Inc. Business Overview

r JCI, based in Milwaukee, Wisconsin, is an automotive supplier currently conducting business in two segments: controls and automotive.

r The Automotive Group produces automotive seating and interior systems for OEMs and automotive batteries for the replacement and OE markets.

r Batteries and plastic containers are manufactured at 11 plants in the U.S. and via partially owned affiliates at plants in India, Mexico, and South America.

r The Company owns a 48% stake in Interstate Battery System of America, a leading global supplier of commercial and automotive batteries.

Financial Data ($ in millions)

Fiscal Year

FYE September 30,

2000

2001

2002

LTM 6/30/03

Revenues EBITDA EBITDA margin EBIT EBIT margin Net income Net income margin

$17,154.6 1,426.8 8.3% 965.0 5.6% 462.6 2.7%

$18,427.2 1,493.7 8.1% 1,085.9 5.9% 532.9 3.2%

$20,103.4 1,621.0 8.1% 1,122.0 5.6% 658.4 3.3%

$21,864.5 1,680.8 7.7% 1,145.9 5.2% 653.1 3.0%

Valuation Stock Price (10/10/03) Shares outstanding (mm)(1) Equity Value: Plus: Debt Plus: Minority Interest Less: Cash Total Enterprise Value LTM Valuation Multiple: Revenue Multiple EBITDA Multiple EBIT Multiple Total Debt/EBITDA (1)

Fully diluted shares outstanding.

$103.10 90.7 $9,353.2 2,490.0 215.5 (253.7) $11,805.0 0.5x 7.0x 10.3x 1.5x

936


Stock Price Performance (4/10/03–10/10/03) 107.20 102.20 97.20 92.20 87.20 82.20 77.20 72.20 4/10/03

5/2/03

5/25/03

6/17/03

7/10/03

8/2/03

8/25/03

9/17/03

10/10/03

11.4

937


Delphi Automotive Systems Business Overview

r Based in Troy, Michigan, Delphi is the world’s #1 producer of automotive components, integrated systems and modules.

r The Company was a wholly owned subsidiary of GM prior to February 1999. The spin-off was completed in May 1999.

r The Company operates through three sectors: electronics and mobile communications (17% of FY00 sales); safety, thermal and electrical architecture (34%); and dynamics and propulsion (49%).


Fiscal Year

FYE December 31,

2000

2001

2002

LTM 6/30/03


$29,139 2,680 9.2% 1,744.0 6.0% 1,062.0 3.6%

$26,088.0 1,534.0 5.8% 449.0 1.7% (370.0) (1.4%)

$27,427.0 1,903.0 6.9% 915.0 3.3% 343.0 1.3%

$27,693.0 1,751.0 6.3% 741.0 2.7% 389.0 1.4%

Valuation Stock Price (10/10/03) Shares outstanding (mm)(1) Equity Value: Plus: Debt Less: Cash Total Enterprise Value LTM Valuation Multiple: Revenue Multiple EBITDA Multiple EBIT Multiple Total Debt/EBITDA (1)

Fully diluted shares outstanding.

$9.03 560.3 $5,059.5 2,629.0 (730.0) $6,9585 0.3x 4.0x 9.4x 1.5x

938


Stock Price Performance (4/10/03–10/10/03) 9.96

Share Price

9.46 8.96 8.46 7.96 7.46 6.96 4/10/03

5/2/03

5/25/03

6/17/03

7/10/03

8/2/03

8/25/03

9/17/03

10/10/03

11.4

939


C&D Technologies Business Overview

r C&D Technologies produces integrated reserve power systems for

r r r

telecommunications, electronic information, and industrial applications in North America. The Company also produces high frequency switching power supplies for use in telecommunications equipment and motive power systems for the materials handling industry. The Company has grown through eight acquisitions. The Company’s management recently stated that it would continue to pursue a strategy of acquisitions. The Company has approximately a 30%–50% market share of lead acid batteries for large Uninterruptible Power Supplies. The Company bought JCI’s specialty battery division (industrial batteries) in 1999. JCI signed a non-compete agreement in 1999 with C&D in connection with the sale.


Fiscal Year

FYE January 31,

2001

2002

2003

LTM 7/31/03


$615.7 126.1 20.5% 100.0 16.2% 55.9 9.1%

$471.6 97.6 20.7% 67.6 14.3% 36.1 7.7%

$335.7 57.8 17.2% 34.1 10.1% 19.3 5.7%

$326.1 52.5 16.1% 29.6 9.1% 16.9 5.2%

Valuation Stock Price (10/10/03) Shares outstanding (mm)(1) Equity Value: Plus: Debt Less: Cash Total Enterprise Value LTM Valuation Multiple: Revenue Multiple EBITDA Multiple EBIT Multiple Total Debt/EBITDA (1)

Fully diluted shares oustanding.

$20.47 25.7 $526.8 22.5 8.2 (6.8) $550.7 1.7x 10.5x 18.6x 0.4x

940


Stock Price Performance (4/10/03–10/10/03) 22.02 21.02 20.02 Share Price

19.02 18.02 17.02 16.02 15.02 14.02 13.02 12.02 4/10/03

5/2/03

5/25/03

6/17/03

7/10/03

8/2/03

8/25/03

9/17/03

10/10/03

941

Varta Automotive/JCI

Invensys’ Industrial Battery Business (Hawker)/Enersys

Aug-02

Mar-02

Invensys’ Industrial Battery Business (Hawker)

Mar-02

(2)

Enersys

JCI

Acquiror

Acquisition of Hawker. The combining of U.S.-based Hawker will create the world’s largest industrial battery company.

Acquisition of Europe based Varta by US based JCI. The combined business will create a leading global player in the automotive battery industry with a market share of 25%.

Transaction Description

Target Sales $578.2

$555.0

$306.3(1)

$425.0(2)

$59.3

$51.0

Target EBITDA

0.8x

0.5x

Sales Multiple

7.2x

6.0x

EBITDA Multiple

Reading, Pennsylvania based company owned by Morgan Stanley Private Equity. Global manufacturer of industrial power storage systems.

US-based supplier of automotive interior systems and starter batteries as well as facility management and control. Automotive battery revenue amounted to $1.2 billion in FY 2001.

Acquirer Description

Transaction Size

European-based manufacturer of industrial batteries for the telecom and information technology sectors, as well as heavy-duty batteries for forklifts.

European-based manufacturer of portable batteries for cameras, flashlights, hearing aids, etc. Operates mainly in Europe and Latin America. Europe accounts for over 80% of Varta Group’s sales.

Target Description

Based on euro exchange rate of $0.98/euro. Excludes warrants issued to Invensys that would give it up to 28% of the combined company.

Varta Automotive Division

Aug-02

(1)

Target

Date

Transaction Multiples ($ in millions, except per share data)

Target/Acquiror

Date

Business Descriptions

C. Comparable M&A Transactions

942


D. Weighted Average Cost of Capital Weighted Average Cost of Capital r Based on an appropriate equity rate of return of 20%–30% and an average cost of debt of 7.5%, the appropriate weighted average cost of capital is 11.5%–21.1%. WACC Cost of Equity Debt to Total Capitalization

15.0%

20.0%

25.0%

30.0%

35.0%

35.0% 40.0% 45.0% 50.0% 55.0%

11.4% 10.9% 10.3% 9.8% 9.3%

14.6% 13.9% 13.1% 12.3% 11.6%

17.9% 16.9% 15.8% 14.8% 13.8%

21.1% 19.9% 18.6% 17.3% 16.1%

24.4% 22.9% 21.3% 19.8% 18.3%

E. Valuation Hurdle Estimated Secured/Priority Claims and Cash Uses as of September 30, 2003 ($ in millions) Amount Administrative Claims DIP Facility Claims(1) Priority Tax Claims Other Secured and Priority Claims Pre-Petition Credit Facility Claims Accrued Interest on Pre-Petition Credit Facility Forbearance Fee Capital Leases and Other Debt Assumed(2) Total Secured / Priority Claims European Securitization Buyout(2) DM Notes Repayment(2) Financing Fees—New Debt Transaction Fees for Advisors Lease Cure Costs Other Cash Uses

$ 0.4 172.2 1.5 5.0 729.3 43.6 8.6 40.2 $1,000.8 137.8 109.2 18.0 14.0 5.0 $284.0

Minimum Valuation Required Before Unsecured Creditor Distributions

$1,284.8

Blackstone Mid-Point TEV Incremental Value Required % Increase in Value Required

$1,000.0 284.8 28.5%

(1)

Reflects revised estimate for DIP Facility Claims from the Plan of Reorganization disclosure estimate of $181.1 million. (2) Based on euro exchange rate of $1.17 / euro.

11.4


943

(b) Expert Report From Jefferies Executive Summary Introduction r This presentation, among other things, analyzes various valuation and comparison methodologies using public data including: r Comparable Company Analysis r Comparable M&A Transaction Analysis r Discounted Cash Flow Analysis r Jefferies used methodologies in each analysis substantially similar in approach to those used throughout Jefferies’ Investment Banking Department for pricing equity transactions, valuing transactions for fairness opinions, advising in Mergers and Acquisitions and other similar transactions r The valuation analysis in this presentation is based upon the Company’s business plan (the “Business Plan”) and other financial information provided by the Company and its financial advisor r By using supporting data from various analyses, we conclude that there is substantial value for unsecured claims as of December 31, 2003, the projected bankruptcy exit date r The valuation analysis and conclusions contained herein were presented to Jefferies’ Restructuring Valuation Committee (“Jefferies’ Committee”) on Saturday, October 11, 2003. This presentation reflects the unanimous consent of the Committee. r The members of the Committee who considered this valuation are: r Raymond Minella, Managing Director and Director of Investment Banking Capital Markets r BA, University of California; JD, Cornell; MBA, University of Pennsylvania r Timothy P. O’Connor, Managing Director, Recapitalization and Restructuring r BS, University of Delaware r Richard Nevins, Managing Director, co-head, Recapitalization and Restructuring Group r BS, University of California; MBA, Stanford University

944


Summary Enterprise Valuation Analysis ($ in millions)

AS OF PROJECT BANKRUPTCY EXIT—12/31/2003 Sum-of-the-Parts Analysis $1,356

$1,819

Comparable Company Analysis $1,427

$1,537

Comparable M&A Analysis $1,095

$1,488

Discounted Cash Flow Analysis $1,583

$1,837

Concluded Range of Valuation $1,478 $1,000

$1,200

$1,400

$1,711 $1,600

$1,800

$2,000

Based on Jefferies’ weighting of 60% for the Discounted Cash Flow Analysis, 27% for the Comparable Company Analysis and 13% for Comparable M&A Analysis, we believe the range of Enterprise Value for Exide is $1.5 to $1.7 billion Note: Sum of Parts Analysis is presented for illustrative purposes only and has not been factored into the Jefferies Concluded Range of Valuation.

Conclusion of Value as of Chapter 11 Exit Date ($ in millions)

r By using supporting data from various analyses, Jefferies has concluded that there is sufficient value to cover unsecured claims

r Jefferies’ analyses produced enterprise values ranging from $1,478 million –$1,711 million with value attributable to remaining unsecured claims ranging from $287 million and $520 million

Estimated Total Enterprise Value (1) Estimated Senior Indebtedness(2) DIP Facility Global Credit Facility (European Portion Only) Global Credit Facility (NA Portion Only) Accrued Interest Payable Receivables Securitization DM Notes Other Debt and Capitalized Leases Total Estimated Senior Indebtedness Value Attributable to Remaining Unsecured Claims (1)

Low

High

$ 1,477.5

$ 1,710.5

$ 164.5 271.4 437.3 57.1 132.1 96.6 31.3 1,190.4 $ 287.1

$ 164.5 271.4 437.3 57.1 132.1 96.6 31.3 1,190.4 $ 520.1

Based on Jefferies concluded range of valuation. Based on Exhibit C of the Company’s Second Amended Disclosure Statement for Third Amended Joint Plan of Reorganization.

(2)

11.4


945

Jefferies Qualifications r Jefferies has extensive experience in reorganization cases and enjoys an excellent reputation for services it has rendered in large and complex chapter 11 cases on behalf of debtors, creditors and creditors committees throughout the United States r Jefferies has restructured over $95 billion in securities and liabilities— over $75 billion since 1998 r Jefferies is one of the leading traders of post reorganization equities and as such has extensive knowledge and expertise in valuing these securities r Jefferies has experience in several bankruptcy cases in the District of Delaware such as: ArmeriServe Food Distribution Inc. Cybercash, Inc. Diamond Brands Operating Corp. Federal-Mogul Corporation Heartland Wireless Communication ICO Global Communications Services Inc. International Wireless Communications

Kaiser Group International, Inc. Marvel Entertainment Group MobileMedia Communications Net2000 Communications, Inc. Silver Cinemas Inc. VF Foods International, Inc. Globalstar, L.P.

r Bill Derrough—Managing Director, Co-head of Recapitalization and Restructuring Group and New York Investment Banking Office r Investment banking experience since 1988 r Since joining Jefferies in early 1998, Mr. Derrough has been actively involved in restructurings, recapitalizations, financings, mergers and other engagements, representing over $35 billion in transaction value r Mr. Derrough oversees all Investment Banking activities in New York, including capital raising, valuation and advisory practices and is the primary point person working between investment banking and the equity sales and trading in making markets in post-reorganized equities Valuation Analysis Quantitative Methods r We used Company historical information and projections provided by Exide management r Jefferies, along with the other major creditor constituencies, has completed extensive due diligence on this financial information r We determined a Concluded Range of Valuation for the Company using three widely-accepted quantitative valuation methods r The quantitative methods that we employed were: r Comparable Company Analysis—Current Multiples r Evaluates the current trading multiples of comparable public companies and applies those multiples to the operating results of the subject company

946


r Comparable M&A Transaction Analysis r Evaluates the trading multiples of comparable public company merger and acquisition transactions and applies those multiples to the operating results of the subject company r Discounted Cash Flow Analysis r Evaluates the projected operating results of the Company and discounts its future cash flows to present value at a required rate of return r For illustrative purposes, we have also completed a sum-of-the-parts analysis utilizing an indication of value from the Enersys bid, and the Debtors’ valuation analysis per their December 17, 2002 presentation

947

86 3.6% $ 178 7.5% $ 46

$ 2,361 (2.8)% 594 25.2% 260 139 19 92

2003

Actual

Fiscal Year Ending March 31,

112 4.8% $ 196 8.4% $ 63

$ 2,323 NA 646 27.8% 244 116 17 84

12/31/03

TTM (2) Ending

120 5.3% $ 201 8.8% $ 60

$ 2,275 (3.6)% 586 25.8% 237 133 18 81

2004

170 7.1% $ 248 10.4% $ 60

$ 2,379 4.5% 633 26.6% 237 131 19 78

2005

(2)

2006

196 7.9% $ 271 10.9% $ 60

$ 2,478 4.2% 656 26.5% 242 126 19 74

Projected

214 8.3% $ 289 11.1% $ 60

$ 2,594 4.7% 678 26.1% 246 125 20 74

2007

Fiscal Year Ending March 31,

Source: The Company’s Business Plan dated December 16, 2002. TTM represents the trailing twelve months. (3) EBITR is defined as earnings before interest, taxes, and restructuring charges. (4) EBITDAR is defined as earnings before interest, taxes, depreciation, amortization, and restructuring charges.

(1)

EBITR(3) % of Sales EBITDAR(4) % of Sales Capital Expenditures

Sales % Growth of Sales Gross Margin % of Sales Selling and Marketing General and Administrative Engineering and R&D Depreciation and Amortization

($ in millions)

5- Year Projections(1)

948


Comparable Company Analysis ($ in millions)

r The following multiples were chosen for comparison on a trailing twelve month (“TTM”) period basis

r Enterprise values are calculated using median multiples for the transportation segment and the industrial segment applied to Exide’s projected results for the TTM period ended December 31, 2003 r In order to minimize volatility, the stock price for each company is the volume-weighted average price over the past month(1) r Blended multiples are calculated based on revenue assuming a 66% allocation for the transportation segment and a 34% allocation for the industrial segment r Jefferies excluded revenue multiples from its analysis because the resulting enterprise valuation diverged substantially from the enterprise valuation figures obtained by using other metrics r See the Appendix for additional detail to the Comparable Company Analysis Implied Ent. Valuation Using Multiples of:

Transportation Segment Multiple Industrial Segment Multiple Blended Multiple TTM 12/31/03 Metric Implied Enterprise Value—As of 12/31/2003

Revenue

EBITDAR

EBITR(2)

FCF(3)

0.5x 2.1x 1.1x $ 2,323

5.2x 12.7x 7.7x $ 196

10.0x 18.2x 12.8x $ 112

10.3x 14.1x 11.6x $ 133

$ 2,515.5

$ 1,515.3

$ 1,427.4

$ 1,537.3

(1) The one month volume-weighted average price is calculated by taking all trades executed over the past month, and weighting the stock price of each trade by the number of shares traded. (2) EBITR is defined as earnings before interest, taxes, and restructuring charges. (3) Free cash flow is defined as EBITDAR minus capital expenditures.

Applying EBITDAR, EBITR, and FCF multiples as of the Projected Bakruptcy Exit Date, the Comparable Company Analysis suggests an enterprise value range of $1.4 billion to $1.5 billion. Comparable M&A Transaction Analysis ($ in millions)

r The following multiples were chosen for comparison based on the TTM period prior to the announcement of each of the selected transactions

r Enterprise values are calculated using median multiples applied to Exide’s projected results for the TTM period ended December 31, 2003

11.4

949


r Blended multiples are calculated based on revenue assuming a 66% allocation for the transportation segment, and a 34% allocation for the industrial segment r See the Appendix for additional detail to the Comparable M&A Transaction Analysis Implied Ent. Valuation Using Multiples of:

Transportation Segment Multiple Industrial Segment Multiple Blended Multiple TTM 12/31/03 Metric Implied Enterprise Value—As of 12/31/2003 (1) (2)

Revenue

EBITDAR

EBITR(1)

FCF(2)

0.8x 0.5x 0.7x $ 2,323

6.9x 7.2x 7.0x $ 196

9.7x 10.0x 9.8x $ 112

11.0x 11.6x 11.2x $ 133

$ 1,609.6

$ 1,371.8

$ 1,094.5

$ 1,487.7

EBITR is defined as earnings before interest, taxes, and restructuring charges. Free cash flow is defined as EBITDAR minus capital expenditures.

Applying EBITDAR, EBITR, and FCF multiples as of the Projeted Bankruptcy Exit Date, the Comparable M&A Transaction Analysis sugests an enterprise value range of $1.1 billion to $1.5 billion. Discounted Cash Flow Analysis—Overview of Calculation

r Enterprise Value was estimated by adding r The discounted value of the Company’s annual projected distributable cash flows (cash flows available to all investors), and

r The discounted terminal value for the Company (the value of the Company beyond the definitive time period)

r Distributable Cash Flows r Calculated using projected annual operating income plus depreciation and amortization plus net changes in working capital less projected capital expenditures plus the net impact of pensions and other assets/liabilities r Terminal Value r The terminal value was calculated by using an EBITDAR multiple range of 6.5x to 7.5x r Discount Rate r The Company’s cash flows and terminal value were discounted to present values at a weighted average cost of capital (“WACC”) of 10.5% to 11.5% to determine enterprise value Discounted Cash Flow Analysis—Range of Value

r The following enterprise values were determined based on a Discounted Cash Flow analysis

950


r See the Appendix for additional detail to the Discounted Cash Flow Analysis Terminal EBITDA Multiple Projected Bankruptcy Exit Date 12/31/03 Weighted Average Cost of Capital (“WACC”) 12.0% 11.5% 11.0% 10.5% 10.0%

6.5x

7.0x

7.5x

$ 1,556 1,583 1,611 1,639 1,668

$ 1,649 1,678 1,708 1,738 1,769

$ 1,743 1,773 1,805 1,837 1,870

Applying a discount rate range of 10.5% to 11.5% and a terminal multiple range of 6.5x to 7.5x, the Discounted Cash Flow Analysis suggests an Enterprise Value range of $1.6 to $1.8 billion Indebtedness and Other Claims Total Debt Total Debt as of September 30, 2003

US

EUR/ROW

TOTAL

$250 million Post-Petition Credit Facility Pre-Petition Credit Facility Senior Secured Global Credit Facilities Agreement (U.S.) Senior Secured Global Credit Facilities Agreement (Europe)

NA

NA

164.5

437.3

—

437.3

—

271.4

271.4

Total Pre-Petition Credit Facility European Accounts Receivable Securitization Accrued Interest Payable Capital Leases and Other Debt 9.125% DM Senior Notes Total Senior Debt 10.000% Senior Notes and Accrued Interest 2.900% Convertible Notes and Accrued Interest

437.3 — NA NA — NA 300.0

271.4 132.1 NA NA 96.6 NA —

708.7 132.1 57.1 31.3 96.6 1,190.4 300.0

321.1

—

321.1

Total Long-term Notes Accrued Interest Payable Other Debt

621.1 NA NA

— NA NA

621.1 19.4 22.9

NA

NA

1,853.8

Total Debt

Note: Based on Exhibit C of the Company’s Second Amended Disclosure Statement for Third Amended Joint Plan of Reorganization

951

∗∗∗

C&D ∗∗∗ Inc. ∗∗∗ Corp. ∗∗∗ Technology, Inc. ∗∗∗ Inc.

∗∗∗

∗∗∗

Inc. Inc. ∗∗∗ Inc. ∗∗∗ Corp. Cooper Tire & ∗∗∗ Co. ∗∗∗ Corporation ∗∗∗ , Inc. ∗∗∗ Inc. ∗∗∗ Inc. ∗∗∗ Inc. ∗∗∗ Inc. ∗∗∗ Inc.

∗∗∗

∗∗∗

∗∗∗

Enterprsie Value(1)

$ 18.79 17.27 8.26 11.25 92.70

$ 39,73 18,73 71.40 2.91 17.90 15.55 18.56 15.68 12,15 42.72 9.85 4.92

∗∗∗

$ 594.4 2,408.7 319.8 924.4 447.2

$ 1,987.3 1,281.3 1,929.2 243.8 1,252.8 2,311.4 291.5 4∗∗∗ .8 220.0 1,129.3 276.4 276.8

∗∗∗

$ 22.6 — 714 22.4 —

$ 892.7 1,5118 876.4 1,062.9 1,883.5 3.277.4 1,987.9 772.1 287.7 — 9,557.3 1,875.1

∗∗∗

$— — — —

— — —

$— 39.8 — 141.5 — — 51.3 20.1

∗∗∗

$ 82 — — — —

$— — — — — 21.8 — 11.6 — — — —

∗∗∗

r Criteria for selecting comparable companies include relevant industry sector and comparable size

($ in millions)

Comparable Company Valuation Analysis

Appendix

$ 52 125.8 52.8 181.2 199.9

$ 39.8 193.8 13.4 49.1 22.3 272.8 1528 140.8 7.4 152.8 52.0 285,3

∗∗∗

$ 876.3 3,210.9 323.5 828.7 328.5

$ 2,2469 2,79.1 2,8292.1 1,427.3 2792.7 5,192.8 1,1728 2,121.0 492.2 930.5 1,770.1 1,446

∗∗∗

952

Inc. Inc. Inc.

$ 328.1 1,3258 3289 251.7 157.8

$ 3,828.5 7587.0 2,350.8 3,977.3 3315.3 5,702.0 2387.3 2,0288 773. 2,8218 2,8112

∗∗∗

$ 525 299.8 0.9 4.0 4.4

$ 51.86 932.8 375.5 307.8 392.7 782.8 213.5 20.2 45.1 229.9 2419

∗∗∗

$ 29.8 172.9 (28.2) (∗∗∗ ) (22.2)

$ 385.7 340.9 290.8 181.7 791.1 354.8 599.8 102.8 28.8 174.9 86.4

∗∗∗

$ 47.3 189.8 5.87 (4.2) (7.8)

$ 315.3 344.9 277.2 190.4 984.1 404.0 184.8 135.2 34.1 997.0 52.3

∗∗∗

19% 82%

∗∗∗

18.7% 1875

∗∗∗

1428 7.3% 278.% 7.3% 17.5% 8.1% 10.9% 12.9% 78% 81%

∗∗∗

9.7% 729% 164 154 284

29% 4.9% 8.5% 4.% 5.8% 3.8% 8.9% 5.1% 49% 4.8% 3,1%

∗∗∗

184

∗∗∗

∗∗∗

14.4% 142%

175 4.8% 7.8% 28% 5.9% 45% 7.9% 67% 6.4% 59% 19%

∗∗∗

0.94 0.57 (2.38) (2.4) (2.40)

3.58 2.13 6.00 40.17 1.87 841 2.17 0.40 94.5 559 459

∗∗∗

(1) Enterprise Value is defined as market capitalization plus long-term debt plus preferred stock and minority interest less cash. Preferred stock is shown at liquidation value. (2) Price represents one month volume-weighted average. (3) Excludes unusual or non-recurring charges.

∗∗∗

Inc. Corp. ∗∗∗ Technologic, Inc. ∗∗∗ Inc. Motor Corporation

∗∗∗

∗∗∗

∗∗∗ Co. Data Corporation ∗∗∗ Inc. ∗∗∗ Inc. ∗∗∗ Inc. ∗∗∗ Inc. ∗∗∗ Inc.

∗∗∗

∗∗∗

∗∗∗

∗∗∗

∗∗∗

∗∗∗

LTM Operating Data(3)

11.4

953


($ in millions) LTM Trading Multiples(1) Enterprise Value/LTM

Transportation Segment American ∗∗∗ & Manufacturing Holdings, Inc. ∗∗∗ , Inc. BorgWarner, Inc. Collins & ∗∗∗ Corp. Cooper Tire & Rubber Co. Dana Corporation Dura Automotive Systems, Inc. Hayes Lemmerz International Inc. Standard Motor Products Inc. Superior Industries International, Inc. Tenneco Automotive, Inc. Tower Automotive, Inc. Mean Median High Low Selected Multiple∗∗∗ Industrial Segment C&D Technologies, Inc. American Power Conversion Corp. Artesyn Technologies, Inc. Power-One Inc. Vicor Corporation Mean Median High Low Selected Multiple∗∗∗ (1) (2) (3)

Revenue

EBITDA

EBIT

FCF

P/E

0.6 0.4 0.9 0.4 0.7 0.5

4.3 4.9 6.8 4.6 6.0 6.5

6.3 8.0 9.8 7.9 12.0 14.5

7.1 7.9 11.1 9.5 13.9 11.7

8.6 8.8 11.9 NM 15.8 37.9

0.5

5.0

7.3

6.4

4.9

0.6 0.6

4.6 10.7

10.9 16.7

8.3 12.6

NM 25.0

1.2 0.5 0.4

6.9 5.4 4.8

8.9 10.2 13.3

14.0 9.4 21.9

14.4 13.3 9.8

0.6 0.5 1.2 0.4 0.5

5.9 5.2 10.7 4.3 5.2

10.5 10.0 16.7 6.3 10.0

11.2 10.3 21.9 6.4 10.3

15.0 12.6 37.9 4.9 12.0

1.8

10.1

17.9

11.2

30.1

2.4 1.0 3.5 2.1

15.3 NM NM NM

18.6 NM NM NM

16.9 NM NM NM

25.7 NM NM NM

2.1 2.1 3.5 1.0 2.1

12.7 12.7 15.3 10.1 12.7

18.2 18.2 18.6 17.9 18.2

14.1 14.1 18.9 11.2 14.1

27.9 27.9 30.1 25.7 27.9

Operating data excludes unusual or non-recurring charges. Free cash flow is defined as EBITDA minus capital expenditures. Selected multiple based upon the median.

954


Comparable Company Valuation Analysis Comparable Company Descriptions—Transportation Segment

r The following is a list of comparable companies that have been included in the transportation segment of our comparable company universe Comparable Companies

Description

American Axle & Manufacturing Holdings, Inc.

American Axle & Manufacturing Holdings, Inc. is a global Tier 1 supplier to the automotive industry. The Company manufactures, engineers, designs and validates driveline systems and related powertrain components and modules for light trucks, sport utility vehicles (SUVs) and passenger cars. Driveline systems include components that transfer power from the transmission and deliver it to the drive wheels. The Company’s driveline and related powertrain products include axles, modules, driveshafts, chassis and steering components, driving heads, crankshafts, transmission parts and forged products. The Company is the principal supplier of driveline components to General Motors Corporation (GM) for its rear-wheel drive light trucks and SUVs manufactured in North America, supplying substantially all of GM’s rear axle and front four-wheel drive/all-wheel drive axle requirements for these vehicle platforms in 2002.

ArvinMeritor, Inc.

ArvinMeritor, Inc. is a global supplier of a broad range of integrated systems, modules and components serving light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. It has three operating segments: Light Vehicle Systems, which supplies air and emissions systems, aperture systems (roof and door systems and motion control products) and undercarriage systems for passenger cars, light trucks and sport utility vehicles to original equipment manufacturers; Commercial Vehicle Systems, which supplies drivetrain systems and components, including axles and drivelines, braking systems, suspension systems and exhaust, ride control and filtration products for medium- and heavy-duty trucks, trailers and off-highway equipment and specialty vehicles; and Light Vehicle Aftermarket, which supplies exhaust, ride control and filter products to the passenger car, light truck and sport utility aftermarket. (continues)

11.4


955

Comparable Companies

Description

BorgWarner, Inc.

BorgWarner Inc. is a global Tier 1 supplier of highly engineered systems and components, primarily for vehicle powertrain applications. The Company’s products fall into five operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer Systems and Transmission Systems. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (OEMs) of passenger cars, sport utility vehicles, trucks and commercial transportation products. The Company operates manufacturing and technical facilities in 43 locations in 14 countries serving customers in North America, South America, Europe and Asia, and is an original equipment supplier to major automotive OEMs worldwide.

Collins & Aikman Corp.

Collins & Aikman Corporation is engaged in the design, engineering and manufacturing of automotive interior components, including instrument panels, fully assembled cockpit modules, floor and acoustic systems, automotive fabric, interior trim and convertible top systems. Sales are diversified among all North American OEMs (original equipment manufacturers), transplants such as Toyota, Honda and Nissan and major Tier 1 integrators. The Company has more than 115 plants and facilities worldwide and conducts all of its operating activities through its wholly owned subsidiary, Collins & Aikman Products Co. The Company markets the majority of its products to customers through a single global commercial operations group that supplies products from four primary categories: plastic components and cockpits, carpet and acoustics, automotive fabrics and convertible top systems.

Dana Corporation

Dana Corporation is a global supplier of modules, systems and components for light, commercial and off-highway vehicle original equipment (OE) manufacturers globally and for related OE service and aftermarket customers. The Company’s manufacturing operations are organized into four market-focused strategic business units. The Automotive Systems Group sells axles, driveshafts, drivetrains, frames, chassis products, driveshafts and related modules and systems. The Automotive Aftermarket Group sells brake products, internal engine hard parts, chassis products and filtration products. The Engine and Fluid Management Group sells sealing, bearing, fluid-management and power-cylinder products. The Heavy Vehicle Technologies and Systems Group sells axles, brakes, driveshafts, chassis and suspension modules, ride controls and related modules and systems for the commercial and off-highway vehicle markets and transmissions and electronic controls for the off-highway market.

956


Comparable Company Descriptions—Transportation Segment (Cont’d)

r The following is a list of comparable companies that have been included in the transportation segment of our comparable company universe Comparable Companies

Description

Dura Automotive Systems, Inc.

Dura Automotive Systems, Inc., Incorporated in 1994, is an independent designer and manufacturer of driver control systems for the global automotive industry. Dura is also a global supplier of seating control systems, engineered assemblies, structural door modules and integrated glass systems. Although a portion of Dura’s products are sold directly to original equipment manufacturers (OEMs) as finished components, Dura uses most of its products to produce “systems” or “subsystems,” which are groups of component parts located throughout the vehicle that operate together to provide a specific vehicle function. Systems produced by Dura include glass, door, pedal, parking brake, transmission shift, seat adjusting and latch. Dura’s principal product categories are driver control systems, seating control systems, engineered assemblies, structural door modules, exterior trim systems and mobile products.

Hayes Lemmerz International

Hayes Lemmerz International, Inc. Is a supplier of wheels, wheel-end attachments, aluminum structural components and automotive brake components. The Company is a major manufacturer of automotive wheels. In addition, the Company also designs and manufactures wheels and brake components for commercial highway vehicles, and powertrain components and aluminum non-structural components for the automotive, commercial highway, heating and general equipment industries. The Company conducts business in three operating segments: Automotive Wheels, Components and Other. On December 5, 2001, the Company, 30 of its wholly owned domestic subsidiaries and one wholly owned Mexican subsidiary filed voluntary petitions for reorganization relief under Chapter 11 of the United States Bankruptcy Code. In June 2003, the Company emerged from Chapter 11 protection.

Standard Motor Products

Standard Motor Products, Inc. is an independent manufacturer and distributor of replacement parts for motor vehicles in the automotive aftermarket industry. The Company is organized into two major operating segments, each of which focuses on a specific line of replacement parts. The Company’s Engine Management segment manufactures ignition and emission parts, onboard computers, ignition wires, battery cables and fuel system parts. The Company’s Temperature Control segment manufactures and remanufactures air conditioning compressors and other air conditioning and heating parts. The Company sells its products primarily to warehouse distributors and large retail chains in the United States, Canada and Latin America. The Company also sells its products in Europe through its European segment. (continues)

11.4



957

Description

Superior Industries international

Superior Industries International Inc. designs and manufactures motor vehicle parts for sale to original equipment manufacturers (OEMs) on an integrated one-segment basis. The Company is a supplier of cast and forged aluminum wheels to automobile and light truck manufacturers, with wheel manufacturing operations in the United States, Mexico and Hungary. The Company is also building its position in the growing market for aluminum suspension and related underbody components to complement its OEM aluminum wheel business. The Company’s facility in Heber Springs, Arkansas, manufactures its new aluminum suspension and related underbody components using licensed Cobapress technology.

Tenneco Automotive, Inc.

Tenneco Automotive Inc. is primarily engaged in the manufacture of automotive emissions control and ride control products and systems for both the original equipment market and the replacement market or aftermarket. As an automotive parts supplier, the Company designs, markets and sells individual component parts for vehicles, as well as groups of components that are combined as modules or systems within vehicles. These parts, modules and systems are sold globally to the vast majority of vehicle manufacturers and throughout all aftermarket distribution channels. Monroe ride control products and Walker exhaust products are two of Tenneco’s brand names. It also offers other brands such as Monroe Sensa-Trac and Reflex (shock absorbers and struts), Quiet-flow (mufflers), DynoMax (performance exhaust products), Rancho (ride control products for the high-performance, light-truck market) and Clevite (elastomeric vibration control components).

Tower Automotive, Inc.

Tower Automotive, Inc. is engaged in the design and production of structural components and assemblies used by automotive original equipment manufacturers (OEMs). The Company’s current products include automotive body structural stampings and assemblies, including exposed sheet metal (Class A) components, lower vehicle structural stampings and assemblies, suspension components, modules and systems. The Company’s products generally can be classified into four categories: body structures and assemblies, lower vehicle structures, suspension and powertrain modules and suspension components.

958


Comparable Company Descriptions—Industrial Segment

r The following is a list of comparable companies that have been included in the industrial segment of our comparable company universe Comparable Companies

Description

American Power Conversion Corporation

American Power Conversion Corporation designs, develops, manufactures and markets power protection and management solutions for computer, communications and electronic applications worldwide. The Company’s products include uninterruptible power supply products, direct current (DC)-power systems, electrical surge protection devices (surge suppressors), power conditioning products, precision cooling equipment, power management software and accessories, racks and enclosures, services and various desktop and notebook personal computer (PC) accessories. These products are primarily used with sensitive electronic devices that rely on electric utility power, including, but not limited to, home electronics, PCs, computer workstations, servers, networking equipment, communications equipment, Internetworking equipment, data centers, mainframe computers and facilities.

Artesyn Technologies, Inc.

Artesyn Technologies, Inc. provides power conversion equipment and real-time subsystems to the computing, storage and communications industries. The Company is primarily engaged in the design, development, manufacture and sale of electronic products, power supplies, power conversion products and power subsystems. It operates in two segments, Power Conversion and Communications Products. The Power Conversion business offers customers AC/DC power supplies, as well as advanced DC/DC and isolated and non-isolated point-of-load (POL) converters for distributed power architectures. The Communications Products business offers its customers central processing unit (CPU) boards, wide area network (WAN) interfaces and protocol software solutions.

C&D Technologies, Inc.

C&D Technologies, Inc. is a technology company that produces and markets systems for the conversion and storage of electrical power, including reserve power systems and embedded, high-frequency switching power supplies. The Powercom Division manufactures and markets integrated reserve power systems and components for the stand-by power market; the Dynasty Division manufactures and markets industrial batteries primarily for the uninterruptible power supply, telecommunications and cable markets; the Power Electronics Division manufactures and markets custom, standard and modified-standard electronic power supply systems, including direct current (DC)-to-DC converters, and the Motive Power Division manufactures complete systems and individual components to power, monitor, charge and test the batteries used in electric industrial vehicles, including fork-lift trucks, automated guided vehicles and airline ground support equipment. (continues)

11.4



959

Description

Power-One, Inc.

Power-One, Inc. is a designer and manufacturer of power conversion products, most of which are sold to the communications infrastructure market. Its products can be classified into three main groups: alternating current/direct current (AC/DC) power supplies, DC/DC converters and DC power systems. AC/DC power supplies power communications and networking equipment, as well as industrial, automatic/semiconductor test, transportation, medical and other electronic equipment. DC/DC converters, including high-density and low-density products, are generally used to control power on communications printed circuit boards. DC power systems are used by communications and Internet service providers. The Company designs its products primarily for the higher-end communications infrastructure market, rather than for use in personal computers (PCs), mobile telephones or other consumer products.

Vicor Corporation

Vicor Corporation is engaged in the development, manufacture and sale of power conversion components and systems. In addition, the Company manufactures and sells complete configurable power systems, accessory products and custom power solutions. It also licenses certain rights to its technology in return for ongoing royalties. The principal markets for Vicor’s power converters and systems are large original equipment manufacturers (OEMs) and smaller, lower volume users, which are broadly distributed across several major market areas.

960

Target

Transportation Segment May-98 Echlin Inc. Aug-98 Cooper Automotive Jan-99 Excel Industries, Inc. Feb-99 Aeroquip-Vickers Mar-99 United Technologies Automotive Apr-99 Walbro Corp. May-99 Varlen Corp. Apr-00 Arvin Industries, Inc. Aug-00 MascoTech, Inc. Dec-00 Delco Remy International, Inc. Aug-01 Textron Automotive Trim Aug-02 Varta AG Automotive Battery Division

Date Announced

r Criteria for selecting transactions include: r Relevant industry sector r Majority stake acquired r Relevant size

($ in millions)

Dana Corp. Federal-Mogul Corp. Dura Automotive Systems, Inc. Eaton Corp. Lear Corp. TI Group PLC AMSTED Industries, Inc. Meritor Automotive, Inc. Heartland Industrial Partners LP Court Square Capital Ltd. Collins & Aikman Corp. Johnson Controls, Inc.

Acquiror

Comparable M&A Transaction Valuation Analysis Transportation Segment

$ 4,352.6 1,900.0 492.1 1,986.0 2,305.4 556.7 808.5 1,116.6 2,053.0 699.4 1,208.4 306.3

Transaction Value

1.2 1.0 0.5 0.9 0.8 0.8 1.2 0.3 1.2 0.6 0.7 0.5

Revenues

12.7 6.5 7.5 7.3 7.8 7.3 7.3 3.7 6.7 4.9 6.9 6.0

EBITDA

19.1 9.2 15.6 10.4 13.6 13.9 9.6 6.0 9.3 6.3 11.7 9.7

EBIT

Transaction Value

22.1 8.4 25.5 15.4 23.1 13.0 12.3 6.8 11.0 6.1 15.3 11.0

FCF(1)

961

(2)

Mean Median High Low Selected Multiple(2)

Carlyle Group LP Timken Co. Blackstone Group

Acquiror

Free cash flow is defined as EBITDA less capital expenditures. Selected multiple based upon the median.

Rexnord Corporation The Torrington Company TRW, Inc.—Automotive Parts

Sep-02 Oct-02 Nov-02

(1)

Target

Date Announced 912.8 829.3 4,725.0

Transaction Value

0.8 0.8 1.3 0.3 0.8

1.3 0.7 0.5

Revenues

6.8 6.9 12.7 3.7 6.9

7.0 5.6 4.8

EBITDA

10.8 9.7 19.1 6.0 9.7

10.6 8.4 9.2

EBIT

Transaction Value

12.9 11.0 25.5 6.1 11.0

8.1 7.7 8.2

FCF(1)

962

Target

(2)

(1)

Varta AG Invensys’ Industrial Battery Business (Hawker) Varta Portable Battery Division Mean Median High Low Selected Multiple(2)

Rayovac Corp.

368.0 168.5

Exide Corporation Management/MSDW Capital Partners Deutsche Bank Enersys 262.0

392.3 425.0

$131.3

Transaction Value

C&D Technologies

Acquiror

Free cash flow is defined as EBITDA less capital expenditures. Selected multiple based upon the median.

Jul-02

Nov-00 Mar-02

Industrial Segment Mar-99 Industrial Battery Business of Johnson Controls Sep-00 GNB Technologies Nov-00 Yussa Inc.

