SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 25, 1997
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Craftmatic Industries, Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-14261 23-2394334
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
2500 Interplex Drive, Trevose, Pennsylvania 19053
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (215) 639-1310
--------------
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(Former name or former address, if changed since last report)
Item 3. Bankruptcy or Receivership
Confirmation of Plan of Reorganization.
---------------------------------------
The purpose of this Form 8-K is to set forth certain items relating to
the Chapter 11 reorganization of Craftmatic Industries, Inc. (the "Company"),
namely, that the Company's plan of reorganization was approved by the bankruptcy
court and that, in connection with the implementation of the plan of
reorganization, the Company will cease to be a reporting company under the
Securities Exchange Act of 1934.
Background
Under cover of a Form 8-K dated January 25, 1996, Craftmatic
Industries, Inc., a Delaware corporation, (the "Company") reported that the
Company and its wholly-owned subsidiary, Craftmatic Organization, Inc.
("Organization") (the Company and Organization are hereafter collectively
referred to as the "Debtors") filed separate voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code"), on January 12, 1996, in United States Bankruptcy Court for the Southern
District of New York (the "Court"). By order of the court, the two cases were
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administratively consolidated for procedural purposes only. (Case Nos. 96B40154
and 96B40155).
On March 20, 1997, the Debtors filed their Consolidated Plan of
Reorganization (the "Plan") with the Court. A copy of the Plan is annexed hereto
as Exhibit A. In connection with the Plan, the Debtors filed an Amended
Disclosure Statement, dated May 6, 1997, with the Court (the "Disclosure
Statement") which Disclosure Statement was approved by the Court on May 15,
1997, as containing adequate information pursuant to Section 1125 of the
Bankruptcy Code.
Thereafter, the Debtors delivered copies of the Plan and the Disclosure
Statement, together with all exhibits and schedules thereto to (i) every holder
of a claim against the Debtors and every holder of an equity interest in the
Company, (ii) all other persons who filed and did not withdraw a notice of
appearance in the Chapter 11 case of the Debtors, (iii) the Office of the United
States Trustee, (iv) every entity that was listed in the Debtors' schedules of
assets and liabilities as a party to an unexpired executory contract or
unexpired lease with the Debtors or that filed a claim against the Debtors, (v)
the United States Attorney for the Southern District of New York, (vi) the
District Director of the Internal Revenue Service and (vii) the Securities and
Exchange Commission.
The Court's order approving the Disclosure Statement fixed June 18,
1997 at 5:00 p.m. as the last date and time by which (i) ballots were to have
been received by the Debtors and the Official Committee of Unsecured Creditors
in order to be counted as acceptances or rejections of the Plan and (ii) all
objections to the Confirmation of the Plan were to have been filed in writing.
Summary of the Plan
The Debtors filed their chapter 11 cases on January 12, 1996. The
filings were precipitated by the erosion of the Debtors' cash position that
occurred as a result of (a) substantial declines in sales as a result of the
declined economy, (b) substantial uncollectible receivables from several of the
Debtors' distributors and (c) defending several lawsuits commenced against the
Debtors by various State Attorneys General offices. During the course of the
chapter 11 proceedings, the Debtors worked to significantly reduce costs and
improve sales and resolve the aforementioned lawsuits.
The purpose of the Plan is to provide creditors and shareholders of the
Company with a distribution while providing for a surviving, financially stable
operating entity with which to continue to do business. The Plan resulted from
the Debtors' efforts to negotiate an arrangement with the creditors' committee
to maximize the recovery for the Debtors' unsecured creditors. The Plan provided
for (a) full payment of the priority portion of all Administrative Claims,
Priority Wage Claims, Priority Tax Claims, and Priority Claims; (b) partial
payment and restructuring of the claim of the Debtors' secured lender Leggett &
Platt, Inc. ("Leggett & Platt"); and (c) a ten percent (10%) distribution to
general unsecured creditors. Holders of common stock would be paid $.01 per
share of Common Stock and upon the Effective Date of the Plan all outstanding
(2)
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shares of Common Stock of the Company would be extinguished under the Plan. The
Debtors' Employee Stock Ownership Plan (the "ESOP") would not retain its
Preferred Shares but would receive a lump sum cash payment in the aggregate
amount of $200,000. Stanley A. Kraftsow, the Debtors' President would pay
$200,000 to the bankruptcy estate in new value for the purpose of funding the
Plan. In connection therewith, Mr. Kraftsow waived his right of distribution
with respect of his Preferred Shares and his shares of Common Stock of the
Company.
