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November 12, 2002
After Surprising Election, 107th Outlook Remains Muddled;
Bankruptcy Bill in Doubt
The House and Senate enter an uncertain lame-duck session today with
little known about its length and breadth -- even though it now appears
the Democrats will remain in control of the Senate for at least another
couple of weeks, CongressDaily reported. One thing for sure is
that President Bush and members of Congress hope to approve the
remaining FY03 appropriations bills, homeland security, remaining
conference reports and dozens of pending nominations. But last week's
election, tipping control of the 108th Congress to Republicans, is one
more complication in a thicket of difficulties besetting the 107th
Congress, reported the online newsletter.
The fate of bankruptcy reform legislation, heading into what could
prove to be the 107th Congress's final weeks, is precarious, the
newswire reported. The GOP's sweep of Congress in last Tuesday's midterm
election presents the party with a range of options that were not
possible in a Democratic-controlled Senate. There was uncertainty before
the election as to whether House Republican leaders would opt to bring
the measure, pending in the form of a conference report, to a vote
during the post-election session. House Republicans can now make a
strong case for delaying bringing up the existing measure -- minus the
offending abortion provision -- until early next year, when the Congress
is under Republican control. The question then becomes whether
Republicans will seek next year to toughen the bill in other areas where
the GOP was forced to concede to Democrats in this year's conference
negotiations. As such, Senate Democrats' incentive for passing the bill
during the lame duck might have increased. 'The case could be made
[that] this is about the best [Democrats] are going to get,' said one
bill observer.
Fears Increase, but Consumers Keep Spending (New York
Times)
The American consumer, still the nation's main source of economic
strength, seems torn between worrying about the future and making
another trip to the mall, the New York Times reported. Polls
indicate that many people, after sustaining an unusual amount of
optimism during the last two years of turmoil, are beginning to wonder
whether the current path of slow growth has become the new economic
reality, rather than merely an interlude. But despite those concerns,
Americans have done little to curb their purchases of clothing, houses
and many other items. With corporate executives still reluctant to
invest in new equipment and nearly every other large economy in the
world struggling, the strength of consumers' resilience will play a
central role in determining the economy's path well into the future.
'There's a fair amount of anxiety about the economy, but there is not a
consistently negative view of it,' said Andrew Kohut, director of the
Pew Research Center, a polling organization. 'Perhaps people have
learned to roll with' the ups and downs of the business cycle. To read
the full article, point your browser to
href='http://www.nytimes.com/2002/11/11/business/11CONS.html.'>
color='#000080'>http://www.nytimes.com/2002/11/11/business/11CONS.html.
Capellas Quits Post at H-P Amid WorldCom Speculation
Michael Capellas, the leading candidate to take over troubled WorldCom
Inc., quit on Monday as the No. 2 executive at Hewlett-Packard Co., the
Wall Street Journal reported. Capellas, who came to H-P as part
of its acquisition of Compaq Computer Corp. in May, is leaving the Palo
Alto, Calif.-based company to 'pursue other career opportunities,'
according to an H-P statement. A spokeswoman for Clinton, Miss.-based
WorldCom declined to comment on whether Capellas would succeed outgoing
WorldCom Chief Executive John W. Sidgmore. In the H-P statement, H-P CEO
Carly Fiorina said the merger integration had 'reached a natural
transition point' and added that she supported his decision. Shares of
H-P fell on Monday on concerns about Ms. Fiorina's ability to go it
alone.
KMART
Kmart Sends Subpoenas to Former Top Executives in Review
Kmart Corp. has sent subpoenas to at least five former executives as
part of the retailer's ongoing internal review of the management
practices leading up to the company's bankruptcy filing, Dow Jones
reported. Former Executive Vice President David Montoya, former Senior
Vice Presidents John Owen, Hector Dominguez, and William Wulfers and
Vice President Leo Anguiano were all specifically named as those who had
received subpoenas in recent filings with the U.S. Bankruptcy Court for
the Northern District of Illinois, where Kmart filed for bankruptcy
protection in January. The content of the subpoenas wasn't disclosed.
Dominguez, Montoya, Owen and Anguiano filed what's known as a
certificate of service indicating that responses to the subpoena had
been turned in to Skadden Arps Slate Meagher & Flom, the Chicago law
firm representing Kmart in the bankruptcy proceedings. Kmart's board of
directors in May said it had initiated a review of former senior
executives, including former Chief Executive Charles Conaway, for
possible wrongdoing. The review, which is expected to wrap up by year's
end, was spawned by a number of anonymous letters the company received
purportedly from former employees.