Date Announced

r Criteria for selecting transactions include: r Relevant industry sector r Majority stake acquired r Relevant Size

($ in millions)

Industrial Segment

0.7 0.5 1.3 0.4 0.5

0.7

0.4 0.8

0.4 0.4

1.3

Revenues

7.7 7.2 10.7 6.0 7.2

6.7

6.0 7.2

7.7 NA

10.7

EBITDA

10.7 10.0 19.1 6.0 10.0

13.6

9.6 13.9

10.4 6.0

19.1

EBIT

Transaction Value

12.4 11.6 23.1 6.1 11.6

23.1

12.3 13.0

15.4 6.8

22.1

FCF(1)

963

$ 348 1,235 $1,583

11.5% 6.5

$71 1.25 0.8728 $62

0.25 0.9732 $48

$170.0 78.1 (44.0) (60.0) (17.2) 16.6 (43.1) (25.9) (3.5)

$50

$27.2 20.4 (2.0) (14.1) (6.3) 53.3 (26.1) (0.6) (2.0)

2005

$76

2.25 0.7828

$98

$196.4 74.1 (57.7) (60.0) (10.1) (7.3) (16.7) (18.2) (3.0)

2006

$79

3.25 0.7020

$112

$214.4 74.1 (64.6) (60.0) (10.1) (17.7) (0.8) (20.3) (3.0)

2007


Projected(1)

$82

4.25 0.6296

$131

$227.8 74.1 (69.6) (60.0) (10.1) (24.3) (0.8) (3.2) (3.0)

2008

$302 4.25 0.6296 1,962 $1,235

Terminal Period

(2)

Provided by the Company and its financial advisor. Assumed to be 38% of EBIT in North America and 25% of EBIT in Europe/ROW as per guidance from the Company and its financial advisor.

(1)

Free Cash Flow 2008 Projected EBITDAR Discount Period Convention Discount Rate/Factor Terminal Value EBITDA Multiple Present Values Sum of Discrete Present Values Present Value of Terminal Value Implied Enterprise Value

Operating Income Plus: Depreciation and Amortization Less: Cash Taxes(2) Less: Capital Expenditures Less: Existing Liability/Legacy Cost Less: Changes in Working Capital Less: Cash Restructuring/Severance Costs Less: Pensions Less: Daramec costs

2004


r DCF analysis using a 6.5x terminal value EBITDA multiple and 11.5% WACC

Summary of Cash Flows—6.5x Terminal Value EBITDA Multiple and 11.5% WACC ($ in millions)

Discoiunted Cash Flow Valuation Analysis

964 $356 1,481 $1,837

10.5% 7.5x

$170.0 78.1 (44.0) (60.0) (17.2) 16.6 (43.1) (25.9) (3.5) $71 1.25 0.8827 $63

$27.2 20.4 (2.0) (14.1) (8.3) 53.3 (26.1) (10.6) (2.0) $50 0.25 0.9753 $49

2005

$78

2.25 0.7988

$196.4 74.1 (57.7) (60.0) (10.1) (7.3) (16.7) (18.2) (3.0) $98

2006

$81

3.25 0.7229

$214.4 74.1 (64.6) (60.0) (10.1) (17.7) (0.8) (20.3) (3.0) $112

2007

$227.8 74.1 (69.6) (60.0) (10.1) (24.3) (0.8) (3.2) (3.0) $131

2008

$86

4.25 0.6542


Projected(1)

$302 4.25 0.6542 2,264 $1,481

Terminal Period

(2)

Provided by the Company and its financial advisor. Assumed to be 38% of EBIT in North America and 25% of EBIT in Europe/ROW as per guidance from the Company and its financial advisor.

(1)

Operating Income Plus: Depreciation and Amortization Less: Cash Taxes(2) Less: Capital Expenditures Less: Existing Liability / Legacy Cost Less: Changes in Working Capital Less: Cash Restructuring / Severance Costs Less: Pensions Less: Daramec costs Free Cash Flow 2008 Projected Discount Period Convention Discount Rate / Factor Terminal Value EBITDA Multiple Preset Values Sum of Discrete Present Values Present Value of Terminal Value Implied Enterprise Value

2004


r DCF analysis using a 7.5x terminal value EBITDA multiple and 10.5% WACC

($ in millions)

Summary of Cash Flows—7.5x Terminal Value EBITDA Multiple and 10.5% WACC

965

1.36

Consolidated Exide Median

CHP APCC ATSN PWER VICR

0.94 1.01 1.01 1.26 1.46 1.27 1.91 0.57 0.97 1.59 1.32 1.26 1.38 1.30 1.87 2.12 1.56 1.56

American Axle & Manufacturing Holdings, Inc. Arvinmeritor, Inc. BorgWarner, Inc. Colins & Aikman Corp. Dana Corporation Dura Automotive Systems, Inc. Hayes Lemmerz International Inc. Standard Motor Products Inc. Superior Industries International, Inc. Tenneco Automotive, Inc. Tower Automotive, Inc. Transportation Median C&D Technologies, Inc. American Power Conversion Corp. Artesyn Technologies, Inc. Power-One, Inc. Vicor Corporation Industrial Median

AXL ARM BWA CKC DCN DRRA HAYZ SMP SUP TEN TWR

Levered Beta

Company

Ticker

Beta Derivation

15.7 — 14.2 — —

$636.5 1,391.6 565.6 1,097.8 2,686.6 918.3 629.5 260.8 — 1,341.3 618.2

Net MV of Debt

502.4 3,406.7 319.6 996.4 461.3

$1,596.4 1,303.3 1,907.7 262.7 2,306.9 197.2 468.0 220.0 1,139.3 264.2 275.1

Market Equity Value

0.94

0.76 0.62 0.86 0.36 0.86 0.33 1.06 0.33 0.97 0.39 0.56 0.62 1.35 1.30 1.82 2.12 1.56 1.56

Unlevered Beta

966


Weighted Average Cost of Debt Calculation

r The analysis below is based upon the Company’s projected capital structure upon emergence as per the Business Plan and Commitment Letter from the Company’s senior secured lenders

US Term Loan European Term Loan Capital Leases and Other Debt Capital Leases—Europe Other Debt—Europe

Amount

Interest Rate (1)

$200.0 300.0 1.2 20.8 10.6 $532.5

5.9% 5.9% 4.9% 4.9% 7.8% 5.9%

(1)

Interest rates assume normalized LIBOR rate of approximately 1.9% or approximately 50 basis points above current levels.

Discount Rate Derivation ∗∗∗

Risk-Free Interest Rate (Twenty-year long-term treasury rate) Market Risk Premium Unlevered Asset Beta of Comparables Comparables Tax Rate Weight of Total Equity of Comparables Weight of Net Debt of Comparables Levered Equity Beta of Comparables (Ba+ (1+(Wd/We∗ (1-t))) Cost of Equity: Levered Equity Beta of Comparables Multiply: Market Risk Premium Industry Risk Premium Plus: Company Risk Premium Plus: Risk-Free Interest Rate Cost of Equity (Rc+Rf+Rp+Be∗ (Rm)) Pre-tax cost of debt Multiply: Assumed Tax Rate Cost of Debt (kd∗ (1-t)) Calculation of WACC: WACC ((Ke∗ We)+(Kd∗ Wd)) (Rounded)

Rf

4.3%

4.3%

Rm Ba t We Wd Be

7.0% 0.94 40.0% 73.2% 26.8% 1.14

7.0% 0.94 40.0% 73.2% 26.8% 1.14

Be Rm

1.14 7.0%

1.14 7.0%

Rc Rf Ke Kd t

8.0% 1.0% 4.3% 13.3% 5.9% 40.0%

8.0% 2.0% 4.3% 14.3% 5.9% 40.0%

3.5%

3.5%

10.5%

11.5%

11.4

967


Sum-Of-The-Parts/Debtors’ December Valuation Approach Valuation of the Industrial Segment

r We applied the Debtors’ valuation of the Industrial segment to our Sum-Of-The-Parts Analysis, as reflected on the prior page • EBITDAR reflects an assumed allocation of corporate overhead based on estimated FY 2003 contribution to EBITDAR ∗∗∗

∗∗∗

Multiples: Industrial Segment FYE 2005 EBITDAR: Industrial Segment(1) Valuation: Industrial Segment Value (1)

Range of Multiples 6.0x(1)

7.0x(1)

8.0x(1)

$ 82.9

$ 82.9

$ 82.9

$ 497.4

$ 580.3

$ 663.2

As per Review of Restructing Alternatives, dated December 17, 2002

968


11.5 Present Fair Salable Value, Liquidation in Place, and Orderly Liquidation Objective. Section 11.21 of Volume 1 of Bankruptcy and Insolvency Accounting discusses how, since the finding of insolvency is determined by a comparison of assets with liabilities, a proper determination of insolvency depends on valuation of liabilities as well as assets. Included below is a description of the appraisals and valuation data used in the chapter 11 filing of Doskocil. Major components are: premises used; enterprise or going-concern values; liquidation-in-place values; orderly liquidation values; assumptions and limiting conditions. (a) Definitions of Valuation Premises Valuation of the Business Enterprise Value of the Doskocil and Wilson Foods legal entities was conducted under the following premise of value: Present Fair Salable Value (PFSV) is the estimated amount that may be realized if assets are sold with reasonable promptness in an arm’s-length transaction under present market conditions.

Present Fair Salable Value restricts the transaction to be conducted with reasonable promptness in current market conditions. For the purposes of this analysis, reasonable promptness was considered to be nine (9) to twelve (12) months for buyer and seller to come together and reach agreement, but not necessarily close the transaction. Business Enterprise Value (BEV) is defined as the combination of all tangible and intangible assets of a continuing business. This includes a normal level of working capital. Alternatively, the Business Enterprise is equivalent to the Invested Capital of the business; that is, the combination of the value of the stockholders’ equity and long-term debt.

Valuation of the tangible assets of the Doskocil and Wilson Foods legal entities was performed under the Fair Market Value definition consistent with each of the following premises: Fair Market Value (FMV) is the estimated amount at which the appraised property might exchange between a willing buyer and a willing seller, neither being under compulsion, each having reasonable knowledge of all relevant facts, with equity to both. Fair Market Value for Liquidation in Place (FMV-LIP) assumes that the buyer and the seller would be contemplating retention of an individual property at its present location for continued use of like operations; it represents the estimated amount an individual property should realize if sold on a negotiated basis, given a reasonable amount of time in which to find a buyer; the property would be offered for sale intact, as a complete, installed assembly of tangible assets in an “as-is, where-is” condition, capable of operating and producing a product. The values are not intended to represent the amount that might be realized from piecemeal

11.5

Present Fair Salable Value, Liquidation in Place, and Orderly Liquidation

969

disposition of the property in the open market, its auction value, sale under forced or distress conditions, or from an alternative use of the property.

Implicit in this definition are the assumptions that:

r If the property were to sell, it is reasonable to expect the property to sell as an assembled unit based on its characteristics.

r Operation of the property is economically feasible under prudent management and provides a reasonable return on the appraised value of the designated property, plus the value of any property not included in the appraisal, and adequate net working capital. r Certain rights to the real estate would transfer as of the date of sale to permit retention of the personal property at its present location as part of concurrent future operations. r The right to operate the property would be conveyed and necessary permits could be transferred or obtained. Fair Market Value for Orderly Liquidation (FMV-OLV) is defined as the estimated gross amount a property should realize if sold piecemeal on a negotiated basis, given a reasonable amount of time in which to find a purchaser. The property would be offered for sale in an “as-is, where-is” condition and location, with the buyer assuming any costs to dismantle and remove. Properties Appraised Included in our BEV investigations were the following operating entities: Doskocil Continuing Operations Wilson Foods, including: Wilson Brands Wilson Continuing Operations (Deli & Food Service) Wilson Refinery These BEV groupings include the various subsidiaries owned by each of the legal entities. Tangible assets appraised included: land; land improvements; buildings; improvements to leased property; machinery; general plant, laboratory, cafeteria, and mobile equipment; racks, vats, molds, and other miscellaneous items; office furniture and equipment including computers. These assets were appraised at the following locations: Doskocil Continuing Operations: South Hutchinson, Kansas Jefferson, Wisconsin Sedalia, Missouri Wilson Foods, Wilson Brands: Birmingham, Alabama

970


Shreveport, Louisiana Marshall, Missouri Logansport, Indiana Oklahoma City, Oklahoma Wilson Foods, Wilson Continuing Operations: Cherokee, Iowa Clarinda, Iowa Wilson Foods, Wilson Refinery: Oklahoma City, Oklahoma Doskocil and Wilson Foods Subsidiaries: Various Locations Intangible assets included in this analysis were limited to the Doskocil and Wilson Foods trademarks and trade names. Methodology There are typically three approaches to value which are used. These are the cost, income, and market (or sales comparison) approaches. The Cost Approach estimates the value based on the cost of reproducing or replacing the property less depreciation from physical deterioration and functional and economic obsolescence, if present and measurable. This approach might be considered the most consistently reliable indication of value when applied to land improvements, special-purpose buildings, special structures, systems, and special machinery and equipment. The Income Approach estimates the value of the property based on a capitalization of identified income streams associated with the property. This approach is most often used to value properties that can be leased or to value certain other tangible or intangible assets where a definitive income stream can be identified. It is also used, through a discounted cash flow analysis, in estimating the Business Enterprise Value of an operating entity. The Market Approach estimates the value indicated by analysis of recent sales of comparable property. Similar properties offered for sale or lease in the current market are analyzed and compared with the property being appraised. Adjustments will be made for differences in time of the transaction; location; type, age, and condition of the improvements; and prospective use. It is also used, by analyzing securities of similar publicly traded companies, in estimating the Business Enterprise Value of an operating entity. These approaches were appropriately utilized in completing our analysis as dictated by the assets being valued and premise (definition) of value according to generally accepted valuation practice. In developing our opinions of value, we did not consider any taxes or transaction costs which may be incurred as a result of a transaction. We were provided with financial statements, operating statistics, and projections by Doskocil Companies management, and other data prepared by Goldman, Sachs & Co.

11.5


971

We accepted these data, without further review and verification, as fairly representing the historical, current, and projected future operations of the previously described entities. Valuation Conclusions Following the approaches outlined above, it is our opinion that on January 31, 1991, the value of the various operating entities and assets of Doskocil Companies, Inc., are as follows: (b) Business Enterprise Values

Doskocil Continuing Operations Wilson Foods Total Doskocil Companies, Inc.

Present Fair Salable Value ($,’000) 50,000 163,000 213,000

(c) Individual Asset Values: Liquidation in Place Fair Market Value Liquidation in Place ($,’000) Fixed Assets Doskocil Continuing Operations Real Estate Machinery & Equipment Office Furniture & Equipment Total Doskocil Continuing Operations Wilson Foods Real Estate Leasehold Improvements Machinery & Equipment Office Furniture & Equipment Total Wilson Foods Wilson Refinery Various Subsidiaries & Locations Total Fixed Assets Intangible Assets Trademarks/Trade Names Total Doskocil Companies, Inc.

13,000 11,480 375 $24,855 $19,605 1,850 19,285 395 $41,090 5,960 4,900 $76,850 13,000 $89,850

972


(d) Individual Asset Values: Orderly Liquidation Fair Market Value Orderly Liquidation ($,’000) Fixed Assets Doskocil Continuing Operations Real Estate Machinery & Equipment Office Furniture & Equipment Total Doskocil Continuing Operations Wilson Foods Real Estate Leasehold Improvements Machinery & Equipment Office Furniture & Equipment Total Wilson Foods Wilson Refinery Various Subsidiaries & Locations Total Fixed Assets Intangible Assets Trademarks/Trade Names Total Doskocil Companies, Inc.

$13,000 6,260 240 $19,500 19,605 0 10,600 270 $30,475 5,000 2,945 $57,920 13,000 $70,920

We have made no investigation of and assume no responsibility for the title to or any liabilities against the property appraised. The values reported herein are based upon the premises described and for the purposes stated, and are subject to the attached assumptions and limiting conditions and general service conditions. Respectfully Submitted, AMERICAN APPRAISAL ASSOCIATES, INC. William C. Golz, Jr. Vice President February 26, 1991 (e) Assumptions and Limiting Conditions We have no present or contemplated future interest in the property appraised nor any personal interest or bias on the subject matter or the parties involved in the appraisal. No responsibility is assumed for matters legal in nature. No investigation has been made of the title to or any liabilities against the property appraised. The appraisal presumes, unless otherwise noted, that the owner’s claim is valid, the property rights are good and marketable, and there are no encumbrances which cannot be cleared through normal processes. To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made nor

11.5


973

liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis. Land areas and descriptions used in this appraisal were furnished by the client and have not been verified by legal counsel or a licensed surveyor. The land description is included for identification purposes only and should not be used in a conveyance or other legal document without proper verification by an attorney. No soil analysis or geological studies were ordered or made in conjunction with this report, nor were any water, oil, gas, coal, or other subsurface mineral and use rights or conditions investigated. Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials could, if present, adversely affect the value of the property. Unless otherwise stated in this report, the existence of hazardous substance, which may or may not be present on or in the property, was not considered by the appraiser in the development of the conclusion of fair market value. The stated value estimate is predicated on the assumption that there is no material on or in the property that would cause such a loss in value. No responsibility is assumed for any such conditions, and the client has been advised that the appraiser is not qualified to detect such substances, quantify the impact on values, or develop the remedial cost. No environmental impact study has been ordered or made. Full compliance with applicable federal, state, and local environmental regulations and laws is assumed unless otherwise stated, defined, and considered in this report. It is also assumed that all required licenses, consents, or other legislative or administrative authority from any local, state, or national government or private entity organization either have been or can be obtained or renewed for any use which the report covers. Plats are presented only as aids in visualizing the property and its environment. Although the material was prepared using the best available data, it should not be considered as a survey or scaled for size. It is assumed that all applicable zoning and use regulations and restrictions have been complied with unless a nonconformity has been stated, defined, and considered in the appraisal report. Further, it is assumed that the utilization of the land and improvements is within the boundaries of the property described and that no encroachment or trespass exists unless noted in the report. We have made a physical inspection of the property and noted visible physical defects, if any, in our report. This inspection was made by individuals generally familiar with real estate and building construction. However, these individuals are not architectural or structural engineers who would have detailed knowledge of building design and structural integrity. Accordingly, we do not opine on, nor are we responsible for, the structural integrity of the property including its conformity to specific governmental code requirements, such as fire, building and safety, earthquake, and occupancy, or any physical defects which were not readily apparent to the appraisers during their inspection. The value or values presented in this report are based upon the premises outlined herein and are valid only for the purpose or purposes stated. The date of value to which the conclusions and opinions expressed apply is set forth in this report. Unless otherwise noted, this date represents the last date

974


of our physical inspection of the property. The value opinion herein rendered is based on the status of the national business economy and the purchasing power of the U.S. dollar as of that date. At the request of the client, the content of this appraisal report has been limited to that data presented herein. As such, it represents something less than a full and complete appraisal report. However, the substance of the appraisal investigation meets all of the requirements of a full and complete appraisal assignment and a complete record of all analyses and conclusions leading to the opinion of value stated herein has been retained in the appraiser’s files. Possession of this report or any copy thereof does not carry with it the right of publication. No portion of this report (especially any conclusion to use the identity of the appraiser or the firm with which he/she is connected, or any reference to the American Society of Appraisers, or the designations awarded by this organization) shall be disseminated to the public through prospectus, advertising, public relations, news, or any other means of communication without the written consent and approval of American Appraisal Associates, Inc. We understand our report will be used as part of the disclosure statement in your plan of reorganization to be submitted to the bankruptcy court. (f) General Service Conditions The service provided by American Appraisal Associates, Inc., will be performed in accordance with professional appraisal standards. Our compensation is not contingent in any way upon our conclusions of value. We assumed, without independent verification, the accuracy of all data provided to us. We will act as an independent contractor and reserved the right to use subcontractors. All files, workpapers or documents developed by us during the course of the engagement shall be our property. We will retain this data for at least five years. Our report is to be used only for the purpose stated herein for bankruptcy proceedings; any use or reliance for any other purpose, by you or third parties, is invalid. You may show our report in its entirety to those third parties who need to review the information contained herein. No reference to our name or our report, in whole or in part, in any public or equity offering document you prepare and/or distribute to third parties may be made without our written consent. You agree to indemnify and hold us harmless against and from any and all losses, claims, actions, damages, expenses or liabilities, including reasonable attorneys’ fees, to which we may become subject in connection with this engagement. You will not be liable for our negligence. Your obligation for indemnification and reimbursement shall extend to any controlling person of American Appraisal Associates, Inc., including any director, officer, employee, subcontractor, affiliate or agent. We reserve the right to include your company/firm name in our client list, but we will maintain the confidentiality of all conversations, documents provided to us, and the contents of our reports, subject to legal or administrative process or proceedings. These conditions can only be modified by written documents executed by both parties.

PART FOUR

Auditing Procedures and Reports

12 Audit Procedures and Special Areas of Inquiry

12.1

Report on Special Investigation

Objective. Section 12.9 of Volume 1 of Bankruptcy and Insolvency Accounting describes methods for discovering irregularities and fraud. This report shows the format and procedures followed by an accounting firm. November 23, 20X1 Mr. Attorney for the Creditors’ Committee of Atlanta, Georgia 30303 Dear Sir: We have performed the procedures requested by you as described on the following pages with respect to the activities of the debtor-in-possession Inc. This report is solely for your information and that of the of Court and the members of the unsecured creditors’ committee of Inc. in considering the activities of the debtor-in-possession and is not to be used for any other purpose. Because the procedures described on the following pages were not specified by the Court or the claimants, such procedures may not be sufficient for their purposes. Also, because these procedures were not sufficient to constitute an examination made in accordance with generally accepted accounting standards, we do not express an opinion on the amounts or items described on the following pages. In connection with performing such procedures, however, nothing came to our attention, other than that which is described in the following pages, which would cause us to believe that the amounts or items should be adjusted. Had we performed additional procedures that might have been requested by the Court or the claimants, or had we made an examination of the financial Inc. in accordance with generally accepted auditstatements of ing standards, other matters might have come to our attention that would have been reported to you.

977

978

Audit Procedures and Special Areas of Inquiry

This report relates only to the matters described herein, and does not extend Inc. taken as a whole for any date to the financial statements of or period. Yours very truly, CPA & Company Index and Summary of Areas Investigated to Date 1 Pro-Forma Liquidation Recovery Estimates 2 Post-Filing Methods of Handling Receipts and Disbursements 3 XYZ Loan Documents and Meeting with XYZ Concerning Monitoring Collateral 4 ABC Loan Documents and Meeting with ABC Concerning Fixed Asset Appraisal 5 Meeting with PCPA 6 Corporate Controls in the Area of Inventory 7 Related Party Transactions 8 Consolidated Tax Returns 9 Omitted 10 Post-Filing Timeliness of Financial Data 11 Forward Commitments 12 Omitted 1. Pro-Forma Liquidation Recovery Estimates We agreed amounts from the October 1, 20X1 financial statements to the divisional general ledgers. We discussed the miscellaneous other asset accounts and the miscellaneous other liability accounts with Controller, as to their content. Observations: 1 The balance sheet includes some deferred costs, approximately $204,000, which would probably not be recoverable upon liquidation of the Company. 2 Accounts payable accounts include a “pad” of approximately $100,000 to cover possible unrecorded liabilities and “accrued other” includes an amount relating to an employee benefit accrual relating to the purchase of the Plant amounting to approximately $139,000. We adjusted, in the manner indicated below, the amounts reflected in the above-described balance sheet to derive a pro-forma estimate of an amount that might have been recoverable by the unsecured creditors upon liquidation at October 1, 20X1 based on the indicated assumptions. The assumptions are not intended to reflect the actual amounts recoverable but are used only for illustrative purposes. Actual results achieved during any liquidation would vary from the assumptions, and such variations could be significant.

12.1


979

The adjustments were based on the following assumptions: 1 The collection of 70% of existing receivables 2 The recovery of 75% of the book value of existing inventories 3 Realization of the preliminary estimate of net proceeds of $2,215,000 on liquidation of property, plant and equipment, based upon preliminary discussions with Bank 4 Payment of certain priority liabilities of approximately $440,000 5 No recovery of deferred costs of approximately $204,000 6 No payment with respect to the “pad” in accounts payable of approximately $100,000 and the employee benefit accrual of approximately $139,000 relating to the purchase of the Plant Given the above, the unsecured creditors could have expected to receive approximately 24 cents on the dollar upon liquidation at October 1, 20X1 prior to administrative fees and any amounts potentially due or receivable with at the location. If the assumption as to respect to the inventory recovery were changed to 40%, the potential payment to unsecured creditors before administrative fees would have been approximately 4 cents on the dollar. 2. Post-Filing Methods of Handling Receipts and Disbursements , Vice-President and , ConWe discussed with troller, the Company’s post-filing methods of handling cash receipts and disbursements at the various locations and we were informed of the following: (1) Cash Receipts Customer remittances are mailed to a lock box at the C&S Bank in Atlanta. However, ABC is no longer handling the depositing and recording of the daily remittances. Each day a courier delivers the sealed receipts to the general offices. A clerk opens the sealed receipts, prepares a listing of checks, prepares the deposit to First Atlanta Bank, and then makes account. The check listings are then sent to the deposit to the various divisions where accounts receivable are relieved. Although a single clerk handles cash receipts with no dual participation, she appears to have no other accounting duties which would conflict with her cash receipts duties. (2) Cash Disbursements Prior to filing of the chapter 11, disbursements greater than $500 required dual signatures of officers at the Corporate offices in Atlanta. Subsettlements, all sequent to the filing, with the exception of disbursements are made at the divisional level. We observed the procelocation and at the dures being followed at the location and discussed the procedures being utilized at the other locations with company officials. Dual signatures are required with both checksigners looking at the supporting documentation which includes the related receiving reports. The supporting documentation is then either stamped “paid” or perforated and the checks are mailed independently of the check

980


preparation and signing functions. Copies of all released checks are then sent to the Corporate headquarters. Observation: It appears that post-filing controls over the handling of cash disbursements are less stringent than pre-filing controls but because of the COD status of many divisional purchases, it may not be possible to strengthen such controls immediately. However, we were informed that not all of the local banks being utilized by the division have been given signature cards and dual signature instructions. We feel that this should be done immediately. 3. XYZ Loan Documents and Meeting with XYZ Concerning Monitoring Collateral

r We read the XYZ loan documents. r We met with XYZ representative,

, and discussed XYZ monitoring of collateral. r Mr. indicated that XYZ had continuously monitored collateral to the date of filing via periodic confirmation of accounts receivable balances and monitoring of monthly physical inventories. In addition, XYZ performed trend analysis on this data and on other financial informaInc. XYZ would not allow examination tion received from of their working papers. r Observation: No conclusions can be reached concerning the extent of reliance which could be placed on work performed by XYZ. 4. ABC Loan Documents and Meeting with ABC Concerning Fixed Asset Appraisal

r We read the ABC loan documents. r We met with an ABC representative, Mr.

and their attorney, . They indicated that ABC is in the process of obtaining Mr. an appraisal of the property, plant and equipment from TBC Appraisers, this appraisal should be available around the first week in December, and that they would make the appraisal available to us.

5. Meeting with Prior CPA (PCPA)

r We discussed with Mr.

, partner, and Mr. , manager, over from PCPA the professional services performed for the last several years to determine whether there were any significant problems encountered by PCPA in the conduct of their audits and whether there had been any significant disagreements with management. r Observation: Messrs. and indicated that the only significant problem area related to inventory controls. In addition, and indicated that there had been no Messrs. Inc. We significant disagreements with the management of did not review PCPA’s workpapers. Review of the PCPA’s workpapers and further inventory testing appears to be warranted.

12.1


981

6. Corporate Controls in the Area of Inventory

r We discussed

Inc.’s method of accounting for inventory with and locations. management personnel at the r We visited the Division Plant while a physical inventory “count” was in progress. r We read the report issued by Arthur Andersen & Company dated April 21, 20X1 describing the limited procedures performed by them with respect to the January 31, 20X1 physical inventory. r Observation: In performing the above procedures, we noted that the maand raw materials inventories are jority of the estimated; these estimates are only as reliable as the estimating capability of the inventory teams; accordingly, such estimates may or may not be reliable. We have recommended that a controlled physical inventory be taken at all locations as soon as practicable. 7. Related Party Transactions

r We discussed with

r r

r r

r

r

, Controller, the changing corporate strucInc., a related company operating as a ture of broker (i.e., from a subsidiary of Inc. to a division of Inc. to a subsidiary of ). Such changes are reflected in the consolidated corporate tax returns for the indicated periods. We also looked at supporting documentation for all direct transactions between as reflected by accounts payable vendor analysis computer run, for the period February 1, 20X1 through October 31, 20X1. Observation: Based upon our limited procedures, it appears that transshould be reviewed further as to possible actions between recovery as preferential. We discussed with management the allocation of income tax benefits and the parent. The information rebetween and to the ceived was agreed to worksheets prepared by consolidated tax returns. Observation: There should be further investigation into the possible reIndustries relating to covery of approximately $66,000 from allocation of an income tax benefit in 20X0. We read the non-competition agreements between and relating to the purchase of the division in 20W1 and discussed with management the payments made pursuant to these agreements since 20W1. Observation: There should be further investigation into the possible reduring 20X1 and covery of approximately $36,000 paid to 20X2 after the expiration of the original 10 year term of the original agreement. We agreed officer’s compensation and “perks” for the twelve months ended October 30, 20X1 to the payroll records, and read the officer’s compensation as shown on the Company’s consolidated income tax returns

982


for the years ended January 31, 20W1, January 31, 20X0 and January 31, 20X1. r Observation: Most family members were removed from the payroll in October, 20X1. r Observation: There is a possibility that a portion of salary ) from October, 20X0 to October, 20X1, approximately (paid by . $34,000, may be recoverable due to his employment by r Observation: Further investigation into the area of “reasonable compensation” may be desired. 8. Consolidated Tax Returns

r We read the

consolidated tax returns for the years ended January 31, 20W1, 20X0 and 20X1. r Observation: It appears that the $5,000,000 upstream dividend to in 20X0 was invested in various “blue-chip” stocks and bonds. The consolidated returns indicate that there are numerous transactions in this portfolio during each year and there has been a general only activity is investpreservation of equity. It appears ment transactions relating to its liquid assets. 10. Post-Filing Timeliness of Financial Data

r We inquired as to the timeliness of monthly financial statements with personnel. Currently divisional financial statements are available by approximately the 10th business day following month end; however, consolidated statements are not ready until approximately the 20th business day. r Observation: In order for creditors and the debtor-in-possession to make timely decisions, we believe this information should be and could be available much earlier in the month. 11. Forward Commitments

r We have discussed with

, Vice-President, and , Controller, the possibility of the Company having significant forward commitments and we were told that the Company does have some forward contracts to provide materials. However, these contracts are based prices plus or minus a percentage. Company upon current officials have indicated to us that they do not hedge their metal purchases. r We have read the contract with related to the at the Plant and discussed the contract with Company offilocation and at the corporate offices. cials at the r Observation: The Company has a contract with to mine . This contract includes the purchase and reprocess the at current of reprocessed materials from the prices. In order to determine the net present value to of the , further analysis of the would be necessary in content. order to estimate the size and recoverable

12.2

12.2

Audit Program Guide

983

Audit Program Guide

Objective. Section 12.32 of Volume 1 of Bankruptcy and Insolvency Accounting indicates that an audit program guide may be used to assist accountants who are conducting audits of companies involved in bankruptcy and insolvency proceedings. The audit program guide presented here is, by definition, designed to guide the auditor in preparing a customized program for each individual engagement; it is not intended to be used as a final program. Modification should and must be made, depending on the nature and characteristics of each situation, including the purpose of the audit. Emphasis for an audit designed to provide information to help management and the creditors in determining the type of corrective action needed for the company to be able to return to profitable operations would be different from emphasis for an investigative audit to determine the extent to which management has misused the company’s resources. In conducting an investigative audit, special emphasis is placed on locating the property of the debtor. At times, when the auditor may be retained for the purpose of valuing the debtor’s business, emphasis is placed on locating and properly valuing the remaining assets and liabilities of the debtor. Where going-concern values must be determined, it is necessary to consider many factors, including the past operations of the debtor and the prospects for the future. The program will also change substantially depending on the type of entity—service, retail, manufacturing, and so forth. Judgment on the part of the auditor is of paramount importance, because it will determine the total time consumed on the engagement and the relative value of such inputs to the creditors and debtor. The auditor must see that the efforts expended are efficient and directed toward the proper areas. The procedures and responsibilities of the auditor may also vary, depending on whether retention was by a creditors’ committee for an out-of-court settlement or assignment under state law, or by the courts in a chapter 11 reorganization or chapter 7 liquidation proceeding. In working with a company in financial difficulty, the accountant must at all times keep in mind what the objectives of the work are and design the audit accordingly. The items in this program should be used as a guide and modified according to the objective of each particular audit. (a) General Procedures 1 Prepare memorandum outlining: a How the engagement was acquired. If by referral, give source and date of referral. b Principal creditors and members of creditors’ committee. c Attorneys for creditors’ committee and debtor. d Background information about the company, including type of business, locations of offices, and any other general information about the firm. e The estimated assets and liabilities of the company. f Any affiliates or subsidiaries.

984


2 Prepare an engagement letter or request for retention order. In an out-ofcourt committee case, the accounting firm should make sure the attorney for creditors and the chairman of the creditors’ committee arrange for covering of all fees, especially if talks cease and court action occurs. In an assignment under state law (providing judicial supervision of the liquidation), chapter 11 (reorganization), or chapter 7 (liquidation), an order is generally required and always recommended if payment is expected from the funds of the estate. However, if the work is accepted because of the “credit body,” the cooperation of the creditors’ committee must also be obtained to protect the accounting firm in payment of fees. If there are affiliates or other related parties not involved in the “official” action, acquire an advance payment if at all possible, and have them sign the engagement letter. 3 Obtain copies or extract significant information and review the following in order to become familiar with the background and details of the firm’s operations: a Recent reports issued to credit agencies. b Financial statements, for the previous three to five years, issued to stockholders, the SEC, creditors, banks, and others. c Bank statements for the last year. (Review for activity in account and unusually large deposits or charges.) d Federal, state, and local income and franchise tax returns and revenue agents’ reports for the last three years. e Copies of inventories for last tax return, last interim statement, and last issued statement. f Board of directors’ and its executive committee’s minutes for the last two years prior to the petition date or commencement of settlement negotiations. g Selected correspondence, for the last year prior to the date when proceedings were initiated (based on the nature of the case, select those documents that are most important for background information), from the files of: 1 Attorneys. 2 Independent accountants. 3 Creditors’ committee. 4 Bankruptcy judge, assignee, or other custodian of assets. 5 Banks and other major creditors. 6 Insurance companies. 7 SEC. 8 IRS. 9 Management consultants. 10 Chief operating officers. h Bankruptcy files in federal court building. i Management letters and engagement letters, for past two years, of previous accountant.

12.2

4 5 6

7

985

Audit Program Guide

j Contracts and agreements relating to: 1 Leases. 2 Shareholders’ buy/sell agreements. 3 Retirement agreements. 4 Insurance agreements. 5 Employment contracts. 6 Construction contracts. 7 Other commitments. Compare the current statement of financial position with those recently issued to creditors. Account for the differences during audit. Determine whether it will be necessary to have fixed assets and inventories appraised for liquidation value by an appraiser or auctioneer. Prepare or, if possible, have management prepare a list of the following books and records and state location (on premises, in warehouse, in attorney’s office or accountant’s office): a General ledger. b Journals. c Subsidiary ledgers. d Supporting records, such as minutes of directors’ meetings, perpetual inventory cards, production records, cost sheets, and stock records. Management should indicate by signature that the list includes all of the company’s books and records, to the best of their knowledge. In order to identify related persons, insiders, and affiliated entities, prepare an analysis of key executives, major stockholders, affiliated companies, and other affiliations, such as joint ventures, in the following manner (for public companies, review Forms 10K and S-1, proxy statements, and other statements filed with the SEC or other regulatory agencies): a Key Executives Position

Office Telephone Address

Name

Period with Company

Extension

b Major Stockholders Shares Owned Date of Petition Name

Other Dates (list)

No.

%

No.

%

No.

%

No.

%

No.

%

c Affiliated Companies Name

Telephone Address

Number

Owners

986


d Joint Ventures Participants

Address

Telephone Number

Description of Venture

% Participation

8 Obtain names, addresses, and telephone numbers of key bookkeeping personnel. 9 Review bankruptcy audit program, consider the information determined from the analysis of the “general” procedures, and modify accordingly. 10 Prepare or have client supply trial balance for year-end audit date, date of bankruptcy court petition, and, for first audits, trial balance as of the beginning of the period covered by audit. 11 Maintain a “time and expense” log showing the name of each person, hours expended, nature of function performed, and other expenses incurred. 12 Prepare petition for fee allowance in tentative form as soon as major part of work is complete, then update the petition before filing with bankruptcy court. (i) Review of Reports and Information Filed with Courts 1 On a test basis, trace to the books and records significant data on supporting schedules that were filed with the petition or subsequent to the petition as required by the Bankruptcy Code. 2 Agree financial statements and other information filed with the court subsequent to petition with company books of original entries. (ii) Review of Reports and Information Filed with the SEC and Released to Public Investors 1 Review annual reports for the past three to five years to determine: a Unusual trends. b Adequacy of disclosures. c Unusual transactions requiring further investigation. 2 Review all unusual year-end transactions and adjustments for the prior two years (such transactions may be evidenced by quarterly results). 3 Review and reconcile quarterly reports (Form 10Q) filed with the SEC with internally prepared financial reports. In connection therewith, review: a Unusual quarterly adjustments. b Adequacy of assumptions and accounting controls. 4 Compare the information in the annual reports and in statements filed with the SEC for the past two years with books and records. Explain any material differences. 5 Review divisional operating results reported in the annual and quarterly reports to determine any unusual trends or relationship of revenues and/or expenses.

12.2

Audit Program Guide

987

6 Review all press releases and published articles in possession of the debtor for the period from one year prior to the filing of the petition to the present. (iii) Reasons for Financial Difficulty 1 Prepare comparative statements of financial position for the past three to five years and examine (it may also be advisable to discuss these with debtor) for the following failure tendencies: a Weakening cash position. b Insufficient working capital. c Overinvestment in receivables or inventories. d Overexpansion in fixed assets. e Increasing bank loans or other current liabilities. f Excessive funded debt and fixed liabilities. g Overcapitalization. h Subordination of loans to banks and creditors. 2 Prepare comparative income statements showing dollars and percentages for the past three to five years, and examine for the following failure tendencies: a Declining sales. b Increasing operating costs and overhead. c Excessive interest and other fixed expenses. d Excessive dividends and withdrawals compared to earnings records. e Declining net profits and lower return on invested capital. f Increased sales with reduced markup. 3 Calculate the following ratios for the year being audited and the prior year. If possible, determine why the unfavorable ratio developed. Current ratio. Quick ratio. Cash flow—total liabilities. Retained earnings—total assets. Inventory—sales. Return on total assets. Trade payables—inventory. Percent increase in inventory—percent increase in sales. Percent increase in off-balance sheet financing. Fixed charge coverage. After the ratios have been calculated, evaluate them for changes from the previous year to the current year and for unusual results, and attempt to determine why the ratio is unfavorable or different from the normal results. In making this assessment, the nature and size of the company, the type of industry, the nature of the examination, and the type of proceeding must be considered.

988


4 Review the method used to determine division profitability for: a Comparability among all segments. b Adequacy and/or reliability of results achieved. 5 Consider the impact that economic conditions had on the deterioration of the company’s position. Evaluate the manner in which the debtor reacted to the economic climate. 6 Determine the efficiency and adequacy of the information system by reviewing the type of information available to the management where critical decisions are made (for example, types of merchandising reports, nature of divisional performance reports, types of reports prepared when a product line was eliminated, and so forth). 7 Compare the actual results for the past three years with the firm’s forecasts. Attempt to find the reason for the difference. 8 Based on the above analysis, prepare a brief summary of the major reasons for the financial difficulty. (iv) Date of Insolvency (Determination of) 1 Examine internal financial reports. Look for periods that have large cash outflows and operating losses. 2 Examine reports issued to creditors. 3 Examine pending legal action for nonpayment of obligations. 4 Examine correspondence with lenders. 5 Prepare an aging schedule of vouchers payable. 6 Look for large and unusual cash outlays such as settlement of legal matters and related attorneys’ fees. (b) Cash (i) Cash on Deposit for months (especially 1 Examine canceled checks in excess of $ the 90 days prior to the date of the bankruptcy petition) for endorsement and cancellation dates. Be alert for endorsements indicating: a Payments to owners, directors, and/or officers. b Payments to affiliated companies. c Loan and exchange transactions. d Checks made payable to cash. e Cashing by “check cashers” (numbered endorsements), multiple endorsements, or other unusual and suspicious endorsements that may indicate fraudulent payments. 2 Review bank reconciliations of all bank accounts for the last statement, to verify balances; uncover any unusual disbursements. 3 Request “cutoff” bank statements and reconcile. 4 Test duplicate deposit slips to entries in cash receipts journal and to remittance advices for months.

12.2

Audit Program Guide

989

5 Prepare a schedule of the reconciliation of sales to bank deposits from to to determine: a The extent and disposition of cash holdbacks. b The existence and degree of control over sales subsequent to the petition. 6 Verify all general journal entries affecting cash, including an examination of all debit and credit memos. 7 Prepare reversal entries for outstanding checks that are unissued and on hand or for which there are no funds in the bank account. 8 Confirm balances with bank. 9 Review the propriety of the handling of checks outstanding at the petition date. 10 Review interbank transfers for names of banks not reflected on books. Be alert during examination for checks made payable to banks (and bank accounts) other than those maintained by the company. Vouch transfers during the period from to to in excess of $ the recipient’s statement. 11 Scan cash receipts, records and returns, and allowance registers for possible unwarranted credits. 12 Examine receipts for disclosure of unusual sources of income that may lead to otherwise unknown assets. (ii) Cash on Hand 1 2 3 4 5 6

Determine existing funds and take possession and control. Count and reconcile funds simultaneously. Test vouchers for supporting documents, signatures, and approvals. Note all vouchers relating to loans or any other unusual vouchers. Return funds to custodians. If funds include loans and vouchers not recorded, adjust account to actual cash balance.