The distributions to each class of claimants and equity interest holders is
summarized below:
Class Description and Description of Distribution
Estimated Amount of Claims Under the Plan
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Class 1: Administrative Claims Payment in full, in cash,
on the latest of (a) the
Effective Date; (b) when
allowed by the if
subsequent to the
Effective Date; or (c)
upon such other terms as
may be agreed upon by the
Debtors and the holders of
such claims.
Class 2: Priority Tax Claims Payment in full, in cash,
on the latest of (a) the
Effective Date or (b) the
date such Priority Tax
Claims come due.
Class 3: Priority Claims and Payment in full, in cash,
Priority Wage Claims other on the Effective Date of
Than Class 2 Priority Tax Claims the amounts entitled to
priority. Any Priority
Claims or Priority Wage
Claims which exceed the
priority set forth in the
Bankruptcy Code will be
treated as Class 6 General
Unsecured Claims.
Class 4: Secured Leggett & Platt Lump sum payment of
("L&P") Claim (approximately $2,392,000) $338,000 under the L & P
Promissory Note, with the
balance of $338,000
thereunder paid over
twelve (12) months.
Payment on the Revolving
Credit Agreement shall be
made under the existing
terms of such agreement.
The Requirements Agreement
shall be modified solely
to extinguish the
$1,200,000 claim against
the Debtors; all other
terms shall remain in
place.
Class 5: Other Secured Claims Other Secured Claims
shall be paid in full
pursuant to the
underlying agreements
between the
respective parties.
(3)
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Class 6: Unsecured Claims Ten percent (10%) lump sum
(approximately $1,800,000) payment, in full, in cash,
without interest on the
latest to occur of (a) the
Effective Date; (b) the
date such Unsecured Claim
becomes Allowed; or (c)
upon such other terms as
may be agreed upon between
the Debtors and the
respective holders of such
Unsecured Claims.
Class 7: Unsecured Insider Claims No payments shall be made
thereon until all Class 1,
2, 3 and 6 Allowed Claims
are paid in full.
Thereafter, each such
Claim shall be paid as may
be agreed by the
Reorganized Debtor and the
holder of such Claims.
Class 8: Equity Interest of the Lump sum payment of
Company's Preferred Shareholders $200,000 to the ESOP
(ESOP Holders) Trustee to occur after the
Confirmation Date on a
date agreeable to the ESOP
Trustee. After such lump
sum payment, the Preferred
Shares held by the ESOP
shall be canceled. Stanley
A. Kraftsow and Carolyn
Kraftsow shall not be paid
for their ESOP Preferred
Shares.
Class 9: Equity Interest of the Class 9 Equity Interest
Holders of Common Stock Holders shall be paid $.01
of the Company per share of the Company's
Common Stock. After such
payment, all Common Stock
of the Company, with the
exception of the shares
held by Stanley Kraftsow,
Carolyn Kraftsow and
trusts held for their
children shall be
canceled. Neither Stanley
A. Kraftsow, Carolyn
Kraftsow nor trusts for
their children shall be
paid for their Common
Stock.
Under the Plan, creditors and shareholders were classified as follows:
CLASS STATUS
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Class 1: Administration Expense Claims Unimpaired
Class 2: Priority Tax Claims Unimpaired
Class 3: Priority Claims Unimpaired
(4)
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Class 4: Secured Leggett & Platt Claim Impaired
Class 5: Other Secured Claims Unimpaired
Class 6: General Unsecured Claims Impaired
Class 7: Unsecured Insider Claims Impaired
Class 8: Preferred Shareholders Impaired
Class 9: Common Shareholders Impaired
Classes of claims that are "Unimpaired" under the Plan are deemed, as a matter
of law, under Section 1126(f) of the Bankruptcy Code to have accepted the Plan
and were therefore not entitled to vote on the Plan. Accordingly, Class 1, 2, 3
and 5 claimants were not entitled to vote to accept or reject the Plan.