Kmart Seeks Bankruptcy Court OK for $6.5 Million Deal with
IRS
Kmart Corp. has asked the court handling its nine-month-old chapter 11
case to approve a deal it has reached with the Internal Revenue Service,
Dow Jones reported. Under the deal, the IRS agreed to pay Kmart a net
tax refund of at least $6.5 million by Nov. 27, according to court
papers obtained on Monday by Dow Jones Newswires. The deal resolves any
claims the government has against Kmart for corporate income taxes for
the years ended in or before January 1999 and for excise taxes for
periods ended on or before Dec. 31, 1998. Kmart said the parties still
are trying to agree on interest for some of the overpayments and
underpayments at issue, but that the net tax refund will be at least
$6.5 million, and could increase by up to $1.5 million. The deal allowed
the IRS to calculate the refund by offsetting claims it holds against
Kmart against amounts it owes the company. The IRS has claims against
Kmart for income tax deficiencies for periods ended before its chapter
11 protection, but also owes Kmart debts for income tax overpayments
made during these periods, Kmart said in court papers.
Debt-laden Magellan Eyes Restructuring
Magellan Health Services Inc. may be facing the financial equivalent of
a nervous breakdown, Dow Jones reported. The Columbia, Md.-based company
spent big money over the last few years to become the nation's largest
provider of mental health benefits with more than 68 million members.
But financial troubles caused by declining membership,
higher-than-expected health-care costs and a debt-laden balance sheet
have generated speculation in some quarters about bankruptcy and pushed
Magellan's stock price so low it was thrown off the New York Stock
Exchange. The only Wall Street analyst still covering the Magellan, J.P.
Morgan's Matt Ripperger, rates it at 'underweight,' which means he
believes the shares will underperform compared with other stocks he
follows. But some investors see better times ahead if Magellan can
successfully restructure its debt. Initially, Magellan was looking for a
refinancing package. But management changed direction earlier this year,
opting instead for a long-term solution, and is now working with New
York investment banking firm Gleacher Partners LLC to lower and
restructure its debt. Magellan has not yet announced a plan for
achieving that end. And there is no timetable for an announcement, said
company spokeswoman Erin Somers. 'It's still relatively early in the
process,' Somers said, declining to reveal what options have been
discussed so far other than capital restructuring.
Borden Chemicals Files Amended Disclosure Statement
Borden Chemicals & Plastics Operating L.P. and its lender last week
filed an amended disclosure statement and chapter 11 plan that calls for
the debtor company to liquidate its assets, Dow Jones reported. Borden
Chemicals & Plastics will distribute the proceeds of the liquidation
to its creditors by creating BCP Liquidating LLC -- a liquidating trust.
The company has already sold most of its assets in various deals,
including sales of $42.4 million and $29 million for manufacturing
facilities. A hearing to consider the adequacy of the second amended
disclosure statement filed by the debtor and BCP Finance Corp. hasn't
been scheduled. Under the terms of the amended proposed liquidation
plan, secured creditors will receive all collateral securing their
claims and a cash amount equal to the principal amount of the claim.
Secured creditors won't receive cash to offset interest, fees, or other
costs, according to the disclosure statement. The proposed plan will pay
unsecured priority claims in full. Borden Chemicals & Plastics
Operating is 99 percent owned by Borden Chemicals & Plastics L.P.,
which didn't file for chapter 11 bankruptcy protection. Borden Chemicals
and Plastics Operating filed for bankruptcy protection April 3, 2001,
listing assets and debts of more than $100 million each.
Court OKs LTV Sale of Tubular Business to Merick Tubeav
The bankruptcy court handling LTV Corp.'s almost two-year-old chapter 11
case has approved the company's request to sell its tubular products
business assets to Maverick Tube Corp. for $110 million in cash,
according to court papers obtained on Monday by Dow Jones Newswires. The
sale will leave LTV, which sold off its integrated steel assets in
February, with its Copperweld Steel operations. LTV had said last month
that it would reorganize the profitable Copperweld unit as a stand-alone
company. The Copperweld unit, which makes welded steel tubing and
bimetallic wire products, has maintained profitable operations
throughout the bankruptcy, LTV said. LTV has said the value expected to
be generated by the sales and the reorganization of the Copperweld
operations won't be enough to provide any recovery for its common
shareholders. It said it believes the shares are 'worthless.' The sale
of the tubular business assets was approved on Thursday by Judge
William T. Bodoh of the U.S. Bankruptcy Court in Youngstown,
Ohio.