(c) Accounts and Notes Receivable 1 Test or prepare aged schedule showing: a Name and address. b Balance due. c Accounts that are assigned. d Aging based on invoice data as follows: 1 Current month. 2 First preceding month. 3 Second preceding month. 4 Third preceding month. 5 Fourth preceding month and prior. e Test d above by examining shipping documents.

990


2 Review aged schedule and determine required allowance for uncollectible accounts. 3 Tie in supporting records with statement amount and receivables. 4 Calculate allowance for trade and cash discounts. 5 Determine existence and approximate amount of possible advertising or other types of allowances. 6 Determine possibility and approximate amount of recorded and unrecorded sales on consignment. 7 Review sales contracts for unrecorded contractual rights of a recoverable nature. 8 Determine method of recording sample lines in possession of sales representatives or agents. 9 Review propriety of recent write-offs, large returns, and compromises of receivables. 10 Request confirmation of receivable balances with customer or collection agent. 11 List subsequent collections of receivables on separate schedule, indicating full details. (This will be required in final accounting for court.) 12 Determine that collection agents have turned over all accounts collected. 13 Compare list of receivables with accounts payable to determine whether the business is obligated to any of its debtors. In preparing reports for the creditors’ committee, it may be desirable to offset a customer’s balance in accounts payable against the receivable. In all reports, the amounts and accounts should be disclosed. (d) Inventories (i) General 1 Obtain copies of previous inventories for the past two years, or statements from management as to their disposition. 2 Perform unit reconciliation from previous to current physical inventory date: Item Identification Quantity in prior inventory Add: Quantity purchased Total to account for Less: Quantity sold Total quantity that should be on hand Quantity on hand (actual count) Discrepancy This step may be difficult to perform, depending on the type of inventory system.

12.2

3 4 5 6

7

8

9 10

Audit Program Guide

991

If unit information is not available, dollar values can be used by removing the gross profit from sales. Determine whether there are merchandise liens outstanding, list them, giving detailed information. List separately and evaluate “bill and hold” merchandise in hands of creditors (check with counsel). Review pending merchandise and freight for possible refunds. Review all material inventory transactions with owners, officers, and affiliated companies during the year prior to the petition to ascertain that they were “arm’s length” transactions. Schedule, for a test of adequate consideration, ( %) transactions, selected on a random basis, with each supplier during the year prior to the filing of the petition. Examine any unusual transaction involving inventory, including any transaction where the method and/or time of payments are different from those customary for this industry. (Examples are over-and-under billing arrangements, rebates, use of inventory for payment of account, and so forth.) Determine that there was a proper cutoff of purchases as of the date the petition was filed. subsequent Review all inventory transactions in excess of $ to the date of the petition. Compare invoice with receiving documents and ascertain that the goods either were sold or are still on hand.

(ii) Observation 1 Observe physical inventory. If business has been closed and no employees are available, arrange to have inventory examined, listed, and valued by a public auction company. This expense should be authorized by the bankruptcy judge. 2 Establish tag control to ascertain that all items are counted and there are no double countings. 3 Make test counts of inventory items, tracing them to completed inventory records. 4 Confirm inventory at contractors, if material. Prepare separate schedule of this inventory and list related “liens” by contractors. 5 Evaluate inventory at contractors to determine advisability of paying off contractor and obtaining merchandise. 6 Review cutoffs on all merchandise—incoming, outgoing, and in process. (iii) Pricing 1 Establish basis of valuation of prior inventories. 2 Obtain copies of insurance report forms reflecting inventory values, and compare to recorded values.

992


3 Test-check pricing of: a Raw materials. b Work-in-process. c Finished goods. d Packing supplies. e Factory supplies. f Obsolete inventory. 4 For manufacturing operations: a Review internal procedures for recording flow of raw materials. b Review costing of product lines and verify existence of pricing by book and/or formula. c Compare the incremental cost required to complete the work-inprocess with the amount to be realized on sale, to determine whether completion is advisable. (iv) Curtailment of Operations 1 Ascertain the method utilized by the company to dispose of assets in divisions and/or product lines discontinued. At a minimum, determine: a The extent to which competitive bids were obtained. b The control system established to ensure: 1 That all funds were received by the company relative to the sale. 2 That all assets available for sale were either sold or are still held and are available for sale (utilize historical records). 3 That there was proper authorization for the sale, when sales occurred after the petition was filed. 2 Evaluate the method(s) utilized by the debtor and/or appraisers to value the asset to be sold. 3 Ascertain that approval was received for the sale of assets at amounts substantially less than appraised values.

(e) Prepaid Expenses (i) Prepaid Insurance 1 Prepare a detailed analysis of insurance accounts showing the prepaid amounts, the cash and loan values of life insurance, and the recoverable deposit premiums. 2 Obtain a schedule of insurance in force from brokers, and compare with records. 3 Review calculation of premium earned based on payroll figures. If the advance exceeds the amount determined from payroll, set it up as a prepaid expense. If the premium is greater than the deposit, show the difference as an accrued liability. 4 Determine the short-rate cancellation values of insurance in force.

12.2

Audit Program Guide

993

5 Determine whether life insurance policies on the lives of corporate officers exist by examining entries on corporate books, by searching for the policies themselves, by analyzing the paid and unpaid bills, or by looking for entries on the books that represent payments to life insurance companies for premiums. 6 Confirm cash and loan values of life insurance with insurers. 7 Determine that all dividends received on the policies have been credited to the corporation. 8 Review insurance claims for possible refunds. (ii) Deposits 1 Examine the correspondence file to see whether there are any deposits or securities unrecorded.

(f) Property, Plant, and Equipment 1 Review all purchases of property, plant, and equipment within the year prior to the petition, to see that the amount paid was not in excess of the value of assets. 2 Prepare a schedule of and review all sales of property, plant, and equipment subsequent to the date of the bankruptcy petition and for one year prior to such date, to ascertain that the amount received was not less than the fair value of the asset transferred. 3 Verify that there are no unrecorded retirements. 4 Establish the existence of plant assets by inspecting major items. 5 Inspect contracts, deeds, title guarantee policies, and other related documents to determine ownership. 6 Determine existence and extent to which property items are security for existing debts. 7 Determine potential loss on abandonment of leasehold improvements. 8 Determine status of real estate tax arrearages. 9 Obtain court-authorized estimates of realizable value of fixed assets from approved appraisers of equipment manufacturers. 10 Review in detail all property, plant, and equipment transactions with owners, officers, and affiliated companies during two years prior to and the period subsequent to the filing of the petition. 11 Evaluate the adequacy of the allowance for depreciation. 12 Determine the existence and disposition of company cars needed by officers. 13 Ascertain, with counsel’s assistance, potential rebates of personal property and real estate taxes paid under discriminatory tax rates. 14 Search county recorder’s offices in counties in which the company is located or has done business, to locate assets not recorded on the debtor’s books.

994


(g) Investments and Other Assets 1 Review percent of the investment purchase transactions during the year prior to and the period subsequent to the petition, to see that the consideration paid was not in excess of the value of the securities. percent of the sales of investments during the year 2 Review prior to and the period subsequent to the petition, to ascertain that the amount received was adequate. 3 Review in detail all investment and other assets transactions with ownyears prior to ers, officers, and affiliated companies during the petition and also during the period subsequent to the petition. 4 Carefully examine all charges and credits to investments and other assets during the year prior to the petition that did not arise from cash transactions, to uncover a fraudulent transfer or a preferential payment. (h) Accounts Payable 1 Prepare or obtain from the client a schedule of the accounts payable, including names and addresses of creditors, amount owed, and distribution by size of debt. 2 Examine and prepare a schedule of all material payments and debits (those ) within the 90-day period (or in the aggregate which exceed $ longer) prior to the date of the petition, to determine possible preferential treatment to specific creditors; consider the necessity to investigate further the accounts of those where the balance decreased substantially during the period six months prior to the petition. List all payments made before the due date and material returns. 3 Prepare a worksheet of changes in major creditors’ accounts for the period of at least 90 days prior to the petition, to ascertain that certain suppliers are not being favored by substantial payments, returns, or offsets. 4 Scrutinize accounts payable for names of related companies or relatives, and investigate the nature and circumstances of any such accounts for the year prior to the petition. 5 Prepare a list of major vendors (representing more than percent of merchandise purchased in a particular department but not less ) and dollar purchases from to than $ and investigate: a Interrelationships of any officers and directors. b Markup on purchased products. 6 Compare balances shown on the books with any claims filed by creditors, and reconcile significant differences. 7 Review the accounts payable as of the date the petition was filed, to ascertain that the transaction activity cutoffs for prefiling obligations were properly made. 8 Ascertain that all payments on accounts made after the date the petition was filed are for obligations incurred subsequent to the petition date.

12.2

Audit Program Guide

995

9 Group liabilities due to factors. If a supplier factors its accounts, the obligation is to the factor. Obligations to suppliers using the same factor should be shown under the factor’s name. 10 See § 12.28 for an audit program for preference search. (i) Accrued Expenses and Other Current Liabilities 1 Review the account balances as of the date the petition was filed, to ascertain that the transaction activity cutoffs for prefiling obligations were properly made. (i) Taxes Payable 1 Determine the amount of tax liability indicated in the records. 2 Examine the most recently filed returns and review all open year’s returns. 3 Ascertain the unpaid balance of the following taxes: a Federal, state, and local corporate tax returns. b Federal, state, and local payroll tax returns. c State and local sales tax returns. d State and local property tax returns. e Commercial rent, gross receipts, or occupancy tax returns (usually of a local nature). f Truck mileage tax returns. g Capital stock franchise tax returns or stock transfer tax returns. 4 Compute accrued payroll taxes to the date of the petition or of the report if an out-of-court settlement is being considered. 5 Analyze expense accounts and establish relationship to payroll. 6 Reconcile tax claims filed by various government authorities to amounts determined from examination of returns and records. Notify counsel of any difference so that claims or records can be adjusted. 7 Verify that all tax claims are properly classified as administration or nonadministration claims. 8 Determine the nature, amount, and availability of net operating loss carryforward that can be used by the reorganized debtor. (ii) Wages Payable and Other Accrued Expenses 1 Prepare or have management prepare a schedule showing name, address, social security number, gross wages due, period covered, and taxes to be withheld for each employee (on hourly wages, salary, or commissions). 2 Verify amounts due against payroll records, to establish that the particular employee in question actually worked for the period claimed. 3 Where union contracts exist, scrutinize the contracts to determine how much severance, sick leave, or vacation pay employees are entitled to receive.

996


4 Segregate the wages and accrued vacation, sick leave, and severance pay into priority and nonpriority classifications. 5 Accrue other wage-related obligations such as union fund contributions and retirement fund contributions. 6 Schedule all other unpaid and unrecorded expenses. 7 Determine existence and terms of any employee benefit plans. (j) Notes Payable and Long-Term Debt (i) Notes Payable 1 Prepare schedule showing: a Creditor name and address. b Date of inception. c Original principal amount and unpaid balance. d Interest rate. e Due date. f Description of security given and date lien was granted. g Guarantors and extent of their obligation. h Restrictive clauses and breaches thereof. i Arrears in principal and interest payments. 2 Review the timing and nature of all security given (at least 90) days prior to the petition. 3 Examine all material payments and other debits within a period of at least 90 days prior to the petition, to determine possible preferential treatment of specific creditors. List details with respect to large returns of merchandise and payments before maturity. 4 Review all material payable transactions with owners, officers, and affiliated companies during the year prior to bankruptcy, to ascertain that they were “arm’s length” transactions. 5 Compare balances shown on books with any claims filed and reconcile significant differences. 6 Ascertain whether any personal guarantees were given to any creditors within one year prior to the date of the petition. days before the petition was 7 Review the account transactions days subsequent to the filing, to ascertain that the filed and cutoffs for prefiling obligations were properly made. 8 Ascertain that all payments on notes made after the date the petition was filed are for obligations incurred subsequent to the petition date. (ii) Mortgages and Other Secured Debts 1 Prepare schedule showing: a Creditor name and address. b Original principal amount and unpaid balance.

12.2

2 3

4

5

6

7 8 9

10 11

Audit Program Guide

997

c Arrearage, in number of payments and total amount. d Date of inception. e Interest rate. f Copy of amortization schedule, including any balloon payment. g Description of security given and date lien was granted. h Guarantors and extent of their obligation. i Restrictive clauses and indication of breaches. j Extent of real estate tax arrearages. k Assessed value of real estate given as security. Review the timing and nature of all security given for a period of at least 90 days (one year for insiders) prior to petition. Where accounts receivable are financed or factored, obtain a copy of the agreement and list special terms. List monthly debits and credits for a minimum of 12 months showing: a Cash advances. b Factor charges. c Interest charges. d Chargebacks. Determine for factored or financed accounts receivable: a That no improprieties exist. b That the lender has or has not unreasonably improved its position by taking collateral for less than fair value. c That the lender has at all times maintained dominion and control over its collateral, with particular emphasis on promptness of remittances to the debtor. d That chargebacks on factored accounts have not been duplicated. Examine all material payments and other debits within a period of at least 90 days prior to the petition, to determine possible preferential treatment to specific creditors. List details with respect to large returns of merchandise and payments before maturity. Review all material payable transactions with owners, officers, and affiliated companies during the year prior to the petition, to ascertain that they were “arm’s length” transactions. Compare balances shown on books with claims filed, and reconcile significant differences. Ascertain whether any personal guarantees were given to any creditors 90 days (one year for insiders) prior to the petition. Review the account transactions 15 days before the petition was filed and 15 days subsequent to the filing, to ascertain that the cutoffs for prefiling obligations were properly made. Ascertain that all payments on notes made after the date the petition was filed are for obligations incurred subsequent to the petition date. Obtain details of UCC filings from the secretary of state for each state where the debtor had assets, to verify collateral given for loans and advances.

998


(k) Stockholders’ Equity (i) Contributed Capital 1 Obtain stock certificate book and prepare schedule indicating: a Certificate number. b Shareholder. c Number of shares. d Date issued. e Date canceled. f Restrictions noted in stubs (or obtain information from transfer agent). 2 List significant characteristics of each class of stock. 3 Determine consideration received for stock, noting: a Whether cash, services, or tangible assets. b Per-share amount. c Total amount. d Amount paid in excess of par. 4 Obtain details surrounding all stock redemptions and reacquisitions, with particular emphasis on legally defined capital of company at such times. 5 Determine valuation basis of treasury stock. 6 Determine status of stock subscriptions receivable. 7 Examine and abstract all available minutes and resolutions related to contributed capital. 8 Analyze stock option and warrant activity and determine status of those not exercised. (ii) Retained Earnings 1 Analyze for previous four to five years, with full explanations for all debits and credits. 2 Establish propriety of all charges not arising from operations. 3 Segregate any amounts that would properly be classified as donated or arising from revaluation of assets.

(l) Revenue (i) Sales Revenue and Sales Deductions 1 Test the cutoff of sales transactions. 2 Check recent common carriers’ receipts to determine unrecorded amounts. 3 Test-check a period of at least the last six months for sales at less than customary or list prices. Also check for prices that, although customary, are generally below those of competitors. Compare the prices charged during the last six months with those of the prior six months.

12.2

Audit Program Guide

999

4 Prepare a schedule showing, by month, comparative sales, sales returns, sales allowances, and net sales for the last three years and indicate customers constituting in excess of 10 percent of total volume. 5 Review sales, sales orders, and cancellations subsequent to the date of filing the petition. 6 Prepare a brief description of purchasing procedure. 7 Determine unfilled orders and management’s plans for completing orders. 8 Determine the potential cost of fulfillment of product guarantees. 9 Prepare a schedule of sales of scrap and waste materials. Compare with previous periods. 10 Examine all sales transactions with owners, officers, and affiliated companies during the year prior to the petition, for adequate consideration. The above procedures are normally not performed in as much detail for liquidating concerns, such as assignments of chapter 7 cases, as they are for going concerns such as out-of-court settlement or chapter 11 reorganizations. (ii) Other Revenue 1 Scan other revenue accounts for unusual items, and make appropriate examinations where required. (m) Costs and Expenses (i) Disbursements in General and merchandise returns 1 Review all disbursements exceeding $ during the last six months or longer prior to the date of the filing to ascertain that: a The goods and/or services were actually received. b The goods and/or services were received during this time period. c The payment or return of merchandise to the vendor was made in a similar manner to all other payments and returns. made for 60 days sub2 Review all disbursements in excess of $ sequent to the petition date to verify that they represent payment for goods and services received or rendered subsequent to the date of the filing. 3 Carefully review the disbursement to officers, directors, affiliated companies, and other related parties for the year prior to the date of the petition. (ii) Cost of Products Sold 1 Test the cutoff of cost of sales. 2 Test cost-of-goods-sold entries against shipping records.

1000


3 Prepare a schedule showing, by month, comparative purchases for the last three years. 4 Prepare a brief description of purchasing procedure. 5 Test-check purchases during the previous 6 to 12 months for adequacy of receiving documentation. 6 Prepare a schedule and analyze all returns in excess of $ within six months prior to the petition, indicating the business reason for the return. 7 Examine all returns and allowances granted owners, officers, relatives, or related companies during the year prior to the petition. 8 Ascertain whether the debtor received credit for all customary purchase discounts, allowances, and rebates. 9 Review purchase commitments for potential losses or excessive commitments.

(iii) Payroll 1 Test selected payroll entries against time cards or piecework reports, union contracts, rate authorization, and deductions authorized. 2 Determine that payroll has been distributed to proper account classifications. 3 Compare recent payroll periods with those of the previous year. Justify any differences. 4 Prepare a comparative analysis for three years prior to the petition date for the year ended of executives’ salaries that exceeded $ . 5 Observe a payoff. Compare payroll checks to be distributed with the payroll register, and prove register totals. 6 Scrutinize (selected weeks) of payroll for payments to officers, relatives, or principals, for unusual payments of back wages and for inordinately high rates of pay. 7 Determine the date of the last union audit and potential additional liability over and above reported contributions.

(iv) Other Costs and Expenses 1 Investigate month-to-month and year-to-year changes in amount of various costs and expenses. 2 Analyze rent expense and abstract pertinent lease terms. 3 Inquire as to the possibility of subleasing all or part of leased premises. 4 Analyze professional fees and determine services rendered. 5 Analyze officers’ salaries and expense accounts. 6 Search for unrecorded liabilities that may involve losses or expenses. 7 Analyze all other significant expense accounts.

12.2

Audit Program Guide

1001

(n) Contracts and Agreements 1 Examine and obtain copies of: a Shareholders’ buy/sell agreements. b Retirement agreements. c Employment contracts. d Insurance agreements. 2 Examine and abstract all other significant information in contracts and agreements.

13 Financial Reporting During Bankruptcy

13.1

First Financial Statements Issued During Chapter 11: Buffets

Objective. Section 13.3 of Bankruptcy and Insolvency Accounting discusses preparation of the balance sheet or statement of financial position as of the date the bankruptcy petition is filed. The financial statements issued by Buffets while in chapter 11 are presented to illustrate the structure and content of these statements. The notes to the financial statements describing the debt subject to compromise are described in 13.3 below. Item 1. Financial Statements BUFFETS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In Thousands, Except Share Data) June 27, 2007 ASSETS CURRENT ASSETS: Cash and cash equivalents Receivables Income tax receivable Inventories Restricted cash Prepaid expenses and other current assets Assets held for sale Deferred income taxes Total current assets PROPERTY AND EQUIPMENT, net GOODWILL OTHER INTANGIBLE ASSETS OTHER ASSETS, net Total assets

April 2, 2008

$ 4,670 10,219 13,324 32,836 — 8,789 48,145 3,000 120,983 221,092 497,492 84,410 37,092

$ 34,499 7,807 892 30,768 3,556 20,080 5,737 — 103,339 206,811 138,500 60,759 38,062

$ 961,069

$ 547,471

1003

1004

Financial Reporting During Bankruptcy

LIABILITIES AND SHAREHOLDER’S DEFICIT LIABILITIES NOT SUBJECT TO COMPROMISE CURRENT LIABILITIES: Accounts payable Accrued liabilities Income taxes payable Short-term debt Current maturities of long-term debt Total current liabilities LONG-TERM DEBT, net of current maturities DEFERRED LEASE OBLIGATIONS DEFERRED INCOME TAXES LONG-TERM TAXES PAYABLE OTHER LONG-TERM LIABILITIES Total liabilities not subject to compromise LIABILITIES SUBJECT TO COMPROMISE SHAREHOLDER’S DEFICIT: Preferred stock; $.01 par value, 1,100,000 shares authorized; none issued and outstanding as of June 27, 2007 and April 2, 2008 Common stock; $.01 par value, 3,600,000 shares authorized; 3,104,510 shares issued and outstanding as of June 27, 2007 and April 2, 2008 Additional paid in capital Accumulated deficit Accumulated other comprehensive income Total shareholder’s deficit Total liabilities and shareholder’s deficit

$ 81,090 133,920 24,336 13,000 6,625 258,971 822,050 38,209 33,456 — 9,341 1,162,027

$ 44,366 80,323 26 30,000 200,000 354,715 — 43,104 26,873 621 6,390 431,703

—

821,134

—

—

31 82 (201,129) 58 (200,958) $ 961,069

31 82 (705,493) 14 (705,366) $ 547,471

The accompanying notes are an integral part of these condensed consolidated financial statements.

13.1

1005


BUFFETS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In Thousands) Sixteen Weeks Ended

Forty Weeks Ended

April 4, 2007 April 2, 2008 April 4, 2007 April 2, 2008 RESTAURANT SALES RESTAURANT COSTS: Food Labor Direct and occupancy Total restaurant costs ADVERTISING EXPENSES GENERAL AND ADMINISTRATIVE EXPENSES CLOSED RESTAURANT COSTS IMPAIRMENT OF ASSETS LOSS ON SALE LEASEBACK TRANSACTIONS LOSS ON LITIGATION SETTLEMENTS MERGER INTEGRATION COSTS OPERATING INCOME (LOSS) OTHER INCOME INTEREST INCOME INTEREST EXPENSE REORGANIZATION ITEMS, NET LOSS RELATED TO REFINANCING LOSS BEFORE INCOME TAXES INCOME TAX EXPENSE (BENEFIT) Net loss

$ 509,202

$ 466,950

$ 1,028,369

$ 1,207,564

176,372 155,314 130,741 462,427 7,919

164,423 140,876 123,435 428,734 9,524

355,556 308,530 259,930 924,016 22,868

422,023 365,182 320,169 1,107,374 28,181

22,300

22,305

46,313

55,876

1,363 —

688 394,025

2,922 —

3,574 400,392

—

—

2,498

—

6,045

47

6,045

131

3,485

778

6,999

4,452

5,663 (194) (60) 28,380

(389,151) (273) (3) 29,133

16,708 (692) (138) 58,994

(392,416) (749) (165) 71,476

—

38,286

—

38,286

840

1,666

41,125

1,671

(23,303)

(457,960)

(82,581)

(502,935)

(8,906) $ (14,397)

3,864 $ (461,824)

(32,108) $ (50,473)

2,316 $ (505,251)


1006


BUFFETS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands) Forty Weeks Ended

OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Amortization of debt issuance cost Accretion of original issue discount Loss related to refinancing: Write-off of debt issuance costs Refinancing premiums expensed Loss on disposal of assets Loss on sale leaseback transactions Reorganization items, net Cash reorganization items Impairment of assets Deferred income taxes Changes in assets and liabilities: Receivables Inventories Prepaid expenses and other current assets Accounts payable Accrued and other liabilities Income taxes receivable/payable Net cash used in operating activities INVESTING ACTIVITIES: Proceeds from sale leaseback transactions Proceeds from sale of assets held for sale Cash reorganization items Acquisitions, net of liabilities assumed and cash acquired Purchase of property and equipment Collections on notes receivable Purchase (sale) of other assets Net cash used in investing activities FINANCING ACTIVITIES: Repayment of pre-merger term loan facility Repurchase of 111/4 % senior subordinated notes Repurchase of 137/8 % senior discount notes Repayment of Ryan’s debt Proceeds from post-merger term loan funding Proceeds from DIP financing Repayment of post-merger term loan funding Proceeds from 121/2 % senior note issuance Proceeds from post-merger revolver facility Proceeds from promissory note Increase in restricted cash Prefunded letters of credit

April 4, 2007

April 2, 2008

$ (50,473)

$ (505,251)

30,674 2,826 5,623

34,449 4,450 —

8,686 31,599 710 2,498 — — — (35,610)

— — 3,132 — 38,286 (7,660) 400,392 3,964

556 (56) 9,663 7,539 5,901 (26,343) (6,207)

2,414 (2,127) (8,642) (886) 3,657 16,993 (16,829)

8,608 5,057 —

— 17,951 333

(168,794) (26,322) 713 314 (180,424)

— (28,898) 510 (52) (10,156)

(182,053) (180,778) (105,306) (145,000) 530,000 — (1,325) 300,000 23,500 5,000 — —

— — — — — 30,000 (4,647) — 44,262 — (3,556) (3,734) (Continued)

13.1

1007


Utility deposits Cash reorganization items Debt issuance costs Payment of refinancing premiums Net cash provided by financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period

— — (36,705) (32,554) 174,779

(3,212) 78 (2,377) — 56,814

(11,852)

29,829

20,219 $ 8,367

4,670 $ 34,499

SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of capitalized interest of $295 and $321)

$ 49,218

$ 67,062

Income taxes

$ 29,814

$ 677


BUFFETS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Voluntary Chapter 11 Filing Buffets Holdings, Inc. (“Buffets Holdings”) and its subsidiaries, including Buffets, Inc. (“Buffets”), are collectively referred to as “the Company” in these notes to condensed consolidated financial statements. On January 22, 2008 (the “Petition Date”), Buffets Holdings and each of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), Case Number 08-10141 (collectively, the “Bankruptcy Cases”). On January 29, 2008, the official committee of unsecured creditors was appointed in the Bankruptcy Cases. The Company is continuing to operate the business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In general, as a debtor-in-possession, the Company is authorized under the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. On January 22, 2008, the Company entered into a Debtor-In-Possession Credit Agreement (the “DIP Credit Agreement”) among Buffets Holdings, Buffets, the lenders named therein, and Credit Suisse, as Administrative Agent and Collateral Agent. The DIP Credit Agreement received interim approval by the Bankruptcy Court on January 23, 2008 and final approval on February 22, 2008. The DIP Credit Agreement provides for $200 million of borrowings under the Pre-Petition Credit Facility (as defined in Note 7—“Debt”) that were rolled into the DIP Credit Agreement and an $85 million new money facility. Of the $85 million new money facility, $30 million was drawn on January 23, 2008 and $55 million was drawn on April 30, 2008. The proceeds of the new money facility incurred under the DIP Credit Agreement are being used to fund the

1008


continued operations of the Debtors’ business, pay certain expenses and fees incurred in connection with the Bankruptcy Cases, support the Debtors’ working capital needs and for general corporate purposes. The Company entered into the first amendment to the DIP Credit Agreement on February 22, 2008, just prior to the Bankruptcy Court’s final approval to reduce the amount of prepetition borrowings rolled into the DIP Credit Agreement from $300 million to $200 million. See Note 7—“Debt” for further discussion regarding the DIP Credit Agreement. In conjunction with the commencement of the Bankruptcy Cases, the Company sought and obtained a number of orders from the Bankruptcy Court which were intended to enable it to operate in the normal course of business during the Bankruptcy Cases. The most significant of these orders were:

r authorization to pay pre-petition and post-petition employee wages and salaries and related benefits during the Bankruptcy Cases,

r authorization to give administrative priority status to the post-petition claims of certain critical vendors and subsequent approval to pay undisputed pre-petition claims of those vendors for goods delivered, received or accepted by the Debtors’ within the 20 days before the Petition Date in an amount not to exceed $35 million, so long as those vendors continued to provide goods to the Company, and r authorization for the continued use of the Debtors’ cash management system Pursuant to the Bankruptcy Code, the Debtors’ pre-petition obligations, including obligations under debt instruments, generally may not be enforced against them. In addition, any actions to collect pre-petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy Court. As a debtor-in-possession, the Company has the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, “assume” means that the Company agrees to perform its obligations and cure any and all existing defaults under the contract or lease, and “reject” means that the Company is relieved from its obligations to perform further under the contract or lease but is subject to a claim for damages for the breach thereof. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims in the Bankruptcy Cases unless such claims had been secured on a pre-petition basis. As of April 2, 2008, the Company has rejected approximately 85 unexpired leases and 200 executory contracts and, where estimates were reasonably determinable, has included charges of the estimated liabilities related thereto in “Reorganization Items, net” in the accompanying unaudited condensed consolidated statement of operations. The Company is in the process of reviewing its executory contracts and remaining unexpired leases to determine which, if any, it will reject. For those remaining executory contracts and unexpired leases, the Company cannot reasonably determine or estimate the ultimate liability that may result from rejecting these contracts or leases and no provisions have been made for these items. The accompanying condensed consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets

13.1


1009

and the satisfaction of liabilities in the normal course of business. However, the Bankruptcy Cases raise substantial doubt about the Company’s ability to remain a going concern. The Company’s continuation as a going concern is contingent upon, among other things, its ability (i) to comply with the terms and conditions of the DIP Credit Agreement; (ii) to reduce administrative, operating and interest costs and liabilities through the bankruptcy process; (iii) to generate sufficient cash flow from operations; (iv) to return to profitability; (v) to obtain confirmation of a plan of reorganization under the Bankruptcy Code and (vi) to obtain financing to facilitate an exit from bankruptcy. In the event the Company’s restructuring activities are not successful and it is required to liquidate, additional significant adjustments will be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used. The accompanying condensed consolidated financial statements reflect adjustments in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. As a result of the Bankruptcy Cases, substantially all unsecured liabilities as of the Petition Date, except those covered under certain first day motions filed with the Bankruptcy Court, are considered subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Bankruptcy Cases are segregated and classified as “Liabilities Subject to Compromise” in the accompanying unaudited condensed consolidated balance sheet under SOP 90-7. The ultimate amount of and settlement terms for the Company’s pre-petition liabilities are dependent on the outcome of the Bankruptcy Cases, and accordingly are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Bankruptcy Cases, and certain gains and losses resulting from reorganization or restructuring of the business are reported separately as “Reorganization Items, net” in the accompanying unaudited condensed consolidated statement of operations. In addition, interest expense is reported only to the extent that it will be paid during the Bankruptcy Cases or that it is probable that it will be an allowed claim under the Bankruptcy Cases. *

*

*

*

3. Summary of Significant Accounting Policies *

*

*

*

Liabilities Subject to Compromise Under bankruptcy law, actions by creditors to collect amounts owed prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against the Company. Substantially all unsecured liabilities as of the Petition Date, except those covered under certain first day motions filed with the Bankruptcy Court, have been classified as “Liabilities Subject to Compromise” in the current fiscal year condensed consolidated balance sheet.

1010


Reorganization Items Reorganization items are expense or income items that were incurred or realized due to the Bankruptcy Cases. These items include professional fees and similar types of expenses incurred as a direct result of the Bankruptcy Cases, loss accruals or gains or losses resulting from activities of the reorganization process, costs and claims, which stem from the rejection of leases and other executory contracts, and interest earned on excess cash accumulated during the Bankruptcy Cases. * * * * 8. Liabilities Subject to Compromise Under bankruptcy laws, actions by creditors to collect amounts owed prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against the Company. Substantially all unsecured liabilities as of the Petition Date, except those covered under certain first day motions filed with the Bankruptcy court, have been classified as “Liabilities Subject to Compromise” in the current fiscal year condensed consolidated balance sheet. On May 12, 2008, the Bankruptcy Court set the Claims Bar Date for July 21, 2008. The Claims Bar Date is defined as the last date for all persons and entities holding or wishing to assert bankruptcy claims against the Company or one of its subsidiaries to file a proof of claim form. As of May 30, 2008, the Company has received approximately 2,100 claims. The Company continues to evaluate all claims asserted in the Bankruptcy Cases and will file periodic motions with the court to reject, modify, liquidate or allow such claims. Recorded amounts may, in certain instances, be different than amounts asserted by the Company’s creditors and remain subject to reconciliation and adjustment. The Company received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations, including employee salaries, wages and benefits, vendor goods for certain critical vendors and certain real property claims. In addition, as of the Petition Date, the Company ceased the accrual of interest on its unsecured 121/2 % Senior Notes. Contractual interest owed but unpaid on that obligation amounts to approximately $28.3 million as of April 2, 2008, which is approximately $7.4 million in excess of recorded interest expense. See Note 7—“Debt” for further discussion of the Company’s debt agreements. The following table summarizes the components of the “Liabilities Subject to Compromise” in the unaudited accompanying condensed consolidated balance sheet as of April 2, 2008 (in thousands): Accounts payable Accrued liabilities Income taxes payable Debt Long-term taxes payable Other long-term liabilities Total Liabilities Subject to Compromise

$ 34,814 76,413 239 681,290 27,001 1,377 $ 821,134

13.2

Financial Statements Issued During Chapter 11: Dura Automotive

1011

10. Reorganization Items As of April 2, 2008, the Company had the following reorganization items (in thousands): Professional fees Lease rejection costs Closed store costs Severance Interest income Gain on extinguishment Gain on asset sales Other Total reorganization items, net

$ 6,354 24,608 7,647 557 (78) (649) (222) 69 $ 38,286

During the third quarter of fiscal 2008, the Company rejected approximately 70 unexpired leases in connection with the Bankruptcy Cases. In accordance with Section 502(b)(6) of the Bankruptcy Code, the Company was required to recognize a charge for claims of a lessor for damages resulting from the termination of a lease of real property. Such claims are limited by specific provisions within the Bankruptcy Code. The Company recognized a charge of approximately $24.6 million related to expected lessor claims and established a liability for an equal amount. This liability is an estimate and is classified as “Liabilities Subject to Compromise” on the accompanying unaudited condensed consolidated balance sheet. In February 2008, the Company closed 52 underperforming restaurants as part of its reorganization plan under chapter 11. Cash charges of approximately $2.4 million were incurred related to these restaurant closures. These charges included approximately $0.9 million related to lease termination costs and obligations, $1.2 million related to employee termination costs and approximately $0.3 related to other associated costs. Non-cash charges related to these closures were approximately $5.2 million. 13.2 Financial Statements Issued During Chapter 11: Dura Automotive Objective. As mentioned above, Section 13.3 of Bankruptcy and Insolvency Accounting discusses preparation of the balance sheet or statement of financial position as of the date the bankruptcy petition is filed. The financial statements issued by Dura Automotive Systems during chapter 11 are presented below as another example of financial reporting during bankruptcy. In a note separate financial statements are presented just for the companies in chapter 11. Also included are financial statements issued after the chapter 11 case was completed on a pro forma basis. Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Dura Automotive Systems, Inc.

1012


We have audited the accompanying consolidated balance sheets of Dura Automotive Systems, Inc. (Debtor-in-Possession) and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ investment (deficit), and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dura Automotive Systems, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, since October 30, 2006 the Company has been in reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such consolidated financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (3) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business. As discussed in Note 15 to the consolidated financial statements on May 12, 2008, the Bankruptcy Court entered an order confirming the Company’s plan of reorganization which became effective on June 27, 2008. The accompanying consolidated financial statements do not include adjustments necessary

13.2

1013


to reflect the application of fresh-start reporting in accordance with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. As discussed in Notes 2 and 7 to the consolidated financial statement, effective January 1, 2007, the Company adopted the recognition and measurement provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement 109. Detroit, Michigan October 31, 2008 DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share amounts)

ASSETS Current Assets: Cash and cash equivalents Accounts receivable, net of allowance of $6,795 in 2007 and $6,203 in 2006 Inventories Deferred income taxes Other current assets Current assets of discontinued operations Total current assets Property, plant and equipment, net Goodwill Deferred income taxes Other assets, net of accumulated amortization of $335 in 2007 and $317 in 2006 Noncurrent assets of discontinued operations

December 31, 2007

December 31, 2006

$ 93,570

$ 90,446

276,022 133,373 11,086 97,932 — 611,983 411,884 — 16,067

293,835 117,858 6,642 122,675 50,592 682,048 434,951 184,321 22,038

9,560 — $ 1,049,494

18,487 112,996 $ 1,454,841

LIABILITIES AND STOCKHOLDERS’ DEFICIT Current Liabilities: Debtors-in-possession financing Current maturities of long-term debt Accounts payable Accrued liabilities Accrued pension and postretirement benefits Deferred income taxes Current liabilities of discontinued operations Total current liabilities Long-term Liabilities: Long-term debt, net of current maturities Pension and postretirement benefits Other noncurrent liabilities

$ 137,483 9,475 174,899 202,708 2,481 2,074 — 529,120

$ 165,000 4,679 161,558 156,823 1,437 2,768 7,074 499,339

3,373 63,303 46,722

2,596 68,044 39,218

1014


December 31, 2007

December 31, 2006

LIABILITIES AND STOCKHOLDERS’ DEFICIT Deferred income taxes Noncurrent liabilities of discontinued operations Total long-term liabilities Liabilities subject to compromise Total Liabilities Commitments and Contingencies (Notes 6, 7, 10 and 11) Minority interests Stockholders’ Deficit: Preferred stock, par value $1; 5,000,000 shares authorized; none issued or outstanding Common stock, Class A; par value $.01; 60,000,000 shares authorized; 18,904,222 issued and outstanding Common stock, Class B; par value $.01; 10,000,000 shares authorized; none issued or outstanding Additional paid-in capital Treasury stock at cost Accumulated deficit Accumulated other comprehensive income Total stockholders’ deficit

13,958

5,176

— 127,356 1,306,779 1,963,255

3,253 118,287 1,335,083 1,952,709

6,284

5,459

—

—

189

189

— 351,878 (1,743) (1,472,639) 202,270 (920,045) $ 1,049,494

— 351,878 (1,743) (1,002,185) 148,534 (503,327) $ 1,454,841

The accompanying notes are an integral part of these consolidated financial statements.