Of the Classes entitled to vote to accept or reject the Plan, the sole
Class 4 creditor voted to accept the Plan; the Class 6 Unsecured Creditors voted
to accept the Plan; no ballots were received from the Class 7 Unsecured
Insiders; the ESOP Trustee voted to accept the Plan; and of the Class 9 Equity
Interest Holders, twenty-four (24) of such holders voted on the Plan, of which
twenty-one (21) holders (representing 316,050 shares of Common Stock) voted to
accept the Plan and three (3) holders (representing 7,500 shares of Common
Stock) voted to reject the Plan. Accordingly, the Plan was accepted by all
classes of Creditors and Equity Interest Holders entitled to vote.
The Confirmation Order
On June 25, 1997, the Court issued an order confirming the Debtors'
Plan of Reorganization under Chapter 11 of the Code (the "Confirmation Order").
Under the Confirmation Order, the court found, among other things, that the Plan
conformed with all applicable provisions of the Code, that the procedures by
which the ballots for acceptance or rejection of the Plan were solicited and
tabulated were fair, properly conducted and in accordance with the Code, the
Bankruptcy Rules and applicable nonbankruptcy law.
Item 7. Exhibits
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
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Exhibit No.
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3.1 Form of Plan of Reorganization
3.2 Disclosure Statement
(5)
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CRAFTMATIC INDUSTRIES, INC.
Date: September 22, 1997 By: /s/ Stanley A. Kraftsow
--------------------------------
Stanley A. Kraftsow,
Chairman of the Board,
Chief Executive Officer
and President
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- ----------------------------------------------X
In re :
In Proceedings For
CRAFTMATIC INDUSTRIES, INC., and : Reorganization Under
CRAFTMATIC ORGANIZATION, INC., Chapter 11
d/b/a/ EAK Advertising Co., : Case Nos. 96 B 40154
96 B 40155 (SMB)
Debtors. : Jointly Administered
- ----------------------------------------------X
DEBTORS' CONSOLIDATED PLAN OF REORGANIZATION
--------------------------------------------
PARKER CHAPIN FLATTAU & KLIMPL, LLP
Attorneys for Debtors and
Debtors-in-Possession
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
Dated: March 20, 1997
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TABLE OF CONTENTS
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ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION......................................................1
I.1 "Administrative Expense Claim" .................................................................2
I.2 "Administrative Expense Claims Bar Date"........................................................2
I.3 "Allowed".......................................................................................3
I.4 "Anniversary Date"..............................................................................3
I.5 "Attorney General Actions"......................................................................3
I.6 "Avoidance Actions".............................................................................3
I.7 "Bankruptcy Code" ..............................................................................3
I.8 "Bankruptcy Court"..............................................................................4
I.9 "Bankruptcy Rules"..............................................................................4
I.10 "Bar Date"......................................................................................4
I.11 "Business Day"..................................................................................4
I.12 "Cash"..........................................................................................4
I.13 "Chapter 11 Case" or "Case".....................................................................4
I.14 "Claim".........................................................................................4
I.15 "Claimant"......................................................................................4
I.16 "Class".........................................................................................4
I.17 "Committee".....................................................................................5
I.18 "Common Shares or Shareholder"..................................................................5
I.19 "Confirmation"..................................................................................5
I.20 "Confirmation Date".............................................................................5
I.21 "Confirmation Order"............................................................................5
I.22 "Craftmatic"....................................................................................5
I.23 "Craftmatic U.K."...............................................................................5
I.24 "Creditor"......................................................................................5
I.25 "Debtors".......................................................................................5
I.26 "DIP Account"...................................................................................6
I.27 "Disallowed Amount".............................................................................6
I.28 "Disclosure Statement"..........................................................................6
I.29 "Disputed Claim"................................................................................6
I.30 "Distribution Dates"............................................................................7
I.31 "Distribution"..................................................................................7
I.32 "Effective Date"................................................................................7
I.33 "Entity"........................................................................................7
I.34 "Equity Interest" or "Interest".................................................................7
I.35 "ESOP"..........................................................................................7
I.36 "ESOP Trustee"..................................................................................7
I.37 "Estate"........................................................................................7
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I.38 "Estate Property"...............................................................................7
I.39 "Executory Contract"............................................................................8
I.40 "Face Amount"...................................................................................8
I.41 "Final Order"...................................................................................8
I.42 "Insider".......................................................................................8
I.43 "Kraftsow Payment" .............................................................................8
