UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) ) ) ) ) ) )

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1 UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re ELECTROGLAS, INC., et al., 1 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No (PJW) (Joint Administration Requested) MOTION OF THE DEBTORS FOR ORDER (I) APPROVING BIDDING PROCEDURES IN CONNECTION WITH THE ANTICIPATED SALE OF SUBSTANTIALLY ALL OF THE DEBTORS ASSETS; (II) SCHEDULING HEARING TO CONSIDER SALE OF ASSETS; (III) APPROVING FORM AND MANNER OF NOTICE; (IV) APPROVING MAXIMUM BREAK-UP FEE; AND (V) GRANTING RELATED RELIEF The debtors and debtors in possession in the above-captioned cases (collectively, the Debtors ), through their undersigned counsel, submit this motion (the Motion ), pursuant to sections 105(a), 363, 365 and 503 of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code ), Rules 2002, 6004, 6006 and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), and Local Rules , and of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (the Local Bankruptcy Rules ), for entry of an order (substantially in the form attached to this Motion as Exhibit A, the Bidding Procedures Order ): (a) approving bidding procedures (the Bidding Procedures ); (b) scheduling an auction (the Auction ) and a hearing (the Sale Hearing ) to consider approval of the sale (the Sale ); (c) approving notice of respective dates, times, and places for (i) the Auction, (ii) the Sale Hearing, (iii) the Sale, (iv) the assumption and assignment of executory contracts and unexpired leases; (d) approving forms of 1 The Debtors are Electroglas, Inc. ( Electroglas ) and Electroglas International, Inc. ( Electroglas International ). ny

2 notice; and (e) granting related relief. In support of this Motion, the Debtors respectfully represent: PRELIMINARY STATEMENT 1. The Bankruptcy Court should approve the auction process and Bidding Procedures and later, the Sale, because the Debtors have satisfied the appropriate standards in the Bankruptcy Code and in the case law. The Debtors have decided to market all or substantially all of their assets in connection with the Sale, and in doing so, are exercising their sound business judgment. This is true for several reasons. First, the prompt sale of their assets is the best opportunity for the Debtors to maximize the value of the estates because it will provide certainty for the Debtors employees, customers and suppliers. If the Debtors were instead subject to a prolonged stay in chapter 11 without adequate financing, this would lead to uncertainty, and could as a result severely harm the estates and threaten recovery for all creditors. Second, the Bidding Procedures are intended to put all relevant parties and potential buyers on notice of the sale, including those parties that previously expressed an interest in purchasing the Debtors assets. Third, the auction and the Bidding Procedures are designed to maximize the value of the estates because they encourage competitive bidding. Fourth, the Debtors anticipate negotiating the terms and conditions of the Sale in good faith, and to facilitate that process, have attached a proposed form of Asset Purchase Agreement to this Motion as Exhibit B. 2. In connection with these chapter 11 cases and on the Petition Date, the Debtors also filed a motion (the DIP and Cash Collateral Motion ) for approval of a DIP credit and security agreement (the DIP Credit Agreement ) and the use of cash collateral. The DIP Credit Agreement contemplates that the Sale occur on a fairly tight timeline: the Bid Procedures Order should be entered by August 5, 2009, and the Sale Hearing should be scheduled to be held 2

3 by August 28, In addition, the DIP Credit Agreement provides that the Bidding Procedures Order be in a form satisfactory to the DIP Lenders (as defined in the DIP and Cash Collateral Motion). However, the DIP Lenders did not review the proposed Bidding Procedures Order before this Motion was filed, and it therefore remains subject to comments from the DIP Lenders in all respects. 3. In any event, for the reasons set forth in this Motion, the Bankruptcy Court should approve the Bidding Procedures and the Sale. JURISDICTION 4. The Bankruptcy Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). Venue of these cases and this Motion in this District is proper pursuant to 28 U.S.C and The statutory predicates for the relief requested in this Motion are Bankruptcy Code sections 105(a), 363, 365 and 503, Bankruptcy Rules 2002, 6004, 6006 and 9014, and Local Bankruptcy Rules , and BACKGROUND 5. On July 9, 2009 (the Petition Date ), the Debtors filed their respective voluntary petitions for relief under chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 6. No request has been made for the appointment of a trustee or examiner, and no official committee has yet been established in these cases. 7. The Debtors supply semiconductor manufacturing test equipment and software to the global semiconductor industry, and have been in the semiconductor equipment business for more than 40 years. The Debtors installed customer base is one of the largest in the 3

4 industry, as the Debtors have sold to date more than 16,500 units of one of their core products, the wafer prober (and its related operating system). The Debtors other major source of revenue comes from their business of designing, manufacturing, selling and supporting motion control systems for advanced technologies. 8. A full description of the Debtors business operations, corporate structures, capital structures, and reasons for commencing these cases is set forth in full detail in the Affidavit of Thomas Brunton in Support of Chapter 11 Petitions and First Day Relief, which was filed contemporaneously with this Motion and which is incorporated in this Motion by reference. Additional facts in support of the specific relief sought in this Motion are set forth below. DEBTORS DECISION TO SELL THE PURCHASED ASSETS 9. During the year ended December 31, 2000, the Debtors employed over 650 full time employees worldwide and had annual revenues of over $225 million. In addition to the Wafer Prober Business at that time, the Debtors also owned and operated a separate software subsidiary and had other operations. 10. In the years that immediately followed, however, the semiconductor industry as a whole experienced a meltdown. This caused severe financial stress throughout the industry, and the companies best equipped to survive the meltdown were those with cutting edge product lines and growing customer bases. The Debtors were not among those companies. 11. Instead, the Debtors relied heavily on their legacy customers and products and as a result, were at a significant competitive disadvantage during and after the meltdown. The precipitous downturn in the semiconductor markets coupled with the competitive disadvantage of the Debtors products caused the Debtors customer base to shrink or level off, and revenue to decline exceptionally. For instance, for the year ended December 31, 2001, the 4