13.2

1015


DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) For the Years Ended December 31,

Revenues Cost of sales Gross profit Selling, general and administrative expenses Prepetition professional fees Facility consolidation, goodwill and asset impairment, and other charges Amortization expense Operating income (loss) Interest expense, net of interest income of $1,823 in 2007, $2,815 in 2006 and $2,987 in 2005 (contractual interest expense was $139.8 million in 2007 and $119.5 million in 2006) Gain on early extinguishment of debt, net Loss from continuing operations before reorganization items, income taxes and minority interest Reorganization items Loss from continuing operations before income taxes and minority interest Provision (benefit) for income taxes Minority interest in non-wholly owned subsidiaries Loss from continuing operations Income (loss) from discontinued operations, including gain (loss) on disposals, net Income (loss) before change in accounting principle Cumulative effect of change in accounting principle, net of tax of $712 in 2006 Net income (loss) Basic and diluted earnings (loss) per share: Loss from continuing operations Income (loss) from discontinued operations Cumulative effect of change in accounting principle Net income (loss)

2007

2006

2005

$ 1,894,696 1,827,786 66,910

$ 1,759,168 1,696,546 62,622

$ 1,935,273 1,719,195 216,078

137,606 —

130,477 10,455

144,480 —

258,100 152 (328,948)

684,164 222 (762,696)

10,877 252 60,469

49,040 —

101,692 —

99,980 (14,805)

(377,988) 57,643

(864,388) 25,315

(24,706) —

(435,631) 8,826

(889,703) 40,231

(24,706) (7,810)

427 (444,884)

432 (930,366)

177 (17,073)

(27,918)

18,689

18,887

(472,802)

(911,677)

1,814

— $ (472,802)

1,020 $ (910,657)

— $ 1,814

$ (23.53) (1.48)

$ (49.31) 0.99

$ (0.91) 1.01

— $ (25.01)

0.05 $ (48.27)

— $ 0.10


1016

Balance, December 31, 2004 Sale and exercise of stock options, including the value of treasury stock Net income Other comprehensive income: Foreign currency translation adjustment Minimum pension liability, net of tax Total comprehensive loss Balance, December 31, 2005 Sale and exercise of stock options, including the value of treasury stock Net loss 1

—

—

129,274

—

—

188

2 —

142,418 —

18,774,948

186

Amount

18,632,530

Shares

Common Stock Class A

(116) —

351,994

—

—

423 —

351,571

Additional Paid-in Capital Amount

Accumulated Deficit

(19,321) —

183,683

—

—

(53,328) —

237,011

205 —

(1,948)

—

—

565 —

(2,513)

— (910,657)

(91,528)

—

—

— 1,814

(93,342)

(in thousands, except per share amounts)

Shares

Treasury Stock

DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT (DEFICIT)

— —

81,001

(5,756)

(64,832)

—

151,589

Accumulated Other Comprehensive Income (Loss)

90

(68,774) 339,707

990

407,491

Total Stockholders’ Investment (Deficit)

1017

— $189

—

—

— 18,904,222

—

—

— $ 189

—

—

— 18,904,222

—

—

— $351,878

—

—

— $ 351,878 —

—

—

— 164,362

—

—

— 164,362 —

—

—


Other comprehensive income (loss): Foreign currency translation adjustment Pension and postretirement benefit plans adjustments, net of tax Total comprehensive loss SFAS 158 adjustment, net of tax Balance, December 31, 2006 Net loss Other comprehensive income (loss): Foreign currency translation adjustment Pension and postretirement benefit plans adjustments, net of tax Total comprehensive loss FIN 48 cumulative effect adjustment Balance, December 31, 2007 — $ (1,743)

—

—

— $ (1,743) —

—

—

2,348 $ (1,472,639)

—

—

— $ (1,002,185) (472,802)

—

—

$ 202,270

8,369

45,367

(4,900) $ 148,534

(3,128)

75,561

2,348 $ (920,045)

(419,066)

(4,900) $ (503,327)

(838,224)

1018


Table of Contents DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31 2007

2006

2005

(in thousands) OPERATING ACTIVITIES: Net income (loss) Less: Net income (loss) from discontinued operations Less: Cumulative effect of change in accounting principle, net of tax Loss from continuing operations Adjustments required to reconcile loss from continuing operations to net cash used in operating activities: Depreciation and amortization Asset impairments Goodwill impairment Facility consolidation charges Amortization of deferred financing fees (Gain) loss on sale of property, plant and equipment Bad debt expense (credit) Reorganization items Payments on reorganization items Deferred income tax (benefit) expense Settlement of environmental matters Gain on early extinguishment of debt Change in other operating items: Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Other assets, liabilities and noncash items Net cash used in continuing operating activities INVESTING ACTIVITIES: Capital expenditures Proceeds from the sale of assets and other Net cash used in continuing investing activities FINANCING ACTIVITIES: DIP Term Loan borrowings DIP Term Loan payments

$ (472,802)

$ (910,657)

$ 1,814

(27,918)

18,689

18,887

— (444,884)

1,020 (930,366)

— (17,073)

75,237 33,921 184,497 39,682 8,627

73,606 10,838 636,927 36,399 4,122

72,704 3,024 — 7,853 3,889

320 1,238 57,643 (49,863) (5,436) — —

(2,377) (450) 25,315 — 42,629 — —

(487) 1,176 — — (27,209) (9,960) (14,805)

34,087 (11,326) 24,846 (38,159) 17,226

(21,039) (19,773) (10,982) (28,594) 817

(24,081) 11,510 (20,948) (17,135) 7,877

(72,344)

(182,928)

(23,665)

(66,818) 7,834

(83,429) 6,370

(61,109) 2,490

(58,984)

(77,059)

(58,619)

— (60,586)

165,000 —

— —

13.2

1019


For the Years Ended December 31

DIP Revolver borrowings, net Proceeds under factoring arrangements Net borrowings under prepetition debt Net borrowings under revolving credit facilities Long-term borrowings Repayments of long-term borrowings Payment on termination of interest rate swap Deferred gain on termination of interest rate swap Proceeds from sales of equity securities Debt issue costs Other, net Net cash provided by (used in) continuing financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET CASH FLOWS FROM CONTINUING OPERATIONS CASH FLOWS FROM DISCONTINUED OPERATIONS: Operating activities Investing activities, including proceeds from sale of business NET CASH FLOWS FROM DISCONTINUED OPERATIONS CASH AND CASH EQUIVALENTS: Beginning of year End of year SUPPLEMENTAL DISCLOSURE: Cash paid for interest Cash paid for income taxes Capitalized interest expense

2007

2006

2005

33,069 7,586 —

— — 68,861

— — —

— 1,825 (4,560)

— — —

17,500 153,285 (179,459)

—

(12,185)

—

— — (3,466) —

— 257 (10,522) (98)

11,374 673 (7,613) (86)

(26,132)

211,313

(4,326)

6,301

16,331

(7,942)

(151,159)

(32,343)

(94,552)

805

6,215

34,124

153,478

14,685

(29,251)

154,283

20,900

4,873

90,446 $ 93,570

101,889 $ 90,446

191,568 $ 101,889

$ 37,917 $ 6,842 $—

$ 70,360 $ 13,336 $ 101

$ 95,293 $ 10,496 $ 453


1020


DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 1. Organization and Basis of Presentation: On October 30, 2006, Dura Automotive Systems, Inc. (referred to as “Dura”, “Company”, “we”, “our” and “us”“) and its United States (“U.S.”) and Canadian subsidiaries (the “Debtors”) filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On June 27, 2008 (the “Effective Date”), the Debtors satisfied, or otherwise obtained a waiver of, each of the conditions precedent to the effective date specified in Article VIII of the Debtors’ Revised Joint Plan of Reorganization Under chapter 11 of the Bankruptcy Code (With Further Technical Amendments) (the “Confirmed Plan”), dated May 12, 2008, as confirmed by an order (the “Confirmation Order”) of the United States Bankruptcy Court entered on May 13, 2008. Refer to the discussion of the Company’s emergence from chapter 11 bankruptcy at Note 15 to the consolidated financial statements in conjunction with the following footnotes. Dura (a Delaware Corporation) and its subsidiaries is a leading independent designer and manufacturer of driver control systems, seating control systems, glass systems, engineered assemblies, structural door modules and exterior trim systems for the global automotive industry. Dura is a holding company whose predecessor was formed in 1990. We sell our products to every major North American, European and Asian automotive original equipment manufacturer (“OEM”). We have manufacturing and product development facilities located in the United States (“U.S.”), Brazil, China, Czech Republic, France, Germany, Mexico, Portugal, Romania, Slovakia, Spain and the United Kingdom (“UK”). We also have a presence in India, Japan, and Korea through sales offices, alliances or technical licenses. Chapter 11 Bankruptcy Filing—On October 30, 2006, Dura and its United States (“U.S.”) and Canadian subsidiaries (the “Debtors”) filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors’ chapter 11 cases were (prior to June 27, 2008) being jointly-administered under Case No. 06-11202 (KJC). In 2007, the Debtors continued to operate their businesses as “Debtorsin-possession” under the supervision of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Dura’s European, Asian, and Latin American operations were not included in the filings and continued their business operations in 2007 without supervision from the Bankruptcy Court and were not subject to the requirements of the Bankruptcy Code. In 2007, the Debtors operated pursuant to chapter 11 under the Bankruptcy Code. The accompanying condensed combined financial statements reported in Note 13 to the consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of assets or liabilities that might result from the Company’s emergence from bankruptcy on the Effective Date.

13.2


1021

American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (“SOP 90-7”), which is applicable to companies in chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statement of operations. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, cash provided by reorganization items must be disclosed separately in the statement of cash flows. Dura adopted SOP 90-7 effective October 30, 2006 and segregated those items, as outlined above, for all reporting periods subsequent to such date. * * * * Goodwill and Other Assets: Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combination transactions. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we perform impairment tests using both a discounted cash flow methodology and a market multiple approach for each of our reporting units. This impairment test is conducted during the second quarter of each year or whenever events or circumstances occur indicating that goodwill or other intangible assets might be impaired. In connection with our review of goodwill during our second quarter of 2006, our analysis indicated that the reported value of our goodwill in our Control Systems reporting unit, recorded in connection with various acquisitions that have been completed over the last ten years, was materially impaired. No other impairments were indicated for the other reporting units. We completed our step two impairment analysis and determined that all of the Control Systems reporting unit’s goodwill was impaired. Accordingly, we recorded an impairment charge for the total amount of the Control Systems reporting unit goodwill of approximately $636.9 million. This charge is reflected in facility consolidation, goodwill and asset impairment, and other charges in the consolidated statement of operations for the year ended December 31, 2006. In connection with our ongoing review of goodwill during our second quarter of 2007, we performed step one of our analysis, which indicated that the carrying value of the goodwill in our Body & Glass reporting unit, recorded in connection with various acquisitions that have been completed over the last ten years, exceeded the fair market value. Under SFAS 142, we completed step two of the impairment assessment of the goodwill related to Body & Glass and determined that all of the Body & Glass reporting unit’s goodwill was

1022


impaired. Accordingly, we recorded an impairment charge for the total amount of the Body & Glass reporting unit’s goodwill, which totaled approximately $184.5 million. This charge is reflected in the facility consolidation, goodwill and asset impairment, and other charges in the accompanying consolidated statement of operations. Changes in business conditions, deterioration of the automotive industry, reduced production volume in Europe, increased raw material costs, higher interest rates and other factors resulted in recognizing such goodwill impairment during 2007. In addition to the completion of our assessment of the Body & Glass reporting unit, our ongoing reassessment included an assessment of the carrying value of our Atwood Mobile Products reporting unit and resulted in the conclusion that no impairment had occurred. The sale of Atwood was completed in August 2007. The related goodwill amount for Atwood of $74.0 million was included in noncurrent assets of discontinued operations as of December 31, 2006. It was also accounted for as part of the loss on the sale amount and is included in the losses from discontinued operations reported in the consolidated statement of operations for the year ended December 31, 2007. A rollforward summary of the carrying amount of goodwill is as follows (in thousands): December 31,

Beginning balance(1) Currency translation adjustment Impairment Ending balance

2007

2006

$ 184,321 176 (184,497) $ —

$ 775,781 45,467 (636,927) $ 184,321

(1)

This amount has been corrected for a presentation typographical error. This correction reduced Body & Glass goodwill by $2,676 from the amount previously reported.

Other assets consisted of the following (in thousands): December 31,

Rabbi trust and cash surrender value Other intangible assets Notes receivable, net of reserves Other assets

2007

2006

917 1,613 2,219 4,811 $ 9,560

9,294 4,723 92 4,378 $ 18,487

The Company amortizes intangible assets on a straight-line basis over the expected period of benefit, ranging from 12 to 20 years. Other intangible assets consist primarily of customer relationships and license agreements of $1.6 million and $4.7 million for the years ended December 31, 2007 and 2006, respectively. Amortization expense for the years ended December 31, 2007 and

13.2


1023

December 31, 2006 were not significant. In 2001, the Company purchased the trademark naming rights of “DURA” in Europe for $4.5 million from a counterparty. Given the change in economic conditions, management determined there are no adequate future cash flows supporting the intangible assets and full impairment of $2.9 million was required and recorded during the fourth quarter of 2007. The Company carried life insurance policies to cover the deferred compensation benefits of certain of its former key executives, which were assumed as part of the Excel acquisition in 1999. The Company was named the beneficiary on these policies. These policies had cash surrender values, and were held in a Rabbi Trust. As part of filing for chapter 11, the obligations associated with the deferred compensation benefits were considered prepetition liabilities and subject to compromise. At the end of 2007, and pursuant to a Court order dated November 27, 2007, the Rabbi Trust was terminated and the related investments were liquidated, and the Company received a substantial amount of funds that were held in the Rabbi Trust. *

*

*

*

Reorganization Items: SOP 90-7 requires reorganization items such as certain revenues, expenses such as professional fees directly related to the process of reorganizing the Debtors under chapter 11, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business to be separately disclosed. The Debtors’ reorganization items incurred in 2007, and between the filing date of October 30, 2006 and December 31, 2006, consisted of the following: For the year ended December 31, 2007

For the period from October 30, 2006 to December 31, 2006

$ 57,643 — — $ 57,643

$ 11,041 12,185 2,089 $ 25,315

Professional and other fees directly related to reorganization, excluding prepetition fees Loss on termination of interest rate swap Prepetition debt issue costs write-off

Professional fees directly related to the reorganization include fees associated with advisors to the Debtors, unsecured creditors and secured creditors. *

*

*

*

New and Proposed Accounting Pronouncements: *

*

*

*

In April 2008, the FASB issued FASB Staff Position SOP 90-7-1, An Amendment of AICPA Statement of Position 90-7 (“FSP SOP 90-7-1”). FSP SOP 90-7-1 resolves the conflict between the guidance requiring early adoption of new accounting standards for entities required to follow fresh-start reporting under

1024


American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, and other authoritative accounting standards that expressly prohibit early adoption. Specifically, FSP SOP 90-7-1 will require an entity emerging from bankruptcy that applies fresh-start reporting to follow only the accounting standards in effect at the date fresh-start reporting is adopted, which include those standards eligible for early adoption if an election is made to adopt early. Management has elected to only adopt new accounting standards in effect at the date fresh-start reporting is adopted and to not early adopt standards eligible for early adoption. * * * * 6. Debt: Due to the chapter 11 filings, outstanding prepetition long-term debt of the Debtors has been reclassified to the caption Liabilities Subject to Compromise (refer to Note 2 to the consolidated financial statements) on the consolidated balance sheet as of December 31, 2007 and 2006. The following is a summary of long-term debt at December 31, 2007 and 2006, including current maturities, and unsecured long-term debt included in liabilities subject to compromise (in thousands): December 31 2007 Subject to Compromise Debtors-In-Possession (“DIP”) Credit Agreements Second lien term loan Revolving credit facility Prepetition Credit Agreement: Second lien term loan Senior unsecured notes Senior subordinated notes Convertible trust preferred securities Deferred gain on interest rate swap, net Debt issue costs, net Accounts receivable factoring Other Less — Current maturities

2006 Subject to Compromise

Debt

Debt

$— —

$ 104,414 33,069

$— —

$ 165,000 —

225,000 400,000 533,858

— — —

225,000 400,000 532,872

— — —

55,250

—

55,250

—

8,976 (15,527)

— —

8,976 (15,527)

— —

— — 1,207,557

7,586 5,262 150,331

— — 1,206,571

— 7,275 172,275

— $ 1,207,557

146,958 $ 3,373

— $ 1,206,571

169,679 $ 2,596

13.2


1025

Pursuant to the requirements of SOP 90-7 as of the chapter 11 filing (October 30, 2006), debt issue costs related to prepetition debt are no longer being amortized and have been included as an adjustment to the net carrying value of the related prepetition debt. In accordance with the Court-approved first day motion, the Company continued in 2007 to accrue and pay the interest on its Second Lien Term Loan whose principal balance is subject to compromise. Interest on unsecured prepetition debt, other than the Second Lien Term Loan, has not been accrued as provided for under the U.S. Bankruptcy Code and the requirements of SOP 90-7. *

*

*

*

13. Debtors Financial Statements: The financial statements of the Debtors are presented as follows: Basis of Presentation: Condensed Combined Debtors-in-Possession Financial Statements—The financial statements contained within this note represent the condensed combined financial statements for the Debtors only. Dura’s non-Debtor subsidiaries are treated as non-consolidated subsidiaries in these financial statements and as such their net income (loss) is included as “Equity income (loss) from nonDebtor subsidiaries, net of tax” in the statements of operations and their net assets are included as “Investments in non-Debtor subsidiaries” in the balance sheets. The Debtor’s financial statements contained herein have been prepared in accordance with the guidance in SOP 90-7. Intercompany Transactions—Intercompany transactions between Debtors have been eliminated in the financial statements contained herein. Intercompany transactions with the Debtors’ non-Debtor subsidiaries have not been eliminated in the financial statements and are reflected as intercompany receivables, loans and payables.

1026


Table of Contents

DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED COMBINED DEBTOR-IN-POSSESSION BALANCE SHEETS (In thousands of dollars)

ASSETS Current Assets: Cash and cash equivalents Accounts receivables, net Third parties Non-Debtors subsidiaries Inventories Other current assets Current assets of discontinued operations Total current assets Property, plant and equipment, net Goodwill Notes receivable from non-Debtor subsidiaries Investments in non-Debtor subsidiaries Other assets, net Noncurrent assets of discontinued operations

December 31, 2007

December 31, 2006

$ 7,528

$ 13,787

100,815 29,810 43,901 29,699 — 211,753 106,555 — 192,410 281,251 8,051 — $ 800,020

139,679 17,479 47,066 57,018 50,592 325,621 145,207 175,935 181,657 225,374 17,234 112,996 $ 1,184,024

LIABILITIES AND STOCKHOLDERS’ DEFICIT Current Liabilities Not Subject to Compromise: Debtors-in-possession financing Current maturities of long-term debt Accounts payable Accounts payable to non-Debtor subsidiaries Accrued liabilities Deferred incomes taxes Current liabilities of discontinued operations Total current liabilities not subject to compromise Long-term Liabilities: Notes payable to non-Debtor subsidiaries Pension and postretirement benefits Other noncurrent liabilities Noncurrent liabilities of discontinued operations Liabilities subject to compromise Total liabilities Stockholders’ Deficit

137,483 — 43,023 27,440 88,739 1,683 — 298,368

$ 165,000 2,266 31,606 1,073 71,302 1,835 7,074 280,156

71,431 37,306 6,181 — 1,306,779 1,720,065 (920,045) 800,020

8,539 47,734 12,586 3,253 1,335,083 1,687,351 (503,327) $ 1,184,024

13.2

1027


DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED COMBINED DEBTOR-IN-POSSESSION STATEMENTS OF OPERATIONS (In thousands of dollars)

Revenues Cost of sales Gross profit Selling, general & administrative expenses Facility consolidation, goodwill and asset impairment, and other charges Amortization expense Operating loss Interest expense, net Loss before reorganization items, loss on equity investment and income taxes Reorganization items Loss before loss on equity investment and income taxes Equity loss (income) from non-Debtor subsidiaries, net of tax Provision (benefit) for income taxes Loss from continuing operations Loss from discontinued operations Net loss

For the year ended December 31, 2007

For the period from November 1, 2006 to December 31, 2006

$ 715,299 730,153 (14,854)

$ 107,805 123,533 (15,728)

66,867

7,340

213,136 152 (295,009) 44,333

6,639 37 (29,744) 6,688

(339,342) 57,643

(36,432) 23,327

(396,985)

(59,759)

62,318 (14,419) (444,884) (27,918) $ (472,802)

(10,000) 5,281 (55,040) (1,556) $ (56,596)

1028


DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED COMBINED DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS (In thousands of dollars) For the period For the year from November 1, ended December 2006 to December 31, 2007 31, 2006 OPERATING ACTIVITIES: Net loss Less: Net loss from discontinued operations Loss from continuing operations Adjustments required to reconcile loss from continuing operations to net cash used in operating activities: Depreciation and amortization Asset impairments Goodwill impairment Facility consolidation charges Amortization of deferred financing fees Loss on sale of property, plant and equipment Bad debt expense (credit) Reorganization items Payments on reorganization items Deferred income tax benefit Equity loss (income) from non-Debtor subsidiaries, net of tax Change in other operating items: Accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Other assets, liabilities and noncash items Current intercompany transactions Net cash used in continuing operating activities INVESTING ACTIVITIES: Capital expenditures Proceeds from the disposal of assets Net cash used in continuing investing activities FINANCING ACTIVITIES: DIP Term Loan borrowings Payments on prepetition revolving credit facilities DIP Term Loan payments DIP Revolver borrowings, net Repayments of long-term borrowings Payment on termination of interest rate swap loss Debt issue costs Net cash (used in) provided by continuing financing activities

$ (472,802) (27,918) (444,884)

$ (56,596) (1,556) (55,040)

25,204 23,412 176,314 13,409 8,627 113 1,212 57,643 (49,863) (13,727)

4,058 5,968 (379) 1,050 712 47 (215) 23,327 — (3,757)

62,318

(10,000)

37,982 341 26,920 (31,937) 3,275 (10,523) (114,164)

(35,137) 2,589 2,885 28,559 10,173 (9,269) (34,429)

(14,872) 1,648 (13,224)

(310) — (310)

—

165,000

— (60,586) 33,069 (2,239)

(106,381) — — (1,011)

— (3,466)

(12,185) (8,557)

(33,222)

36,866

13.2


1029

For the period For the year from November 1, ended December 2006 to December 31, 2007 31, 2006 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET CASH FLOWS FROM CONTINUING OPERATIONS CASH FLOWS FROM DISCONTINUED OPERATIONS: Operating activities Investing activities, including proceeds from sale of business NET CASH FLOWS FROM DISCONTINUED OPERATIONS CASH AND CASH EQUIVALENTS: Beginning of year/period End of year/period

*

*

*

68

782

(160,542)

2,909

805

7,930

153,478

(7,930)

154,283

—

13,787 $ 7,528

10,878 $ 13,787

*

15. Subsequent Events: Emergence From Chapter 11: On June 27, 2008, the Company satisfied, or otherwise obtained a waiver of, each of the conditions precedent to the effective date specified in Article VIII of the Debtors’ Revised Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (With Further Technical Amendments) (the “Confirmed Plan”), dated May 12, 2008, as confirmed by an order (the “Confirmation Order”) of the United States Bankruptcy Court entered on May 13, 2008. As contemplated by the Confirmed Plan, prior to and on the Effective Date, DOC took part in a corporate reorganization resulting, among other things, in the formation of New Dura, cancellation of Old Dura shares, and issuance of New Dura shares. Further, the following exit financing transactions incurred (For detailed information, refer to Note 6 to the consolidated financial statements):

r The obligations of the Debtors under the DIP Revolver and the New Term Loan DIP Agreement, except those surviving obligations set forth in Article IX.D.4 of the Confirmed Plan (collectively, the “Allowed DIP Facility Claims”) were repaid in full and terminated. The creditors holding Allowed DIP Facility Claims were paid in full in cash on the Effective Date. r Outstanding debt securities of certain of the Debtors were cancelled, and the indentures governing such debt securities were terminated. The holders of these notes received approximately 95% of the common stock of the New Dura.

1030


r The creditors holding Allowed Second Lien Facility Claims (as defined in the Confirmed Plan) relating to the Second Lien Facility, were paid in full in shares of New Series A Preferred Stock on the Effective Date. r The Company entered into various exit financing facilities as detailed in Note 6 to the consolidated financial statements. Fresh-Start Reporting (Unaudited): The Predecessor Company’s emergence from the chapter 11 Cases resulted in a new reporting entity for accounting purposes and the adoption of freshstart reporting in accordance with SOP 90-7. Since the reorganization value of the assets of the Successor Company immediately before the date of confirmation of the Plan is less than the total of all post-petition liabilities and allowed claims, and the holders of the Predecessor Company’s voting shares immediately before confirmation of the Plan received less than 50 percent of the voting shares of the emerging entity, the Successor Company is required to adopt fresh-start reporting as of the Effective Date. The Bankruptcy Court confirmed the Plan based upon a reorganization value of the Company between $450 million and $550 million, which was estimated using various valuation methods, including (i) a comparison of the Company and its projected performance to the market values of comparable companies; (ii) a review and analysis of several recent transactions of companies in similar industries to the Company; and (iii) a calculation of the present value of the future cash flows of the Company under its projections. Based upon a reevaluation of relevant factors used in determining the range of reorganization value and updated expected cash flow projections, the Company concluded that $498 million should be used for fresh-start reporting purposes as it most closely approximated fair value. In accordance with fresh-start reporting, the Company’s reorganization value has been allocated to existing assets using the measurement guidance provided in SFAS 141. In addition, liabilities, other than deferred taxes, have been recorded at the present value of amounts estimated to be paid. Finally, the Predecessor Company’s accumulated deficit has been eliminated, and the Company’s new debt and equity have been recorded in accordance with the Plan. Deferred taxes have been determined in conformity with SFAS 109. The excess of the value of net tangible and identifiable intangible assets and liabilities over the reorganization value has been recorded as a reduction to the property, plant and equipment value in the accompanying unaudited pro-forma Consolidated Balance Sheet. Estimates of fair value represent the Company’s best estimates, which are based on industry data and trends and by reference to relevant market rates and transactions, and discounted cash flow valuation methods, among other factors. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the reasonable control of the Company. Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be realized, and actual results could vary materially. In accordance with SFAS 141, the preliminary allocation of the reorganization value is subject to additional adjustment within one year

13.2

1031


after emergence from bankruptcy to provide the Company with adequate time to complete the valuation of its assets and liabilities. Future adjustments may result from:

r Completion of valuation reports associated with long-lived tangible and intangible assets which may derive further adjustments or recording of additional assets or liabilities; r Adjustments to deferred tax assets and liabilities, which may be based upon additional information, including adjustments to fair value estimates of underlying assets or liabilities; r Adjustments to amounts recorded based upon estimated fair values or upon other measurements, which could change the amount of recorded goodwill; or r Results of operations incurred from January 1, 2008 through the Effective Date. The adjustments presented below are presented on an unaudited pro-forma basis as of December 31, 2007 even though the actual date of emergence is June 29, 2008. Accordingly, these estimates are preliminary and subject to further revisions and adjustments, based on any updated valuations, actual amounts and applicable economic conditions as of June 29, 2008. The Company’s actual fresh-start accounting adjustments may vary significantly from those presented below. Predecessor Company December 31, 2007 Current Assets: Cash and cash equivalents Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property, plant and equipment, net Deferred income taxes Other assets, net Current Liabilities: Debtors-in-possession financing Current maturities of long-term debt Accounts payable Accrued liabilities Accrued pension and postretirement benefits

Plan Effects (1)

$ 93,570 276,022 133,373 11,086 97,932 611,983

$ 45,709 — —

Fresh-Start Adjustments

Successor Company December 31, 2007

11,800 57,509

— — 6,669 — — 6,669

$ 139,279 276,022 140,042 11,086 109,732 676,161

411,884 16,067 9,560 $ 1,049,494

— — 16,882 $ 74,391

(69,137) (8,866) (116) $ (71,450)

342,747 7,201 26,326 $ 1,052,435

$ 137,483

$ (137,483)

—

$—

9,475 174,899 202,708

70,600 — (100)

— —

80,075 174,899 202,608

2,481

—

—

2,481

1032


Predecessor Company December 31, 2007 Deferred income taxes Total current liabilities Long-term Liabilities: Long-term debt, net of current maturities Pension and postretirement benefits Other noncurrent liabilities Deferred income taxes Total long-term liabilities Liabilities subject to compromise Total Liabilities Successor Company Convertible Preferred Stock Minority interests Stockholders’ Investment (Deficit): Successor Company Common Stock Predecessor Company Common Stock Additional paid-in capital Treasury stock at cost Accumulated deficit (including FIN 48 cumulative adjustment of $2,348 in 2007) Accumulated other comprehensive income Total stockholders’ investment (deficit)

Plan Effects (1)

Fresh-Start Adjustments

Successor Company December 31, 2007

2,074 529,120

— (66,983)

1,136 1,136

3,210 463,273

3,373

140,500

—

143,873

63,303 46,722 13,958 127,356

— — — 140,500

(3,000) — (3,000)

63,303 43,722 13,958 264,856

1,306,779 1,963,255

(1,306,779) (1,233,262)

— (1,864)

— 728,129

— 6,284

236,475 —

— —

236,475 6,284

—

84

—

84

189 351,878 (1,743)

(189) (192,251) 1,743

— (78,164) —

— 81,463 —

(1,472,639)

1,261,791

210,848

—

202,270

—

(202,270)

—

(920,045) $ 1,049,494

1,071,178 $ 74,391

(69,586) $ (71,450)

81,547 $ 1,052,435

(1) The reported amounts in the Plan Effects column of the table above reflect adjustments related to the Plan of Reorganization and the effects of the consummation of the transactions contemplated therein, which included settlement of various liabilities, issuance of certain securities, incurrence of new indebtedness, repayment of old indebtedness, and other cash payments.

13.3

13.3

Liabilities Subject to Compromise

1033


Objective. Section 13.3 of Bankruptcy and Insolvency Accounting discusses liabilities subject to compromise as summarized below (in the notes in 13.3 of Volume 1). (a) Comments Related to SOP 90-7 in Buffets 10K for Year Ending July 2, 2008

r The Company’s continuation as a going concern is contingent upon, amongst other things, its ability (i) to comply with the terms and conditions of the DIP Credit Agreement; (ii) to reduce administrative, operating and interest costs and liabilities through the bankruptcy process; (iii) to generate sufficient cash flow from operations; (iv) to return to profitability; (v) to obtain confirmation of a plan of reorganization under the Bankruptcy Code and (vi) to obtain financing to facilitate an exit from bankruptcy. In the event the Company’s restructuring activities are not successful and it is required to liquidate, additional significant adjustments will be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used. See Note 10—“Debt” for further details on the Company’s compliance with the financial covenants in its DIP Credit Agreement. The accompanying consolidated financial statements reflect adjustments made in accordance with American Institute of Certified Public Accountants’ Statement of Position 90–7 (“SOP 90–7”). r Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. As a result of the Bankruptcy, substantially all unsecured liabilities as of the Petition Date, except those covered under certain first day motions filed with the Bankruptcy Court, are considered subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by the affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Bankruptcy are segregated and classified as “Liabilities Subject to Compromise” in the accompanying consolidated balance sheet under SOP 90–7. The ultimate amount of and settlement terms for the Company’s pre-petition liabilities are dependent on the outcome of the Bankruptcy, and accordingly are not presently determinable. Pursuant to SOP 90–7, professional fees associated with the Bankruptcy, and certain gains and losses resulting from reorganization or restructuring of the business are reported separately as “Reorganization Items, net” in the accompanying consolidated statement of operations. In addition, interest expense is reported only to the extent that it will be paid during the Bankruptcy or that it is probable that it will be an allowed claim under the Bankruptcy. r Derivative Instruments and Hedging Activities. Prior to the Petition Date, the Company used financial derivatives to manage interest rate risk in accordance with its Pre-Petition Credit Agreement, as amended

1034

r

r

r r

r


and restated on March 13, 2007. . . . On January 22, 2008, the Company received notification that the Bankruptcy caused an Event of Default, as defined in the Swap Agreement. As a result of the default, January 22, 2008 was set as the Early Termination Date, as described in the Swap Agreement, and a calculation of the amount owed under the agreement was performed and determined to be approximately $1.0 million. As a result, the Company recorded a current liability in the amount of $1.0 million and wrote off the related other comprehensive income, deferred tax asset and related valuation allowance to interest expense. In accordance with SOP 90–7, the Company classified the $1.0 million swap liability as “Liabilities Subject to Compromise” in the accompanying consolidating balance sheet. Liabilities Subject to Compromise. Under bankruptcy law, actions by creditors to collect amounts owed prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against us. Substantially all unsecured liabilities as of the Petition Date, except those covered under certain first day motions filed with the Bankruptcy Court, have been classified as “Liabilities Subject to Compromise” in the current fiscal year consolidated balance sheet. The Company’s estimates include judgments and assumptions regarding the amounts for which claims will be allowed by the Bankruptcy Court. These estimates and assumptions are monitored and adjusted when warranted by changing circumstances. Changes in these factors may produce materially different amounts of liabilities than what is currently estimated. Reorganization Items. Reorganization items are expense or income items that were incurred or realized due to the Bankruptcy. These items include professional fees and similar types of expenses incurred directly related to the Bankruptcy, loss accruals or gains or losses resulting from activities of the reorganization process, costs and claims, which stem from the rejection of leases and other executory contracts, and interest earned on excess cash accumulated during the Bankruptcy. The Company ceased amortizing debt issuance costs related to the Senior Notes subsequent to the petition date as interest was no longer being accrued in accordance with SOP 90–7. Recognition of Liabilities in Connection with a Purchase Business Combination. See Note 12—“Acquisitions” for further discussion of the merger with Ryan’s. Subsequent to the Petition Date, the Company rejected the leases and closed 54 underperforming restaurants as part of its reorganization plan under chapter 11. In accordance with SOP 90–7, costs associated with these closures of approximately $7.8 million are classified as “Reorganization Items, net” in the accompanying consolidated statement of operations. 10. Debt

As of July 2, 2008, debt consisted of the following (in thousands):

13.3


DEBT NOT SUBJECT TO COMPROMISE Super-Secured borrowings consist of the following: DIP facility new money loan, interest at LIBOR, with a 4.0% floor, plus 7.25%, due January 22, 2009 (interest at 11.25% as of July 2, 2008) DIP facility rollover loan, interest at LIBOR plus 7.25%, due January 22, 2009 (interest at 9.73% as of July 2, 2008) Total debt not subject to compromise DEBT SUBJECT TO COMPROMISE Secured borrowings consist of the following: Revolving credit facility, interest at LIBOR plus 7.25%, due July 31, 2008 (interest at 9.73% as of July 2, 2008) Letter of credit facility, interest at LIBOR plus 7.25%, due July 31, 2008 (interest at 9.73% as of July 2, 2008) Term loan, interest at LIBOR plus 7.25%, due January 22, 2009 Unsecured borrowings consist of the following: Senior notes, interest at 12.50%, due November 1, 2014 Total debt subject to compromise Total debt

1035

$81,250 199,631 280,881

27,402 5,286 353,945 300,000 686,633 $967,514

In accordance with the provisions of SOP 90–7, the Company classified all amounts outstanding under this obligation as “Liabilities Subject to Compromise” in the consolidated balance sheet, and ceased the accrual of interest on these notes as of the Petition Date. As of July 2, 2008, the unpaid contractual interest on these notes was approximately $37.8 million, consisting of approximately $20.9 million of interest expense recorded in the accompanying financial statements through the Petition Date and approximately $16.9 million of excess contractual interest subsequent to the Petition Date through the end of the fiscal year. Management, in consultation with bankruptcy counsel, does not expect post-petition interest on this debt to be paid. As a result, the Company ceased accruing interest under this obligation as of the Petition Date in accordance with SOP 90–7. During the third quarter of fiscal year 2008, the Company closed 53 underperforming restaurants in connection with the Bankruptcy. These costs were written off to reorganization items in accordance with SOP 90–7. Net loss for the third quarter of fiscal 2008 included a $394.0 million charge related to impairment of goodwill, other intangible and long-lived assets and $38.3 million related to reorganization costs. The net loss for the second quarter of fiscal year 2007 included pretax charges of approximately $0.8 million in closed restaurant costs as two stores were closed during the quarter and a pretax charge of approximately $3.1 million related to the Ryan’s and North’s acquisitions. The net loss for the second quarter of fiscal year 2008 included $2.8 million related to closed restaurant costs as nineteen stores were closed during the quarter, $6.4 million related to impairment of intangible and long-lived assets and $2.0 million related to merger integration costs. Net loss for the first quarter of fiscal 2007 included a pretax charge of approximately $0.7 million for

1036


closed restaurant costs as compared to $0.1 million for the comparable period in fiscal year 2008. The decrease was due in large part to the closure of three underperforming stores in the first quarter of fiscal year 2007 compared to one in the first quarter of fiscal year 2008. The first quarter of fiscal year 2007 also included a pretax charge of approximately $0.4 million related to the Ryan’s acquisition that commenced in the second quarter of fiscal year 2007. Net income for the first quarter of fiscal year 2008 included $1.6 million related to merger integration costs.

14 Reporting Results of the Plan

14.1

Fresh-Start Reporting: Sunbeam-Oster

Objective. Section 14.4 of Volume 1 of Bankruptcy and Insolvency Accounting states that when fresh-start reporting is adopted, Paragraph 39 of SOP 90-7 indicates the notes to the initial financial statement should make certain disclosures. As an illustration, the balance sheet issued by a debtor in chapter 11 after adoption of fresh-start reporting is reproduced below. This model illustrates how a debtor might present the balance sheet resulting from fresh-start reporting, separate from prior balance sheets issued by the debtor. SUNBEAM-OSTER COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1990 (Dollars in Thousands) Assets Current assets: Cash Receivables Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment Trademarks and tradenames Other assets Goodwill

$ 46,160 147,492 141,192 11,094 345,938 152,913 231,800 20,148 30,616 $ 781,415 (Continued)

1037

1038

Reporting Results of the Plan

Liabilities and Shareholders’ Equity Current Liabilities: Seasonal borrowings Current maturities of long-term debt Accounts payable Payrolls and employee benefits Accrued rationalization and reorganization expense Other accrued liabilities Total current liabilities Long-term debt Nonoperating liabilities, net Other long-term liabilities Redeemable warrants Commitments and contingencies∗ Shareholders’ equity: Common stock Paid-in capital Shares issuable Warrants issuable Total shareholders’ equity

$ 22,735 27,514 78,040 17,216 47,202 71,702 264,409 101,079 4,887 39,802 1,838

307 133,353 227,531 8,209 369,400 $ 781,415

See accompanying notes to consolidated balance sheet. ∗ Notes 3, 6, 14 and 15

SUNBEAM-OSTER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1990 (Dollars, Except Per Share Amounts, in Thousands) 1 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Within its single line of business—consumer products—Sunbeam-Oster Company, Inc. (Sunbeam-Oster or the Company) has five major business groups: (i) The Outdoor Products Group, consisting primarily of gas barbecue grills, casual outdoor furniture and a line of outdoor time and temperature instruments; (ii) The Home Comfort and Personal Care Products Group, consisting of a broad line of warming blankets and throws, health care and comfort products such as vaporizers, humidifiers and portable heaters, hair care products, and blood pressure and temperature monitoring equipment; (iii) The Professional Products Group, providing barber and beauty shops, food service, and pet and agricultural markets with selected Company products which have been adapted to commercial applications; (iv) The Household Products Group, having responsibility for a full line of small electrical kitchen appliances including mixers, Osterizers, Oskar food processors, toasters, irons, can openers, food scales and thermometers, timers and coffee makers, as well as a diverse line of indoor household time and weather instruments; and (v) The International

14.1

1039


Group, which manufactures and markets a broad range of the above-mentioned products in world markets. On September 28, 1990, Sunbeam-Oster acquired (the Acquisition) the assets and assumed certain liabilities, through a reorganization, of Allegheny International, Inc., an entity operating as a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code. The Company has adopted “fresh start” reporting in accordance with the AICPA’s Statement of Position on “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” Accordingly, assets and liabilities have been restated to allocate the reorganization value in conformity with Accounting Principles Board Opinion No. 16. The excess of the reorganization value over the estimated fair value of identifiable net assets of the reorganized entity has been classified as goodwill. The Company is in the process of obtaining additional information and pursuing settlements of litigation and certain other contingencies relating to Allegheny International, Inc. for periods prior to September 28, 1990. When such items are settled and information is obtained, changes to the reorganization value and/or the allocation of the reorganization value may be required. A further discussion concerning the acquired assets and assumed liabilities and the approved plan of reorganization is contained in Note 3. The accompanying September 30, 1990, consolidated balance sheet reflects the application of the following significant accounting policies:

Principles of Consolidation The consolidated balance sheet includes the accounts of the Company and all majority-owned subsidiaries that it controls. All material intercompany balances have been eliminated in consolidation. Fiscal Year The Company’s fiscal year ends on the Sunday nearest September 30. Short-Term Investments Short-term investments are stated at cost, which approximates market. For purposes of the statements of cash flows, cash equivalents are highly liquid, short-term investments with maturities of three months or less at the date of purchase. Accounts Receivable Accounts receivable at September 30, 1990, of $147,492 consist of $159,020 of trade accounts receivable, substantially all of which were due from (continued )

1040


distributors and retailers located throughout the United States and Canada, and sundry receivables of $6,733, less valuation allowances of $18,261. Inventories Inventories are stated at the lower of cost or market with cost being determined principally by the first-in, first-out (FIFO) method. Inventories at September 30, 1990, of $141,192 include $68,377 of finished goods, $19,419 of work-in-process and $53,396 of raw materials and supplies. Property, Plant and Equipment Property, plant and equipment is stated at cost. The company will provide for depreciation using primarily the straight-line method in amounts that will allocate the costs of property, plant and equipment over their estimated useful lives. Property, plant and equipment at September 30, 1990, of $152,913 include $2,874 of land, $36,258 of buildings and improvements, and $113,781 of machinery and equipment. Amortization Periods Trademarks and tradenames and goodwill will be amortized over 30 years using the straight-line method. Deferred financing costs will be amortized over the life of the applicable debt. Income Taxes Deferred income taxes are not provided for on the undistributed earnings of foreign subsidiaries, since such earnings are considered to be permanently reinvested. The Company has adopted the provisions of Statement No. 96 of the Financial Accounting Standards Board under which deferred income taxes are measured by applying currently enacted tax laws.

2 REALIGNMENT OF OPERATIONS: As contemplated in the Modified Plan (as described in Note 3), the acquired assets and assumed liabilities of Allegheny International, Inc. and its direct and indirect subsidiaries were allocated to three of the Company’s subsidiaries: Sunbeam Americas Holdings, Limited (SAHL), Sunbeam-Oster Housewares, Inc. and Montey Corporation.

