Voluntary Reorganization Under Chapter 11
Bankruptcy Proceedings and Plan of Reorganization
On August 22, 2012, the Company filed voluntary petitions for reorganization under Chapter 11 of the Code. Under Chapter 11 of the Code, certain claims against the Company in existence before the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Company continues business operations as a debtor-in-possession. These claims are reflected in the September 30, 2012 balance sheet as liabilities subject to compromise. Additional claims (liabilities subject to compromise) may arise after the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Company’s assets (secured claims) also are stayed, although the holders of such claims have the right to move the court for relief from the stay. Secured claims are secured primarily by liens on the Company’s property and equipment.
The Company continues to operate the business as “debtor-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Code and the orders of the Court. The Plan was voted on and accepted by an overwhelming majority of the Company’s stakeholders.
On October 3, 2012, the Court entered an order confirming the Plan, which includes, among other things, the following provisions:
cancellation of all existing equity interests including capital stock, options, warrants or other rights to purchase the Company’s existing capital stock;
recapitalization of the Company with the authorization of 19,000,000 shares of newly issued common stock (“Common Stock”) and 1,000,000 shares of preferred stock;
holders of the existing outstanding 113/8% Senior Secured Notes due 2012 (the “Notes”) will receive their pro rata share of 97.5% of newly issued Common Stock (subject to dilution by the exercise of warrants and equity pursuant to a management incentive plan) and $150,000 of newly issued 10.5% Senior Secured Notes due 2017 (the “New Notes”);
holders of the existing preferred stock will receive their pro rata share of (i) 2.5% of newly issued Common Stock (subject to dilution by the exercise of warrants and equity pursuant to a management incentive plan), and (ii) two tranches of eight-year warrants to acquire shares of newly issued Common Stock representing, in the aggregate, up to 15.0% of the Company’s outstanding capital stock following the restructuring (subject to dilution as described above);
execution of a new $25,000 credit facility (the “Exit Facility”);
repayment of $15,900 of principal and accrued interest under the DIP Credit Facility (as defined below); and
cancellation of the Notes totaling approximately $316,200, which includes accrued interest.
The Plan does not contain any significant compromise and settlement agreement, other than those identified in this report. Under the Plan, general unsecured creditors, vendors, customers and employees were not anticipated to be negatively impacted and the Company’s obligation to these groups is expected to be paid in full in accordance with their original terms.
Contemporaneous with the Petition Date, the Company entered into a Senior Revolving Debtor in Possession Credit Facility (the “DIP Credit Facility”). Borrowings under the DIP Credit Facility were used to purchase $13,898 of investments in U.S. Treasury notes. Unused portions of the DIP Credit Facility are subject to availability under a borrowing base and compliance with certain covenants.
As part of the Plan, the Company agreed to continue to pay scheduled interest on the Notes. Only the accrued interest on the Notes as of the Petition Date is subject to compromise. Accordingly, contractual interest and reported interest are equal for the three and nine months ended September 30, 2012.
Voluntary Reorganization Under Chapter 11 (continued)
Liabilities Subject to Compromise
The accompanying condensed consolidated balance sheet at September 30, 2012 contains the following accounts:
pre-petition liabilities that are subject to compromise are reported separately at amounts equal to allowed claims and are classified as non-current;
pre-petition liabilities not subject to compromise and post-petition liabilities are reported on a “going concern” basis and are not separately identified;
pre-petition liabilities, including claims that become known after a petition is filed, are reported on the basis of the expected amount of the allowed claims as opposed to amounts for which those allowed claims may be settled; and
claims not subject to reasonable estimation are disclosed in the footnotes to the consolidated financial statements;
The Company recorded $316,209 of liabilities subject to compromise at September 30, 2012, which consists entirely of the Notes and related accrued interest through the Petition Date. There was no change in liabilities subject to compromise between the Petition Date and September 30, 2012. No other liabilities are presented as subject to compromise because a first day motion to pay general creditors in the normal course of business was approved by the Court.
Expenses that result from reorganization activities and the Restructuring are reported as reorganization items in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2012. For the three and nine months ended September 30, 2012, the Company recorded reorganization expense of $1,428, which is solely related to professional fees. None of these fees were paid in cash as of September 30, 2012 and are included in accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheet at September 30, 2012.
For the three and nine months ended September 30, 2012, the Company has not recorded any income from reorganization activities.