5 Debtors annual revenue dropped to just under $85 million, over a 60% drop from the year before. 12. That was only the beginning of the Debtors financial decline. Except for a small spike in 2004, the Debtors revenue continued to drop or remain stagnant through 2009; for the majority of the years after 2001 to the present, annual revenues were well below $50 million, less than 25% of what they were in But the Debtors did not remain idle during this crisis. Over the years, they trimmed costs and disposed of their divisions and other operations that deviated from the core prober businesses. For instance, the Debtors disposed of their software division and their inspection business. The Debtors also modified their manufacturing strategy by moving their facilities from the U.S. to Singapore and then later, outsourcing their manufacturing to a third party altogether. The Debtors also shut down multiple offices worldwide, including offices in Tokyo, Texas, Massachusetts and Arizona. 14. These cost cutting measures reduced the workforce over the years by about 85%, to approximately 50 full time and contract employees as of the Petition Date; they also helped the Debtors bottom line to some degree. However, under the circumstances, they were not enough. One year ago, the Debtors quarterly revenue was $11 million. At the end of 2008, that number dropped by more than 80% to approximately $2 million per quarter over a 95% drop from quarterly revenue in This severe decline between 2008 and 2009 was due to the worldwide freeze in the credit and equity markets and the deep down cycle in the semiconductor equipment markets. 15. As a result and as the Debtors saw their cash continuing to deplete and revenues decline, on January 29, 2009, the Debtors engaged Needham & Company ( Needham ) 5

6 to act as their exclusive investment bankers. Needham s primary role was to help the Debtors restructure, whether through an asset sale or otherwise. As of April 13, 2009, Needham contacted fifty six (56) potential strategic or financial buyers. In connection with its marketing efforts, Needham distributed materials about the Debtors and their operations to forty seven (47) interested parties. Twelve (12) of them expressed further interest and entered into non-disclosure agreements with the Debtors so that they could perform additional due diligence. During that process, Needham and the Debtors management presented their cash projections to those twelve (12) parties, but were unable to proceed with a transaction because the Debtors were not expected to achieve cash flow positive operations until the second calendar quarter of While the Debtors were working with Needham to find a potential buyer or restructuring partner, they missed their sales goals and as a result, found themselves in yet further financial decline. A number of factors contributed to this, including the continued impact of the credit crisis on the financial services market and the relentless down cycle in the semiconductor equipment markets generally. The Debtors were accustomed to ordinary downturns in revenue because the semiconductor market is cyclical and accordingly, accounted for a reasonable downturn cycle in setting their sales goals. This time around, however, the down cycle was worse than anticipated. It was unexpected and financially catastrophic for the Debtors, and it became more apparent afterward that they were going to run out of cash in the near term and they had to walk a thin line between remaining an attractive platform for potential buyers (which is expensive), and shutting their doors completely. 17. In late April 2009, Needham generated several bids for all or substantially all of the Debtors assets, but because of the current macro market conditions, including the severe liquidity and credit crisis, as well as the micro market conditions affecting the 6

7 semiconductor business generally, Needham could not find a cash buyer that was willing to pay a high enough sales price to satisfy the Debtors outstanding obligations to the holders of the Debtors 6.25% Convertible Senior Subordinated Secured Notes due 2027 (the Noteholders ). Accordingly, the Debtors were unable to find a stalking horse bidder. 18. The Debtors continue to believe that the value of their estates would best be maximized and preserved through a sale process. Therefore, the Debtors commenced these chapter 11 cases and filed this Motion requesting approval of the proposed Auction for a sale of substantially all of the Debtors assets (the Purchased Assets ) to the bidder with the highest or otherwise best offer (the Successful Bidder ) without a stalking horse bidder. 19. The Debtors reserve the right, however, to enter into an agreement with a stalking horse bidder (the Stalking Horse Bidder ) before the Auction, so long as any agreed upon break-up fee (the Break-up Fee ) payable to the Stalking Horse Bidder, if it is not the Successful Bidder at the Auction, is not greater than three percent (3%) of its Qualified Bid (as defined below). 20. The sale of the Purchased Assets is subject to the Bankruptcy Court s approval and the auction process proposed in this Motion. The Debtors believe that the sale of the Purchased Assets is the best way maximize the value of their estates for the benefit of their creditors and other interested parties. SUMMARY OF RELIEF REQUESTED 21. The Debtors seek, pursuant to Bankruptcy Code sections 105(a), 363, 365 and 503, Bankruptcy Rules 2002, 6004, 6006 and 9014, and Local Bankruptcy Rules , and , the Bankruptcy Court s approval of: (a) the institution of bidding, auction and notice procedures for the solicitation and consideration of competing offers for the Purchased Assets (collectively, the Bidding Procedures, attached to the Bidding Procedures 7