14.1


1041

3 CHAPTER 11 PROCEEDINGS: On February 20 and May 3, 1988, Allegheny International, Inc. and certain of its subsidiaries (collectively, the Debtors) filed petitions under Chapter 11 with the Bankruptcy Court for the Western District of Pennsylvania (the Court). The Debtors’ Plan of Reorganization (the Stock Plan) was filed with the Court on December 29, 1989. On January 24, 1990, Japonica Partners, a Rhode Island limited partnership (Japonica Partners) and the general partner of Sunbeam-Oster Equities, L.P., a Delaware limited partnership formed by Japonica Partners (SOE), filed its Plan of Reorganization with the Court. The general partners of Japonica Partners are Paul B. Kazarian, Ltd., a corporation wholly-owned by Paul B. Kazarian, and M. G. Lederman, Ltd., a corporation wholly-owned by Michael G. Lederman. On September 13, 1990, the Court approved a modified Stock Plan (the Modified Plan). In accordance with the Modified Plan and pursuant to an Asset Purchase Agreement, dated as of September 28, 1990, Sunbeam-Oster acquired all of the assets of Allegheny International (through a reorganization) including the capital stock of the direct subsidiaries of Allegheny International in consideration of the assumption by Sunbeam-Oster of certain liabilities of the Debtors and the satisfaction of the interest of the equity holders of Allegheny International (the Equity Holders) and the allowed claims of certain creditors of the Debtors (the Creditors). Pursuant to the Modified Plan, upon the consummation of the Acquisition, the assets and undischarged liabilities of the Debtors were allocated among three of Sunbeam-Oster’s subsidiaries: (i) SAHL, (ii) Sunbeam-Oster Housewares, Inc. and (iii) Montey Corporation. In connection with the initial capitalization of Sunbeam-Oster, SOE purchased 300 shares of common stock at $2.33 per share. In addition, pursuant to the Modified Plan, on September 28, 1990, 30,678,684 shares of common stock were issued to SOE in satisfaction of Allegheny International secured bank claims held by SOE. The share data herein gives effect to a 3-for-1 stock split declared on December 10, 1990. The Modified Plan also provided for certain Creditors and Equity Holders to be granted an election (the Election) to satisfy their claims and interests through the receipt of either (i) cash or (ii) newly issued common stock or redeemable warrants. The Election period ended on November 12, 1990. Pursuant to the Modified Plan, Japonica Partners was permitted to decide whether Creditors and Equity Holders who failed to effectively exercise their Election would receive cash or securities. On November 28, 1990, the Company issued a press release announcing that cash would be distributed to such Creditors and Equity Holders. On or about December 12, 1990, an aggregate of approximately $85,200 in cash, 33,176,406 shares of common stock and 5,623,783 redeemable warrants were distributed, or reserved for distribution, to Creditors and Equity Holders. In consideration for the $85,200 used to fund this cash distribution, the Company issued 839,974 shares of 9.5% Convertible Exchangeable Preferred Stock to the limited partners of SOE (the Limited Partners). SOE received approximately $2,300 in cash, 32,874,462 shares of common stock and 4,422,178 redeemable warrants. Accordingly, SOE owns approximately 99.6% of the issued and outstanding common stock (95.1% on a fully diluted basis). As of September 30, 1990, certain disputed claims had not been discharged by the Modified Plan. Under the Modified Plan, the Company has the right

1042


to settle such disputed claims through cash payments or, if certain conditions are met, through the issuance of common stock. Management believes that the disputed claims will be settled for amounts substantially below the face amounts of such claims. The Company has accrued approximately $12,500 for the estimated settlement value of disputed claims. AIR of Dallas, Inc., AIR Realty of Houston, Inc., Allegheny Sherry Lane Management, Inc. and Allegheny International Credit Corporation (the Continuing Debtors) remain in Chapter 11 proceedings. 9 CAPITALIZATION: In connection with the initial capitalization of the Company, SOE purchased 300 shares of common stock at $2.33 per share. In addition, pursuant to the Modified Plan, on September 28, 1990,30,678,684 shares of common stock were issued to SOE in satisfaction of Allegheny International secured bank claims held by SOE. The Modified Plan also provided for certain Creditors and Equity Holders to be granted an election (the Election) to satisfy their claims and interests through the receipt of either (i) cash or (ii) newly issued common stock or redeemable warrants. The Election period ended on November 12, 1990. Pursuant to the Modified Plan, Japonica Partners was permitted to decide whether Creditors and Equity Holders who failed to effectively exercise their Election would receive cash or securities. On November 28, 1990, the Company issued a press release announcing that cash, rather than securities, would be distributed to such Creditors and Equity Holders. On or about December 12, 1990, an aggregate of 33,176,406 shares of common stock and 5,623,783 redeemable warrants were distributed, or reserved for distribution, to Creditors and Equity Holders electing to receive common stock or warrants. Each redeemable warrant issued pursuant to the Modified Plan entitles the holder to purchase three shares of common stock at an exercise price of $2.90 per share (subject to adjustment) through 1995. If, prior to September 28, 1992, a “going private transaction” (as defined) occurs, the warrants are redeemable at the option of either the Company or the holder of the warrants, at a price of $1.53 per warrant through September 1991 and $1.75 per warrant through September 1992. The redeemable warrants not held by SOE have been excluded from shareholders’ equity at September 30, 1990. In addition to the common stock and redeemable warrants, $82,991 was distributed to the creditors and shareholders of Allegheny International, other than SOE, electing to receive cash in lieu of securities. The Company issued 839,974 shares of 9.5% Convertible Exchangeable Preferred Stock (the Preferred Stock) to the Limited Partners as consideration for the funding of the cash settlements. The Preferred Stock has a cumulative annual dividend rate of 9.5% (subject to adjustment) payable quarterly commencing March 15, 1991. The Company has the ability to pay these dividends with additional shares of Preferred Stock. The dividend rate for these payments-in-kind will range from 14%–18% as determined by the provisions of the Preferred Stock. The Preferred Stock is convertible to common stock at any time at a conversion price of $9.85, which is the equivalent of 10.15 shares of common stock for each share of Preferred Stock, subject to adjustment upon the occurrence of certain events. At the option of the Company, the Preferred Stock is exchangeable into

14.1


1043

subordinated debt, as defined, or callable at a $100.00 per share liquidation price, plus accrued and unpaid dividends. In addition to the common stock and redeemable warrants issuable pursuant to the terms of the Modified Plan, warrants to purchase 1,104,315 shares of common stock, with an exercise price of $2.16 per share, were issuable to certain banks involved in financing the Modified Plan. At September 30, 1990, there were 26,503,319 shares of common stock reserved for issuance upon the exercise of warrants and conversion of Preferred Stock. Valuation of Enterprise Equity Value The Company has accounted for the reorganization using “fresh start” reporting. Accordingly, the value of equity has been determined based on the Court-approved free enterprise value adjusted for debt service and other cash charges of noncore operations. An analysis of the determination of the enterprise equity value is as follows: Assumed enterprise value Less—Debt at consummation Present value of liabilities not related to the Company’s continuing core businesses, net of assets Enterprise equity value

$ 570,000 (140,650) (59,950) $ 369,400

The determination of assumed enterprise value was based on certain valuation methods including the discounted cash flows of expected future operating results. Allocation of Enterprise Equity Value to Shareholders’ Equity Based on the results of the Election and the resulting issuance of equity securities in accordance with the provisions of the Modified Plan and the financing arrangements, the components of shareholders’ equity at September 30, 1990, would have been: Common stock, par value 3.01 per share— Authorized, 100,000,000 shares Issued and outstanding, 63,855,390 shares Redeemable warrants Other warrants Paid-in capital Preferred stock, par value $.01 per share— Authorized, 2,000,000 shares Issued and outstanding as a series of preferred stock, 839,974 shares of 9.5% Convertible Exchangeable Preferred Stock (liquidation preference $100.00 per share) Total shareholders’ equity

$ 639 6,766 1,443 277,561

82,991 $369,400

1044 10


SUPPLEMENTARY BALANCE SHEET DATA: September 30, 1990

Other assets— Deferred financing costs Other Other accrued liabilities— Advertising and sales promotion Product warranty Other

$19,374 774 $20,148 $ 14,548 14,738 42,416 $71,702

Nonoperating liabilities, net consist of miscellaneous items associated with the prebankruptcy operations of Allegheny International which do not relate to the ongoing operations of Sunbeam-Oster. Nonoperating liabilities (assets), net— Environmental remediation Accrued pension Accrued postretirement health care Notes receivable Cash surrender value on life insurance policies on former key employees Net assets of discontinued operations Other

14.2

$15,325 24,141 21,878 (13,548) (13,599) (30,090) 780 $4,887

Financial Statements Based on SOP 90-7

Objective. Section 14.4 of Volume 1 of Bankruptcy and Insolvency Accounting discusses statements issued by debtors based on fresh-start reporting. The financial statements and financial information presented below were taken from (a) Northwest Airlines, illustrating the process followed in the adoption of fresh-start reporting in accordance with SOP 90-7, and (b) Wheeling Pittsburg, illustrating procedures that may be followed in making entries to record fresh-start accounting.

14.2

1045


(a) Northwest Airlines (10Q) NORTHWEST AIRLINES CORPORATION—10Q PART I. FINANCIAL INFORMATION Item 1. Financial Statements. NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Successor

(Unaudited, in millions except per share amounts) Operating Revenues Passenger Regional carrier revenues Cargo Other Total operating revenues Operating Expenses Aircraft fuel and taxes Salaries, wages and benefits Selling and marketing Aircraft maintenance materials and repairs Other rentals and landing fees Depreciation and amortization Aircraft rentals Regional carrier expenses Other Total operating expenses Operating Income (Loss) Other Income (Expense) Interest expense, net Investment income Reorganization items, net Other, net Total other income (expense) Income (Loss) Before Income Taxes Income tax expense (benefit) Net Income (Loss) Applicable to Common Stockholders Earnings (loss) per common share: Basic Diluted Average shares used in computation: Basic Diluted See accompanying notes.

Period from June 1 to June 30, 2007

Predecessor Period from April 1 to May 31, 2007

Three Months Ended June 30, 2006

$ 861 135 69 65 1,130

$ 1,566 229 129 127 2,051

$ 2,425 396 236 234 3,291

267 205 65 64 46 39 31 63 155 935 195

582 412 124 119 94 85 64 134 275 1,889 162

886 675 190 183 142 134 54 366 366 2,996 295

(40) 17 — 3 (20) 175 69

(87) 25 1,944 (2) 1,880 2,042 (1)

(138) 25 (464) (3) (580) (285) —

$ 106

$ 2,043

$ (285)

$ 0.41 $ 0.41

$ 23.37 $ 16.87

$ (3.27) $ (3.27)

262 262

87 113

87 87

1046


NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Successor

(Unaudited, in millions except per share amounts) Operating Revenues Passenger Regional carrier revenues Cargo Other Total operating revenues Operating Expenses Aircraft fuel and taxes Salaries, wages and benefits Selling and marketing Aircraft maintenance materials and repairs Other rentals and landing fees Depreciation and amortization Aircraft rentals Regional carrier expenses Other Total operating expenses Operating Income (Loss) Other Income (Expense) Interest expense, net Investment income Reorganization items, net Other, net Total other income (expense) Income (Loss) Before Income Taxes Income tax expense (benefit) Net Income (Loss) Applicable to Common Stockholders Earnings (loss) per common share: Basic Diluted Average shares used in computation: Basic Diluted See accompanying notes.


Predecessor Period from January 1 to May 31, 2007

Six Months Ended June 30, 2006

$ 861 135 69 65 1,130

$ 3,768 521 318 317 4,924

$ 4,474 735 450 522 6,181

267 205 65

1,286 1,027 315

1,630 1,351 384

64 46 39 31 63 155 935 195

303 235 206 160 345 684 4,561 363

372 285 268 122 732 757 5,901 280

(40) 17 — 3 (20) 175 69

(219) 56 1,551 (2) 1,386 1,749 (2)

(276) 43 (1,439) 3 (1,669) (1,389) —

$ 106

$ 1,751

$ (1,389)

$ 0.41 $ 0.41

$ 20.03 $ 14.28

$ (15.92) $ (15.92)

262 262

87 113

87 87

14.2

1047


NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions) ASSETS CURRENT ASSETS Cash and cash equivalents Unrestricted short-term investments Restricted cash, cash equivalents and short-term investments Accounts receivable, less allowance (2007–$5; 2006–$14) Flight equipment spare parts, less allowance (2007–$2; 2006–$255) Maintenance and operating supplies Prepaid expenses and other Total current assets PROPERTY AND EQUIPMENT Flight equipment Less accumulated depreciation Other property and equipment Less accumulated depreciation Total property and equipment, net FLIGHT EQUIPMENT UNDER CAPITAL LEASES Flight equipment Less accumulated amortization Total flight equipment under capital leases OTHER ASSETS Goodwill International routes, less accumulated amortization (2007–$0; 2006–$334) Other intangibles, less accumulated amortization (2007–$7; 2006–$0) Investments in affiliated companies Other, less accumulated depreciation and amortization (2007–$1; 2006–$914) Total other assets Total Assets See accompanying notes.

Successor

Predecessor

June 30, 2007

December 31, 2006

$ 2,678 632

$ 1,461 597

706

424

742

638

136 120 182 5,196

104 130 212 3,566

6,884 41 6,843 556 9 547 7,390

10,424 2,815 7,609 1,674 1,103 571 8,180

8 — 8

24 12 12

6,188

8

2,977

634

2,180 166

30 42

466 11,977 $ 24,571

743 1,457 $ 13,215

1048


NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions) LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) CURRENT LIABILITIES Air traffic liability/deferred frequent flyer liability Accrued compensation and benefits Accounts payable Collections as agent Accrued aircraft rent Other accrued liabilities Current maturities of long-term debt Current maturities of capital lease obligations Total current liabilities LONG-TERM DEBT LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES DEFERRED CREDITS AND OTHER LIABILITIES Long-term pension and postretirement health care benefits Deferred frequent flyer liability Deferred income taxes Other Total deferred credits and other liabilities LIABILITIES SUBJECT TO COMPROMISE PREFERRED REDEEMABLE STOCK SUBJECT TO COMPROMISE COMMITMENTS AND CONTINGENCIES COMMON STOCKHOLDERS’ EQUITY (DEFICIT) Predecessor Company common stock, $.01 par value; shares authorized—315,000,000; shares issued—111,374,977 at December 31, 2006 Successor Company common stock, $.01 par value; shares authorized—400,000,000; shares issued—195,188,600 at June 30, 2007 Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Predecessor Company Treasury stock (2006—24,024,317 shares) Total common stockholders’ equity (deficit) Total Liabilities and Stockholders’ Equity (Deficit) See accompanying notes.

Successor

Predecessor

June 30, 2007

December 31, 2006

$ 2,290 389 829 206 17 467 513 9 4,720 6,138

$ 1,557 301 624 138 49 329 213 — 3,211 3,899

119

—

3,449 1,550 1,131 178 6,308 —

86 — — 161 247 13,572

—

277

—

1

2 7,178 106 —

— 1,505 (7,384) (1,100)

— 7,286 $24,571

(1,013) (7,991) $ 13,215

14.2

1049


NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Successor

(Unaudited, in millions) Cash Flows from Operating Activities Net income (loss) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization Income tax expense (benefit) Pension and other postretirement benefit contributions less than (greater than) expense Stock-based compensation Reorganization items, net Increase (decrease) in cash flows from operating assets and liabilities, excluding the effects of the acquisition of Mesaba Aviation, Inc.: Changes in certain assets and liabilities Long-term vendor deposits/holdbacks Post-emergence reorganization payments Other, net Net cash provided by (used in) operating activities Cash Flows from Reorganization Activities Net cash provided by (used in) reorganization activities Cash Flows from Investing Activities Capital expenditures Purchase of short-term investments Proceeds from sales of short-term investments Decrease (increase) in restricted cash, cash equivalents and short-term investments Cash and cash equivalents acquired in acquisition of Mesaba Aviation, Inc. Other, net Net cash provided by (used in) investing activities




$ 106

$ 1,751

$ (1,389)

39 69

206 (2)

268 —

— 10 —

3 — (1,551)

149 1 1,439

(61) 147 (67) (4)

441 163 — 13

394 (116) — 12

239

1,024

758

—

5

12

(128) —

(312) (44)

(186) (18)

9

15

10

(7)

(74)

(74)

— (1)

16 1

— (1)

(127)

(398)

(269)

1050


NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Successor

(Unaudited, in millions) Cash Flows from Financing Activities Proceeds from long-term debt Payments of long-term debt and capital lease obligations Proceeds from equity rights offering Other, net Net cash provided by (used in) financing activities Increase (Decrease) in Cash and Cash Equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Available to be borrowed under credit facilities Cash and cash equivalents and unrestricted short-term investments at end of period Supplemental Cash Flow Information: Interest paid Investing and Financing Activities Not Affecting Cash: Manufacturer financing of aircraft and other non-cash transactions See accompanying notes.




67

326

72

(59) 750 1

(610) — (1)

(278) — —

759

(285)

(206)

871

346

295

1,807 $ 2,678

1,461 $ 1,807

684 $ 979

$ 127

$ 127

$9

$ 3,310

$ 2,445

$ 1,576

$ 53

$ 208

$ 125

$ 84

$ 167

$ 117

14.2

1051


NORTHWEST AIRLINES CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited, in millions) Balance at January 1, 2007 (Predecessor Company) Series C Preferred Stock converted to common stock Net income (loss) from January 1 to May 31, 2007 Other comprehensive income (loss) Foreign currency Unrealized gain/(loss) on investments Total Balance at May 31, 2007 (Predecessor Company) Fresh start adjustments: Cancellation of the Predecessor Company’s preferred and common stock Elimination of the Predecessor Company’s accumulated deficit and accumulated other comprehensive loss Reorganization value ascribed to the Successor Company Issuance of new equity interests in connection with emergence from Chapter 11 Balance at June 1, 2007 (Successor Company) Net income from June 1 to June 30, 2007 Other comprehensive income (loss) Deferred gain/(loss) from hedging activities Unrealized gain/(loss) on investments Total Compensation expense associated with equity awards Balance at June 30, 2007 See accompanying notes.

Retained Accumulated Additional Earnings Other Common Stock Paid-In (Accumulated Comprehensive Treasury Shares Amount Capital Deficit) Income (Loss) Stock

Total

111.4

$1

$ 1,505

$ (7,384)

$ (1,100)

$ (1,013) $ (7,991)

—

—

2

—

—

—

2

—

—

—

1,751

—

—

1,751

—

—

—

—

(1)

—

(1)

—

—

—

—

1

—

111.4

1

1,507

(5,633)

(1,100)

(1,013)

1 — (6,238)

(111.4)

(1)

(1,507)

—

—

1,013

(495)

—

—

—

5,633

1,100

—

6,733

167.4

2

6,448

—

—

—

6,450

27.8 195.2

— 2

728 7,176

— —

— —

— —

728 7,178

—

—

—

106

—

—

106

—

—

—

—

1

—

1

—

—

—

—

(1)

—

(1) —

— 195.2

— $2

2 $ 7,178

— $ 106

— $—

— $—

2 $ 7,286

1052


Selected Notes to Condensed Consolidated Financial Statements Note 2 – Voluntary Reorganization Under Chapter 11 Background and General Bankruptcy Matters. The following discussion provides general background information regarding the Company’s Chapter 11 cases, and is not intended to be an exhaustive summary. Detailed information pertaining to the bankruptcy filings may be obtained at http://www.nwarestructuring.com. On September 14, 2005 (the “Petition Date”), NWA Corp. and 12 of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed a voluntary petition for relief under Chapter 11. On May 18, 2007, the Bankruptcy Court entered an order approving and confirming the Debtors’ First Amended Joint and Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan” or “Plan of Reorganization”). The Plan became effective and the Debtors emerged from bankruptcy protection on May 31, 2007 (the “Effective Date”). On the Effective Date, the Company implemented fresh-start reporting in accordance with SOP 90-7. The Plan generally provided for the full payment or reinstatement of allowed administrative claims, priority claims, and secured claims, and the distribution of new common stock of the Successor Company to the Debtors’ creditors, employees and others in satisfaction of allowed unsecured claims. The Plan contemplated the issuance of approximately 277 million shares of new common stock by the Successor Company (out of the 400 million shares of new common stock authorized under its amended and restated certificate of incorporation). The new common stock is listed on the New York Stock Exchange (the “NYSE”) and began “regular way” trading under the symbol “NWA” on May 31, 2007. The distributions of the Successor Company’s common stock, which are subject to certain holdbacks as described in the Plan, were authorized under the Plan as follows:

r 225.8 million shares of common stock are issuable to holders of certain general unsecured claims;

r 8.6 million shares of common stock are issuable to holders who also held a guaranty from a Debtor;

r 15.2 million shares of common stock are subject to awards under a management equity plan; and

r 27.8 million shares of common stock were issued in the Rights Offering and Equity Commitment Agreement. Pursuant to the Plan of Reorganization, stockholders of NWA Corp. prior to the Effective Date received no distributions and their stock was cancelled. In connection with the consummation of the Plan of Reorganization, on the Effective Date, the Company’s existing $1.225 billion Super Priority Debtor in Possession and Exit Credit Guarantee Agreement (the “DIP/Exit Facility”)

14.2


1053

was converted into exit financing in accordance with its terms. See “Note 10—Long-Term Debt and Short-Term Borrowings” for additional information. Stockholder Rights Plan. Pursuant to the Stockholder Rights Plan (the “Rights Plan”), each share of common stock has attached to it a right and, until the rights expire or are redeemed, each new share of common stock issued by NWA Corp., will include one right. Once exercisable, each right entitles the holder (other than the acquiring person or group) to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $120, subject to adjustment. The rights become exercisable upon the occurrence of certain events, including the acquisition by any air carrier with passenger revenues in excess of approximately $1 billion per year (as such amount may be increased based on increases in the Consumer Price Index from 2000) (a “Major Carrier”), a holding company of a Major Carrier or any of their respective affiliates acquires beneficial ownership of 20% or more of NWA Corp.’s outstanding common stock or commences a tender or exchange offer that would result in such person or group acquiring beneficial ownership of 20% or more of NWA Corp.’s outstanding common stock. The rights expire on May 31, 2017, and may be redeemed by NWA Corp. at a price of $.01 per right prior to the time they become exercisable. Claims Resolution Process. As permitted under the bankruptcy process, many of the Debtors’ creditors filed proofs of claim with the Bankruptcy Court. Through the claims resolution process, many claims were disallowed by the Bankruptcy Court because they were duplicative, amended or superseded by later filed claims, were without merit, or were otherwise overstated. Throughout the Chapter 11 proceedings, the Company also resolved many claims through settlements or by Bankruptcy Court orders following the filing of an objection. The Company will continue to settle claims and file additional objections with the Bankruptcy Court. With respect to unsecured claims, once a claim is allowed consistent with the claims resolution process, the claimant is entitled to a distribution of new common stock. Pursuant to the terms of the Plan of Reorganization, approximately 167.8 million shares of new common stock were issued and distributed on or about May 31, 2007 and July 16, 2007 as part of the initial distributions in respect of valid unsecured claims totaling $7.6 billion. Additionally, approximately 7.0 million shares of new common stock were distributed in respect of valid unsecured guaranty claims. In total, there are approximately 59.7 million remaining shares of new common stock held in reserve under the terms of the Plan of Reorganization. Of these shares, approximately 58.0 million are being held in reserve relating to disputed unsecured claims totaling $2.6 billion and 1.6 million are being held in reserve relating to unsecured guaranty claims totaling $737 million. The Company estimates that the probable range of unsecured claims to be allowed will be between $8.2 and $8.8 billion. Based on the current status of the claims resolution process, the actual results are expected to fall towards the low end of this range. Differences between claim amounts filed and the Company’s estimates are being investigated and will be resolved in connection with the claims resolution process. However, there will be no further financial impact to the Company associated with the settlement of such unsecured claims, as the holders of all allowed unsecured claims against the Predecessor

1054


Company will receive under the Plan of Reorganization only their pro rata share of the distribution of the newly issued Common Stock of the Successor Company. With respect to administrative and priority claims, pursuant to the terms of the Plan of Reorganization these claims will be satisfied with cash. Many administrative and priority claims still remain unpaid, and the Company will continue to settle claims or file objections with the Bankruptcy Court to eliminate or reduce such claims. All of these claims have been accrued by the Successor Company based upon the best available estimates of amounts to be paid. However, it should be noted that the claims resolution process is uncertain and could result in material adjustments to the Successor Company’s financial statements. Additionally, secured claims were deemed unimpaired under the Plan of Reorganization. Pursuant to the Plan of Reorganization those claims were satisfied upon either reinstatement of the obligations in the Successor Company, surrendering the collateral to the secured party, or by making full payment in cash. However, certain disputes still remain with respect to the valuation of some security interests that may result in material future adjustments to the Company’s financial results. Equity Commitment Agreement. On March 27, 2007, the Bankruptcy Court approved the Equity Commitment Agreement dated February 12, 2007 (“ECA”) among NWA Corp., together with Northwest, as guarantor, and JP Morgan Securities Inc. (“JP Morgan”), pursuant to which, among other things, JP Morgan agreed to backstop the rights offering (the “Rights Offering”) to creditors of NWA Corp., Northwest and the Debtors. The Company raised a total of $750 million in new capital through the sale of 27,777,778 shares of new common stock pursuant to the Rights Offering and JP Morgan’s commitments under the ECA. Restructuring Goals. As part of its restructuring in Chapter 11, the Company identified three major elements essential to transforming its business and substantially completed the actions necessary to achieve its targeted business improvements. The three major elements included:

r Achieving approximately $2.4 billion in annual cost reductions, including both labor and non-labor costs; r Resizing and optimization of the Company’s fleet to better serve Northwest’s markets; r Restructuring and recapitalization of the Company’s balance sheet, including a targeted reduction in debt and lease obligations of approximately $4.2 billion, providing debt and equity levels consistent with long-term profitability. The Company used the provisions of Chapter 11 and other changes implemented in its business to achieve its targeted restructuring improvements. Outlined below is an overview of significant transactions related to labor and non-labor cost restructuring, fleet optimization, and the Company’s balance sheet restructuring efforts. ...

14.2


1055

Balance Sheet Restructuring. Under the Plan, the Company reduced its total pre-petition debt by approximately $4.2 billion through the elimination of unsecured debt and restructuring of aircraft and other secured obligations. Additionally, the Company refinanced its Bank Term Loan with the DIP/Exit financing facility, providing a significant interest expense savings. The aircraft restructurings achieved an estimated $400 million annual reduction in ownership costs including interest, rent and depreciation expense. The elimination of the unsecured debt will drive additional interest expense reductions. See “Item 8. Consolidated Financial Statements and Supplementary Data, Note 6—Liabilities Subject to Compromise” in the Company’s 2006 Form 10-K, for additional information. Note 3—Fresh-Start Reporting Upon emergence from its Chapter 11 proceedings on May 31, 2007, the Company adopted fresh-start reporting in accordance with SOP 90-7. The Company’s emergence from Chapter 11 resulted in a new reporting entity with no retained earnings or accumulated deficit. Accordingly, the Company’s consolidated financial statements for periods prior to June 1, 2007 are not comparable to consolidated financial statements presented on or after June 1, 2007. Fresh-start reporting reflects the value of the Company as determined in the confirmed Plan of Reorganization. Under fresh-start reporting, the Company’s asset values are remeasured and allocated in conformity with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS No. 141”). The excess of reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill in the accompanying Condensed Consolidated Balance Sheets. In addition, fresh-start reporting also requires that all liabilities, other than deferred taxes and pension and other postretirement benefit obligations, should be stated at fair value or at the present values of the amounts to be paid using appropriate market interest rates. Deferred taxes are determined in conformity with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Preliminary estimates of fair value included in the Successor Company financial statements represent the Company’s best estimates based on independent appraisals and valuations and, where the foregoing have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, we cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. In accordance with SFAS No. 141, the preliminary allocation of the reorganization value is subject to additional adjustment within one year after emergence from bankruptcy when additional or improved information on asset and liability valuations becomes available. Future adjustments may result from:

r Completion of valuation reports associated with long-lived tangible and intangible assets which may drive further adjustments or recording of additional assets or liabilities.

1056


r Adjustments to deferred tax assets and liabilities, which may be based upon additional information, including adjustments to fair value estimates of underlying assets or liabilities and the determination of cancellation of indebtedness income. r Adjustments to recorded fair values which could change the amount of recorded goodwill. To facilitate the calculation of the enterprise value of the Successor Company, Northwest’s financial advisors assisted management in the preparation of a valuation analysis for the Successor Company’s common stock to be distributed as of the Effective Date to the unsecured creditors. The valuation methods included (i) a comparison of the Company and its projected performance to the market values of comparable companies; and (ii) two variants of discounted cash flow analysis which were weighted 40 and 60 percent in the calculation of the baseline valuation range. The estimated enterprise value, and corresponding equity value, is highly dependent upon achieving the future financial results set forth in the fiveyear financial projections included in the Company’s Plan of Reorganization, as well as the realization of certain other assumptions. The equity value of the Company was calculated to be a range of approximately $6.45 billion to $7.55 billion. Based on claims trading prior to the Company’s Effective Date and the trading value of the Company’s common stock post emergence, the equity value of the Company was estimated to be $6.45 billion for purposes of preparing the Company’s financial statements. The estimates and assumptions made in this valuation are inherently subject to significant uncertainties and the resolution of contingencies beyond the reasonable control of the Company. Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be realized, and actual results could vary materially. Moreover, the market value of the Company’s common stock may differ materially from the equity valuation. As part of the provisions of SOP 90-7, we were required to adopt on June 1, 2007 all accounting guidance that was going to be effective within the subsequent twelve-month period. See “Note 4 — Summary of Significant Accounting Policies, New Accounting Standards.” The following Fresh-Start Condensed Consolidated Balance Sheet illustrates the financial effects on the Company of the implementation of the Plan of Reorganization and the adoption of fresh-start reporting. This Fresh-Start Condensed Consolidated Balance Sheet reflects the effect of the consummation of the transactions contemplated in the Plan of Reorganization, including settlement of various liabilities, issuance of certain securities, incurrence of new indebtedness, repayment of old indebtedness, and other cash payments. The effects of the Plan of Reorganization and fresh-start reporting on the Company’s Condensed Consolidated Balance Sheet are as follows (in millions):

14.2

1057


(a)

(in millions) ASSETS CURRENT ASSETS Cash, cash equivalents and unrestricted short-term investments Restricted cash, cash equivalents and short-term investments Accounts receivable, less allowance Flight equipment spare parts and maintenance and operating supplies Prepaid expenses and other Total current assets PROPERTY AND EQUIPMENT Net flight equipment and net flight equipment under capital leases Other property and equipment, net Total property and equipment, net OTHER ASSETS Goodwill International routes and other intangible assets Investments in affiliated companies Other Total other assets Total Assets

(b) (c) (d) New Credit Debt Discharge Facility New (Successor) (Predecessor) & Financing Equity Fresh-Start Reorganized May 31, 2007 Reclassification Transactions Issued Adjustments June 1, 2007

$ 2,465

$ (20)

$—

$ 750

$—

$ 3,195

974

—

—

—

170

1,144

587

—

—

—

(9)

578

217 254 4,497

— — (20)

— — —

— (22) 728

31 (51) 141

248 181 5,346

7,767

—

—

—

(1,068)

6,699

477

—

—

—

69

546

8,244

—

—

—

(999)

7,245

18

—

—

—

6,239

6,257

653

—

—

—

4,513

5,166

54 707 1,432 $ 14,173

— — — $ (20)

— — — $—

— — — $ 728

111 (235) 10,628 $ 9,770

165 472 12,060 $ 24,651

$—

$—

$—

$ 274

$ 2,280

4 179

— —

— —

(20) 5

429 1,722

305

(10)

—

—

513

— — 488

10 — —

— — —

— (49) 210

10 38 4,992

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Air traffic liability/deferred frequent flyer liability $ 2,006 Accrued compensation and benefits 445 Accounts payable 1,538 Current maturities of long-term debt and capital lease obligations 218 Current maturities of long-term debt—exit financing — Other 87 Total current liabilities 4,294

(Continued)

1058


(Continued) (a)

(in millions) LONG-TERM OBLIGATIONS Long-term debt and obligations under capital leases Exit financing Total long-term obligations DEFERRED CREDITS AND OTHER LIABILITIES Long-term pension and postretirement health care benefits Deferred frequent flyer liability Deferred income taxes Other Total deferred credits and other liabilities LIABILITIES SUBJECT TO COMPROMISE PREFERRED REDEEMABLE STOCK SUBJECT TO COMPROMISE COMMON STOCKHOLDERS’ EQUITY (DEFICIT) Predecessor Company common stock, additional paid-in capital and treasury stock Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Successor Company common stock and additional paid-in capital Total common stockholders’ equity (deficit) Total Liabilities and Stockholders’ Equity (Deficit)

(b) (c) (d) New Credit Debt Discharge Facility New (Successor) (Predecessor) & Financing Equity Fresh-Start Reorganized May 31, 2007 Reclassification Transactions Issued Adjustments June 1, 2007

4,149 —

1,993 —

(1,215) 1,215

— —

22 —

4,949 1,215

4,149

1,993

—

—

22

6,164

86

3,786

—

—

(426)

3,446

— 4 275

— — 125

— — —

— — —

1,549 1,127 (209)

1,549 1,131 191

365

3,911

—

—

2,041

6,317

14,350

(14,350)

—

—

—

—

275

(275)

—

—

—

—

495

—

—

—

(495)

—

(8,655)

1,763

—

—

6,892

—

(1,100)

—

—

—

1,100

—

—

6,450

—

728

—

7,178

(9,260)

8,213

—

728

7,497

7,178

$ 14,173

$ (20)

$—

$ 728

$ 9,770

$ 24,651

14.2


1059

(a) Debt Discharge and Reclassification: This column reflects the discharge of $8.2 billion of liabilities subject to compromise pursuant to the terms of the Plan of Reorganization. Pursuant to the Plan, the holders of general unsecured claims and guaranty claims together will receive approximately 234 million common shares of the Successor Company in satisfaction of such claims. This column also reflects the Successor Company’s reinstatement of $6.4 billion of secured liabilities which had been classified as liabilities subject to compromise on the Predecessor Company’s balance sheet, consisting of the following: r $3.8 billion represents the reinstatement of pension and other postretirement benefit plan liabilities; r $2.3 billion reflects the reinstatement of secured debt, including accrued interest; and r $0.3 billion is associated with accruals for priority payments and other payments required under the Plan. Additionally, this column reflects the payment of $20 million for cash cures and convenience class payments to certain unsecured creditors pursuant to the Plan, and the reclassification of $125 million of pre-petition deferred liabilities and credits that were reclassified out of liabilities subject to compromise, and subsequently written off as part of the fresh-start adjustments. (b) New Credit Facility Financing Transactions. In connection with the Plan of Reorganization, on the Effective Date, the Company’s existing $1.225 billion DIP/Exit Facility was converted into the Exit Facility in accordance with its terms. See “Note 10—Long-term Debt and ShortTerm Borrowings” for further details. (c) New Equity Issued. This column reflects $750 million in gross proceeds received on the Effective Date from the Company’s Rights Offering, offset by associated transaction costs of $22 million. (d) Fresh-Start Adjustments. Fresh-start adjustments were recorded on the Effective Date to reflect asset values at their estimated fair values and liabilities at their estimated fair value or the present value of amounts to be paid, including the following: r $4.5 billion of incremental intangible assets were recorded in conjunction with the estimated fair value of the Company’s international route authorities, slots and other intangible assets; r $1.5 billion was recorded to recognize the additional estimated fair value of the Company’s frequent flyer liability; r The balance of the Company’s flight equipment was decreased by $1.1 billion to its estimated fair value; r The Company’s deferred tax liability balance was increased by $1.1 billion in conjunction with recording the estimated fair value of certain indefinite-lived intangible assets; r The pension and OPEB liability balances were reduced by $0.4 billion;

1060


r The Company’s air traffic liability balance was increased by $0.3 billion to its estimated fair value; and

r Entries were recorded to eliminate the Predecessor Company’s equity balances and establish the opening equity balances of the Successor Company. Additionally, goodwill of $6.2 billion was recorded to reflect the excess of the Successor Company’s reorganization value over the value of tangible and identifiable intangible assets. Changes in the fair values of these assets and liabilities from the current estimated values, as well as changes in other assumptions, could significantly impact the reported value of goodwill. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. Moreover, the market value of the Company’s common stock may differ materially from the equity valuation. Note 4—Significant Accounting Policies .... Impairment of Long-Lived Assets: The Company evaluates long-lived tangible assets and definite-lived intangible assets for potential impairments in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). The Company records impairment losses on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. The current fair market value is determined by independent appraisal or published sales values of similar assets and the future net cash flows are based on assumptions such as asset utilization, expected remaining useful lives, future market trends and projected salvage values. Impairment charges are recorded in depreciation and amortization expense on the Company’s Condensed Consolidated Statements of Operations. If there are subsequent changes in these estimates, or if actual results differ from these estimates, additional impairment charges may be recognized. Flight Equipment Spare Parts: On the Effective Date, flight equipment spare parts were remeasured at current replacement cost in accordance SFAS No. 141. Inventories are expensed when consumed in operations or scrapped. An allowance for obsolescence is provided based on calculations defined by the type of spare part. This obsolescence reserve is recorded over the useful life of the associated aircraft. Airframe and Engine Maintenance: Routine maintenance, airframe and engine overhauls are charged to expense as incurred or accrued when a contractual obligation exits, such as induction of an asset at a vendor for service or on the basis of hours flown for certain costs covered by power-by-the-hour type

14.2

1061


agreements. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset. Intangibles: Goodwill represents the excess of the reorganization value of the Successor Company over the fair value of tangible assets and identifiable intangible assets resulting from the application of SOP 90-7. Identifiable intangible assets consist primarily of international route authorities, trade names, the WorldPerks customer database, airport slots/airport operating rights, certain partner contracts and other items. International route authorities, certain airport slots/airport operating rights and trade-names are indefinite-lived and, as such, are not amortized. The Company’s definite-lived intangible assets are amortized on a straight-line basis over the estimated lives of the related assets, which span periods of 4 to 30 years. The following table presents information about our intangible assets, including goodwill, at June 30, 2007 and December 31, 2006:

Successor June 30, 2007

(in thousands) SkyTeam alliance & other code share partners England routes NWA customer relationships WorldPerks affinity card contract WorldPerks marketing partner relationships Visa contract Gates Pacific routes and Narita slots/airport operating rights NWA trade name and other Slots/airport operating rights Goodwill

Asset Life

Gross Carrying Amount

Accumulated Amortization

Predecessor December 31, 2006 Gross Carrying Amount

Accumulated Amortization

30 5

$ 461,900 16,000

$ (1,283) (267)

$— —

$— —

9

530,000

(4,907)

—

—

15

195,700

(1,087)

—

—

22 4

43,000 11,900 —

(163) (199) —

— — 90,675

— — (78,326)

Indefinite

2,961,700

—

967,639

(333,679)

Indefinite

663,700

—

1,500

—

Indefinite Indefinite

283,300 6,188,387 $ 11,355,587

— — $ (7,906)

30,457 7,740 $ 1,098,011

(11,248) — $ (423,253)

Deferred Tax Assets: The Company accounts for income taxes utilizing the liability method. Deferred income taxes are primarily recorded to reflect the tax consequences of differences between the tax and financial reporting bases of assets and liabilities. Under the provisions of SFAS No. 109, the realization of the future tax benefits of a deferred tax asset is dependent on future taxable income against which such tax benefits can be applied. All available evidence must be considered in the determination of whether sufficient future taxable

1062


income will exist. Such evidence includes, but is not limited to, the company’s financial performance, the market environment in which the company operates, the utilization of past tax credits, and the length of relevant carryback and carryforward periods. Sufficient negative evidence, such as cumulative net losses during a three-year period that includes the current year and the prior two years, may require that a valuation allowance be established with respect to existing and future deferred tax assets. As a result, it is more likely than not that future deferred tax assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be realized. On the Effective Date, the Company restated deferred taxes based on the remeasured values of the Successor Company and in accordance with SFAS No. 109. Note 5—Fair Value Measurements SOP 90-7 requires that the Company adopt new accounting standards that have been issued and will become effective within the next year. In accordance with this guidance, the Company adopted SFAS No. 157, Fair Value Measurements, on the Effective Date. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 requires, among other things, the Company’s valuation techniques used to measure fair value to maximize the use of observable inputs and minimize the use of unobservable inputs. This standard was applied prospectively to the valuation of assets and liabilities on and after the Effective Date. There are three general valuation techniques that may be used to measure fair value, as described below: (A) Market approach—Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; (B) Cost approach—Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and (C) Income approach—Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques, option-pricing models, and excess earnings method). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate. Excess earnings method is a variation of the income approach where the value of a specific asset is isolated from its contributory assets. For assets and liabilities measured at fair value on a recurring basis during the period, SFAS No. 157 requires quantitative disclosures about the fair value measurements separately for each major category of assets and liabilities. There were no changes in the valuation techniques used to measure the fair values of assets measured on a recurring basis during the period. Assets measured at fair value on a recurring basis during the period included:

14.2

1063


Successor Company Quoted Prices in Active Markets for As of Identical June 30, Assets 2007 (Level 1)

(in millions) ASSETS Cash and cash equivalents Restricted cash, cash equivalents, and short-term investments Available for sale securities Derivatives Total

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs Valuation (Level 3) Technique

$ 2,678

$ 2,678

$—

$—

(A)

706 632 36 $ 4,052

706 632 36 $ 4,052

— — — $—

— — — $—

(A) (A) (A)

Fair value information for each major category of assets and liabilities measured on a nonrecurring basis during the period is listed in the following table. The Company remeasured its assets and liabilities at fair value on the Effective Date as required by SOP 90-7 using the guidance for measurement found in SFAS No. 141. The gains and losses related to these fair value adjustments were recorded on the Predecessor Company. Where two valuation techniques are noted below, either individual assets were valued using one technique, while other assets in the same category were valued using a different technique, or a combination of the two techniques was used to measure individual assets within the category. Assets and liabilities measured at fair value on a nonrecurring basis during the period included: Successor Company

(in millions)

Quoted Prices in Active Significant Markets for Other As of Identical Observable June 1, Assets Inputs 2007 (Level 1) (Level 2)

ASSETS Flight Equipment $ 6,699 Goodwill (1) 6,257 International routes and other intangible assets (2) 5,166 Other property and equipment 546 Non-operating flight equipment and property leased to others 282 Flight equipment spare parts and maintenance and operating supplies 248

Significant Unobservable Inputs (Level 3)

Total Gains Valuation (Losses) Technique

$— —

$ 6,699 —

$— 6,257

$ (1,068) —

(A),(B) (C)

—

946

4,220

4,513

(B),(C)

—

546

—

69

(A),(B)

—

282

—

(47)

(A),(B)

—

248

—

31

(A),(B) (Continued)

1064


(Continued) Successor Company

(in millions) Equity investments Computer software Other Prepaid rents and deferred costs

Quoted Prices in Active Significant Markets for Other As of Identical Observable June 1, Assets Inputs 2007 (Level 1) (Level 2)



124 120 147

— — —

124 120 147

— — —

111 46 21

37

—

37

—

(56) $ 3,620

(A),(C) (B) (A) (A)

Successor Company

(in millions) LIABILITIES Debt and obligations under capital leases Deferred frequent flyer liability (3) Air traffic liability Deferred credits and other liabilities

Quoted Prices in Active Significant Markets for Other As of Identical Observable June 1, Liabilities Inputs 2007 (Level 1) (Level 2)



$ 6,687

$—

$ 6,687

$—

$ (22)

(C)

1,972 1,857

— —

— 1,857

1,972 —

(1,559) (259)

(C) (A)

125

—

125

—

158 $ (1,682)

(A)

(1) Goodwill represents the excess of the fair value of the Company assets over the allocated values of the identifiable assets as determined under the guidance of SFAS No. 141. Northwest’s financial advisors assisted management in the preparation of a valuation analysis for the Successor Company’s common stock to be distributed to Unsecured Creditors under the Plan. In its valuation analysis, Northwest’s financial advisors estimated the fair value of the Successor Company’s Common Stock as of the Effective Date. (2) Other Intangible Assets are identified by type in “Note 4 — Significant Accounting Policies.” With the exception of the value of Northwest’s trademarks and trade names, these valuations included significant unobservable inputs (Level 3), which generally included the Company’s five-year Business Plan, 12-months of historical revenues and expenses by city pair, and Company projections of available seat miles, revenue passenger miles, load factors, and operating costs per available seat mile. The valuations also included market verifiable sources, such as licensing information, royalty rates and macroeconomic factors. (3) The frequent flyer liability was measured at fair value based on an analysis of how a hypothetical transaction to transfer this liability might be negotiated in the market. Assumptions used in this measurement include the price of a frequent flyer mile based on actual ticket prices for similarly restricted tickets, estimates about the number of miles that will never be used by customers, and projections of the timing when the miles will be used.