I.44 "L&P"...........................................................................................9
I.45 "L&P Secured Claim".............................................................................9
I.46 "L&P Promissory Note"...........................................................................9
I.47 "L&P Requirements Agreement"....................................................................9
I.48 "L&P Revolving Credit Agreement"................................................................9
I.49 "Lien"..........................................................................................9
I.50 "Local Rules"...................................................................................9
I.51 "Other Secured Claim"...........................................................................9
I.52 "Payoff Date"...................................................................................9
I.53 "Person".......................................................................................10
I.54 "Petition".....................................................................................10
I.55 "Petition Date"................................................................................10
I.56 "Plan".........................................................................................10
I.57 "Preferred Shareholder"........................................................................10
I.58 "Priority Claim"...............................................................................10
I.59 "Priority Tax Claim"...........................................................................10
I.60 "Priority Wage Claim"..........................................................................10
I.61 "Professional Administrative Expense Claim"....................................................11
I.62 "Professional Persons".........................................................................11
I.63 "Property".....................................................................................11
I.64 "Reorganized Debtors"..........................................................................11
I.65 "Reorganized Debtors Assets"...................................................................11
I.66 "Reserve Account" .............................................................................11
I.67 "Schedules"....................................................................................11
I.68 "Secured Claim"................................................................................11
I.69 "Tax"..........................................................................................12
I.70 "Unclaimed Property" ..........................................................................12
I.71 "Unsecured Claim" .............................................................................12
I.72 "Unsecured Insider Claim"......................................................................12
ARTICLE II CLASSIFICATION AND TREATMENT OF
CLAIMS AND EQUITY INTERESTS...............................................................13
II.1 Summary........................................................................................13
II.2 Classification and Treatment...................................................................13
II.3 Class 1: Administrative Expense Claims........................................................13
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II.4 Class 2: Priority Tax Claims..................................................................14
II.5 Class 3: Priority Claims and Priority Wage Claims.............................................14
II.6 Class 4: Secured L&P Claim....................................................................15
II.7 Class 5: Other Secured Claims.................................................................15
II.8 Class 6: General Unsecured Claims.............................................................16
II.9 Class 7: Unsecured Insider Claims.............................................................16
II.10 Class 8: Equity Interests: Preferred Shareholders............................................16
II.11 Class 9: Equity Interests: Common Shareholders...............................................17
II.12 Form of Payments...............................................................................17
II.13 Time Limit for Objection to Claims.............................................................17
II.14 Resolution of Disputed Claims..................................................................18
II.15 Payments.......................................................................................18
II.16 Right of Pre-Payment...........................................................................18
II.17 No payments on Account of Disputed Claims......................................................18
II.18 Reserve for Disputed Claims....................................................................18
II.19 Nonconsensual Confirmation/Cramdown............................................................19
ARTICLE III ACCEPTANCE OR REJECTION OF THE PLAN.......................................................20
III.1 Voting Classes.................................................................................20
III.2 Acceptance by Impaired Classes.................................................................20
III.3 Presumed Acceptance of Plan....................................................................20
III.4 Confirmability of the Plan.....................................................................20
III.5 Controversy Concerning Impairment..............................................................20
ARTICLE IV MEANS FOR EXECUTION OF THE PLAN...........................................................21
IV.1 Reorganized Debtors' Ability to Make the Distribution Provided For in the
Plan...........................................................................................21
IV.2 Vesting of Assets..............................................................................21
IV.3 Actions Prior the Effective Date...............................................................21
IV.4 Powers and Duties of the Reorganized Debtors' Operation of Business............................22
IV.5 Preferences and Fraudulent Conveyances.........................................................22
IV.6 Authority to Object to Claims, Compromise Litigation and Contested
Matters, and Abandon Estate Assets.............................................................22
IV.7 Further Authorization..........................................................................23
ARTICLE V EFFECTS OF CONFIRMATION...................................................................24
V.1 Discharge of Claims............................................................................24
V.2 Binding Effect/Injunction......................................................................24