8 Order as Schedule I), and (b) notice procedures for the assumption and assignment of executory contracts to the Successful Bidder. 22. More specifically, through this Motion, the Debtors request that the Bankruptcy Court enter the Bidding Procedures Order approving (i) the Bidding Procedures, (ii) the notice establishing the dates, times, and locations of the deadline to bid on the Purchased Assets, the Auction of the Purchased Assets and the Sale Hearing pursuant to the dates proposed in the Bidding Procedures Order, subject to the Bankruptcy Court s availability (the Notice of Auction and Sale Hearing ); and (iii) the notice (the Notice of Assumption and Assignment ) of the Debtors intent to assume or assign to the Successful Bidder, the contracts, commitments, leases, licenses, permits, purchase orders, and any other executory contracts and unexpired leases (collectively, the Executory Contracts and Unexpired Leases ), and the corresponding cure amounts required to be paid in connection with such assumption or assignment. 23. As previously stated, under the DIP Credit Agreement, the Bidding Procedures Order should be entered on or before August 5, 2009 and the Sale Hearing should be held on or before August 28, To maximize value and ensure a successful result in these cases, a prompt and orderly sale of the Purchased Assets must take place. Absent a prompt sale pursuant to the procedures and timelines proposed, the Debtors believe that the value of the Purchased Assets will be significantly compromised. The schedule proposed in the Bidding Procedures complies with the requirements of the DIP Credit Agreement. 24. The Debtors expressly reserve the right to modify the relief requested in this Motion, including the proposed Bidding Procedures, before or at the applicable hearing. 8

9 BIDDING PROCEDURES AND RELEVANT NOTICES A. Bidding Procedures 25. The proposed Bidding Procedures, which are attached to the Bidding Procedures Order as Schedule I, will maximize the realizable value of the Purchased Assets for the benefit of the Debtors estates, creditors and other interested parties. The Bidding Procedures contemplate an auction process pursuant to which bids for the Purchased Assets will be subject to higher or otherwise better offers. The Bidding Procedures primarily benefit the Debtors by creating a bidding process that ensures, among other things: (a) structure and certainty to the process; (b) the Debtors ability to compare the relative values of competing offers, if any; (c) that a potential purchaser has the financial wherewithal to timely consummate its purchase; and (d) meaningful bidding increments. The Debtors seek to implement a competitive bidding process designed to maximize recovery for the benefit of their estates. As described below and more fully in the Bidding Procedures, only Qualified Bidders who timely submit Qualified Bids will be eligible to participate in the Auction. Specifically, the Bidding Procedures provide, in relevant part, as follows 2 : (a) Participation Requirements: In order to participate in the bidding process or otherwise be considered for any purpose under the Bidding Procedures, a person interested in the Purchased Assets must submit an offer (each, a Bid ), and each party submitting a Bid (each, a Bidder ) must satisfy the conditions set forth below: (i) (ii) Confidentiality Agreement: A Bidder must deliver to the Debtors an executed confidentiality agreement(s) in form and substance acceptable to the Debtors. Good Faith Deposit: A Bid (other than a Bid in which the sole purchase price consideration is a credit bid under Section 363(k) of the Bankruptcy Code) must be accompanied by a deposit to an interest bearing escrow 2 The following description of the Bidding Procedures is a summary of the terms set forth in the Bidding Procedures annexed to the Bidding Procedures Order as Exhibit A. Capitalized terms used but not defined in this section have the meanings ascribed to them in the Bidding Procedures. To the extent that this summary differs in any way from the terms set forth in the Bidding Procedures, the terms of the Bidding Procedures shall control. 9

10 account to be identified and established by the Debtors in the amount of 10% of the proposed purchase price (the Good Faith Deposit ) (iii) (iv) (v) (vi) (vii) Documentation: A Bid must include executed transaction documents (the Transaction Documents ) to effect the proposed sale transaction (the Transaction ). A copy of the foregoing documents (including the matters contemplated by clause (v) below) shall be forwarded by the Debtors to the Noteholders and the Creditors Committee promptly (and in any event within 24 hours) after they are provided to the Debtors. Fees and Expense Reimbursements: No Bidder, other than a Stalking Horse Bidder (if any), shall be entitled to any expense reimbursement, breakup fee, termination fee, or similar fee or payment. Executory Contracts and Leases: Transaction Documents shall identify all of the Debtors executory contracts and unexpired leases that the Bidder wishes to have assumed and assigned to it pursuant to the Transaction. Corporate Authority: A Bid must include written evidence that demonstrates appropriate corporate authorization for the Bidder to consummate the proposed Transaction; provided, that if the Bidder is an entity specially formed for the purpose of effecting the Transaction, then the Bidder must furnish written evidence of the approval of the Transaction by the equity holder(s) of such Bidder. No Collusion: A Bidder must confirm that it has not engaged in any collusion with respect to the bidding or the sale. (viii) Disclosure: A Bid must fully disclose the identity of each entity that will be bidding for the assets or otherwise participating in connection with such bid, and the complete terms of any such participation. (ix) Proof of Financial Ability to Perform: A Bid must include written evidence that the Bidder has the necessary financial ability to close the Transaction and provide adequate assurance of future performance under all executory contracts and leases to be assumed and assigned in such Transaction. Such information should include, among other things, the following: contact names and numbers for verification of financing sources; evidence of the Bidder s internal resources and proof of any debt or equity funding commitments that are needed to close the Transaction; the Bidder s most current audited and latest unaudited financial statements; and 10