14.2

1065


Note 7—Reorganization Related Items In accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the Company. In connection with its bankruptcy proceedings, implementation of our Plan of Reorganization and adoption of fresh-start accounting, the Company recorded the following largely non-cash reorganization income/(expense) items: Predecessor

(In millions) Discharge of unsecured claims and liabilities (a) Revaluation of frequent flyer obligations (b) Revaluation of other assets and liabilities (c) Employee-related charges (d) Abandonment of aircraft and buildings (d) Restructured aircraft lease/debt charges (d) Professional Fees Other (d) Reorganization items, net

Period from April 1 to May 31, 2007

Three Months Ended June 30, 2006

Period from January 1 to May 31, 2007


$ 1,763

$—

$ 1,763

$—

(1,559)

—

(1,559)

—

2,816 (308)

— 6

2,816 (312)

— 47

(275)

(111)

(323)

(137)

(72) (43) (378) $ 1,944

(323) (11) (25) $ (464)

(74) (60) (700) $ 1,551

(1,298) (26) (25) $ (1,439)

(a) The gain on discharge of unsecured claims and liabilities relates to the Company’s unsecured claims as of the Petition Date and the discharge of unsecured claims established as part of the bankruptcy process. In accordance with the Plan of Reorganization, the Company discharged its estimated $8.2 billion in unsecured creditor obligations in exchange for the distribution of approximately 234 million common shares of the Successor Company valued at emergence at $6.45 billion. Accordingly, the Company recognized a non-cash reorganization gain of approximately $1.8 billion. (b) The Company revalued its frequent flyer miles to estimated fair value as a result of fresh-start reporting, which resulted in a $1.6 billion non-cash reorganization charge. (c) In accordance with fresh-start reporting, the Company revalued its assets at their estimated fair value and revalued its liabilities at estimated fair value or the present value of amounts to be paid. This resulted in a non-cash reorganization gain of $2.8 billion, primarily as a result of newly recognized intangible assets, offset partially by reductions in the fair value of tangible property and equipment. (d) Prior to emergence the Company recorded its final provisions for allowed or projected unsecured claims including employee-related AFA-CWA contract related claims, other employee related claims, claims associated with restructured aircraft lease/debt, and municipal bond obligation related settlements.

Note 8—Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, which requires that deferred tax assets and liabilities be recognized, using enacted tax rates, for the tax effect of temporary differences between the financial

1066


reporting and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Based on the consideration of all available evidence, the Company has provided a valuation allowance on deferred tax assets recorded beginning in the first quarter 2003. The Company continues to record a full valuation allowance against its deferred tax assets due to the uncertainty regarding the ultimate realization of those assets. Significant components of the Company’s deferred tax assets and liabilities as of June 30, 2007 and December 31, 2006 are as follows:

(In millions) Deferred tax liabilities: Accounting basis of assets in excess of tax basis Accounting basis of intangible assets in excess of tax basis Other Total deferred tax liabilities Deferred tax assets: Expenses not yet deducted for tax purposes Reorganization charges not yet deducted for tax purposes Pension and postretirement benefits Deferred revenue Air traffic liability Travel award programs Net operating loss carryforward Alternative minimum tax credit carryforward Other Total deferred tax assets Valuation allowance for deferred tax assets Net deferred tax assets Net deferred tax liability

Successor

Predecessor

June 30, 2007

December 31, 2006

$ 1,696 1,892 91 3,679

$ 2,219 — 71 2,290

215 1,184 1,335 572 94 104 1,191 134 55 4,884 (2,336) 2,548 $ 1,131

253 1,526 1,476 — — 104 1,216 134 17 4,726 (2,436) 2,290 $—

At June 30, 2007, the Company has certain federal deferred tax assets available for use in the regular tax system and the alternative minimum tax (“AMT”) system. The deferred tax assets available in the regular tax system include: NOLs of $3.3 billion, AMT credits of $134 million, general business tax credits of $7 million and foreign tax credits of $11 million. The deferred tax assets available in the AMT system are: NOLs of $3.3 billion and foreign tax credits of $9 million. AMT credits available in the regular tax system have an unlimited carryforward period and all other deferred tax assets in both systems are available for years beyond 2007, expiring in 2008 through 2027. The Company also has the following deferred tax assets available at June 30, 2007, for use in certain states: NOLs with a tax benefit value of approximately $81 million are available for years beyond 2007, expiring in 2008 through 2027,

14.2


1067

and state job tax credits of $7 million are available for years beyond 2007, expiring in 2008 through 2011. The valuation allowance recorded against our net deferred tax assets in freshstart reporting will be reversed against goodwill when the Company reports income in future periods. As a result, the Company will generally report income tax expense and reduce goodwill. However, our NOLs will generally offset most income taxes otherwise payable until the NOLs are fully consumed or expire unused. The Company adopted FIN 48 on January 1, 2007. As of June 30, 2007, the Company had unrecognized tax benefits of approximately $1 million, which, if recognized, would impact the effective tax rate in future periods. During the quarter, as a result of a resolution of a state tax controversy the Company recognized a bankruptcy-related gain of $1 million, which was previously an unrecognized tax benefit. Subject to the impact of the Company’s bankruptcy filing, open tax years for federal income tax purposes are 1996 through 2006 and for state income tax purposes generally are 2005 and 2006. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had $12 million accrued for interest and nothing accrued for penalties at June 30, 2007. Note 14—Pension and Other Postretirement Health Care Benefits The Company has several defined benefit pension plans and defined contribution 401(k)-type plans covering substantially all of its employees. Northwest froze future benefit accruals for its defined benefit Pension Plans for Salaried Employees, Pilot Employees, and Contract Employees effective August 31, 2005, January 31, 2006, and September 30, 2006, respectively. Replacement coverage was provided for these employees through 401(k)-type defined contribution plans or in the case of IAM represented employees, the IAM National Multi-Employer Plan. Northwest also sponsors various contributory and noncontributory medical, dental and life insurance benefit plans covering certain eligible retirees and their dependents. The expected future cost of providing such postretirement benefits is accrued over the service lives of active employees. Retired employees are not offered Company-paid medical and dental benefits after age 64, with the exception of certain employees who retired prior to 1987 and receive lifetime Company-paid medical and dental benefits. Prior to age 65, the retiree share of the cost of medical and dental coverage is based on a combination of years of service and age at retirement. Medical and dental benefit plans are unfunded and costs are paid as incurred. The pilot group is provided Company-paid decreasing life insurance coverage. The Pension Protection Act of 2006 (“2006 Pension Act”) was signed into law on August 17, 2006. The 2006 Pension Act allows commercial airlines to elect special funding rules for defined benefit plans that are frozen. The unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period. The unfunded liability is defined as the actuarial liability calculated using an 8.85% interest rate minus the fair market value of plan assets. Northwest elected the special funding rules for frozen defined benefit

1068


plans under the 2006 Pension Act effective October 1, 2006. As a result of this election (1) the funding waivers that Northwest received for the 2003 plan year contributions were deemed satisfied under the 2006 Pension Act, and (2) the funding standard account for each Plan has no deficiency as of September 30, 2006. New contributions that came due under the 2006 Pension Act funding rules were paid while Northwest was in bankruptcy and must continue to be paid going forward. If the new contributions are not paid, the future funding deficiency that would develop will be based on the regular funding rules rather than the special funding rules. It is Northwest’s policy to fund annually at least the minimum contribution as required by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). However, as a result of the commencement of Northwest’s Chapter 11 case, Northwest did not make minimum cash contributions to its defined benefit pension plans that were due after September 14, 2005. Subsequent to Northwest’s bankruptcy filing and prior to its election under the 2006 Pension Act, Northwest paid the normal cost component of the plans’ minimum funding requirements relating to service rendered post-petition and certain interest payments associated with its 2003 Contract Plan and Salaried Plan year waivers. As noted above, effective October 1, 2006, Northwest elected the special funding rules available to commercial airlines. As a result of Northwest’s Chapter 11 filing, we appointed an independent fiduciary for all of our tax-qualified defined benefit pension plans to pursue, on behalf of the plans, claims to recover minimum funding contributions due under federal law, to the extent that Northwest is not continuing to fund the plans due to bankruptcy prohibitions. The independent fiduciary subsequently withdrew all of the claims that the independent fiduciary filed in our Chapter 11 Case following our election of the special funding rules under the 2006 Pension Act. Upon emergence from Chapter 11, the Company adopted fresh-start reporting in accordance with SOP 90-7. The Company’s defined benefit and postretirement health care plans were remeasured in conformity with SFAS No. 141. This remeasurement resulted in a $409 million reduction in the defined benefit pension plan liabilities as well as a $35 million reduction in postretirement health care plan liabilities. Postretirement health care plan liabilities were reduced by an additional $120 million as a result of the discharge of liabilities subject to compromise pursuant to the Plan. Northwest’s 2007 calendar year contributions to its frozen defined benefit plans under the provisions of the 2006 Pension Act and the replacement plans will approximate $128 million.

(b) Wheeling Pittsburg Journal Entries A Joint Plan of Reorganization was filed by the Corporation and the Official Committee of Unsecured Creditors on July 11, 1990. That Joint Plan of Reorganization was, by its terms, conditioned upon acceptance and ratification of a new collective bargaining agreement with the USWA. A new collective bargaining agreement was ratified on September 11, 1990; subsequently the

14.2


1069

Corporation filed the Plan on October 18, 1990. The Plan was confirmed on December 18, 1990 and substantially consummated on January 3, 1991. The Plan created a holding company structure as follows: the Corporation changed its name to Wheeling-Pittsburgh Corporation (“WPC”) and incorporated a new wholly owned subsidiary named Wheeling-Pittsburgh Steel Corporation (“WPSC”) to which substantially all of the Corporation’s operating assets and liabilities were transferred. Chapter 11 claims filed against the Corporation and subsequently allowed in the bankruptcy proceedings totaled approximately $1.3 billion, which exceeded the amount of liabilities recorded by $390 million. The Plan discharged the claims through distribution of $587 million in cash including escrow accounts, the issuance of $306 million of long-term debt, the issuance of 8,500,000 shares of New Common Stock to secured creditors, 5,690,000 shares of New Common Stock to unsecured creditors and 5,810,000 shares of New Common Stock to preconfirmation preferred and common stock equity holders. The value of the cash and securities distributed was $216 million less than the allowed claims; the resultant gain was recorded as an extraordinary gain. The sum of the allowed claims plus post petition liabilities exceeded the value of preconfirmation assets. Also, the Corporation experienced a change in control as prereorganization equity holders received less than 30% of the new Common Stock issued pursuant to the Plan. AICPA SOP 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, requires that under these circumstances, a new reporting entity is created and assets and liabilities should be recorded at their fair values. This accounting treatment is referred to in these statements as “fresh start reporting.” “Fresh start reporting” equity value was determined with the assistance of independent advisors. The methodology employed involved estimation of enterprise value (i.e., the market value of the Corporation’s debt and shareholders’ equity), taking into account a discounted cash flow analysis and an analysis of comparable, publicly traded U.S. integrated steel companies. The discounted cash flow analysis was based on ten-year cash flow projections prepared by management. Cash flows were discounted at a debt-free cost of equity of 13.9%. Terminal value calculation was based on a growing perpetuity of cash flow, assuming a growth rate of 6%, reflecting 1% real growth and 5% inflation. The ten-year cash flow projections were based on estimates and assumptions about circumstances and events that have not yet taken place. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Corporation, including, but not limited to, those with respect to the future courses of the Corporation’s business activity. Accordingly, there will usually be differences between projections and actual results because events and circumstances frequently do not occur as expected, and those differences may be material. The Corporation has adopted “fresh start reporting” in accordance with the SOP 90-7 in preparing its final balance sheet as of December 31, 1990. The balance sheet will become the opening balance sheet for WPC. The distribution and “fresh start reporting” referred to above have been reflected as of December 31, 1990 in the accompanying financial statements. Since the December 31, 1990 Consolidated Balance Sheet has been prepared as

1070


if it is of a new reporting entity, a black line has been shown to separate it from prior-year information since it is not prepared on a comparable basis. The effect of the Plan of Reorganization on the Corporation’s balance sheet as of December 31, 1990, is as shown on page 596 (in thousands). The following entries record the provisions of the Plan and the adoption of fresh-start reporting ($ in thousands): Debit (1) Increase prepetition liabilities to the amount of allowed claims. Reorganization charge Prepetition liabilities

390,356 390,356

(2) Record distribution pursuant to the amended plan. Prepetition liabilities Other assets (escrows) Cash Payrolls & employee benefits Other current liabilities Long-term debt due in one year Long-term debt Other long-term liabilities Common stock Additional paid-in capital Gain on debt discharge

1,287,234 14,000

1,301,234 (3) Record exchange of stock for stock: Preferred stock Common stock (old) Additional paid-in capital Common stock (new)

99,577 51,146 111,002 261,725

(4) Record assets and liabilities at fair value under fresh-start reporting and eliminate deficit in accumulated earnings. Inventories Other current assets Property, plant and equipment Investments Other assets Employee benefit liabilities Other liabilities Reorganization credit Accumulated earnings Additional paid-in capital

Credit

390,356 390,356

21,038 565,473 14,022 6,000 6,464 299,993 12,930 142 159,507 215,665 1,301,234

261,667 58 261,725

100,911 5,296 72,676 16,000

171,374 360,961

1,053 2,400 122,798 38,894 19,146 171,374 360,961

14.3

Pro Forma Balance Sheet of USG Corporation

1071

Example of NOL Reducing Deferred Taxes At December 31, 1990 no deferred federal and state tax liability is required as calculated under SFAS 96. No provision or benefit for deferred tax was recorded in 1990, 1989 or 1988. The principal sources of the temporary differences entering into calculation of the deferred tax provision, for 1990, are shown in the table below. 1990 Deferred Tax at 34% Temporary Difference Reorganization items Depreciation Inventory reserve Safe harbor leases Post employment insurance benefits Salaried employees supplemental annuities Misc. state & local tax accruals Vac. pay accrual adjustments Other Application of temporary difference & non-recognition of NOL carryforwards Deferred tax provision for 1990

($ in Millions) $ 77.9 .1 (1.4) (1.5) 3.5 (3.0) (1.7) 2.1 (1.1) 74.9 (74.9) -0-

The investment tax credit refund of $14.0 million, which was received and recorded in 1988, represented an investment tax credit carryback refund under a special provision of the 1986 Tax Reform Act. Income taxes paid in 1990, 1989 and 1988 were $10.8 million, $5.5 million and $3.3 million, respectively. Federal tax returns have been settled by the Internal Revenue Service (IRS) through 1979. The IRS is currently examining the Corporation’s 1987 tax return and can review earlier years to the extent any NOL’s incurred in such years are carried forward to offset future income. Management believes it has adequately provided for all taxes on income. 14.3


Objective. Section 14.8 of Volume 1 of Bankruptcy and Insolvency Accounting reveals that acceptance by creditors of an out-of-court settlement or confirmation of a plan of reorganization after fiscal year end but before issuance of statements is a subsequent event that may require recognition in the accounts. As an example, excerpts from the annual report filed by USG Corporation just prior to its emergence from chapter 11 are shown below (USG filed a prepackaged chapter 11 plan). Two Notes (2 and 19) describe the plan and show the impact that adoption of the plan and fresh-start reporting would have had on

1072


the balance sheet if the plan had become effective as of the last date of the year. The impact is shown in the form of a pro forma balance sheet. The preconfirmation balance to the accounts and the restructuring and fresh-start adjustments needed to prepare the pro forma balance sheet are shown. USG CORPORATION DECEMBER 31, 1992 Note 2: Financial Restructuring On January 22, 1993, the Corporation announced that it had reached an agreement in principle with all committees and certain institutions representing debt subject to the Restructuring on the terms of the Prepackaged Plan. The Corporation received signed letters from these committees and institutions indicating that they support or do not object to the terms of the Prepackaged Plan, and signed Commitment Letters from 100% of its 31 member Bank Group approving the terms of an Amended Credit Agreement, the major provisions of which are summarized below. On February 5, 1993, the Corporation’s Registration Statement bearing Registration No. 33-40136, which included the Disclosure Statement detailing the terms of the Prepackaged Plan, was declared effective by the SEC. Solicitation of approvals of the Prepackaged Plan was then carried out and completed on March 15, 1993. See Item 7, “Management’s Discussion and Analysis of Results of Operations and Financial Condition— Liquidity and Capital Resources,” for information on the background of the Restructuring and development, approval and filing of the Prepackaged Plan. The following summary of the major provisions of the Prepackaged Plan is qualified in its entirety by reference to the more detailed information appearing in the Disclosure Statement, including the Plan of Reorganization. (1) The Prepackaged Plan provides for a one-for-50 reverse stock split (the “Reverse Stock Split”) to be effected immediately prior to the distribution of new common stock (the “New Common Stock”) pursuant to the Prepackaged Plan. On the date of consummation of the Prepackaged Plan (the “Effective Date”), after giving effect to the Reverse Stock Split, the following distributions would be made to holders of the Old Subordinated Debentures: r For each $1,000 principal amount of Old Senior Subordinated Debentures (excluding accrued interest thereon, which will be canceled), the holder will receive 50.81 shares of New Common Stock. r For each $ 1,000 principal amount of Old Junior Subordinated Debentures (excluding accrued interest thereon, which will be canceled), the holder will receive 11.61 shares of New Common Stock and 5.42 warrants (the “New Warrants”), each to purchase one share of New Common Stock. Existing stockholders will retain their shares of common stock, subject to the Reverse Stock Split and the issuance of New Common Stock to holders of the Old Subordinated Debentures under the Prepackaged Plan.

14.3


1073

Under the Prepackaged Plan, there will be approximately 37.2 million shares of New Common Stock outstanding on the Effective Date, of which the common stock held by existing stockholders would represent approximately 3% of the total number of outstanding shares. If all of the New Warrants were exercised, the aggregate holdings of Old Senior Subordinated Debenture holders, Old Junior Subordinated Debenture holders and existing stockholders would represent 76.7%, 20.6% and 2.7%, respectively, of the total number of outstanding shares of New Common Stock. (2) For each $1,000 principal amount of Old Senior 1991 Notes, the holder will receive $750 principal amount of 8% senior notes due 1995 (the “New Senior 1995 Notes”) and $250 principal amount of 9% senior notes due 1998 (the “New Senior 1998 Notes”). In addition, the Corporation will issue $10 million principal amount of the New Senior 1998 Notes to two institutional holders of existing 8% senior notes due 1996 (the “Old Senior 1996 Notes”) in exchange for an equal principal amount thereof. The New Senior 1995 and 1998 Notes will be secured, with certain other indebtedness of the Corporation and subject to a collateral trust arrangement controlled primarily by holders of the Banks’ claims, by first priority security interests in the capital stock of certain subsidiaries of the Corporation. (3) The Prepackaged Plan provides for the following modifications to the Current Credit Agreement (the Current Credit Agreement, as modified by the Prepackaged Plan, is referred to as the “Amended Credit Agreement”): (i) an option to exchange on the Effective Date up to $300 million (but not less than $100 million) of principal on the Bank Term Loan and a pro rata amount (of up to $27 million) of accrued but unpaid interest on the Bank Term Loan for 101/4 % senior notes due 2002 (the “New 101/4 % Senior Notes”); (ii) extending the final maturity of the remaining principal outstanding on the Bank Term Loan from 1996 to 2000 and deferring all scheduled principal payments until December 1994; (iii) capitalizing up to $75 million (or $48 million if the election in (i) above is fully subscribed) in interest originally due on or after December 31, 1991 into notes bearing annual interest at LIBOR plus 21/4 % (or Citibank’s base rate plus 11/4 %) and maturing in the years 1998 and 2000; (iv) making available (at the Corporation’s option but subject to certain limitations on the availability of LIBOR) an annual interest rate applicable to the Bank Term Loan and an extended revolving credit facility of LIBOR plus 17/8 % (or Citibank’s base rate plus 7/8 %), with the option to capitalize the amount of such interest in excess of LIBOR plus 1% per annum (such capitalized interest would bear interest annually at LIBOR plus 21/4 % (or Citibank’s base rate plus 11/4 %) and mature in the years 1998 and 2000); (v) providing for an excess cash flow sweep that will take into account certain liquidity thresholds and that will retire the Bank Term Loan earlier than 2000 if the Corporation meets or exceeds current projections; (vi) suspending all financial covenants through January 1, 1995 and providing for new covenants thereafter; (vii) extending to 1998

1074


the maturity date of, and establishing a maximum borrowing capacity of $175 million under the Revolving Credit Facility, including a $110 million letter of credit subfacility; and (viii) exchanging (at the option of the holders thereof) up to approximately $16 million owed in connection with certain interest rate swap contracts for an equal principal amount of New 101/4 % Senior Notes or Bank Term Loans (provided that in the event that no New 101/4 % Senior Notes are issued in the Restructuring, such $16 million shall be exchanged for Bank Term Loans) and exchanging approximately $5 million in additional amounts owed in connection with such interest rate swap contracts for an equal principal amount of capitalized interest notes. Under the Prepackaged Plan, all existing defaults and accrued default interest as of the Effective Date under the Current Credit Agreement will be waived or cancelled. (4) The Corporation has arranged a receivables financing facility (the “Interim Receivables Financing Facility”) for use during the Chapter 11 Case utilizing the proceeds, and interest received thereon, from the sale of DAP, which the Banks approved in a further amendment to the Current Credit Agreement. In connection with the Interim Receivables Financing Facility, subject to the terms and conditions of an order of the Bankruptcy Court, including the satisfaction of certain financial tests concerning minimum cash balances and interest coverage ratios, the Corporation will pay current interest on the Bank Debt (at the same nondefault rate set forth in the Prepackaged Plan) and on the Old Senior 1991 Notes and its other senior debt securities (at the applicable non-default contract rates). If such interest is not so paid during the pendency of the Chapter 11 Case, because the Corporation is unable to continue the Interim Receivables Financing Facility for any reason, the Prepackaged Plan provides for payment of such interest in cash on the effective date at the base rate option referred to above as applicable to the Bank Term Loan. (5) The Prepackaged Plan also includes or is based in part on provisions relating to (i) the selection of five new directors to be nominated by representatives of certain creditors; (ii) the settlement of certain employee compensation arrangements; and (iii) the release of certain potential claims. See Part III, Item 10, “Directors and Executive Officers of the Registrant” and Item 11, “Executive Compensation” for additional information on (i) and (ii) above. In connection with the pending Restructuring efforts, the Corporation has deferred certain principal and interest payments in order to maintain adequate liquidity during the Restructuring process. These payment deferrals constitute defaults under the applicable loan agreements and indentures, which remain uncured or unwaived as of the date of this report, but are addressed in the Prepackaged Plan. See Item 7, “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources,” for information relating to the debt payment deferrals and default condition. See the Indebtedness footnote for additional information relating to the default condition, including arrearage as of the date of this report.

14.3


1075

Note 19: Subsequent Event On March 17, 1993, the Corporation filed a Plan of Reorganization and a petition for relief under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. On that date, the Corporation also obtained orders from the Bankruptcy Court authorizing, among other things: (i) payment of prepetition liabilities to trade creditors and employees; (ii) continuation of existing employee compensation, benefits and insurance programs; (iii) continuation of the consolidated cash management system and corporate liability insurance programs; and (iv) payment of current interest due to the Banks and holders of senior debt securities. A hearing on confirmation of the Plan of Reorganization has been set for April 23, 1993. None of the subsidiaries of the Corporation are part of this proceeding and there will be no impact on the trade creditors of the Corporation’s subsidiaries. The following unaudited pro forma consolidated balance sheet and accompanying notes as of December 31, 1992 were prepared as if the consummation of the Prepackaged Plan had occurred on that date including the adoption of “Fresh Start Reporting” as required by AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). This pro forma statement is qualified in its entirety by reference to the more detailed pro forma financial information appearing in the Disclosure Statement, including the Plan of Reorganization substantially as filed with the Bankruptcy Court.

1076


USG CORPORATION PRO FORMA CONSOLIDATED BALANCE SHEET as of December 31, 1992 (unaudited)

Historical

Pro Forma Restructuring Adjustments

Adjustments Fresh Start Adjustments

Pro Forma

(Dollar Amounts in Millions) ASSETS Current Assets: Cash and cash equivalents Receivables (net of reserves of $11) Inventories Restricted cash Total current assets Property, Plant and Equipment, Net Purchased Goodwill, Net Other Assets Reorganization Value in Excess of Identifiable Assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable Accrued expenses Notes payable Revolving Credit Facility Long-term debt maturing within one year Long-term debt classified as current Taxes on income Total current liabilities Long-Term Debt Deferred Income Taxes Minority Interest in CGC Other Long-Term Obligations Stockholders’ Equity/(Deficit): Preferred stock: $1 par value; authorized 36,000,000 shares; $1.80 convertible preferred stock (initial series); outstanding — none Common Stock: $0.10 par; authorized 300,000,000 shares; outstanding—55,757,394 (after deducting 368,409 shares held in treasury), pro forma outstanding— 37,171,600 shares Capital received in excess of par value Deferred currency translation Reinvested earnings/(deficit) Total stockholders’ equity/(deficit) Total liabilities and stockholders’ equity

$ 180 299 113 88 680 800 69 110

$ (48) (a) (64) (b) — (88) (a) (200) — — (58) (c)

$— — 25 (i) — 25 — (69) (i) —

$ 132 235 138 — 505 800 — 52

— $ 1,659

— $ (258)

679 (i) $ 635

679 $2,036

$ 91 553 2 140 576 1,926 — $ 3,288 $67 175 9 —

$— (380) (d) — (140) (e) (570) (e) (1,926) (e) 20 (f) $(2,996) $ 1,469 (e) 14 (f) — —

$— — — — — — 16 (i) $ 16 $ (265) (k) 53 (j) — 182 (1)

$ 91 173 2 — 6 — 36 $ 308 $1,271 242 9 182

—

—

—

5 23 (8) (1,900) $(1,880) $ 1,659

(2) (g) (431) (g) — 826 (h) $ 1,255 $ (258)

— (433) (m) 8 (n) 1,074 (o) $ 649 $ 635

See accompanying Notes to the Pro Forma Consolidated Balance Sheet.

3 21 — — $ 24 $2,036

14.3


1077

NOTES TO THE PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) The following notes set forth the explanations and assumptions used in preparing the unaudited Pro Forma Consolidated Balance Sheet. The pro forma adjustments are based on estimates by the Corporation’s management using information currently available. (a) Reflects the following (in millions of dollars): Repayment of Revolving Credit Facility Payment of nonrecurring fees and expenses incurred in connection with the Restructuring Payments under Management Incentive Compensation Plan Payment of excess Bank Debt accrued interest Collection of letters of credit classified as accounts receivable Reclassification of proceeds received from the sale of DAP which have been restricted for use in the Restructuring Collection of appeal bonds classified as accounts receivable

$(140) (22) (16)(∗ ) (15) 42 88 15 (48)

(∗ ) Payments under Management Incentive Compensation Plan represent the cash payment of a management bonus which is contingent and payable upon successful implementation of the Restructuring.

(b) Reflects the following (in millions of dollars): Collection of letters of credit classified as accounts receivable Industrial revenue bonds previously put back to the Corporation that will not be remarketed results in reductions in accounts receivable and debt Collection of appeal bonds classified as accounts receivable

$(42)

(7) (15) (64)

(c) For financial reporting purposes, old capitalized financing costs totaling ($25) million applicable to the Bank Debt and the Old Subordinated Debentures and deferred reorganization expenses totaling ($33) million are being written off to the extraordinary gain and reorganization items, respectively. (d) Reflects the following (in millions of dollars): Write-off of accrued interest that will not be paid to holders of the Old Senior Subordinated Debentures Reclassification of Bank Debt accrued interest to debt Write-off of Default Interest on the Bank Debt Reclassification of accrued interest on swaps to debt Reversal of accrued management incentive compensation Payment of excess Bank Debt accrued interest

$(221) (75) (44) (22) (3) (15) (380)

1078


(e) Represents changes in short-term and long-term debt (including reclassification of the remaining balance of debt classified as current to long-term debt) as a result of the Prepackaged Plan. The change in debt consists of the following:

Notes Payable

Revolving Credit Facility

LTD Maturing In One Year

(Dollar Amounts in Millions) Historical carrying amounts Old Senior 1991 Notes Old Senior 1996 Notes Old Senior Subordinated Debentures Old Junior Subordinated Debentures Bank Debt Industrial revenue bonds New Senior 1995 Notes New Senior 1998 Notes New Bank Debt New 101/4 % Senior Notes Capitalized interest notes Reclassification Pro forma adjustment Pro forma carrying amounts before fresh-start adjustments

$2

$140

$576 (100)

(140)

(470)

— —

(140)

(570)

2

—

6

Long-Term Debt

Total

LTD Classified as Current

(Dollar Amounts in Millions) Historical carrying amounts Old Senior 1991 Notes Old Senior 1996 Notes Old Senior Subordinated Debentures Old Junior Subordinated Debentures Bank Debt Industrial revenue bonds New Senior 1995 Notes New Senior 1998 Notes New Bank Debt New 101/4 % Senior Notes Capitalized interest notes Reclassification Pro forma adjustment Pro forma carrying amounts before fresh-start adjustments

$1,926

$ 67

(1,926) (1,926)

(10) (600) (515) (370) (7) 75 35 540 342 53 1,926 1,469

$2,711 (100) (10) (600) (515) (980) (7) 75 35 540 342 53 — (1,167)

—

1,536

1,544

14.3

1079


(f) As a result of the Restructuring, the domestic operating loss and related income tax benefit would be reduced. (g) Reflects the following: Capital Received in Excess of Par Value

Common Stock

(Dollar Amounts in Millions) Issuance of 36,056,452 shares of New Common Stock at an estimated market price of $11.67 (reflecting the impact of the Reverse Stock Split) under the terms of the Prepackaged Plan to holders of the Old Subordinated Debentures Record estimated market value of New Warrants issued to holders of Old Junior Subordinated Debentures Impact of the Reverse Stock Split Tax impact on canceled restricted stock

$418

$3

10 5 (2) 431

— (5) — (2)

(h) Reflects the write-off of $55 million for nonrecurring fees and expenses incurred in connection with the Restructuring and the extraordinary gain, net of taxes, resulting from the Restructuring which has been estimated as follows (in millions of dollars): Old Senior Subordinated Debentures: Historical carrying amount Estimated market value of $11.67 per share times 30,480,712 shares of New Common Stock issued in the Restructuring (after the Reverse Stock Split) Retirement of Old Senior Subordinated Debentures Write-off of old capitalized financing costs Write-off of old accrued interest Subtotal Old Junior Subordinated Debentures: Historical carrying amount Estimated market value of $11.67 per share times 5,575,740 shares of New Common Stock issued in the Restructuring (after the Reverse Stock Split) Retirement of Old Junior Subordinated Debentures Write-off of old capitalized financing costs Estimated market value of New Warrants issued in the Restructuring Write-off of old accrued interest Subtotal

$600

(356) $244 (15) 221 $450 480

(65) 145 (1) (10) 35 439

1080 Bank Debt: Write-off of old capitalized financing costs Write-off of accrued Default Interest Subtotal Record Management Incentive Compensation Plan Tax provision Total


(7) 44 37 (13)(∗ ) (32] 881

(∗ )The Management Incentive Compensation Plan adjustment represents a provision for a management bonus which is contingent upon successful implementation of the Restructuring.

(i) An estimated reorganization value of $2,036 million (the “Reorganization Value”) is being used to implement fresh-start reporting along with adjustments of $25 million to inventory and ($69) million to purchased goodwill, of which the Reorganization Value in excess of identifiable assets is estimated to be approximately $679 million. The net of these adjustments is reflected as a decrease against reinvested earnings/(deficit). The Corporation plans to review its property, plant, and equipment and obtain appraisals of assets in order to determine what revisions, if any, should be made to individual accounts. The final allocation of Reorganization Value to the Corporation’s assets will take place once the review and appraisal process is completed. The Corporation does not expect any potential adjustment to have a material adverse impact to the financial statements. Any allocation would have no effect on cash flow or EBITDA and would result in a timing difference of reported earnings in the future. If a portion of the $679 million is ultimately allocated to property, plant, and equipment, net income would increase between 1993 and 1997 and would be reduced beyond 1997, since Reorganization Value in excess of identifiable assets would be fully amortized over five years, while depreciation would continue over the estimated useful life of the Corporation’s assets. (j) Reflects the tax adjustment associated with the adoption of SOP 90-7. (k) In accordance with SOP 90-7, the Corporation’s liabilities will be recorded at their estimated present values as of the Effective Date. For purposes of the unaudited Pro Forma Consolidated Balance Sheet, the present value of the Corporation’s liabilities, other than long-term debt, is assumed to be equal to the historical book value of such liabilities. The adjustment to reduce total pro forma debt (after the adjustment in note (e)) to an estimated present value using discount rates ranging from 9% to 14% is $265 million. (l) Reflects the adoption of SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions using the one-time charge method.

14.3


1081

(m) In accordance with SOP 90-7, this adjustment reflects the elimination of reinvested earnings/(deficit) of ($425) million and the elimination of deferred currency of ($8) million against capital received in excess of par value. (n) In accordance with SOP 90-7, this adjustment reflects the elimination of deferred currency translation against capital received in excess of par value. (o) Reflects the offset to all the fresh-start adjustments except for deferred currency which is offset in capital received in excess of par value.

15 Reporting on an Insolvent Company

15.1 Example of Unqualified Opinion Containing Uncertainty About Going Concern Objective. Section 15.19 of Volume 1 of Bankruptcy and Insolvency Accounting describes the issuance of an unqualified opinion with an explanation regarding the ability of the Company to continue as a going concern. As shown below, this type of report was issued by the CPA firm for the 10-Ksb/a for BioForce Nanosciences Holdings, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Shareholders BioForce Nanosciences Holdings, Inc. We have audited the accompanying consolidated balance sheets of BioForce Nanosciences Holdings, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 1083

1084

Reporting on an Insolvent Company

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioForce Nanosciences Holdings, Inc. as of December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has incurred substantial losses from operations and has limited sales of its products which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Chisholm, Bierwolf & Nilson, LLC Bountiful, Utah February 22, 2008 NOTES TO FINANCIAL STATEMENTS NOTE A—CONTINUITY OF OPERATIONS The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. Our platform product, the Nano eNabler TM system, was launched in 2005, with initial sales occurring in 2006. Due to the fact that we are still at an early stage of development of the market for the Nano eNabler TM system and our other products, we have sustained significant operating losses in recent years. As a result of these losses, we are dependent upon debt and equity financing, revenues from the sales of our Nano eNabler TM system and other products, and continued grant receipts to fund our future operations. Our plans to continue as a going concern are to continue to concentrate our efforts on increasing public awareness of our products through marketing and advertising, expanding our sales organization, and raising additional capital through debt and/or equity financings. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. 15.2 Example of Unqualified Opinion Explaining the Ability to Continue as a Going Concern Objective. Section 15.19 of Volume 1 of Bankruptcy and Insolvency Accounting describes the issuance of an unqualified opinion with an explanation regarding the ability of the Company to continue as a going concern. As shown below, this type of report was issued by the CPA firm for Versadial, Inc. Note 2 to the financial statements contains an identification of changes that must occur for Versadial to continue as a going concern. To the Board of Directors and Stockholders of Versadial, Inc.

15.2

Example of Unqualified Opinion Explaining the Ability to Continue

1085

We have audited the accompanying consolidated balance sheet of Versadial, Inc.(the “Company”) as of June 30, 2008 and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the two-year period ended June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versadial, Inc. as of June 30, 2008, and the results of its operations and cash flows for each of the years in the two-year period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company’s ability to continue in the normal course of business is dependent upon the success of future operations. The Company has incurred cumulative losses of approximately $20.0 million since inception and utilized cash of approximately $3.0 million for operating activities during the two years ended June 30, 2008. The Company has a working capital deficit of approximately $9.5 million and a stockholders’ deficit of approximately $11.3 million as of June 30, 2008. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Rothstein, Kass & Company, P.C. Roseland, New Jersey November 13, 2008

(a) Going Concern and Management’s Response The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. At June

1086


30, 2008, the Company has incurred cumulative losses of approximately $20.0 million since inception and utilized cash of approximately $3.0 million for operating activities during the two years ended June 30, 2008. The Company has a working capital deficit of approximately $9.5 million and a stockholders’ deficit of approximately $11.3 million as of June 30, 2008. At June 30, 2008, current liabilities include accounts payable and accrued expenses of approximately $4.7 million of which approximately $1.9 million is for the purchase and development of new equipment due to two vendors in Germany. In October 2008, the Company reached an agreement with one of these vendors for the $1.1 million due that vendor to amortize these costs over production on a per piece basis, which is scheduled to start in late fourth quarter 2008, with any remaining unamortized balance due in monthly installments commencing July 2009 through December 2009. In October 2008, the Company reached an agreement with the other vendor for the $0.8 million due that vendor whereby the Company would pay approximately $275,000 in October 2008 and the remaining balance at a rate of approximately $75,000 per month until paid. The $275,000 was paid in October 2008 with the proceeds from a financing as described below. Approximately $1.1 million included in accounts payable is due to a vendor in the United States for; (a) the amortization of purchased equipment under a capital lease obligation of approximately $0.6 million and; (b) start up costs and additional equipment at a new U.S. based facility of approximately $0.5 million. In October 2008, the Company paid approximately $0.5 million of the balance due the vendor for the amortization from the proceeds of a financing as described below and is in discussions with the vendor for deferred payment of the balance. Current capital lease obligations of approximately $3.7 million are to be repaid through amortization of production based on the number of units produced with any balance due 18 months from the start of production which commenced in November 2007. The Company anticipates revenues from production may cover this obligation and that alternatively this obligation may be extended as to the term and amount of amortization per unit produced. In addition, approximately $1.2 million of current liabilities relates to bridge loans which will be repaid out of the proceeds from any new additional financings as described below. (See notes 6, 12, 20 and 23). On August 30, 2007, the Company entered into a Securities Purchase Agreement whereby it could sell 8% promissory notes in the principal amount of up to $2.5 million at a price of ninety seven (97%) percent of the principal amount of notes. The notes were due upon the earlier of (a) six months following final closing date of November 27, 2007, (b) the date on which the Company received no less than $4.0 million in gross proceeds from the closing of a private offering of its equity securities or (c) on the date the Company closed on a rights offering. The Company received net proceeds of $2.4 million in regards to the notes of which $2.2 million was received from a related party. On January 28, 2008, the Company repaid an aggregate of $1.3 million of these notes with the proceeds from a private offering inclusive of interest and discount of which $1.2 million was repaid to a related party (see Notes 9 and 11). On May 31, 2008, the holders of the notes agreed to extend the maturity date to the earlier of (a) March 31, 2009 or (b) the date on which the Company receives gross proceeds in excess of $7.0 million from any debt or equity financing.

15.2

Example of Unqualified Opinion Explaining the Ability to Continue

1087

On January 28, 2008, the Company received $2.8 million for the purchase of 1,750,000 units of its securities consisting of 1,750,000 shares of common stock and stock purchase warrants (20% warrant coverage) in connection with a private placement offering. The proceeds of the private placement were used primarily for working capital purposes including (i) repayment of outstanding current indebtedness of the Company including approximately $1.3 million in bridge financing incurred with the Securities Purchase Agreement inclusive of accrued interest and discount, (ii) payment of other outstanding obligations, and (iii) funding anticipated working capital requirements including product development and the acquisition of tooling and molds. The private placement was extended through a final closing date of May 31, 2008 for a maximum aggregate placement of $5.5 million. The Company had received a letter from Fursa Master Global Event Driven Fund, L.P. (“Fursa”), the purchaser of 1,250,000 units in the private placement, committing Fursa Master Global Event Driven Fund, L.P. to subscribe and pay $2.0 million for an additional 1,250,000 units by May 31, 2008 (see Note 11). Fursa did not deliver the $2.0 million by May 31, 2008. The Company is presently in discussions with Fursa regarding this obligation and is also seeking to obtain additional debt or equity financing from alternative sources. On October 20, 2008, Innopump entered into an unsecured loan agreement with Sea Change Group, LLC (“SCG”). SCG is the sublicensor of the patented technology used in the manufacture of the Company’s proprietary products. The loan is for a principal amount of $3,445,750, matures on June 29, 2009 and bears interest at the rate of one and eighty three hundredths percent (1.83%) per month. The net proceeds from the loan, after fees and the required establishment of a cash collateral account, aggregated approximately $2.2 million. The proceeds of the loan are to be used primarily for working capital purposes including (i) payment of current accounts payable and other outstanding obligations, and (ii) funding anticipated working capital requirements including product development and the acquisition of tooling and molds (see Notes 14 and 23). Management recognizes that the Company must generate additional revenue and gross profits to achieve profitable operations. Management’s plans to increase revenues include the continued building of its customer base and product lines. In regard to these objectives, the Company will commence production in connection with a supply agreement with a customer in the consumer products industry as related to the manufacture of a new size (20mm) dispenser in fiscal 2009 (see Note 20). In addition, the Company has relocated its operations for the production of its two current product lines (the 40mm and 49mm size dispensers) from Germany to the United States. The manufacturing facility in the United States commenced operations in November 2007 and became fully operational in February 2008. This new facility will increase both production capacity and gross profit margins on these product lines (see Note 20). Management believes that the capital received to date from previous financings may not be sufficient to meet financial obligations in regard to the capital equipment commitments required to expand its product line and increase production capacity and to fund operations and repay debt during the next twelve months. Additional debt or equity financing may be required which may include receivables or purchase order financing, the issuance of new debt or equity instruments, additional amortization of a portion of construction

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costs through the Company’s production partners and possible restructuring of current amortization agreements. There can be no assurance that the Company will be successful in building its customer base and product line or that available capital will be sufficient to fund current operations and to meet financial obligations as it relates to capital expenditures and debt repayment until such time that the revenues increase to generate sufficient profit margins to cover operating costs and amortization of capital equipment. If the Company is unsuccessful in building its customer base or is unable to obtain additional financing on terms favorable to the Company, there could be a material adverse effect on the financial position, results of operations and cash flows of the Company. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 15.3 Sample of a Qualified Opinion with “Except for” Wording for Departure from GAAP Objective. Section 15.19 of Volume 1 of Bankruptcy and Insolvency Accounting discusses situations where the auditor issues a qualified opinion and specific paragraphs that must be included in the auditor’s report to indicate that, “except for” the effects of a particular situation, the financial statements are presented. Following is an example to illustrate the necessary paragraphs included in the auditor’s qualified opinion report. Report of Independent Accountants To the Board of Directors and Shareholders of ABC Company: Introductory Paragraph [Same as the standard report.] Scope Paragraph [Same as the standard scope paragraph, assuming that there is no limitation on scope; otherwise, the scope paragraph should be modified as follows]: Except as discussed in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards. Those standards. . . . Explanatory Paragraph [Used to explain the departure from generally accepted accounting principles and/or the limitation on the scope of the audit. In addition, the monetary effect on the financial statements, if known, should be indicated.] Opinion Paragraph [The standard opinion paragraph is qualified “except for”.] In our opinion, except for the effects of . . ., as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and subsidiaries as of December 31, 20XX, and the results of their operations and cash flows for the year then ended, in conformity with generally accepted accounting principles.