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V.3 Pursuit of Available Claims and Causes of Action and Objections to Claims......................25
ARTICLE VI CONDITIONS PRECEDENT TO THE PLAN BECOMING
EFFECTIVE.................................................................................26
VI.1 Conditions.....................................................................................26
ARTICLE VII EXECUTORY CONTRACTS AND NONRESIDENTIAL REAL
PROPERTY LEASES...........................................................................26
VII.1 Assumption of Executory Contracts..............................................................26
VII.2 Treatment of Allowed Rejection Claims..........................................................26
ARTICLE VIII RETENTION OF JURISDICTION.................................................................26
VIII.1 Retention of Jurisdiction......................................................................27
ARTICLE IX THE COMMITTEE.............................................................................28
IX.1 Committee......................................................................................28
ARTICLE X MODIFICATION OF THIS PLAN.................................................................29
X.1 Modification...................................................................................29
ARTICLE XI SUBSTANTIVE CONSOLIDATION.................................................................29
XI.1 Substantive Consolidation......................................................................29
XI.2 Order Granting Substantive Consolidation.......................................................30
ARTICLE XII MISCELLANEOUS PROVISIONS..................................................................31
XII.1 Net Operating Loss.............................................................................31
XII.2 Transfer Free and Clear of Taxes...............................................................31
XII.3 Amendment and Restatement of Debtors Certificates of Incorporation.............................31
XII.4 Exculpation and Releases.......................................................................32
XII.5 Fractional Cents and Cents.....................................................................32
XII.6 Cancellation of Interests......................................................................33
XII.7 Unclaimed Property.............................................................................33
XII.8 Amendment of the Plan..........................................................................33
XII.9 Severability...................................................................................33
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XII.10 Revocation.....................................................................................34
XII.11 Binding Effect.................................................................................34
XII.12 Successors and Assigns.........................................................................34
XII.13 Governing Law..................................................................................34
XII.14 Headings.......................................................................................34
XII.15 Notices........................................................................................35
XII.16 Rules of Interpretation........................................................................35
XII.17 Releases of Professionals......................................................................36
XII.18 Confirmation Order.............................................................................36
XII.19 Computation of Time............................................................................36
XII.20 No Admissions..................................................................................36
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- -------------------------------------------------X
In re :
In Proceedings For
CRAFTMATIC INDUSTRIES, INC., and : Reorganization Under
CRAFTMATIC ORGANIZATION, INC., Chapter 11
d/b/a/ EAK Advertising Co., : Case Nos. 96 B 40154
96 B 40155 (SMB)
Debtors. : Jointly Administered
- -------------------------------------------------X
DEBTOR'S PLAN OF REORGANIZATION
-------------------------------
Craftmatic Industries, Inc. and Craftmatic Organization, Inc., debtors
and debtors-in-possession, hereby propose the following plan of reorganization
pursuant to the provisions of chapter 11 of Title 11 of the United States Code,
11 U.S.C. ss.101, et seq.
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
-------------------------------------
For the purposes of this Plan, the following terms shall have the
respective meanings as hereinafter set forth (such meanings to be equally
applicable to the singular and plural forms of the terms defined, unless the
context otherwise requires). Capitalized terms, used in this Plan, shall at all
times, refer to the terms as defined in this Article One. A term used in this
Plan, which is not defined herein, but is defined in the Bankruptcy Code, shall
have the meaning assigned to such term in the Bankruptcy Code. A term used in
this Plan,
<PAGE>
which is not defined herein, or in the Bankruptcy Code, but is defined in the
Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), shall have the
meaning assigned to such term in the Bankruptcy Rules. Accounting terms, if any,
not otherwise defined in this Plan, shall have the meanings assigned to them, in
accordance with generally accepted accounting principles currently in effect.
The words "herein," "hereof" and "hereunder" and other words of similar import
refer to this Plan as a whole, including all exhibits and schedules, if any,
annexed hereto, as the same may from time to time be amended or supplemented,
and not to any particular Article, Section or subdivision contained in this
Plan.
I.1 "Administrative Expense Claim" means a claim for any unpaid cost or
expense of administration in connection with this Bankruptcy Case of a kind
specified in sections 503(b) and 502(f) of the Bankruptcy Code and referred to
in section 507(a)(1) of the Bankruptcy Code, including, without limitation, any
actual and necessary costs and expenses incurred after the Filing Date and up to
the Effective Date of preserving the Estate of the Debtor, any indebtedness or
obligation expressly incurred or assumed by the Debtor, as debtor-in-possession,
in connection with the conduct of its business or businesses, allowances of
compensation for legal or other services and reimbursement of costs and expenses
under sections 330 (a) or 331 of the Bankruptcy Code or otherwise allowed by the
Bankruptcy Court, all costs of making distributions and providing notices and
ballots with respect to this Plan, and all fees and charges assessed against the
Estate under chapter 123 of title 2 of the United States Code.