11 any such other form of financial disclosure or credit-quality support information or enhancement, acceptable to the Debtors in their sole discretion, that demonstrates such Bidder is able to close the Transaction. (x) (xi) (xii) Credit Bid: The Debtors secured lenders, either together or individually, may credit bid their outstanding indebtedness under section 363(k) of the Bankruptcy Code and any such bid shall constitute a Qualified Bid and an allowed claim for bidding purposes only. Contingencies: A Bid may not be conditioned on obtaining financing or any internal approval, or on the outcome or review of due diligence, but may be subject to the accuracy in all material respects at the closing of specified representations and warranties. Irrevocable: A Bid must be irrevocable through the Auction and, if such Bid is accepted as the Successful Bid or the Backup Bid (as defined below), must continue to remain irrevocable, subject to the terms and conditions of the Bidding Procedures. (b) (c) (d) Bid Deadline: Regardless of when a party qualifies as a Preliminarily Interested Party, all Bids must be in writing and received by the Debtors on or before 12:00 noon (prevailing Eastern time) on August 18, 2009 (the Bid Deadline ). Qualified Bids. Bids received from Bidders before the Bid Deadline that are determined by the Debtors to meet the above requirements shall constitute Qualified Bids, and such Bidders shall constitute Qualified Bidders. The Debtors will promptly advise the potential bidder in writing of the Debtors determination whether or not the Bidder is a Qualified Bidder. Only Qualified Bidders may participate at the Auction. Bid Assessment Criteria. If more than one Qualified Bid is received by the Bid Deadline, the Debtors will conduct an Auction to determine the highest or otherwise best Qualified Bid. The Debtors, after consulting with the Noteholders and the Creditors Committee, will determine the highest or otherwise best Qualified Bid in their business judgment, after taking into account any factors the Debtors, after consulting with the Noteholders and the Creditors Committee, deem relevant, including, without limitation, the following criteria (the Bid Assessment Criteria ): (i) (ii) (iii) (iv) the amount and nature of the consideration; the proposed assumption of any liabilities, if any; the ability of the Qualified Bidder to close the proposed Transaction; the proposed closing date and the likelihood, extent, and impact of any potential delays in closing; 11

12 (v) (vi) (vii) any purchase price (or similar) adjustments; the impact of the Transaction on any actual or potential litigation; and the net after-tax consideration to be received by the Debtors estates. (e) (f) Auction. If more than one Qualified Bid is received by the Bid Deadline, the Debtors will conduct an auction to determine the highest or otherwise best Qualified Bid. The Auction shall take place on August 19, 2009 at 12:00 noon (prevailing Eastern Time) at the offices of Morrison & Foerster LLP, 1290 Avenue of the Americas, New York, New York 10104, or such other place and time as the Debtors shall notify all Qualified Bidders, any statutory committee appointed in these cases and other invitees. Auction Rules. (i) (ii) (iii) Qualified Bidders shall appear in person at the Auction, or through a duly authorized representative. At the start of the Auction, the Debtors shall describe the terms of the Qualified Bid serving as the baseline bid (the Auction Baseline Bid ). All Bids made after the Auction Baseline Bid shall be overbids (each, an Overbid ), which must comply with the conditions for a Qualified Bid set forth above and must be made in $100,000 increments. Any Overbid after the Auction Baseline Bid may include only cash, the assumption of debt, marketable securities, or a credit bid under section 363(k) of the Bankruptcy Code. All Overbids shall be made and received on an open basis, and all material terms of each Overbid shall be fully disclosed to all Bidders who have submitted Qualified Bids. Any Overbid must remain open and binding on the Bidder until and unless the Debtors accept a higher or otherwise better Overbid and subject to the procedures with respect to Backup Bids. To the extent not previously provided (which shall be determined by the Debtors), a Bidder submitting an Overbid (other than any Bidder making a credit bid under Section 363(k) of the Bankruptcy Code) must submit, as part of its Overbid, written evidence (in the form of financial disclosure or credit-quality support information or enhancement acceptable to the Debtors) demonstrating such Bidder s ability to close the Transaction proposed by such Overbid. The Debtors shall maintain a transcript or video record of all bids made and announced at the Auction, including the Auction Baseline Bid and all Overbids. Adjournment of Auction. The Debtors shall have the right to declare one or more adjournments in the Auction. The Debtors may declare adjournments to, among other things: (1) facilitate discussions between the Debtors and individual Bidders; (2) allow individual Bidders to consider how they wish to proceed; and (3) give Bidders the opportunity to provide the Debtors with such additional evidence as the Debtors may 12

