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Distressed Internet companies and other businesses that need financing fast may want to learn the Texas two-step, since two laws there expedite bankruptcy proceedings so that debtors can raise cash quickly and more rapidly emerge from the shadow of Chapter 11. Witness the case of SpectraCell Laboratories Inc., a Houston-based medical services company that performs specialized blood tests. Thanks to the new rules, SpectraCell was in bankruptcy for just 60 days and was able last fall to put together a $9 million recapitalization. “They would not have survived long enough without the capital infusion,” said Zack Clement, SpectraCell’s legal counsel and a partner in the Houston office of Fulbright & Jaworski. The two laws don’t replace the federal bankruptcy code, but supplement it. The 6-year-old “expedited case rule” allows for a 60-day stay in bankruptcy so long as a reorganization plan and a disclosure statement, among other filings with the court, are made. And in January 2000, the “complex case rule” was passed by Texas lawmakers to ensure that there will always be a time or day of the week to hear a particular company’s case. The only qualification is that the company must have more than $5 million in debt. Bankruptcy lawyers say that Texas and a few other court systems around the country have rules such as these on their books to lure homegrown companies to file for Chapter 11 in their state instead of Wilmington, Del., or Phoenix, both considered pro-debtor jurisdictions. Delaware, in fact, attracted 2,285, or 23 percent, of the 9,884 corporate Chapter 11 cases filed in the U.S. in 2000. SpectraCell invoked both rules. The company, started in 1992 by Walter Stanberry Jr., a medical technology entrepreneur, owns and operates a clinical lab that specializes in performing a blood test that analyzes individual nutritional deficiencies and helps prevent future diseases along those lines. But when Medicare decided not to reimburse for such testing in March 1998, SpectraCell’s revenue slid 42 percent and the company started losing cash. After a two-year descent, SpectraCell in August filed for Chapter 11 protection with the U.S. Bankruptcy Court for the Southern District of Texas in Houston after defaulting on a licensing payment to the Research Development Foundation of America. SpectraCell was licensing the testing technology from RDF. Thanks to the two Texas rules, however, SpectraCell was able to hit the ground running with the $9 million capital infusion and a new marketing plan by the end of October. SpectraCell’s confirmation hearing was held Sept. 30 and its $9 million restructuring package became effective 30 days later. Said Stanberry: “It was real critical to have fast-track capability for our rank-and-file employees and our clientele.” Indeed, the fast turnaround enabled it to generate $500,000 of monthly revenue by March, a 25 percent jump from the $400,000 per month it was garnering before its bankruptcy filing. Operating losses are nearly nil, compared with monthly operating losses of $100,000 in July 2000. SpectraCell filed for bankruptcy with $8 million in debt and roughly $500,000 to $600,000 in hard assets. Normally, the debtor has an exclusive period of 120 days to file a plan of reorganization after the bankruptcy filing has been made before creditors could create rival plans. But in SpectraCell’s case, the reorganization plan started with a $1 million cash infusion from three groups: a series of venture capital partnerships managed by Houston Venture Partners (a creditor of SpectraCell), existing SpectraCell management and RDF (an affiliate of the Clayton Foundation for Research). The other $8 million of the financing package comes from exchanging debt for equity. In return for the cash infusion and their debt, Houston Venture Partners and RDF agreed to take 40 percent of the post-Chapter 11 SpectraCell’s equity. Another 35 percent to 40 percent of equity went to SpectraCell’s unsecured creditors in exchange for the $6.5 million in claims they held. SpectraCell management assumed the remaining equity as well as company shares that were reserved under the company’s stock ownership plan. Debt-free and with a cash infusion, the reorganized SpectraCell was able to reinstate a sales force around the country that marketed the blood test. Now SpectraCell is exploring the sale of one of its subsidiaries, Hemex Laboratories. And one SpectraCell investor who asked not to be named said the company is considering a new technology that could predict what medicines a patient might be allergic to before treatment. Copyright (c)2001 TDD, LLC. All rights reserved.

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