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I.2 "Administrative Expense Claims Bar Date" means sixty (60) days
after the Confirmation Date, which date may be further extended by the
Bankruptcy Court for cause shown. The Administrative Expenses Bar Date shall be
the last date for professionals or other entities to file a claim requesting
compensation or reimbursement of expenses pursuant to sections 327, 328, 330,
331, 503, 506 or 1103 of the Bankruptcy Code for services rendered through and
including the Confirmation Date.
I.3 "Allowed" means a Claim or Ownership Interest or portion thereof:
(i) which is scheduled by the Debtor pursuant to sections 521(1) and 1106(a)(2)
of the Bankruptcy Code, other than a Claim or Ownership Interest which is
scheduled by the Debtor as disputed, contingent, unliquidated or unknown; or
(ii) proof of which has been filed, pursuant to section 501(a) of the Bankruptcy
Code, on or before the Bar Date, and in either case as to which Claim or
interest no objection to the allowance thereof has been or can be interposed
prior to the final date for filing such objections set forth in an order of the
Bankruptcy Court; or (iii) which, after objection thereto, has been allowed, in
whole or in part, by a Final Order; or (iv) which has been allowed pursuant to
this Plan or a Final Order.
I.4 "Anniversary Date" means the first (1st) Business Day one (1) year
after the last day of the month preceding the Effective Date, and each
anniversary of such Business Day thereafter.
I.5 "Attorney General Actions" means those investigations or civil
actions commenced against the Debtors by various state agencies for Debtor's
alleged failure to comply with state law.
-3-
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I.6 "Avoidance Actions" means those actions arising under sections 546,
547, 548, and 550 of the Bankruptcy Code.
I.7 "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as
amended, and as codified in Title 11 of the United States Code, 11 U.S.C.
ss.101 et seq. as in effect from time to time.
I.8 "Bankruptcy Court" means the United States Bankruptcy Court for the
Southern District of New York, with jurisdiction over the Chapter 11 case.
I.9 "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure,
as amended, in effect on the Effective Date.
I.10 "Bar Date" means July 17, 1996 such date having been fixed by
order of the Bankruptcy Court, on or before which date all Persons asserting a
Claim against the Debtor (other than the Debtor's Professionals or Persons
asserting Administrative Claims) must have filed a proof of claim or be forever
barred from asserting a Claim against the Debtor or its property, and from
voting on the Plan and/or sharing in any Distributions thereunder.
I.11 "Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in the State of New York are authorized or
required by law to close.
I.12 "Cash" means lawful currency of the United States of America.
I.13 "Chapter 11 Case" or "Case" means the Debtors jointly administered
cases for reorganization under chapter 11 of the Bankruptcy Code, Case Nos.
96 B 40154 (SMB) and 96 B 40155 (SMB) commenced as of the Petition Date.
-4-
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I.14 "Claim" means a claim against the Debtor, as such term is defined
in section 101(5) of the Bankruptcy Code.
I.15 "Claimant" means holder of a claim.
I.16 "Class" means any group of Allowed Claims which are substantially
similar to each other as classified pursuant to this Plan.
I.17 "Committee" means the official committee of unsecured creditors
heretofore appointed in the Debtor's Chapter 11 Case by the United States
Trustee pursuant to section 1102 of the Bankruptcy Code, as may be redesignated
from time to time.
I.18 "Common Shares or Shareholder" means any person or entity holding
common shares of Industries.
I.19 "Confirmation" means the entry by the Bankruptcy Court of the
Confirmation Order.
I.20 "Confirmation Date" means the date of the entry of the
Confirmation Order upon the legal docket of the Clerk of the Bankruptcy Court.
I.21 "Confirmation Order" means the order signed and issued by the
Bankruptcy Court pursuant to section 1129 of the Bankruptcy Code confirming this
Plan, and approving and authorizing the implementation of the transactions
contemplated herein, as such order may be amended, modified or supplemented.
I.22 "Craftmatic" means the Debtors.
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I.23 "Craftmatic U.K." means that non-Debtor party owned and controlled
by Stanley Kraftsow which has the exclusive right to sell "Craftmatic" Beds in
the United Kingdom pursuant to written agreement.
I.24 "Creditor" means the holder of a Claim, an Allowed Claim or a
Disputed Claim, as the case may be.