13 require that the Bidder has sufficient internal resources, or has received sufficient non-contingent debt or equity funding commitments, to consummate the proposed Transaction at the prevailing Overbid amount. (g) (h) Other Terms. The Debtors may announce at the Auction additional procedural rules (e.g., the amount of time to make subsequent Overbids) for conducting the Auction so long as the rules are not inconsistent with the Bidding Procedures. The Debtors shall continue the Auction until there is only one Qualified Bid that the Debtors determine in their sole discretion (after consultation with the Noteholders and the Creditors Committee) is the highest or otherwise best Qualified Bid at the Auction (the Successful Bid ). The Auction shall not close unless and until: (a) all Bidders who have submitted Qualified Bids have been given a reasonable opportunity as determined by the Debtors in their sole discretion, after consultation with the Noteholders and the Creditors Committee, to submit an Overbid at the Auction to the then-existing Overbid; and (b) the Successful Bidder has submitted fully executed transaction documents memorializing the terms of the Successful Bid. At the Sale Hearing, the Debtors shall present the Successful Bid to the Bankruptcy Court for approval. The Debtors presentation of the announced Successful Bid to the Bankruptcy Court for approval does not constitute the Debtors acceptance of the Successful Bid. The Debtors shall have accepted a Successful Bid only when the Bankruptcy Court has approved such Bid. Irrevocability of Certain Bids. If an Auction is conducted, the party the Debtors determine to have the second highest or otherwise best Qualified Bid at the Auction shall be required to serve as a backup bidder (the Backup Bidder ). The Backup Bidder shall be required to keep its initial Qualified Bid (or its final Overbid) (the Backup Bid ) open and irrevocable until the earlier of 5:00 p.m. (prevailing Eastern time) on the date that is forty-five (45) days after the date of the Auction (the Outside Backup Date ) or the closing of the transaction with the Successful Bidder. (i) Sale Hearing. On or before August 26, (j) Return of Deposit. The Good Faith Deposits of all Qualified Bidders required to submit a Good Faith Deposit shall be held in one or more interest-bearing escrow accounts by the Debtors, but shall not become property of the Debtors estates unless forfeited according to these Bidding Procedures or otherwise pursuant to further order of the Bankruptcy Court. The Good Faith Deposits of any Qualified Bidder that is neither the Successful Bidder nor the Backup Bidder shall be returned to such Qualified Bidder not later than 3 business days after the Sale Hearing. The Good Faith Deposit of the Backup Bidder shall be returned to the Backup Bidder on the date that is 3 business days after the earlier of (i) the closing of the transaction with the Successful Bidder and (ii) the Outside Backup Date. Upon the return of the Good Faith Deposits, their respective owners shall receive any and all interest that will have accrued thereon. If the Successful 13

14 Bidder timely closes the winning transaction, its Good Faith Deposit may be credited towards its purchase price. (k) (l) (m) Failure to Close. If, following the Sale Hearing, the Successful Bidder fails to consummate an approved transaction because of a breach or failure to perform on the part of such Successful Bidder, the Debtors may designate the Backup Bidder to be the new Successful Bidder, and the Debtors will be authorized (but not required) to consummate the transaction proposed in such Backup Bid without further order of the Bankruptcy Court. In such case, the defaulting Successful Bidder s Good Faith Deposit shall be forfeited to the Debtors, and the Debtors specifically reserve the right to seek all available damages from the defaulting Successful Bidder. The Good Faith Deposit of the Backup Bidder shall be held by the Debtors until 3 business days after the earlier of (i) the closing of the transaction with the Successful Bidder and (ii) the Outside Backup Date. Reservation of Rights. The Debtors reserve all rights to terminate the bidding process at any time if the Debtors determine, in their business judgment, that the bidding process will not maximize the value of the Debtors bankruptcy estates. In addition, the Debtors reserve all rights not to submit any bid that is not acceptable to the Debtors for approval to the Bankruptcy Court. The Debtors shall further have the right to amend these bidding rules or impose such other terms and conditions for the bidding process that the Debtors determine, in their sole business judgment, are necessary to fulfill their fiduciary duties, provided that such modifications are not inconsistent with any Bankruptcy Court order. Without limiting the generality of the foregoing, the Debtors may reject at any time before entry of an order of the Bankruptcy Court approving a Qualified Bid, any bid that, in the Debtors sole discretion, is (i) inadequate or insufficient, (ii) not in conformity with the requirements of the Bankruptcy Code or the Bidding Procedures, or (iii) contrary to the best interests of the Debtors, their estates and their creditors. Expenses. No Bidder, other than the Stalking Horse Bidder (if any), shall be entitled to any expense reimbursement, breakup fee, termination fee, or similar fee or payment. 26. The Bidding Procedures are fair and reasonable, and are not likely to dissuade any potential purchaser from bidding on the Purchased Assets. B. Notice of Auction and Sale Hearing 27. The Debtors request that the Bankruptcy Court schedule the Sale Hearing on or before August 26, The Debtors further request that the objection deadline with 14

15 respect to the sale of the Purchased Assets be at least seven (7) business days prior to such hearing. 28. Furthermore, on or before three (3) business days after entry of the Bidding Procedures Order, the Debtors will cause the Notice of Auction and Sale Hearing and the Bidding Procedures Order to be sent by first-class mail postage prepaid, to the following: (i) (ii) (iii) (iv) (v) (vi) (vii) the Office of the United States Trustee; counsel for the Creditors Committee (if any); counsel to Comerica Bank; all entities known to have expressed a bona fide interest in acquiring all or substantially all of the Purchased Assets; all entities (or counsel therefor) known to have asserted any lien, claim, encumbrance, right of refusal, or other interest in or upon any portion of the Purchased Assets; federal, state, and local regulatory or taxing authorities or recording offices or any other governmental authorities that, as a result of the sale of the Purchased Assets, may have claims, contingent or otherwise, in connection with the Debtors ownership of the Purchased Assets or have any reasonably known interest in the relief requested by the Motion, including the Delaware Secretary of State; all parties, if any, who are known to claim interests in, and the non-debtor counterparty to, any Executory Contracts or Unexpired Leases; (viii) the United States Attorney s office; (ix) (x) the Internal Revenue Service; and all parties who have requested or are required to receive notice pursuant to Bankruptcy Rule 2002 as of the date of the entry of the Bidding Procedures Order. In addition to the foregoing, (i) electronic notification of this Motion, the Bidding Procedures Order and the Notice of Auction and Sale Hearing also will be posted on the Bankruptcy Court s website, and (ii) on or before three (3) business days after entry of the Bidding Procedures Order, the Debtors will: (a) serve the Notice of Auction and Sale Hearing 15