15.4

Sample of a Disclaimer of Opinion Issued to Creditors’ Committees

1089

15.4 Sample of a Disclaimer of Opinion Issued to Creditors’ Committees and in Chapter 11 Reorganizations Objective. Section 15.20 of Volume 1 of Bankruptcy and Insolvency Accounting discusses the auditor’s disclaimer of opinion and statement of reasons for disclaiming an opinion. These include disclosure of all areas of the examination that were not completed, limitations placed on the scope of the examination, inadequate internal controls and any other information that impacted the decision to disclaim an opinion. The disclaimer of an opinion is illustrated in two different situations below: (a) Example of the type of disclaimer issued to creditors’ committees and in Chapter 11 reorganizations. REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ABC Company, Inc. New York, New York We have audited the accompanying balance sheet of ABC Company, Inc. as of April 28, 20X7, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. Our examination did not include the application of audit procedures sufficiently comprehensive to constitute an examination in accordance with generally accepted auditing standards. In accordance with prevailing standards of professional practice, the foregoing statements are deemed to be unaudited. We therefore do not express an opinion on the financial statements in the accompanying report. The accompanying financial statements have been prepared assuming that ABC Company will continue as a going concern. As discussed in Note X to the financial statements, under existing circumstances there is substantial doubt as to the ability of ABC Company to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities that might result from the possible inability of ABC Company to continue as a going concern. /s/ Jones & Company New York, New York May 14, 20X4 (b) Example of disclaimer due to weak internal controls. LIQUIDMETAL TECHNOLOGIES, INC. Amendment No. 2 to the Annual Report of Form 10-K for the Fiscal Year ended December 31, 2005

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EXPLANATORY NOTE We are filing this Amendment No. 2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the U.S. Securities and Exchange Commission (SEC) on March 16, 2006 and as amended by Amendment No. 1 thereto filed on March 31, 2006, to (1) revise the cover page of the Form 10-K to correctly reflect the aggregate market value of our Common Stock held by non-affiliates as of June 30, 2005, (2) amend the disclosure in Item 9A to clarify that, on January 16, 2006, our management “completed” its documentation, assessment and evaluation of its internal controls over financial reporting as of December 31, 2005, and (3) to reflect the addition of certain information related to the disclaimer of opinion by our independent registered public accounting firm with respect to the audit of our internal control over financial reporting as of December 31, 2005. Other than the changes referred to above, all other information included in the above described Form 10-K, as amended, remains unchanged. This amendment does not reflect events occurring after the filing of such Form 10-K, as amended, and does not modify or update the disclosures therein in any way other than as required to reflect the amendment as described above and set forth below. Return to Contents Item 9A. Controls and Procedures Evaluation of disclosure controls and procedures. During the course of the reaudit of our financial statements of Liquidmetal Technologies, Inc. (the “Company”) for the fiscal years ended December 31, 2001, 2002, and 2003, it was determined that revenues from certain sales made by the Company to various customers were either not recognized in the proper periods or should not have been recognized as revenue. It was also determined that compensation expense related to certain stock options granted in 2001 and 2002 were not calculated in accordance with generally accepted accounting principles under APB Opinion No. 25, SFAS No. 123, and EITF 00-23. These determinations and the associated restatement of previously issued financial statements in the Form 10-K for the year ended December 31, 2003, filed on November 10, 2004, suggest that, at the time of the subject transactions and the preparation of our financial statements for the relevant periods, the Company’s disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) were ineffective as of the end of the period covered by such Form 10-K. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC has adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports on Form 10-K as of the Company’s fiscal year ended December 31, 2004. SOX 404 also requires the public accounting firm auditing a public company’s financial statements to attest and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Although these requirements were first applicable to the Company’s

15.4


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annual report on Form 10-K for the fiscal year ended December 31, 2004, the Company did not comply with these requirements for such fiscal year as described in the following paragraphs. Therefore, the Company’s former independent registered public accounting firm, Stonefield Josephson, Inc., issued a disclaimer of opinion with respect to the Company’s internal control over financial reporting as of December 31, 2004, and such disclaimer was filed with the Company’s amended Form 10-K filed on May 10, 2005. The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of December 31, 2005, of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures, as of December 31, 2005, were not effective. This determination was based primarily on the material weaknesses in internal controls over financial reporting identified below. Update on Management’s Assessment of Internal Control Over Financial Reporting The time and resources committed to the restatement of prior periods’ financial statements as aforementioned delayed management in commencing and completing its documentation, assessment and evaluation of internal control over financial reporting. Due to the issues described in the foregoing paragraph, as well as limitation on financial and internal resources, management’s assessment of the effectiveness of our internal control over financial reporting had been substantially delayed, which in turn prohibited the Company’s former independent registered public accounting firm, Stonefield Josephson, Inc., in performing its audit of management’s assessment of the effectiveness of internal control over financial reporting pursuant to SOX 404 as of December 31, 2004. The Company has been advised by the SEC that the filing of the above mentioned disclaimer does not comply with the SEC’s rules and regulations under Section 404, and the SEC has further advised us that this noncompliance has resulted in the Company being in violation of Section 13(a) under the Securities Exchange Act of 1934. Section 13(a) establishes the general requirement that public companies must file with the SEC, in accordance with such rules and regulations as the SEC may prescribe, such information, documents, and reports as the SEC may from time to time require for the protection of investors, including Form 10-Ks and 10-Qs. During 2005, the Company has taken steps to comply with Section 404, including hiring independent consulting firms, Assurance Consulting 3 in January 2005 and Login Financial in July 2005, to assist the Company with its Section 404 compliance and to identify and propose remedial actions to address and mitigate deficiencies in internal controls over financial reporting. In addition, beginning July 2005 the Company has devoted additional internal resources including having an executive manager lead the SOX 404 compliance effort on a full time basis. Also, beginning August 2005, management allocated a consultant from Login Financial to our South Korean operations

1092


and re-evaluated our controls as well as implemented additional control procedures. The Company’s evaluation included revising our documentation, reperforming walkthroughs and re-testing our internal controls. In addition, on November 14, 2005 management hired an additional “Big 4” third party consultant who is experienced in the SOX 404 effort for companies operating in South Korea to address and mitigate material deficiencies during the fourth quarter of 2005 and into 2006. Even though the Company devoted these resources, considering the nature of the Company’s operations having substantial presence in South Korea in addition to the Company’s U.S. operations in Texas and California as well as the amount of time, financial resources, complexity associated with Section 404 compliance, limited financial resources of the Company and management’s late start in identifying and documenting its internal controls, the Company’s auditors advised the Company and the Audit Committee of the Board of Directors that they believed it was highly unlikely that the Company’s management would be able to finish its testing and assessment of the Company’s internal controls in time for Stonefield to begin its testing of management’s assertions over internal controls by the end of fiscal year 2005 in accordance with the standards of Section 404. In the ongoing process of making our assessment of internal control over financial reporting, management used the criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Of the various control procedures that we have documented, performed walkthroughs, and tested as of December 31, 2005, management has identified several control deficiencies, some of which have been determined to be material weaknesses in internal control over financial reporting as follows. 1. Lack of adequate segregation of duties in the Company’s South Korean Operations in accounts receivable involving cash receipts, shipping, delivery of products and customer invoice reconciliations: This deficiency resulted from the fact that the processes utilized at the Company’s Korean Operations were designed to meet certain Korean business practices whereby invoices are created once a month, the invoices are confirmed by the customer prior to being sent to and received by the customer, and payments of invoices are done only through wire transfers. As part of these Korean business practices, “tax invoices” are generated by sellers of goods and are issued to customers as formal documents required by the Korean government to immediately document and report sales for income tax purposes. Previously, these processes were handled by the accounting and sales departments in the Korean Operations, and to mitigate the risk of fraud or error, the Company relied on the fact that all invoices were confirmed with the customer prior to recognizing revenue, all cash receipts were received via wire transfer, and revenue accounts were reconciled by accounting on a monthly basis. Nevertheless, the Company’s former auditor has informed the Company that these processes lacked certain formal documentation and segregation of duties. To remediate these weaknesses, the Company implemented the following changes in its Korean Operations during November 2005:

15.4


1093

r Segregation of Duties: The tax invoices are now being created by a sales accountant, an individual who has dual duties in both Accounting and Sales in the Korean Operations, whereas previously, tax invoices were created by the Assistant Sales Manager responsible for delivery of the products to the customer. This segregation of the tax invoicing function from product deliveries is an additional control procedure to mitigate the risk of fraud or error. r Sequential Documents: The Company has created an internal, sequential invoice system tracked directly by the Company’s SAP system which summarizes the tax invoice created by the accounting department, delivery requisitions created by the production department, and the sales transaction report created by the sales department. This three-way matching system is an additional control to ensure that revenues are properly documented and reconciled at the end of each month. r Additional Resources: In November 2005, the Company began devoting additional internal resources to the Korean accounting department to segregate duties further. This included having (1) the sales accountant create all tax invoices as mentioned under “Segregation of Duties” above, (2) the Assistant Sales Manager reconcile the delivery requisitions maintained in the Production Department, and (3) the Accounting Department control vendor creation in the purchasing module of our SAP reporting system. In addition, the Company is currently conducting a search for an accountant for the Korean operations to further augment control procedures. 2. Lack of adequate segregation of duties in the Company’s Coatings Division in Texas in order processing and invoicing: The Company’s coatings business in Texas (the “Coatings Business”) is managed by two individuals, the Vice President of Coatings and the General Accountant. The accountant handles all of the “front end” processes, including purchase orders, sales orders, order fulfillment, and invoicing. To mitigate the risk of fraud or error, the Company previously relied on the fact that the “back end” processes for all orders (such as cash receipts, vendor management, customer management, collections, and review of the results of operations) are all handled by the Company’s corporate office. In addition, the Company also relied on the fact that all sales orders, inventory management, and order fulfillment are handled through the Company’s SAP system, which provides real-time monitoring and review. Despite these measures, the Company’s former auditor concluded that the lack of segregation of duties in the Coatings Business constituted a material weakness in the Company’s internal controls over financial reporting. As a result, in September 2005, the Company instituted additional internal control procedures in its Coatings Business, including the following: (1) requiring that all orders be supported by a written purchase order containing the customer’s letterhead and address, the part number and description, and the signature of the purchaser with terms and conditions, (2) requiring that all 3rd party vendor “drop shipments” be supported by shipping documents faxed or mailed to the Company by

1094

3.

4.

5.

6.


the vendor, (3) periodically performing on-site audits of the accounting procedures at the Coating Business by the Company’s central corporate accounting group, the first of which has been performed in December 2005 and (4) hiring an additional Accounting Manager in December 2005 in the Corporate Accounting Group to further monitor the Coatings Business and other accounting functions. Lack of adequate controls and documentation in the Company’s South Korean Operations to evidence proper customer invoicing and revenue recognition in the proper period: The measures taken to remedy the deficiency described in number 1 above also served to remediate this deficiency. Lack of progress in documenting, assessing and evaluating our internal controls in our South Korean Operations evidenced by aforementioned deficiencies of which remediations will need to be completed as of December 31, 2005: The Company’s overall assessment of its internal controls, including documentation, walkthroughs, and testwork, commenced in February of 2005. Management believes that the Company’s assessment of its controls in its U.S. operations has been substantially completed in December 2005, although due to limited financial resources, the Company was unable to begin its assessment of its Korean Operations until mid-to late 2005. The Company identified and, beginning in August of 2005, retained a bi-lingual consultant from Login Financial to work in the Company’s Korean Operations on a full time basis to help with the SOX 404 compliance effort. In addition, to expedite the implementation process, the Company hired, in November 2005, a consultant from Price Waterhouse Coopers–Korea who is familiar with SOX 404 implementation for Korean companies. Nevertheless, the Company’s former auditor informed the Company that they believed that progress at the Korean Operations on the SOX 404 process has not been sufficient to enable the Company to complete the process in time for compliance. Although the disclosure in this paragraph may not be characterized as a material weakness in internal controls per se (but instead constitutes an update on the Company’s efforts regarding SOX 404 compliance), the Company has disclosed this information based on former auditor’s recommendation. Lack of controls over internal access to the Company’s SAP system of reporting by unauthorized users: SAP is the Company’s global enterprise resource planning (ERP) software that handles the Company’s financial reporting on a real-time basis. Historically, access to SAP was controlled on an ad hoc basis by the Controller and the Vice President of Operations of the Company, and formal IT procedures for SAP administration were lacking. During September 2005, the Company hired an independent IT consultant specializing in SOX implementations specifically for the Company’s global IT cycle. The Company has substantially completed its assessment of IT system controls, including improving the Company’s internal access controls to its SAP system. Manual performance of numerous procedures that could be automated using current reporting systems: Current manual procedures include (1)

15.4


1095

creating excel spreadsheet invoices to bill customers; (2) performing manual currency translations (“FX Translation”) for financial reporting in U.S. dollars; and (3) using a manual purchase requisition system. While these procedures may be automated through modules in the SAP system, due to the significant financial investment necessary to automate these procedures in SAP, the Company is not able to automate these procedures at this time. However, beginning in August 2005, the Company implemented control procedures to mitigate risks associated with manual procedures including (1) requiring additional authorizations for all purchases, journal entries, and requisitions and (2) creating checklists for month end, customer/vendor creation, human resource filing, and revenue support to ensure propriety and completeness of the Company’s accounting records. On January 16, 2006, the Company’s management completed and concluded its documentation, assessment and evaluation of its internal controls over financial reporting as of December 31, 2005. During the course of its assessment, management has identified the control deficiencies described in the foregoing paragraphs and believes that these deficiencies were remediated as of December 31, 2005. However, our independent auditors, Stonefield Josephson Inc., resigned on December 1, 2005, and on January 20, 2006, the Company hired Choi, Kim & Park LLP (“CKP”) as its new independent registered public accounting firm. While the Company has advised CKP of the foregoing weaknesses in internal controls, due to the untimeliness of the foregoing events, CKP was unable to satisfactorily complete their audit of the Company’s internal control over financial reporting pursuant to SOX 404, and thus, have issued a disclaimer of an opinion on the company’s internal control over financial reporting as of December 31, 2005. The Company’s management will continue to monitor potential changes in the legal and regulatory requirements of SOX 404, particularly the requirements for small public companies. In general, the SEC has broad authority under the Securities Exchange Act of 1934 to institute investigations, to seek injunctions, to seek monetary penalties, and to otherwise pursue enforcement actions for violations of Section 13(a), including a failure to file a Form 10-K or for the omission of necessary statements in a Form 10-K. Therefore, a violation under Section 404 could potentially subject a company to these same investigations and penalties. Section 404 is a relatively new legal requirement, and there is very little precedent establishing the consequences or appropriate response to a public company’s failure to comply with Section 404. Accordingly, although the Company has discussed its Section 404 noncompliance for 2004 and 2005 with the SEC, the Company cannot predict what action, if any, the SEC may take against the Company as a result of a failure to be compliant with its obligations under Section 404. Changes in internal controls. The Company has made significant changes to the internal controls over financial reporting during 2005. These material changes are described in paragraphs 2, 5, and 6 above under the caption “Update on Management’s Assessment of Internal Control Over Financial Reporting.” In addition, the company has previously disclosed as a material weakness a

1096


lack of adequate controls and monitoring of payroll process, as such function was outsourced to a third-party payroll processor that was not certified under SAS 70 (Type II). In August 2005, the Company remediated this weakness by retaining the services of ADP for payroll processing. ADP is certified under SAS 70 (Type II). Return to Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Liquidmetal Technologies, Inc. We were engaged to audit management’s assessment included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Liquidmetal Technologies, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Liquidmetal Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has not completed its assessment of internal control over financial reporting, which has prevented us from being able to satisfactorily complete an audit of the Company’s internal control over financial reporting. However, management has identified the following material weaknesses during their assessment: lack of adequate segregation of duties in accounts receivable involving cash receipts, shipping, delivery of products, and invoice reconciliations, as well as in order processing and invoicing; lack of documentation of authorization of transactions; manual performance of numerous procedures that could be automated using current reporting systems; material adjustments to the accounting records and financial statements as of and for the year ended December 31, 2005 that were not initially identified by the Company’s internal control over financial reporting; and the Company had inadequate controls related to timely performance of its assessment of internal control over financial reporting. The existence of one or more material weaknesses as of December 31, 2005 would preclude a conclusion that the Company’s internal control over financial reporting was effective as of that date. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and our disclaimer of opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and

15.5

Example of Adverse Opinion for Material Departures from GAAP

1097

fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has represented to us that they have completed their assessment of their internal control over financial reporting as of December 31, 2005, and we have performed a preliminary review of their assessment by reviewing the Company’s documentation of their internal control assessment and performing a limited observation of internal controls. However, due to the timing of our engagement, we were unable to satisfactorily complete an audit of their internal control over financial reporting, we were unable to apply other procedures to satisfy ourselves as to the effectiveness of the Company’s internal control over financial reporting, and we were unable to conclude whether management’s assessment is fairly stated. Therefore, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion either on management’s assessment or on the effectiveness of the company’s internal control over financial reporting. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Liquidmetal Technologies, Inc. and our report dated February 23, 2006 expressed an unqualified opinion including an explanatory paragraph on the Company’s ability to continue as a going concern. Choi, Kim & Park, LLP /s/ Choi, Kim & Park, LLP Los Angeles, California Certified Public Accountants February 23, 2006 15.5 Example of Adverse Opinion for Material Departures from GAAP Objective. Section 15.21 of Volume 1 of Bankruptcy and Insolvency Accounting discusses situations where the auditor issues an adverse opinion, which may be necessary when the entity’s disclosures with respect to the ability to continue as a going concern are materially inadequate. The example below contains the necessary paragraphs to be included in the auditor’s report in such a case.

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Report of Independent Accountants To the Board of Directors and Shareholders of ABC Company: Introductory Paragraph [Same as the standard report.] Scope Paragraph [Same as the standard report.] Explanatory Paragraph [Used to explain the departure from generally accepted accounting principles, including the inadequacy of the disclosures, if any.] Opinion Paragraph [Modified as follows]: In our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of ABC Company as of December 31, 20XX, or the results of its operations or its cash flows for the year then ended. 15.6

Report in Connection with Claims of Creditors

Objective. Section 15.22 of Volume 1 of Bankruptcy and Insolvency Accounting discusses reports relating to the application of agreed-on procedures, including the performance of selected procedures in connection with claims of creditors or relating to inventory in a particular location. These procedures are generally not sufficient to enable the accountant to express an opinion on the specific accounts or items. The report below for comparison of claims received from creditors with those listed in the debtor’s records is from a sample form issued by the AICPA. REPORT IN CONNECTION WITH CLAIMS OF CREDITORS Trustee XYZ Company At your request, we have performed the procedures enumerated below with respect to the claims of creditors of XYZ Company as of May 31, 20XX, set forth in the accompanying schedules. Our review was made solely to assist you in evaluating the reasonableness of those claims, and our report is not to be used for any other purpose. The procedures we performed are summarized as follows: a. We compared the total of the trial balance of accounts payable at May 31, 20XX, prepared by the company, to the balance in the company’s related general ledger account. b. We compared the claims received from creditors to the trial balance of accounts payable.

15.7

Report for Agreed-on Procedures Relating to Leveraged Buyout Transactions

1099

c. We examined documentation submitted by the creditors in support of their claims and compared it to documentation in the company’s files, including invoices, receiving records, and other evidence of receipt of goods or services. Our findings are presented in the accompanying schedules. Schedule A lists claims that are in agreement with the company’s records. Schedule B lists claims that are not in agreement with the company’s records and sets forth the differences in amounts. Because the above procedures do not constitute an examination made in accordance with generally accepted auditing standards, we do not express an opinion on the accounts payable balance as of May 31, 20XX. In connection with the procedures referred to above, except as set forth in Schedule B, no matters came to our attention that caused us to believe that the accounts payable balance might require adjustment. Had we performed additional procedures or had we made an examination of the financial statements in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. This report relates only to the accounts and items specified above and does not extend to any financial statements of XYZ Company, taken as a whole. 15.7 Report for Agreed-on Procedures Relating to Leveraged Buyout Transactions Objective. Section 15.22 of Volume 1 of Bankruptcy and Insolvency Accounting discusses reports issued where agreed-on procedures are applied. One such situation occurs in connection with leveraged buyout transactions and relates to solvency issues. In such cases, the following format of the report was suggested as part of the AICPA’s conclusion that accountants should not issue solvency letters (described in § 15.29 of Volume 1). Illustrative Agreed-on Procedures Report (Leveraged Buyout Transaction) March 24, 20X2 XYZ Bank and ABC Corporation: This report is furnished at the request of XYZ Bank and ABC Corporation pursuant to the Credit Agreement dated as of March 24, 20X2 (the “Credit Agreement”), between ABC Corporation (the borrower) and XYZ Bank (the lender) in connection with the financing transaction set forth therein. The sufficiency of the agreed-upon procedures we have been requested to perform, as set forth in subsequent paragraphs of this report, is the sole responsibility of the borrower and lender. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purposes for which this report has been requested or for any other purpose. Further, we make no representations regarding questions of legal interpretation, nor do we provide any assurance as to any matters relating to the borrower’s solvency, adequacy of capital or ability to pay its debts. The agreed-upon procedures described below should not be taken to supplant any additional inquiries and procedures that the lender should undertake in its consideration of the proposed financing transaction contemplated by the Credit Agreement.

1100


We have previously audited the consolidated balance sheet of the borrower as of December 31, 20X1, and the related consolidated statements of income, stockholders’ equity and cash flow for the year then ended, and have rendered our unqualified report thereon dated February 27, 20X2. We have not audited any financial statements of the borrower as of any date or for any period subsequent to December 31, 20X1. As requested, we have performed the following agreed-upon procedures as of and for the periods set forth below (our procedures did not extend to the period from March 21, 20X2, to March 24, 20X2, inclusive): 1. We have read the minutes of the 20X2 meetings of the stockholders and board of directors of the borrower as set forth in the minute books at March 20, 20X2, officials of the borrower having advised us that the minutes of all such meetings through that date were set forth therein. 2. We have read the accompanying unaudited consolidated financial statements of the borrower as of February 28, 20X2, and for the two-month period then ended, officials of the borrower having advised us that no financial statements as of any date or for any period subsequent to February 28, 20X2, were available. 3. We have made inquiries of certain officials of the borrower who have responsibility for financial and accounting matters regarding whether a. The unaudited consolidated financial statements referred to above are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the December 31, 20X1, audited consolidated financial statements. b. At March 20, 20X2, there was any decrease in consolidated net assets or consolidated net current assets as compared with the amounts shown in the February 28, 20X2, unaudited consolidated balance sheet. Based on the results of the procedures described in steps 1 through 3, above, nothing came to our attention that caused us to believe that the February 28, 20X2, financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the December 31, 20X1, audited financial statements or that, at March 20, 20X2, there was any decrease in consolidated net assets or consolidated net current assets as compared with the amounts shown on the February 28, 20X2, unaudited consolidated balance sheet. 4. With respect to the accompanying unaudited pro forma consolidated balance sheet as of February 28, 20X2,1 which has been prepared on the basis set forth in the notes and assumptions thereto, we have a. Read the unaudited pro forma consolidated balance sheet and supporting notes and assumptions. b. Made inquiries of certain officials of the borrower who have responsibility for financial and accounting matters as to whether all adjustments necessary to present the unaudited pro forma 1 For example, this presentation might reflect a business combination accounted for as a purchase under Accounting Principles Board Opinion No. 16, Business Combinations.

15.7

Report for Agreed-on Procedures Relating to Leveraged Buyout Transactions

1101

consolidated balance sheet in accordance with the basis set forth in the notes thereto have been made. c. Discussed with certain officials of the borrower their assumptions regarding the effects of the transaction set forth in the notes to the unaudited pro forma consolidated balance sheet. d. Compared the amounts shown in the unaudited consolidated balance sheet of the borrower at February 28, 20X2, and in the unaudited pro forma consolidated balance sheet to the corresponding amounts shown on worksheets prepared by the borrower and found them to be in agreement; tested the mathematical accuracy of such worksheets. Based on the results of the procedures described in 4a–d, above, no matters came to our attention that caused us to believe that the unaudited pro forma consolidated balance sheet does not reflect the proper application of the pro forma adjustments to the historical unaudited consolidated balance sheet. 5. With respect to the accompanying forecasted statement of consolidated cash flows for the three years ending December 31, 20X4 (the forecast), prepared by the borrower, we have a. Read the forecast for compliance in regard to format with the preparation guidelines established by the American Institute of Certified Public Accountants (AICPA) for presentation of a forecast. b. Tested the mathematical accuracy of the forecast. Based on the results of the procedures referred to in steps 5a–b, no matters came to our attention to cause us to believe that the format of the forecast should be modified or that the forecast is mathematically inaccurate. Because the foregoing procedures in steps 1–4 do not constitute an audit made in accordance with generally accepted auditing standards or an examination made in accordance with attestation standards established by the AICPA, we do not express an opinion on the February 28, 20X2, unaudited historical consolidated financial statements or unaudited pro forma consolidated balance sheet. Because the procedures described in steps 1 and 5a–b above do not constitute an examination of prospective financial statements in accordance with standards established by the AICPA, we do not express an opinion on whether the forecast referred to above is presented in conformity with AICPA presentation guidelines or on whether the underlying assumptions provide a reasonable basis for the presentation. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Had we performed additional procedures or had we audited the borrower’s February 28, 20X2, consolidated financial statements in accordance with generally accepted auditing standards or had we examined the borrower’s unaudited pro forma consolidated balance sheet or the forecast in accordance with standards established by the AICPA, other matters might have come to our attention that would have been reported to you. This report is intended solely for use by the borrower and the lender in connection with the loan contemplated under the Credit Agreement and is

1102


not to be otherwise used, circulated, quoted or referred to by the borrower or the lender and should not be used by any party who did not participate in determining the foregoing procedures. We have no responsibility to update this report for events and circumstances occurring after March 20, 20X2.

15.8

Examination Report for Projected Financial Statements

Objective. Section 15.30 of Volume 1 of Bankruptcy and Insolvency Accounting discusses reports on prospective financial statements. In many bankruptcy situations, the CPA may assist with forecasts or projections and, as a result, should consider the type of report to issue. In this exhibit is an example of a report in which an opinion is expressed on the presentation of the projections. Also note than in a chapter 11 proceeding, the CPA may issue the report in accordance with provisions (described above) in CSSR 03-1. The Board of Directors XYZ Technologies, Inc. We have examined the accompanying projected income statement, balance sheet and statement of cash flow for XYZ Technologies, Inc. (the “Company”) for the year ending December 31, 20X9, which projection hypothetically assumes that the Company will have sales of approximately 10,000 units of the ABC products at selling prices of $295 for Issue 3 ($275 selling price to distributors); and sales of approximately $2.2 million to Delta Communications. The projection also hypothetically assumes that the Company will be able to obtain new short term borrowings to meet expected cash needs during the projection period. There is no assurance that the Company will be able to obtain such new borrowings. Our examination was made in accordance with standards for an examination of a projection established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection. The accompanying projection and this report were prepared for presentation to the Company’s current lenders and should not be used for any other purpose. In our opinion, the accompanying projection is presented in conformity with guidelines for presentation of a projection established by the American Institute of Certified Public Accountants, and the underlying assumptions as described in the summary of significant accounting policies and key assumptions underlying the projection provide a reasonable basis for management’s projection. However, even if the hypothetical assumptions as described above occur there will usually be differences between the actual and projected results, because events and circumstances frequently do not occur as expected and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. CPA & Company Date

15.9

15.9

Compilation Report for Projected Financial Statements

1103

Compilation Report for Projected Financial Statements

Objective. Section 15.30 of Volume 1 of Bankruptcy and Insolvency Accounting discusses reports on prospective financial statements. In many bankruptcy situations, the CPA may assist with forecasts or projections and, as a result, should consider the type of report to issue. The following exhibit contains an example of a compilation report issued based on projected financial statements. Also note than in a chapter 11 proceeding, the CPA may issue the report in accordance with provisions (described above) in CSSR 03-1. Date XYZ Partners (an Illinois limited partnership) Debtor in Possession We have compiled the accompanying projected financial statements of XYZ Partners (“Partnership”), which consist of the following presentations for the calendar years 20X1 through 20X7 and for the three months ending March 31, 20X8. Notes and Assumptions Underlying Projections; Projected Statements of Taxable Income (Loss) Prepared on the Income Tax Basis of Accounting; Projected Statements of Cash Flows; and Projected Statement of Capital Contributions, Ordinary Income (Loss) From Real Estate Rental Activities, Cancellation of Indebtedness Income, and Gain on Termination of Partnership Interest for a Class A Limited Partner Who Invested Pre-Petition Capital of $36,000 in the Partnership and Who Elects Not to Contribute Additional Post-Petition Capital to the Partnership, With Historical Information Presented For Years Prior to 1989. The Partnership became the subject of a voluntary proceeding for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy , 20X0. Accordingly, pre-petition obligations of the PartCode”) on April nership (including those arising under agreements entered into prior to the commencement of the Chapter 11 proceeding) are subject to adjustment and modification pursuant to the Bankruptcy Code. The Partnership filed a Plan of Reorganization (“Plan”) in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Divi, 20X1. The aforementioned projections are sion (“Court”) on March prepared on the assumption that the Plan will be confirmed by the Court as filed. The confirmation of the Plan is subject to a vote of creditors and is contingent upon the Plan’s satisfaction of certain provisions of the Bankruptcy Code. The accompanying projections, prepared on the income tax basis of accounting as described in Note 5, are not intended to present the overall projected financial position, results of operations, and cash flows in the projection period in conformity with guidelines for presentation of a projection established by the American Institute of Certified Public Accountants. The projections and this report are prepared solely for purposes of their use as exhibits to the

1104


disclosure statement of the Partnership with respect to its Plan, and any other use without the prior written consent of CPA & Company is prohibited. A compilation is limited to presenting projected financial information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projected information. We have not audited the projected information (or the historical information presented for years prior to 20X0) and, accordingly, do not express an opinion or any other form of assurance on the accompanying projections, assumptions, or historical information. Furthermore, even if the Plan is confirmed by the Court and consummated in accordance with the described provisions, the reader can expect that there will be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events or circumstances occurring after the date of this report. We have not audited, reviewed or compiled the historical information included for years prior to 20X1, accordingly we do not express an opinion or any other form of assurance on said information. Under section 10.33 of the Treasury regulations, prospective financial statements that are predicated upon assumptions regarding the federal tax aspects of an investment may be construed as a “tax shelter opinion.” The regulations require that the practitioner issuing a tax shelter opinion provide, where possible, (1) an opinion on each material tax issue with respect to the investment, and (2) an overall evaluation of whether the material tax benefits in the aggregate more likely than not will be realized. If not possible, the practitioner is required to state the reasons preventing the rendering of such an opinion and evaluation. However, section 1125(e) of the Bankruptcy Code provides that a person, acting in good faith and in compliance with the applicable provisions of the Bankruptcy Code, who (1) solicits acceptance or rejection of a plan or (2) participates in the offer, issuance, sale, or purchase of a security offered or sold under the plan, is not liable for violation of any applicable law, rule, or regulation governing solicitation of acceptance or rejection of a plan for the offer, issuance, sale, or purchase of securities. Pursuant to its order dated , 20X0, the Court has held that this compilation report is not February governed by section 10.33 of the Treasury Regulations nor is this compilation report to be construed as a “tax shelter opinion” pursuant to such regulations. Insofar as the discussion of federal tax matters included as Note 11 to the accompanying projections contains a discussion significantly less in scope than would be required under the standards of Treasury regulation section 10.33, each limited partner and prospective limited partner in the Partnership is urged to consult his or her personal tax advisor as to the tax considerations of the Partnership’s Plan. CPA & Company 15.10

Disclaimer of Opinion on Projected Financial Statements

Objective. Section 15.30 of Volume 1 of Bankruptcy and Insolvency Accounting discusses reports on prospective financial statements. In many bankruptcy situations, the CPA may assist with forecasts or projections and, as a result,

15.10

Disclaimer of Opinion on Projected Financial Statements

1105

should consider the type of report to issue. In the following exhibit is an example of a disclaimer of opinion on prospective financial statements. In many chapter 11 situations the CPA may prefer to issue the report in accordance with provisions (described above) in CSSR 03-1. To the Board of Directors of XYZ, Inc. We have examined the projected balance sheet, statement of income, and cash flows of XYZ, Inc. as of and for each of the six fiscal years in the period ended May 31, 20X6 (the projected statements), included in the XYZ, Inc. Five Year Business Plan dated April 4, 20X1, which have been prepared based on the assumptions included therein. Except as explained in the fourth paragraph, our examination was made in accordance with standards for an examination of a financial projection established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection. The accompanying projection and this report were prepared to communicate the Company’s Five Year Business Plan to the unsecured Creditors’ Committee XYZ, Inc. bankruptcy case in connection with the Company’s efforts to develop a plan of reorganization. They should not be used for any other purpose. The projected statements do not include information regarding provisions or credits for income taxes or net earnings and earnings per share, which are required for prospective financial statements in the guidelines established by the American Institute of Certified Public Accountants. If the omitted information were included in the projected statements, it might influence the users’ conclusions about the XYZ, Inc. projected financial position, results of operations and cash flow for the plan periods. Accordingly, this presentation is not designed for those who are not informed about such matters. As noted in the projected statements, management has assumed that XYZ, Inc. will implement a plan of reorganization and emerge from bankruptcy during the first quarter of fiscal 20X3. However, management believes that there is no reasonable basis, at this time, upon which to formulate assumptions regarding the form and effects of a plan of reorganization. Accordingly, management has not made any assumptions in the projected statements to reflect the effects of a plan of reorganization, except that certain expenses related to the bankruptcy process have been assumed to cease as of the first quarter of fiscal 20X3. The effects that a plan of reorganization and the related tax implications will have on the historical carrying values of assets and liabilities and the capital structure of a reorganized entity could be material. Further, should XYZ, Inc. not emerge, as assumed, from bankruptcy in the first quarter of fiscal 20X3, additional bankruptcy expenses would be incurred in fiscal 20X3 and until such time as XYZ would emerge from bankruptcy protection. Those expenses could significantly affect XYZ’s projected results of operations and cash flows. We were, therefore, unable to obtain suitable support for assumptions related to these matters.

1106


As described in the preceding paragraph, because of the significance of the assumptions related to the implementation of an approved plan of reorganization and its effects on the projected statements, we are unable to and do not express an opinion with respect to the basis for the underlying assumptions. We have no responsibility to update this report for events and circumstances occurring after the date of this report. CPA & Company Date

PART FIVE

Taxes

16 Tax Awareness

16.1

IRS Form 1041

Objective. Section 16.4 of Volume 1 of Bankruptcy and Insolvency Accounting discusses the responsibility for filing income tax returns and other information required by the bankruptcy court. Where the individual and bankruptcy estate are separate entities they are required to file separate returns. The estate must file Form 1041 and attach Form 1040, which is used to calculate the tax due for the estate, based on the tax rates for a married person filing separate return. An example of a Form 1041 is presented below.

16.2

IRS Form 982

Objective. Section 16.21 of Volume 1 of Bankruptcy and Insolvency Accounting discusses conditions under which the debtor may elect or be required to reduce basis in assets. The reduction of basis and other tax attributes is made on Form 982, a copy of which is shown below.

16.3 Impact of Taxes on Potential Plan of Liquidation in Chapter 11 Proceeding Objective. Section 16.32 of Volume 1 describes the special rules for corporations in chapter 11 and also notes that the disclosure statement contains a description of the tax impact of the plan, including a discussion of the extent to which the net operating loss may be preserved. An example of the discussion of the tax issues in the disclosure statement for a liquidating plan where the assets were transferred to the trust is reproduced below. (a) Administrative and Priority Tax Claims 1. ADMINISTRATIVE CLAIMS Subject to the provisions of sections 328. 330(a) and 331 of the Bankruptcy Code, each Holder of an Allowed Working Capital Administrative Claim will be paid the full unpaid amount of such Claim in Cash by the Purchaser in the ordinary course of business. 1109

1110

Tax Awareness

Form

Department of the Treasury —Internal Revenue Service

1041

A

Type of entity (see instr.):

2008

U.S. Income Tax Return for Estates and Trusts

Decedent’s estate

For calendar year 2008 or fiscal year beginning

OMB No. 1545-0092

, 2008, and ending

, 20

Name of estate or trust (If a grantor type trust, see page 14 of the instructions.)

C

Employer identification number

Name and title of fiduciary

D

Date entity created

Number, street, and room or suite no. (If a P.O. box, see page 15 of the instructions.)

E

Nonexempt charitable and splitinterest trusts, check applicable boxes (see page 16 of the instr.):

Simple trust Complex trust Qualified disability trust ESBT (S portion only) Grantor type trust Bankruptcy estate–Ch. 7 Bankruptcy estate–Ch. 11

Described in section 4947(a)(1) City or town, state, and ZIP code

Not a private foundation Described in section 4947(a)(2)

Pooled income fund

Check Initial return Final return applicable boxes: Change in fiduciary 䊳 G Check here if the estate or filing trust made a section 645 election F

Change in trust’s name

Amended return Change in fiduciary’s name

1 2a

1 2a b 3 4 5 6 7 8 9 10 11 12 13 14 15a b 16 17 18 19 20 21

Interest. Check if Form 4952 is attached 䊳 Taxes Fiduciary fees Charitable deduction (from Schedule A, line 7) Attorney, accountant, and return preparer fees Other deductions not subject to the 2% floor (attach schedule) Allowable miscellaneous itemized deductions subject to the 2% floor 䊳 Add lines 10 through 15b 17 Adjusted total income or (loss). Subtract line 16 from line 9 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) Estate tax deduction including certain generation-skipping taxes (attach computation) Exemption 䊳 Add lines 18 through 20

22 23 24 b c d e

Taxable income. Subtract line 21 from line 17. If a loss, see page 23 of the instructions Total tax (from Schedule G, line 7) Payments: a 2008 estimated tax payments and amount applied from 2007 return Estimated tax payments allocated to beneficiaries (from Form 1041-T) Subtract line 24b from line 24a Tax paid with Form 7004 (see page 24 of the instructions) Federal income tax withheld. If any is from Form(s) 1099, check 䊳 Other payments: f Form 2439 ; g Form 4136 ; Total 䊳䊳 Total payments. Add lines 24c through 24e, and 24h Estimated tax penalty (see page 24 of the instructions) Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid Amount of line 28 to be: a Credited to 2009 estimated tax 䊳 ; b Refunded 䊳

Tax and Payments

Interest income Total ordinary dividends Qualified dividends allocable to: (1) Beneficiaries (2) Estate or trust Business income or (loss). Attach Schedule C or C-EZ (Form 1040) Capital gain or (loss). Attach Schedule D (Form 1041) Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) Farm income or (loss). Attach Schedule F (Form 1040) Ordinary gain or (loss). Attach Form 4797 Other income. List type and amount Total income. Combine lines 1, 2a, and 3 through 8

Change in fiduciary’s address

Income

Number of Schedules K-1 attached (see instructions) 䊳

Deductions

B

25 26 27 28 29

Sign Here

䊳

3 4 5 6 7 8 9 10 11 12 13 14 15a 15b 16 18 19 20 21 22 23 24a 24b 24c 24d 24e 24h 25 26 27 28 29

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

䊳

Paid Preparer’s Use Only

May the IRS discuss this return with the preparer shown below (see instr.)? Yes No

䊳

Signature of fiduciary or officer representing fiduciary

䊳

EIN of fiduciary if a financial institution Date

Preparer’s signature

Firm’s name (or yours if self-employed), address, and ZIP code

Date

䊳

For Privacy Act and Paperwork Reduction Act Notice, see the separate instructions.