Airlines Up On Good News On Labor Front
Shares of the nation's major airlines reversed two sessions of losses to
resume their recent climb on Monday, aided by a string of positive news,
Dow Jones reported. A tentative wage-concession agreement reached on
Saturday between financially troubled United Airlines and its flight
attendants lifted shares of parent UAL Corp. Shares of Delta Air Lines
Inc. received a boost from an article in Barron's newsweekly,
which said the No. 3 U.S. carrier's stock could reach $20 without much
improvement in the industry's fortunes, citing the carrier's potential
labor flexibility and relatively healthy balance sheet. America West
Airlines customer service workers' rejection on Friday of a bid to join
force with the International Brotherhood of Teamsters send the stock of
parent America West Holdings Corp. higher. UAL shares lead the group's
gain, trading up 46 cents, or 14 percent, at $3.74, more than double the
52-week low of $1.42 reached Oct. 18. Following the strong opening, the
airline sector lost steam, with the AMEX airline index recently trading
down 1.02 points, or 2.4 percent, at 41.11. 'Following a rally of this
magnitude, a certain level of profit-taking is naturally to be
expected,' said Jamie Baker, analyst at J.P. Morgan Securities Inc. in
New York. UAL and America West remained in the plus column, trading up
10 percent and 7.5 percent, respectively.
Enchira Biotech Seeks Holder Approval to Liquidate Company
Enchira Biotechnology Corp.'s board of directors is seeking shareholder
approval to liquidate and dissolve the company because of lack of
revenue, the need for additional capital and the loss of its rights to
its 'gene shuffling' technology, Dow Jones reported. If the plan is
approved, Enchira Biotechnology will liquidate its remaining assets and
use the proceeds to pay or make arrangements for its remaining
liabilities and obligations, the filing said. However, if shareholders
don't approve the proposal, the board will seek bankruptcy protection,
the filing said. According to a preliminary proxy filed late on Friday
with the Securities and Exchange Commission, in 2001 the company was
found to have breached a joint development and license agreement with a
former corporate partner and lost the rights to technology related to
its gene shuffling process.
Although Enchira Biotechnology has developed other technology relating
to the treatment of cancer, the board believes that the stigma
associated with the gene shuffling technology litigation severely
hampered the company's ability to raise additional capital in the public
and private markets and to align itself with a strategic partner, the
filing said. In addition, the company said it never had revenue from a
commercial product, and without additional capital or other funding, the
company would be forced to liquidate under the protection of federal
bankruptcy laws. Enchira Biotechnology is a drug discovery and
development company.
Retailer's Profit Off 69 Percent
The May Department Stores Company, operator of Lord & Taylor,
Filene's Basement and other department stores, said its third-quarter
earnings fell 69 percent, as it struggled with sluggish sales, the
Associated Press reported. The results were below analysts' projections,
which had been reduced last week after the company warned of
disappointing sales. The retailer, which is based in St. Louis, earned
$16 million, or 5 cents a share, in the period, which ended Nov. 2,
compared with $52 million, or 16 cents a share, a year earlier. Revenue
fell to $3.05 billion from $3.2 billion in the third quarter of 2001.
The earnings included costs related to combining its various store
divisions and early debt redemption.
Genuity Gets Loan Extension
Genuity Inc. said on Monday it had received a 10-day extension from
lenders as negotiations continue over its debts, the Associated Press
reported. The company said it would pay $8.3 million to the group, which
includes banks and Verizon Corp., as part of the arrangement. The
parties had announced a two-week extension on Oct. 25. The banks
provided Genuity with $723 million in funding in July as part of a $2
billion line of credit. Verizon previously loaned Genuity $1.15 billion.
Genuity has paid the banks $208 million in outstanding debt. Genuity's
financial problems came to a head in July when Verizon declined to
exercise its option to acquire a controlling interest in the company.
Woburn, Mass.-based Genuity operates one of the key components of the
Internet's backbone, a 17,500-mile network of high-capacity lines that
are part of the nerve center of cyberspace. But it has been forced to
the verge of bankruptcy by the glut in the telecommunications
sector.
Ebbers May Give Up Pension to Repay WorldCom Loan
Former WorldCom Inc. CEO Bernard Ebbers may relinquish some or all of
his $1.5 million annual pension to help settle a $408 million personal
loan from WorldCom that helped precipitate his ouster, people familiar
with the matter say, the Associated Press reported. WorldCom's board
also has been seizing assets Ebbers pledged as collateral for the loan,
fearing that he will declare bankruptcy, the sources said. The company
and Ebbers's attorneys have been discussing a plan under which he would
receive credit toward the huge loan by giving up the pension. Ebbers
used the $408 million company loan to pay off outside personal debts.