16 on all known creditors of the Debtors; and (b) subject to applicable submission deadlines, publish the Notice of Auction and Sale Hearing once in one or more publications the Debtors deem appropriate, including but not limited to The San Jose Mercury News (local edition). C. Notice of Assumption and Assignment 29. As noted above, the Debtors may seek to assume executory contracts and unexpired leases to be identified on schedules to the Transaction Documents (the Assumed Contracts ). At least initially, the Assumed Contracts shall be those executory contracts and unexpired leases that the Debtors believe should be assumed and assigned as part of the orderly transfer of the Purchased Assets. The Successful Bidder may choose to exclude (or to add) executory contracts and unexpired leases from (or to) the list of Assumed Contracts, subject to further notice. 30. In the interim, the Debtors shall serve a notice of potential assumption and assignment of the Executory Contracts and Unexpired Leases (the Assumed Contracts ) in the form attached to this Motion as Exhibit D (the Notice of Assumption and Assignment ) on all non-debtor parties to Executory Contracts and Unexpired Leases on or before 23 days before the Sale Hearing by first class mail or hand delivery. If after the Auction, the Successful Bidder identifies additional Executory Contracts or Unexpired Leases to be assumed and assigned that are not set forth in the original Notice of Assumption and Assignment, or chooses to remove any of the previously identified Executory Contracts and Unexpired Leases from the list of Assumed Contracts, the Debtors will promptly send a supplemental notice (a Supplemental Notice of Assumption and Assignment ) to the applicable counterparties regarding these executory contracts and unexpired leases at least five (5) days before the Sale Hearing. 31. In the Notice of Assumption and Assignment, the Debtors will identify whether the Executory Contract and Unexpired Lease is a Purchased Asset and the calculation of 16

17 the undisputed cure amounts that the Debtors believe must be paid to cure all defaults under the Executory Contracts and Unexpired Leases (the Cure Amounts ). If no amount is listed on the Notice of Assumption and Assignment to be served, the Debtors believe that there is no Cure Amount. The Debtors request that unless the non-debtor party to an Executory Contract or Unexpired Lease files an objection (the Cure Amount/Assignment Objection ) to (a) its scheduled Cure Amount or (b) to the proposed assumption or assignment of such Executory Contract or Unexpired Lease by the later of (i) 4:00 p.m. on the date that is five (5) days before the Sale Hearing or (ii) ten (10) days after service of the Supplemental Notice of Assumption and Assignment (the Cure Amount/Assignment Objection Deadline ), and serves a copy of the Cure Amount/Assignment Objection so as to be received no later than the Cure Amount/Assignment Objection Deadline on the same day to: (a) Electroglas, Inc., 5729 Fontanoso Way, San Jose, CA (Attn: Company Officer); (b) counsel to the Debtors, Pepper Hamilton LLP, Hercules Plaza, Suite 5100, 1313 N. Market Street, P.O. Box 1709, Wilmington, Delaware (Attn: David B. Stratton, Esq. and James C. Carignan, Esq.); (c) special counsel to the Debtors, Morrison & Foerster, LLP, 425 Market Street, San Francisco, California (Attn: G. Larry Engel, Esq.), and Morrison & Forester LLP, 1290 Avenue of the Americas, New York, New York (Attn.: James J. DeCristofaro, Esq.); (d) co-counsel to the Noteholders, Cozen O Connor, Chase Manhattan Centre, 1201 North Market Street, Suite 1400, Wilmington, DE (Attn: Mark E. Felger, Esq.); and (e) co-counsel to the Noteholders, Lovells LLP, 590 Madison Avenue, New York, New York (Attn.: Christopher R. Donoho III, Esq.); (f) counsel to the Creditors Committee (if any); and (g) the Office of the United States Trustee, 844 King Street, Room 2313, Wilmington, Delaware (Attn: Jane Leamy, Esq.) (collectively, the Notice Parties ); then such non-debtor party should (i) be forever barred from objecting to 17

18 the Cure Amount and from asserting any additional cure or other amounts with respect to such Executory Contract and Unexpired Lease and the Debtors shall be entitled to rely solely upon the Cure Amount, and (ii) be deemed to have consented to the assumption and assignment of such Executory Contract and Unexpired Lease and shall be forever barred and estopped from asserting or claiming against the Debtors, the Successful Bidder or any other assignee of the relevant Executory Contract or Unexpired Lease that any additional amounts are due or defaults exist, or conditions to assumption or assignment must be satisfied, under such Executory Contract or Unexpired Lease; provided, however, that any counterparty may raise at the Sale Hearing an objection to the assumption and assignment of the Executory Contract or Unexpired Lease solely with respect to the Successful Bidder s ability to provide adequate assurance of future performance. 32. The Successful Bidder shall be responsible for satisfying any requirements regarding adequate assurance of future performance that may be imposed under section 365(b) of the Bankruptcy Code in connection with the proposed assignment of any Assumed Contract. The Debtors propose that the Bankruptcy Court make its determinations concerning adequate assurance of future performance under the Assumed Contracts pursuant to section 365(b) of the Bankruptcy Code at the Sale Hearing. 33. The Debtors also request that if an objection challenges a Cure Amount, the objection must set forth the cure amount being claimed by the objecting party (the Claimed Cure Amount ) with appropriate documentation in support thereof. Upon receipt of an objection to a Cure Amount, the Debtors may, in their sole discretion, hold an amount equal to the Claimed Cure Amount in reserve pending further order of the Bankruptcy Court or agreement between the Debtors and the objecting party. So long as the Debtors hold the Claimed Cure Amount in 18