Preparer’s SSN or PTIN

Check if self-employed EIN Phone no. Cat. No. 11370H

(

) Form

1041

(2008)

16.3

1111

Impact of Taxes on Potential Plan of Liquidation in Chapter 11 Proceeding

Form 1041 (2008)

Schedule A 1 2 3 4 5 6 7

Amounts paid or permanently set aside for charitable purposes from gross income (see page 25) Tax-exempt income allocable to charitable contributions (see page 25 of the instructions) Subtract line 2 from line 1 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes Add lines 3 and 4 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable purposes (see page 25 of the instructions) Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13

Schedule B 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Page

1 2 3 4 5 6 7

Income Distribution Deduction

Adjusted total income (see page 26 of the instructions) Adjusted tax-exempt interest Total net gain from Schedule D (Form 1041), line 15, column (1) (see page 26 of the instructions) Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) Capital gains for the tax year included on Schedule A, line 1 (see page 26 of the instructions) Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the loss as a positive number Distributable net income. Combine lines 1 through 6. If zero or less, enter -0If a complex trust, enter accounting income for the tax year as 8 determined under the governing instrument and applicable local law

1 2 3 4 5

Income required to be distributed currently Other amounts paid, credited, or otherwise required to be distributed Total distributions. Add lines 9 and 10. If greater than line 8, see page 26 of the instructions Enter the amount of tax-exempt income included on line 11 Tentative income distribution deduction. Subtract line 12 from line 11 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18

9 10 11 12 13 14 15

Schedule G

6 7

Tax Computation (see page 27 of the instructions)

1 Tax: a Tax on taxable income (see page 27 of the instructions) b Tax on lump-sum distributions. Attach Form 4972 c Alternative minimum tax (from Schedule I (Form 1041), line 56) d Total. Add lines 1a through 1c 2a Foreign tax credit. Attach Form 1116 b Other nonbusiness credits (attach schedule) c General business credit. Attach Form 3800 d Credit for prior year minimum tax. Attach Form 8801 3 Total credits. Add lines 2a through 2d 4 Subtract line 3 from line 1d. If zero or less, enter -0-. 5 Recapture taxes. Check if from: Form 4255 Form 8611 6 Household employment taxes. Attach Schedule H (Form 1040) 7 Total tax. Add lines 4 through 6. Enter here and on page 1, line 23

1a 1b 1c 䊳

1d

䊳

3 4 5 6 7

2a 2b 2c 2d

䊳

Other Information 1 2 3

4 5 6 7 8 9

2

Charitable Deduction. Do not complete for a simple trust or a pooled income fund.

Yes No

Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses Enter the amount of tax-exempt interest income and exempt-interest dividends 䊳 $ Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any individual by reason of a contract assignment or similar arrangement? At any time during calendar year 2008, did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country? See page 29 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,” enter the name of the foreign country 䊳 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See page 29 of the instructions Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,” see page 30 for required attachment 䊳 If this is an estate or a complex trust making the section 663(b) election, check here (see page 30) 䊳 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see page 30) If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 䊳 Are any present or future trust beneficiaries skip persons? See page 30 of the instructions Form

1041

(2008)

1112

Form

Tax Awareness

982

(Rev. February 2009) Department of the Treasury Internal Revenue Service

Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) 䊳

Part I 1 a b c d e 2 3

Attachment Sequence No.

Attach this form to your income tax return.

Name shown on return

OMB No. 1545-0046

General Information (see instructions)

Amount excluded is due to (check applicable box(es)): Discharge of indebtedness in a title 11 case Discharge of indebtedness to the extent insolvent (not in a title 11 case) Discharge of qualified farm indebtedness Discharge of qualified real property business indebtedness Discharge of qualified principal residence indebtedness 2 Total amount of discharged indebtedness excluded from gross income Do you elect to treat all real property described in section 1221(a)(1), relating to property held for sale to customers in the ordinary course of a trade or business, as if it were depreciable property?

Part II

Yes

No

Reduction of Tax Attributes. You must attach a description of any transactions resulting in the reduction in basis under section 1017. See Regulations section 1.1017-1 for basis reduction ordering rules, and, if applicable, required partnership consent statements. (For additional information, see the instructions for Part II.)

Enter amount excluded from gross income: 4 For a discharge of qualified real property business indebtedness, applied to reduce the basis of depreciable real property 5 That you elect under section 108(b)(5) to apply first to reduce the basis (under section 1017) of depreciable property 6 Applied to reduce any net operating loss that occurred in the tax year of the discharge or carried over to the tax year of the discharge 7 8

Applied to reduce any general business credit carryover to or from the tax year of the discharge Applied to reduce any minimum tax credit as of the beginning of the tax year immediately after the tax year of the discharge 9 Applied to reduce any net capital loss for the tax year of the discharge including any capital loss carryovers to the tax year of the discharge 10a Applied to reduce the basis of nondepreciable and depreciable property if not reduced on line 5. DO NOT use in the case of discharge of qualified farm indebtedness b Applied to reduce the basis of your principal residence. Enter amount here ONLY if line 1e is checked 11 For a discharge of qualified farm indebtedness, applied to reduce the basis of: a Depreciable property used or held for use in a trade or business, or for the production of income, if not reduced on line 5

4 5 6 7 8 9 10a 10b

11a

b Land used or held for use in a trade or business of farming

11b

c Other property used or held for use in a trade or business, or for the production of income

11c

12

Applied to reduce any passive activity loss and credit carryovers from the tax year of the discharge

12

13

Applied to reduce any foreign tax credit carryover to or from the tax year of the discharge

13

Part III

94

Identifying number

Consent of Corporation to Adjustment of Basis of Its Property Under Section 1082(a)(2)

Under section 1081(b), the corporation named above has excluded $ from its gross income for the tax year beginning , and ending . Under that section, the corporation consents to have the basis of its property adjusted in accordance with the regulations prescribed under section 1082(a)(2) in effect at the time of filing its income tax return for that year. The corporation is organized under the laws of . (State of incorporation)

Note. You must attach a description of the transactions resulting in the nonrecognition of gain under section 1081. For Paperwork Reduction Act Notice, see page 4 of this form.

Cat. No. 17066E

Form

982

(Rev. 2-2009)

16.3


1113

Subject to the provisions of sections 328, 330(a) and 331 of the Bankruptcy Code, each Holder of an Allowed Other Administrative Claim will be paid the full unpaid amount of such Claim in Cash by the PostConsummation Trust Plan Administrator, out of the Post-Consummation Trust Priority Account (unless otherwise provided in the Plan), (a) on or as soon as practicable after the Effective Date; (b) or if such Claim is Allowed after the Effective Date, on or as soon as practicable after the date such Claim is Allowed; or (c) upon such other terms as may be agreed upon by such Holder and the Post-Consummation Trust Plan Administrator, or otherwise upon an order of the Bankruptcy Court. If the Post-Consummation Trust Priority Account is not sufficient to provide for the payment in full of all Allowed Other Administrative Claims, the Post-Consummation Trust Plan Administrator shall utilize the other assets (or proceeds thereof) of the Post-Consummation Trust (other than assets held in segregated accounts), to the extent necessary, to pay such Allowed Other Administrative Claims in full. Bar Date for Administrative Claims Except as otherwise provided in Article II.A of the Plan, unless previously Filed, requests for payment of Other Administrative Claims must be Filed and served on the Post-Consummation Trust Plan Administrator and the Purchaser, pursuant to the procedures specified in the Confirmation Order and the notice of entry of the Confirmation Order, no later than 60 days after the Effective Date. Holders of Other Administrative Claims that are required to File and serve a request for payment of such Other Administrative Claims and that do not File and serve such a request by the applicable bar date will be forever barred from asserting such Other Administrative Claims against the Debtors, the Post-Consummation Trust or Unsecured Creditors Trust, or their respective property, and such Other Administrative Claims will be deemed discharged as of the Effective Date. Objections to such requests must be Filed and served on the Post-Consummation Trust Plan Administrator, the Purchaser and the requesting party by the later of (a) 180 days after the Effective Date and (b) 90 days after the Filing of the applicable request for payment of Administrative Claims. a. Professional Compensation Retained Professionals or other Entities asserting a Fee Claim for services rendered before the Confirmation Date must File and serve on the Post-Consummation Trust and such other Entities who are designated by the Bankruptcy Rules, the Confirmation Order, or other order of the Bankruptcy Court an application for final allowance of such Fee Claim no later than 45 days after the Effective Date; provided that any professional who may receive compensation or reimbursement of expenses pursuant to the Ordinary Course Professionals Order may continue to receive such compensation and reimbursement of expenses for services rendered before the Effective Date, without further Bankruptcy Court review or approval, pursuant to the Ordinary Course Professionals Order. Objections to any Fee Claim must be Filed and served on the

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Tax Awareness

Post-Consummation Trust Plan Administrator and the requesting party by the later of (i) 75 days after the Effective Date and (ii) 30 days after the Filing of the applicable request for payment of the Fee Claim. To the extent necessary, the Confirmation Order will amend and supersede any previously entered order of the Bankruptcy Court regarding the payment of Fee Claims. Each Holder of an Allowed Fee Claim shall be paid by the Post-Consummation Trust Plan Administrator from the Retained Professional Escrow Account. The Indenture Trustees may submit detailed invoices to the Debtors or the Trusts, as applicable, for all fees and expenses for which the Indenture Trustees seek reimbursement without the need for further Bankruptcy Court approval. The Debtors or the Trusts, as applicable, upon review of such invoices, may pay those amounts that the Debtors or the Trusts, as applicable, in their sole discretion, deem reasonable, and shall object in writing to those fees and expenses, if any, that the Debtors or the Trusts, as applicable, deem to be unreasonable. In the event that the Debtors or the Trusts, as applicable, object to all or any portion of an Indenture Trustee’s invoice, the Debtors or the Trusts, as applicable, and such Indenture Trustee will endeavor, in good faith, to reach mutual agreement on the amount of such disputed fees and/or expenses. In the event that the Debtors or the Trusts, as applicable, and an Indenture Trustee are unable to resolve any differences regarding disputed fees or expenses, either party shall be authorized to move to have such dispute heard by the Bankruptcy Court. b. Ordinary Course Liabilities Holders of Working Capital Administrative Claims based on liabilities incurred by a Debtor in the ordinary course of its business will not be required to File or serve any request for payment of such Working Capital Administrative Claims. 2. DIP FACILITY CLAIMS Subject to the provisions of sections 328, 330(a), 331 and 506(b) of the Bankruptcy Code, and pursuant to the terms of the Final DIP Order, the Allowed DIP Facility Claims will be paid in full in Cash on the Effective Date. 3. PRIORITY TAX CLAIMS On the later of the Effective Date or the date on which a Priority Tax Claim becomes an Allowed Priority Tax Claim, or, in each such case, as soon as practicable thereafter, each Holder of an Allowed Priority Tax Claim due and payable on or prior to the Effective Date will receive on account of such Claim, Cash in an amount equal to the amount of such Allowed Priority Tax Claim, which amounts shall be payable by the Post-Consummation Trust out of the Post-Consummation Trust Priority Account. If the PostConsummation Trust Priority Account is not sufficient to provide for the payment in full of all Allowed Priority Tax Claims, the Post-Consummation Trust Plan Administrator shall utilize the other assets (or proceeds thereof) of the Post-Consummation Trust (other than assets held in segregated accounts), to the extent necessary, to pay such Allowed Priority Tax Claims in full.

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(b) Certain U.S. Federal Income Tax Consequences The following is a summary of certain U.S. federal income tax consequences of the Plan to the Debtors and certain Creditors, including without limitation Holders of 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, General Unsecured Claims, 6.75% Debenture Related Claims, Preferred Equity Interests and Common Equity Interests. This summary is based on the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), Treasury Regulations thereunder, and administrative and judicial interpretations and practice, all as in effect on the date hereof and all of which are subject to change, with possible retroactive effect. Due to the lack of definitive judicial and administrative authority in a number of areas, substantial uncertainty may exist with respect to some of the tax consequences described below. No opinion of counsel has been obtained, and the Debtors do not intend to seek a ruling from the IRS as to any of such tax consequences, and there can be no assurance that the IRS will not challenge one or more of the tax consequences of the Plan described below. This summary does not apply to Holders of Claims that are not United States persons (as defined in the Internal Revenue Code) or that are otherwise subject to special treatment under U.S. federal income tax law (including, but not limited to, banks, governmental authorities or agencies, financial institutions, insurance companies, pass-through entities, tax-exempt organizations, brokers and dealers in securities, mutual funds, small business investment companies, and regulated investment companies). The following discussion assumes that Holders of 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, General Unsecured Claims, 6.75% Debenture Related Claims, Preferred Equity Interests and Common Equity Interests hold such interests as “capital assets” within the meaning of Internal Revenue Code § 1221. Moreover, this summary does not purport to cover all aspects of U.S. federal income taxation that may apply to the Debtors and Holders of 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, General Unsecured Claims, 6.75% Debenture Related Claims, Preferred Equity Interests and Common Equity Interests based upon their particular circumstances. Additionally, this summary does not discuss any tax consequences that may arise under state, local, or foreign tax law. The Debtors continue to explore various possible alternative structures to maximize the going concern value of the Debtors’ Estates. In this regard, if the Debtors determine that an alternative structure should be implemented, the Plan may be modified to effectuate such alternate structure, provided that such modifications shall not adversely affect the treatment and recoveries of Holders of Claims and Equity Interests set forth herein. The following summary is not a substitute for careful tax planning and advice based on the particular circumstances of each Creditor, including without limitation, Holders of 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, General Unsecured Claims, 6.75% Debenture Related Claims, Preferred Equity Interests and Common Equity Interests. All Creditors are urged to consult their own tax advisors as to the U.S. federal income tax consequences, as well as any applicable state, local, and foreign consequences, of the restructuring.

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Tax Awareness

IRS Circular 230 Disclosure To ensure compliance with requirements imposed by the IRS, any tax advice contained in this Disclosure Statement is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax-related penalties under the U.S. Internal Revenue Code. The tax advice contained in this Disclosure Statement was written to support the promotion or marketing of the transactions described in this Disclosure Statement. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. A. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO THE HOLDERS OF CLAIMS AND EQUITY INTERESTS 1. Consequences to Holders of Unsecured Claims Pursuant to the Plan, the 5.75% Convertible Senior Note Claims, the International Holding Company Debtor Claims and the General Unsecured Claims (collectively the “Unsecured Claims”) will be surrendered for Cash or for shares of the Post-Consummation Trust Residual Assets or Unsecured Creditors Trust Assets (the “Recovery Shares”). This will be treated as a taxable exchange under Section 1001 of the Internal Revenue Code. Accordingly, Holders of the Unsecured Claims should recognize gain or loss equal to the difference between: (i) the fair market value of any Cash or Recovery Shares received in exchange for the Unsecured Claims; and (ii) the Holder’s adjusted basis, if any, in the Unsecured Claims. Such gain or loss should be capital in nature so long as the Unsecured Claims are held as capital assets (subject to the “market discount” rules described below) and should be long term capital gain or loss if the Unsecured Claims were held for more than one year. To the extent that a portion of the Cash or Recovery Shares received in exchange for the Unsecured Claims is allocable to accrued but untaxed interest, the Holder may recognize ordinary income. See “Accrued But Untaxed Interest” below. The fair market value of the Recovery Shares is contingent in part on the outcome of certain Chapter 5 Claims or other causes of action included in either the Post-Consummation Trust or the Unsecured Creditors Trust. It is therefore plausible that a Holder could treat the transaction as an ‘open’ transaction for tax purposes, in which case the recognition of any gain or loss on the transaction might be deferred pending the determination of the amount of any recoveries under Chapter 5 Claims or other causes of action included in the Recovery Shares. The federal income tax consequences of an open transaction are uncertain and highly complex, and a Holder should consult with its own tax advisor if it believes open transaction treatment might be appropriate. (a) Accrued But Untaxed Interest To the extent that any amount received under the Plan by a Holder is attributable to accrued but untaxed interest, such amount should be taxable to the Holder as ordinary interest income, if such accrued interest has not been previously included

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in the Holder’s gross income for U.S. federal income tax purposes. Conversely, a Holder may be able to recognize a deductible loss (or, possibly, a write-off against a reserve for bad debts) to the extent that any accrued interest was previously included in the Holder’s gross income but was not paid in full by Debtor. The extent to which amounts received by a Holder will be attributable to accrued but untaxed interest is unclear. Under the Plan, the aggregate consideration to be distributed to Holders of Allowed Claims in each Class 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 satisfying accrued, but unpaid, interest, if any. Certain legislative history indicates that an allocation of consideration as between principal and interest provided in a bankruptcy plan is binding for U.S. federal income tax purposes. However, the IRS could take the position that the consideration received by a Holder should be allocated in some way other than as provided in the Plan. Holders of 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, and General Unsecured Claims should consult their own tax advisors regarding the proper allocation of the consideration received by them under the Plan. (b) Market Discount Holders who exchange 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, and General Unsecured Claims for Cash or Recovery Shares may be affected by the “market discount” provisions of Internal Revenue Code Sections 2276 through 1278. Under these rules, some or all of the gain realized by a Holder may be treated as ordinary income (instead of capital gain), to the extent of the amount of “market discount” on such 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, and General Unsecured Claims. In general, a debt obligation with a fixed maturity of more than one year that is acquired by a holder on the secondary market (or, in certain circumstances, upon original issuance) is considered to be acquired with “market discount” as to that holder if the debt obligation’s stated redemption price at maturity (or revised issue price, in the case of a debt obligation issued with original issue discount) exceeds the tax basis of the debt obligation in the holder’s 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 (equal to 0.25 percent of the debt obligation’s stated redemption price at maturity or revised issue price, in the case of a debt obligation issued with original issue discount). Any gain recognized by a Holder on the taxable disposition of 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, and General Unsecured Claims (determined as described above) that were acquired with market discount should be treated

1118

Tax Awareness

as ordinary income to the extent of the market discount that accrued thereon while the 5.75% Convertible Senior Note Claims, RJ Tower Bondholder Claims, and General Unsecured Claims were considered to be held by a Holder (unless the Holder elected to include market discount in income as it accrued). (c) Receipt of Interests in Post-Consummation Trust and in the Unsecured Creditors Trust On the Effective Date, the Post-Consummation Trust and the Unsecured Creditors Trust shall be settled and are currently anticipated to exist as grantor trusts for the benefit of certain creditors. Subject to definitive guidance from the IRS or a court of competent jurisdiction to the contrary (including the receipt of an adverse determination by the IRS upon audit if not contested by the Plan Administrator or the Unsecured Creditors Trust Plan Administrator), pursuant to Treasury Regulation Section l.6711(a) and/or Treasury Regulation Section 301.7701 4(d) and related regulations, the Plan Administrator and the Unsecured Creditors Trust Plan Administrator may designate and file returns for each of the Post-Consummation Trust and the Unsecured Creditors Trust as a “grantor trust” and/or “liquidating trust” and therefore, for federal income tax purposes, the Post-Consummation Trust’s and Unsecured Creditors Trust’s taxable income (or loss) should be allocated pro rata to its beneficiaries. The Plan Administrator and the Unsecured Creditors Trust Plan Administrator intend to take a position on PostConsummation Trust’s and Unsecured Creditors Trust’s tax return that the Post-Consummation Trust and the Unsecured Creditors Trust, respectively, should each be treated as a grantor trust set up for the benefit of creditors. Holders of Claims that receive a beneficial interest in the PostConsummation Trust and in the Unsecured Creditors Trust will be required to report on their U.S. federal income tax returns their share of the Post-Consummation Trust’s and the Unsecured Creditors Trust’s items of income, gain, loss, deduction and credit in the year recognized by the Post-Consummation Trust and the Unsecured Creditors Trust, respectively, whether or not each of the Post-Consummation Trust and the Unsecured Creditors Trust is taxed as a grantor trust. This requirement may result in Holders being subject to tax on their allocable share of the Post-Consummation Trust’s and the Unsecured Creditors Trust’s taxable income prior to receiving any cash distributions from the Post-Consummation Trust and the Unsecured Creditors Trust. Any Post-Consummation Trust Assets and Unsecured Creditors Trust Assets held by the Post-Consummation Trust and the Unsecured Creditors Trust on account of Disputed Claims shall be treated as held in trust by the Post-Consummation Trust and the Unsecured Creditors Trust as fiduciary for the benefit of

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holders of Disputed Claims (each such trust referred to as a “Disputed Claims Reserve”). Under section 468B(g) of the Tax Code, amounts earned by an escrow account, settlement fund or similar fund must be subject to current tax. Although certain Treasury Regulations have been issued under this section, no Treasury Regulations have as yet been promulgated to address the tax treatment of such accounts in a bankruptcy setting. Thus, depending on the facts of a particular situation, such an account could be treated as a separately taxable trust, as a grantor trust treated as owned by the holders of disputed claims or by the Debtor (or, if applicable, any of its successors), or otherwise. On February 1, 1999, the IRS issued proposed Treasury Regulations that, if finalized in their current form, would specify the tax treatment of reserves of the type here involved that are established after the date such Treasury Regulations become final. In general, such Treasury Regulations would tax such a reserve as a “qualified settlement fund” under Treasury Regulation sections 1.468B-1 et seq. and thus subject to a separate entity level tax. As to previously established escrows and the like, such Treasury Regulations would provide that the IRS would not challenge any reasonably, consistently applied method of taxation for income earned by the escrow or account, and any reasonably, consistently applied method for reporting such income. Absent definitive guidance from the IRS or a court of competent jurisdiction to the contrary, the Post-Consummation Trust and the Unsecured Creditors Trust shall (i) treat each Disputed Claims Reserve as a discrete trust for federal income tax purposes, consisting of separate and independent shares to be established in respect of each disputed claim in the class of claims to which such reserve relates, in accordance with the trust provisions of Code, and (ii) to the extent permitted by applicable law, report consistently for state and local income tax purposes. In addition, pursuant to the Plan, all parties shall report consistently with such treatment. Accordingly, subject to issuance of definitive guidance, the Post-Consummation Trust and the Unsecured Creditors Trust, in each case as fiduciary for Holders of Disputed Claims, will report as subject to a separate entity level tax any amounts earned by their respective Disputed Claims Reserves, except to the extent such earnings are distributed by such fiduciary during the same taxable year. In such event, any amount earned by a Disputed Claims Reserve that is distributed to a holder during the same taxable year will be includible in such holder’s gross income. Distributions from a Disputed Claims Reserve will be made to Holders of Disputed Claims when such claims are subsequently Allowed and to Holders of previously Allowed claims when any Disputed Claims are subsequently disallowed. Such distributions (other than amounts attributable to earnings) should be taxable to the recipient in accordance with the principles discussed above.

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Tax Awareness

Holders of Claims are urged to consult their tax advisors regarding the tax consequences of the right to receive and of the receipt (if any) of property from the Post-Consummation Trust and/or the Unsecured Creditors Trust and each Holder of a Disputed Claim is urged to consult its tax advisor regarding the potential tax treatment of the Disputed Claim Reserve, distributions therefrom, and any tax consequences to such Holder relating thereto. 2. Consequences to Holders of 6.75% Debenture Related Claims Holders of 6.75% Debenture Related Claims will receive no distribution on account of such Claims. Holders of 6.75% Debenture Related Claims should be entitled to a loss deduction provided that such deduction was not previously claimed by such Holders and provided such Holders have a tax basis in their 6.75% Debenture Related Claims. The loss realized on the cancellation of 6.75% Debenture Related Claims should be a capital loss under Internal Revenue Code Section 165 if such claims are treated as “securities” under Internal Revenue Code Section 165(g)(2). If 6.75% Debenture Related Claims are not treated as “securities” under Internal Revenue Code Section 165(g)(2), the loss realized on the cancellation of 6.75% Debenture Related Claims may be a capital loss or an ordinary loss under Internal Revenue Code Section 166, depending on the facts and circumstances of the Holder, the obligor, and the instrument with respect to which a deduction is claimed. 3. Consequences to Holders of Preferred Equity Interests and Common Equity Interests Holders of Preferred Equity Interests and Common Equity Interests that are cancelled in the Plan will be allowed a worthless stock deduction (unless such Holder had previously claimed a worthless stock deduction with respect to any Preferred Equity Interests and Common Equity Interests and assuming that the taxable year that includes the Plan is the same taxable year in which such stock first became worthless) in an amount equal to the Holder’s adjusted basis in the Preferred Equity Interests and or Common Equity Interests. A worthless stock deduction is a deduction allowed to a Holder of a corporation’s stock for the taxable year in which such stock becomes worthless. If the Holder held Preferred Equity Interests and Common Equity Interests as a capital asset, the loss will be treated as a loss from the sale or exchange of such capital asset. 4. Information Reporting and Backup Withholding Under the backup withholding rules, a Holder of a Claim may be subject to backup withholding with respect to distributions or payments made pursuant to the Plan unless that Holder: (a) comes within certain exempt categories (which generally include corporations) and, when required, demonstrates that fact, or (b) provides a correct taxpayer identification number and certifies under penalty of perjury that the taxpayer identification number is correct and that the Holder is not subject to backup withholding because of a failure to report all dividend and interest income. Backup withholding is not an

16.4

Tax Impact of Plan of Chapter 11 Corporate Reorganization

1121

additional tax, but merely an advance payment that may be refunded to the extent it results in an overpayment of tax. Debtor will withhold all amounts required by law to be withheld from payments of interest and dividends. Debtor will comply with all applicable reporting requirements of the Internal Revenue Code. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF SUCH HOLDER’S CIRCUMSTANCES AND INCOME TAX SITUATION. ALL HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE DEBTORS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTION CONTEMPLATED BY THE RESTRUCTURING, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, AND OF ANY CHANGE IN APPLICABLE TAX LAWS. B. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO DEBTORS The Sale Transaction will constitute a taxable sale of the Acquired Assets. The Debtors will recognize gain or loss on the Sale Transaction equal to the difference between: (i) the fair market value of the Sale Proceeds and the Assumed Liabilities; and (ii) the Debtors’ adjusted basis in the Acquired Assets. The Debtors expect that gain, if any, as a result of the Sale Transaction will be offset by net operating losses carried forward from prior tax periods. 16.4


Objective. Section 16.32 of Volume 1 describes the special rules for corporations in chapter 11 and also notes that the disclosure statement contains a description of the tax impact of the plan, including a discussion of the extent to which the net operating loss may be preserved. An example of the nature of the tax impact of a reorganization plan in chapter 11 was contained in the disclosure statement for Dura Automotive Systems and is reproduced in (a) below. Also presented in (b) is a summary of the first day order limiting trading in the debtor’s stock. (a) Certain United States Federal Income Tax Consequences The following discussion summarizes certain U.S. federal income tax consequences of the implementation of the Plan to the Debtors and the Reorganized Debtors and certain holders of Claims. The following summary is based on the Internal Revenue Code of 1986, as amended (the “Tax Code”), Treasury Regulations promulgated thereunder (the “Regulations”), judicial decisions and published administrative rules and pronouncements of the Internal Revenue Service as in effect on the date hereof. Changes in such rules or new interpretations thereof may have retroactive effect and could significantly affect the federal income tax consequences described below.

1122

Tax Awareness

The federal income tax consequences of the Plan are complex and are subject to significant uncertainties. The Debtors have not requested and will not request a ruling from the Internal Revenue Service or an opinion of counsel with respect to any of the tax aspects of the Plan. Thus, no assurance can be given as to the interpretation that the Internal Revenue Service will adopt. In addition, this summary does not address foreign, state or local tax consequences of the Plan, nor does it purport to address the federal income tax consequences of the Plan to special classes of taxpayers (such as Persons who are related to the Debtors within the meaning of the Tax Code, foreign taxpayers, broker-dealers, banks, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, tax exempt organizations, investors in pass-through entities and holders of Claims who are themselves in bankruptcy). Furthermore, this discussion assumes that holders of Claims hold only Claims in a single Class. Holders of Claims should consult their own tax advisors as to the effect such ownership may have on the federal income tax consequences described below. This discussion assumes that the various debt and other arrangements to which the Debtors are a party will be respected for federal income tax purposes in accordance with their form. ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES PERTAINING TO A HOLDER OF A CLAIM. ALL HOLDERS OF CLAIMS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN. INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE UNITED STATE INTERNAL REVENUE SERVICE, ANY TAX ADVICE CONTAINED IN THIS DISCLOSURE STATEMENT (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING TAX-RELATED PENALTIES UNDER THE TAX CODE. TAX ADVICE CONTAINED IN THIS DISCLOSURE STATEMENT (INCLUDING ANY ATTACHMENTS) IS NOT WRITTEN TO SUPPORT THE PROMOTION, MARKETING OR PROMOTION OF THE TRANSACTIONS OR MATTERS ADDRESSED BY THE DISCLOSURE STATEMENT. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. A. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS AND THE REORGANIZED DEBTORS The Debtors expect to report consolidated net operating loss (“NOL”) carryforwards for U.S. federal income tax purposes of approximately $260 million as of the Petition Date. As discussed below, the amount of the Debtors’ NOL carryforwards may be significantly reduced or eliminated upon implementation of the Plan. In addition, the Reorganized Debtors’ subsequent utilization of any losses and NOL carryforwards remaining

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and possibly certain other tax attributes may be restricted as a result of and upon the implementation of the Plan. 1. Reduction of NOLs The Tax Code provides that a debtor in a bankruptcy case must reduce certain of its tax attributes, such as NOL carryforwards, current year NOLs, tax credits and tax basis in assets, by the amount of any cancellation of indebtedness (“COD”) realized upon consummation of the Plan. COD is the amount by which the indebtedness discharged (reduced by any unamortized discount) exceeds any consideration given in exchange therefor, subject to certain statutory or judicial exceptions that can apply to limit the amount of COD (such as where the payment of the canceled debt would have given rise to a tax deduction). As a result of Consummation of the Plan, and in particular the cancellation of some Claims and exchange of other Claims for Cash, New Common Stock, and opportunities to participate in the Rights Offering of the Reorganized Debtors, the Debtors expect to realize substantial COD. The extent of such COD and resulting tax attribute reduction will depend significantly on both the value of the New Common Stock and stock rights distributed and the amount of Cash distributed. Based on the estimated reorganization value of the Reorganized Debtors, it is anticipated that there will be material reductions in the consolidated NOL carryforwards and current year NOLs of the Reorganized Debtors. Indeed, it may be that the amount of COD will exceed the amount of the NOLs thereby eliminating the NOLs and also reducing the Reorganized Debtors’ tax basis in their assets. 2. Limitation on NOL Carryforwards And Other Tax Attributes Following the implementation of the Plan, the Debtors anticipate that any remaining NOL and tax credit carryforwards and, possibly, certain other tax attributes of the Reorganized Debtors allocable to periods prior to the Effective Date (collectively, “Pre Change Losses”) may be subject to limitation under section 382 of the Tax Code as a result of an “ownership change” of the Reorganized Debtors by reason of the transactions pursuant to the Plan. Under section 382 of the Tax Code, if a corporation undergoes an “ownership change,” the amount of its Pre Change Losses that may be utilized to offset future taxable income generally is subject to an annual limitation. As discussed more fully herein, although the Debtors have taken steps to ensure that an “ownership change” will not occur prior to the implementation of the Plan, the Debtors anticipate that the issuance of the New Common Stock pursuant to the Plan will result in an “ownership change” of the Reorganized Debtors for these purposes, and that the Debtors’ use of their NOL carryforwards, if any, will be subject to limitation unless an exception to the general rules of section 382 of the Tax Code applies. 3. Pre Confirmation Measures To ensure that no “ownership change” occurred prior to the confirmation of the Plan, on November 21, 2006, the Court entered an

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Tax Awareness

order restricting trading in the common stock of Dura Automotive Systems, Inc. by certain “substantial” shareholders who hold 4.5% or more of the stock. Those restrictions will become irrelevant once the Plan is confirmed and the equity interests are canceled. 4. General Section 382 Annual Limitation In general, the amount of the annual limitation to which a corporation that undergoes an ownership change would be subject is equal to the product of (a) the fair market value of the stock of the loss corporation immediately before the ownership change (with certain adjustments) multiplied by (b) the “long-term tax-exempt rate” in effect for the month in which the ownership change occurs (currently, approximately 4.50%). Any unused limitation may be carried forward, thereby increasing the annual limitation in the subsequent taxable year. 5. Special Bankruptcy Exceptions An exception to the foregoing annual limitation rules generally applies when so called “qualified creditors” of a company in bankruptcy 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 (the “382(1)(5) Exception”). Under the 382(1)(5) 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, and during the part of the taxable year prior to and including the plan of reorganization, in respect of all debt converted into stock in the reorganization. If the 382(1)(5) Exception applies and the Reorganized Debtors undergo another ownership change within two years after Consummation of the Plan, then the Reorganized Debtors’ Pre Change Losses would be eliminated in their entirety. Where the 382(1)(5) Exception is not applicable (either because the debtor company does not qualify for it or the debtor company otherwise elects not to utilize the 382(1)(5) Exception), a second special rule will generally apply (the “382(11(6) Exception”). When the 382(1)(6) Exception applies, a corporation in bankruptcy that undergoes an “ownership change” generally is permitted to determine the fair market value of its stock after taking into account the increase in value resulting from any surrender or cancellation of creditors’ claims in the bankruptcy. This differs from the ordinary rule that requires the fair market value of a corporation that undergoes an ownership change to be determined before the events giving rise to the change. The 382(1)(6) Exception also differs from the 382(1)(5) Exception in that under it the Reorganized Debtors are not required to reduce their NOLs by the amount of interest deductions claimed within the prior three year period and the Reorganized Debtors may undergo a change of ownership within two years without triggering the elimination of their NOLs.

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While it is not certain, it is doubtful at this point that the Reorganized Debtors will elect to utilize the 382(1)(5) Exception. In the event that the Reorganized Debtors do not use the 382(1)(5) Exception, the Debtors expect that the Reorganized Debtors’ use of the NOLs after the Effective Date will be subject to limitation based on the rules discussed above, but taking into account the 382(1)(6) Exception. B. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE HOLDERS OF CLASS 1, CLASS 2 AND CLASS 3B CLAIMS Pursuant to the Plan, holders of Allowed Class 1 Other Secured Claims whose claims are not reinstated holders of Allowed Class 2 Second Lien Facility Claims and holders of Class 3B Senior Notes Claims will receive cash in full satisfaction of their Claims. A holder who receives cash in exchange for its Claim pursuant to the Plan generally will recognize income, gain or loss for federal income tax purposes in an amount equal to the difference between (1) the amount of cash received in exchange for its Claim and (2) the holder’s adjusted tax basis in its Claim. The character of such gain or loss as capital gain or loss or as ordinary income or loss will be determined by a number of factors, including the tax status of the holder, the nature of the Claim in such holder’s hands, whether the Claim constitutes a capital asset in the hands of the holder, whether the Claim was purchased at a discount and whether and to what extent the holder has previously claimed a bad debt deduction with respect to its Claim. See discussions of accrued interest and markets discount below. C. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THE HOLDERS OF CLASS 3A AND CLASS 5 CLAIMS Pursuant to the Plan, in full satisfaction and discharge of their Claims, holders of Allowed Class 3A Senior Notes Claims will receive New Common Stock and the right to participate in the Rights Offering (the “Stock Rights”), while the holders of Allowed Class 5 Other General Unsecured Claims will receive either New Common Stock or Cash. The U.S. federal income tax consequences of the Plan to such holders of Claims will depend, in part, on whether the Claims surrendered constitute a “security” for U.S. federal income tax purposes. Whether a debt instrument constitutes a “security” is determined based on all the facts and circumstances, but most authorities have held that the length of the term of a debt instrument at initial issuance is an important factor in determining whether such instrument is a security for federal income tax purposes. These authorities have indicated that a term of less than five years is evidence that the instrument is not a security, whereas a term of ten years or more is evidence that it is a security. There are numerous other factors that could be taken into account in determining whether a debt instrument is a security, including the security for payment, the creditworthiness of the obligor, the subordination or lack thereof with respect to other creditors, the right to vote or otherwise participate in the management of the obligor, convertibility of the instrument into an equity interest of the obligor, whether payments of interest arc fixed, variable or contingent and whether such payments

1126

Tax Awareness

are made on a current basis or accrued. The Senior Notes have a term of approximately 10 years. The Debtors expect that they will take the position that the Senior Notes are “securities.” If a holder’s Claims are treated as securities, the exchange of such Claims for New Common Stock and/or Stock Rights should be treated as a recapitalization and therefore a tax free reorganization under the Tax Code. In general, this means that a holder will not recognize loss with respect to the exchange and will not recognize gain except with respect to accrued but unpaid interest on the Claims. A holder should obtain a tax basis in the New Common Stock and Stock Rights equal to the tax basis of the Claims exchanged therefore, and allocated according to the fair market value of the New Common Stock and Stock Rights as of the Effective Date. A holder should have a holding period for the New Common Stock and/or Stock Rights that includes the holding period for the Claims; provided that the tax basis of any share of New Common Stock or Stock Right treated as received in satisfaction of accrued interest should equal the amount of such accrued interest, and the holding period for such share of New Common Stock or Stock Right should not include the holding period of the Claims. If a holder’s Claims are not treated as “securities” for federal income tax purposes, a holder should be treated as exchanging its Claims for New Common Stock and/or Stock Rights in a fully taxable exchange. In that case, the holder should recognize gain or loss equal to the difference between (1) the fair market value as of the Effective Date of the New Common Stock and Stock Rights received that is not allocable to accrued interest and (2) the holder’s tax basis in the Claims surrendered by the holder. Such gain or loss should be capital in nature (subject to the “market discount” rules described below) and should be long term capital gain or loss if the Claims were held for more than one year by the holder. To the extent that a portion of the New Common Stock and Stock Rights received in the exchange is allocable to accrued interest, the holder may recognize ordinary income. See the discussion of accrued interest below. A holder’s tax basis in the New Common Stock and Stock Rights should equal their fair market value as of the Effective Date. A holder’s holding period for the New Common Stock and Stock Rights should begin on the day following the Effective Date. Regardless of whether a holder’s Claims are treated as “securities” for federal income tax purposes, a holder who receives Cash should recognize gain or loss equal to the difference between (1) the amount of cash received that is not allocable to accrued interest and (2) the holder’s tax basis in the Claims surrendered by the holder. Such gain or loss should be capital in nature (subject to the “market discount” rules described below) and should be long term capital gain or loss if the Claims were held for more than one year by the holder. To the extent that a portion of the cash received in the exchange is allocable to accrued interest, the holder may recognize ordinary income. See the discussion of accrued interest below. A recipient of Stock Rights generally should not recognize gain or loss upon the exercise of such rights. The tax basis in the New Common

16.4


1127

Stock received upon exercise of the Stock Rights should equal the sum of the holder’s tax basis in the Stock Rights and the amount paid for such New Common Stock. The holding period in such New Common Stock received should commence the day following its acquisition. Upon any lapse of Stock Rights received in exchange for Claims, the holder generally should recognize a loss equal to its tax basis in the Stock Rights. In general, such loss should be a capital loss. D. ACCRUED INTEREST To the extent that any amount received by a holder of a Claim is attributable to accrued interest, such amount should be taxable to the holder as interest income. Conversely, a holder of a Claim may be able to recognize a deductible loss (or, possibly, a write off against a reserve for worthless debts) to the extent that any accrued interest on the Claims was previously included in the holder’s gross income but was not paid in full by the Debtors. Such loss may be ordinary, but the tax law is unclear on this point. The extent to which the consideration received by the holder of a Claim will be attributable to accrued interest is unclear. Nevertheless, the Regulations generally treat a payment under a debt instrument first as a payment of accrued and untaxed interest and then as a payment of principal. E. MARKET DISCOUNT Under the “market discount” provisions of sections 1276 through 1278 of the Tax Code, some or all of the gain realized by a holder of a Claim who exchanges the Claim for New Common Stock and/or Stock Rights on the Effective Date may be treated as ordinary income (instead of capital gain), to the extent of the amount of “market discount” on the Claim. In general, a debt instrument is considered to have been acquired with “market discount” if its holder’s adjusted tax basis in the debt instrument is less than (1) the sum of all remaining payments to be made on the debt instrument, excluding “qualified stated interest” or (2) in the case of a debt instrument issued with original issue discount, its adjusted issue price, by at least a de minimis amount (equal to 0.25% of the sum of all remaining payments to be made on the Claim, excluding qualified stated interest, multiplied by the number of remaining whole years to maturity). Any gain recognized by a holder on the taxable disposition of Claims that had been acquired with market discount should be treated as ordinary income to the extent of the market discount that accrued thereon while such Claims were considered to be held by the holder (unless the holder elected to include market discount in income as it accrued). To the extent that the surrendered Claims that had been acquired with market discount are deemed to be exchanged for New Common Stock and/or Stock Rights in a tax free reorganization, any market discount that accrued on such debts but was not recognized by the holder may cause any gain recognized on the subsequent sale, exchange, redemption or other disposition of the New Common Stock or Stock Rights to be treated as ordinary income to the extent of the accrued but unrecognized market discount with respect to the exchanged Claim.

1128

Tax Awareness

THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN ARE COMPLEX. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF SUCH HOLDER’S CIRCUMSTANCES AND INCOME TAX SITUATION. ALL HOLDERS OF CLAIMS OR EQUITY INTERESTS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTION CONTEMPLATED BY THE PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS AND OF ANY CHANGE IN APPLICABLE TAX LAWS. (b) Summary of Equity Trading Order On the Petition Date, the Debtors filed a motion requesting entry of an order limiting the ability of substantial shareholders and shareholders holding a fifty percent or greater interest in the Debtors to transfer their equity interests or assert claims of worthlessness, to protect the Debtors’ valuable net operating losses and tax benefits. The Bankruptcy Court entered an interim order granting the relief requested on October 31, 2006, and entered a final order on November 20, 2006.

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