But Ebbers, who resigned as chief executive in April amid controversy
over the sizable company loan, may not have sufficient assets to repay
even half the loan, sources close to the negotiations said. Ebbers had
pledged company shares as collateral. But those shares, once valued at
$286 million, are essentially worthless. The other major assets backing
the loan are 500,000 acres of timberland in the Southeast and a large
Canadian cattle ranch.
Also on Monday, in a filing with the bankruptcy court, WorldCom said it
took in $2.3 billion in revenue in September and that it had a net loss
of $108 million. It ended the month with $1.4 billion in cash, $200
million more than at the beginning of the period. The company also said
it does not expect its preferred stock or tracking stocks to have any
value when it emerges from bankruptcy.
Reorganization to Boost Armstrong World Asbestos Exposure
Armstrong World Industries Inc. said it will record a charge of more
than $2.4 billion to increase liabilities subject to compromise if its
proposed reorganization plan is approved and becomes effective, Dow
Jones reported. In a Form 10-Q quarterly report filed Friday with the
Securities and Exchange Commission, the Armstrong Holdings Inc. unit
said its total exposure to asbestos-related personal injury claims is
likely to be 'significantly higher' than the recorded liability and to
be material to the financial statements. The company's asbestos-related
personal injury liability balance on Sept. 30 was $690.6 million, which
was recorded in liabilities subject to compromise. The company said in
Friday's SEC filing that if its proposed reorganization plan is
approved, it will record a pretax charge exceeding $2.4 billion, net of
insurance coverage, to increase the subject to compromise liability. The
company didn't adjust its asbestos-related personal injury liability
during the third quarter because the timing and terms of the resolution
of its chapter 11 case remain uncertain, it said. Armstrong World, a
floor manufacturer, filed for chapter 11 protection on Dec. 6, 2000, to
deal with asbestos liabilities.
Networking Buyers Await Bankruptcies
Potential acquirers of telecom equipment makers are betting that a rash
of insolvencies down the road will allow them to pick up assets cheaply
and without legal baggage, the Daily Deal reported. Why buy a
company just before it declares bankruptcy? That's the question
surrounding many telecom equipment makers even as deal rumors continue
to swirl in an industry that everyone agrees is ripe for
consolidation.
As sales among networking technology makers continue to fall and
liquidity crises loom, potential acquirers are sitting on the sidelines.
The reason? They're waiting for the companies to go bankrupt so they can
buy deeply discounted assets while ditching the debt and legal
liabilities that accompany distressed firms. Responding to rumors that
prospective buyers, including aerospace companies, are eyeing Lucent
Technologies Inc., Steven Artuso, an analyst with Pittsburg Research
Inc. of Great Neck, N.Y., asked: 'Why would a company acquire Lucent
now? That would be like acquiring WorldCom a week before it filed for
bankruptcy.' To be sure, Lucent reported cash of $4.4 billion for the
quarter ended Sept. 30, and expects to end 2003 with $2 billion. But
holders of Lucent's $1.6 billion in 8 percent convertible preferred
stock may redeem the shares as of Aug. 2, 2004. (Shareholders will vote
to satisfy the obligation with cash or stock.) If Lucent's stock remains
low, that could wipe out shareholder equity, said one stock analyst.
Most of the large networkers are debt-rich, credit-poor and hurting for
sales, the Deal reported. Smaller players are free of debt but
living on dwindling reserves of cash raised during the technology boom.
Matt Feldman, a partner with law firm Willkie Farr & Gallagher in
New York, said the advantages of buying a company out of bankruptcy are
'huge.' For one, the buyer receives assets for cents on the dollar free
from debt, liens or other encumbrances. 'The bankruptcy process insures
the buyer ends up with no hidden liabilities,' said David Cohen, counsel
for Hertzfeld & Rubin PC in New York.
Also, if a company buys a struggling concern that soon becomes
insolvent, the acquirer may be subject to paying back the target's
creditors under fraudulent conveyance laws, said Greg Milmoe, a partner
with Skadden, Arps, Slate, Meagher & Flom LLP in New York. By
contrast, 'If the acquirer waits for the bankruptcy filing, there's no
chance of this happening,' he said. Bankruptcies among telecom gear
makers may still be more than a year away. But telecom carrier spending
continues to plummet, and flagging equity prices make it difficult
merely to raise financing, let alone acquire competitors. 'All the
indications are that acquirers are indeed waiting for bankruptcies,
rather than acquiring networkers with deteriorating fundamentals,' said
Timm Bechter, a vice president with Baltimore investment bank Legg Mason
Inc.
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