19 reserve, the Debtors seek authority to assume and assign the Executory Contract or Unexpired Lease that is the subject of an objection without further delay. The Debtors propose that the Bankruptcy Court resolve any disputes regarding the Cure Amount at or after the Sale Hearing. 34. The Debtors or the Successful Bidder, as the case may be, may determine to exclude any Executory Contract or Unexpired Lease from the list of Purchased Assets at any time before the conclusion of the Sale Hearing. The non-debtor party or parties to any such excluded contract or lease will be notified of such exclusion by the fastest means feasible and reasonable under the circumstances, and by written notice. AUTHORITY FOR REQUESTED RELIEF A. The Proposed Sale of the Purchased Assets is Within the Sound Business Judgment of the Debtors and Should be Approved 35. Section 363(b)(1) of the Bankruptcy Code provides, in relevant part, that a debtor in possession, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate U.S.C. 363(b)(1). Section 363 of the Bankruptcy Code does not set forth a standard for determining when it is appropriate for a court to authorize the sale or disposition of a debtor s assets prior to confirmation of a plan. However, courts in this Circuit and others have required that the decision to sell assets outside the ordinary course of business be based upon the sound business judgment of the debtors. See In re Abbotts Dairies of Pa., Inc., 788 F.2d 143 (3d Cir. 1986); see also Myers v. Martin (In re Martin), 91 F.3d 389, 395 (3d Cir. 1996); Comm. of Equity Sec. Holders v. Lionel Corp. (In re The Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983); Dai-Ichi Kangvo Bank, Ltd. v. Montgomery Ward Holding Corp., (In re Montgomery Ward Holding Corp.), 242 B.R. 147, 153 (D. Del. 1999); In re Del. & Hudson Ry., 124 B.R. 169, 176 (D. Del. 1991). 19

20 36. The sound business judgment test requires a debtor to establish four elements in order to justify the sale or lease of property outside the ordinary course of business, namely, (a) that a sound business purpose justifies the sale of assets outside the ordinary course of business, (b) that adequate and reasonable notice has been provided to interested persons, (c) that the debtors have obtained a fair and reasonable price, and (d) that the sale was negotiated in good faith. Abbotts Dairies, 788 F.2d 143; Titusville Country Club v. Pennbank (In re Titusville Country Club), 128 B.R. 396, 399 (Bankr. W.D. Pa. 1991); In re Sovereign Estates, Ltd., 104 B.R. 702, 704 (Bankr. E.D. Pa. 1989). In this case, as set forth more fully herein, the proposed sale of the Purchased Assets and the Bidding Procedures is based upon sound business judgment and should be approved. A debtor s showing of a sound business purpose need not be unduly exhaustive but, rather, a debtor is simply required to justify the proposed disposition with sound business reasons... In re Baldwin United Corp., 43 B.R. 888, 906 (Bankr. S.D. Ohio 1984). Whether or not there are sufficient business reasons to justify a transaction depends upon the facts and circumstances of each case. Lionel, 722 F.2d at 1071; Montgomery Ward, 242 B.R. at 155 (approving funding of employee incentive and severance program; business purpose requirement fulfilled because stabilizing turnover rate and increasing morale were necessary to successful reorganization). 37. Additionally, section 105(a) of the Bankruptcy Code provides a bankruptcy court with broad powers in the administration of a case under the Bankruptcy Code. Section 105(a) provides that [t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]. 11 U.S.C. 105(a). Provided that a bankruptcy court does not employ its equitable powers to achieve a result not contemplated by the Bankruptcy Code, the exercise of its section 105(a) power is 20

21 proper. In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir. 1993); Pincus v. Graduate Loan Ctr. (In re Pincus), 280 B.R. 303, 312 (Bankr. S.D.N.Y. 2002). Pursuant to section 105(a), a court may fashion an order or decree that helps preserve or protect the value of a debtor s assets. See, e.g., Chinichian v. Campolongo (In re Chinichian), 784 F.2d 1440, 1443 (9th Cir. 1986) ( Section 105 sets out the power of the bankruptcy court to fashion orders as necessary pursuant to the purposes of the Bankruptcy Code. ); In re Cooper Props. Liquidating Trust, Inc., 61 B.R. 531, 537 (Bankr. W.D. Tenn. 1986) (noting that bankruptcy court is one of equity and as such it has a duty to protect whatever equities a debtor may have in property for the benefit of its creditors as long as that protection is implemented in a manner consistent with the bankruptcy laws. ). 38. The Debtors submit that more than ample business justification exists to sell the Purchased Assets to the Successful Bidder pursuant to the Bidding Procedures. The prompt sale of the Purchased Assets pursuant to the procedures and timelines proposed presents the best opportunity to maximize the value for the estates. The Debtors believe that the Bidding Procedures are the best method by which they can obtain the best price for the Purchased Assets and provide interested parties with accurate and reasonable notice of the sale. The Bidding Procedures will allow the Debtors to conduct the Auction in a controlled, fair and open fashion that will encourage participation by financially capable bidders who demonstrate the ability to close a transaction, thereby ensuring a competitive and fair bidding process, increasing the likelihood that the Debtors will receive the best possible consideration for the Purchased Assets, and satisfying the first prong of Abbotts Dairies. 39. In addition, the notice described herein and in the Bidding Procedures Order is designed to provide adequate notice to all potentially interested parties, including those 21

22 who have previously expressed an interest in purchasing the Purchased Assets in the past six months. Accordingly, the proposed sale of the Purchased Assets satisfies the second prong of the Abbotts Dairies standard. 40. The Bidding Procedures are also designed to maximize the value received for the Purchased Assets. The process proposed by the Debtors allows for a timely auction process while providing bidders ample time and information to submit a timely bid. Along with the Debtors marketing process, the Bidding Procedures are designed to ensure that the Purchased Assets will be sold for the highest or otherwise best possible purchase price. The Debtors are subjecting the value of the Purchased Assets to market testing and permitting prospective purchasers to bid on the Purchased Assets, thereby subjecting the proposed sale to a market check through the solicitation of competing bids in a court-supervised auction process. Accordingly, the Debtors and all parties in interest can be assured that the consideration received for the Purchased Assets will be fair and reasonable, and therefore the third prong of the Abbotts Dairies standard is satisfied. 41. The good faith prong of the Abbotts Dairies standard is also satisfied here. The Debtors request that the Bankruptcy Court find that the Successful Bidder is entitled to the benefits and protections provided by section 363(m) of the Bankruptcy Code in connection with the sale of the Purchased Assets. 42. The Bidding Procedures have been proposed in good faith and provide for both the Debtors and the potential purchaser to act in good faith in negotiating the sale of the Purchased Assets and the related assignment of the Executory Contracts and Unexpired Leases. Although the Bankruptcy Code does not define good faith purchaser, the Third Circuit, construing section 363(m) of the Bankruptcy Code, has stated that the phrase encompasses one 22

23 who purchases in good faith and for value. Abbots Dairies, 788 F.2d at 147. To constitute lack of good faith, a party s conduct in connection with the sale must usually amount to fraud, collusion between the purchaser and other bidders, or the trustee, or an attempt to take grossly unfair advantage of other bidders. Id. (citing In re Rock Indus. Mach. Corp., 572 F.2d 1195, 1198 (7th Cir. 1978)). See also In re Bedford Springs Hotel, Inc., 99 B.R. 302, 305 (Bankr. W.D. Pa. 1989); In re Perona Bros., Inc., 186 B.R. 833, 839 (D.N.J. 1995). Due to the absence of a bright line test for good faith, the determination is based on the facts of each case, concentrating on the integrity of an actor s conduct during the sale proceedings. In re Pisces Leasing Corp., 66 B.R. 671, 673 (E.D.N.Y. 1986) (quoting Rock Indus. Mach. Corp., 572 F.2d at 1998). 43. Here, the sale of the Purchased Assets and the assignment of the Executory Contracts and Unexpired Leases, as designated by any Successful Bidder, will be in good faith. As discussed throughout this Motion, and as will be further demonstrated at the Sale Hearing, any sale agreement will be the culmination of a solicitation and negotiation process in which all parties will be represented by counsel. Except for one of the Noteholders, no known potential bidder for the Purchased Assets is an insider of the Debtors, as that term is defined in section 101(31) of the Bankruptcy Code, and all negotiations have been and will continue to be conducted on an arms length, good faith basis. Moreover, there is no evidence of fraud or collusion in terms of the proposed sale. With respect to the potential bidders, the Bidding Procedures are designed to ensure that no party is able to exert undue influence over the process. Accordingly, the proposed sale of the Purchased Assets satisfies the fourth prong of the Abbotts Dairies standard. 23

24 44. All parties in interest will receive notice of the proposed sale and will be provided with an opportunity to be heard. Additionally, all counterparties to Executory Contracts and Unexpired Leases will be provided notice of assumption or assignment and an opportunity to be heard. The Debtors submit that such notice is adequate for entry of the Bidding Procedures Order and satisfies the requisite notice provisions required under sections 363(b) and 365 of the Bankruptcy Code. B. Assumption and Assignment of Executory Contracts and Unexpired Leases Should be Approved 45. To facilitate and effectuate the sale of the Purchased Assets, the Debtors seek authority to assume and assign various Executory Contracts and Unexpired Leases to the Successful Bidder to the extent required by the Successful Bidder. Section 365 of the Bankruptcy Code authorizes a debtor to assume or assign its executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court, provided that the defaults under such contracts and leases are cured and adequate assurance of future performance is provided. A debtor s decision to assume or reject an executory contract or unexpired lease must only satisfy the business judgment rule and will not be subject to review unless such decision is clearly an unreasonable exercise of such judgment. Group of Institutional Investors v. Chicage, Milwaukee, St. Paul & Pac. Ry., 318 U.S. 523 (1943) (applying Bankr. Act section 77 subsection (b), predecessor to Bankruptcy Code Section 365, and rejecting test of whether executory contract was burdensome in favor of whether rejection is within debtor s business judgment); Lubrizol Enters. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043, (4th Cir. 1985). 46. The meaning of adequate assurance of future performance depends on the facts and circumstances of each case, but should be given practical, pragmatic construction. 24