I.25 "Debtors" means Craftmatic Industries, Inc. and Craftmatic
Organization, Inc. which filed petitions for reorganization under chapter 11 of
the Bankruptcy Code with the Bankruptcy Court on the Petition Date; and (ii) the
Reorganized Debtors, where required within the context of the Plan.
I.26 "DIP Account" means the Debtor-in-Possession bank accounts
maintained by the Debtors during the Chapter 11 Case.
I.27 "Disallowed Amount" means, with respect to a particular Disputed
Claim, the amount, if any, by which the Face Amount of such Creditor's Disputed
Claim exceeds the Allowed Amount of such Claim.
I.28 "Disclosure Statement" means the Disclosure Statement respecting
the Plan filed by the Debtors in the Chapter 11 Case, and approved by order of
the Bankruptcy Court as containing adequate information in accordance with
section 1125 of the Bankruptcy Code.
I.29 "Disputed Claim" means a Claim (or portion thereof) against the
Debtors as to which: (a) a proof of Claim has been filed, or deemed filed, under
applicable law or order of the Bankruptcy Court, with the Bankruptcy Court; (b)
an objection has been timely filed; and
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<PAGE>
(c) such objection has not been: (i) withdrawn, (ii) overruled or denied in
whole by a Final Order, or (iii) granted in whole or part by a Final Order;
provided, however, the Bankruptcy Court may estimate a Disputed Claim for
purposes of allowance pursuant to section 502(c) of the Bankruptcy Code. For
purposes of the Plan, a Claim shall be considered a Disputed Claim in its
entirety if: (w) before the time that an objection has been filed, the amount of
the Claim specified in the proof of Claim exceeds the amount of any
corresponding Claim scheduled by the Debtor in the Schedules; (x) there is a
dispute as to classification of the Claim; (y) the Claim is unliquidated; or (z)
the Claim has been or hereafter is listed on the Schedules as unliquidated,
disputed, or contingent, or is not listed on the Schedules.
I.30 "Distribution Dates" means the Effective Date (or the next
Business Day, if such date does not fall on a Business Day) and the succeeding
dates on which Distributions will be made by the Reorganized Debtors pursuant to
the Plan.
I.31 "Distribution" means the payment to Creditors by the Reorganized
Debtors on the Effective Date as required by, this Plan.
I.32 "Effective Date" means the later of (a) the first (1st) Business
Day after the Confirmation Order becomes a Final Order, (b) the date the
conditions precedent set forth in Article V.1 of the Plan have been satisfied or
(c) such other date as may be fixed by Order of the Court.
I.33 "Entity" shall have the meaning set forth in section 101(15) of
the Bankruptcy Code.
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I.34 "Equity Interest" or "Interest" means any equity interest in the
Debtors, and any option, warrant or other agreement requiring the issuance of
any such equity interest.
I.35 "ESOP" means the Employee Stock Ownership Plan of Industries.
I.36 "ESOP Trustee" means either of the two appointed trustees (Stanley
Halbert, CPA or Harvey Shapiro, Esq.) of the ESOP.
I.37 "Estate" means all of the assets of the Debtors as of the Petition
Date as provided for by section 541 of the Bankruptcy Code.
I.38 "Estate Property" means (i) all property constituting the Debtors'
Estate within the meaning of section 541 of the Bankruptcy Code, including
without limitation all of the Debtors' rights, title and interest in the
properties identified in the Schedules, all proceeds and income from or of such
properties, and all Claims of the Debtors.
I.39 "Executory Contract" means any unexpired leases or executory
contracts within the meaning of section 365 of the Bankruptcy Code.
I.40 "Face Amount" means with respect to any Claim,
(a) if the holder of such Claim has not timely filed proof
thereof with the Bankruptcy Court, the amount, if any, of such
Claim as listed in the Schedules, however the Face Amount
shall not include any Claim listed in the Schedules as either
contingent, unliquidated, or disputed if the holder of such
Claim has not timely filed proof thereof with the Bankruptcy
Court;
(b) if the holder of such Claim has timely filed proof thereof
with the Bankruptcy Court: (i) the amount stated in such proof;
or (ii) the amount otherwise directed by an order of the
Bankruptcy Court; or
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(c) notwithstanding the provisions of subsections (a) and (b), if
an Allowed Amount has been established or determined by the
Bankruptcy Court, the Allowed amount of such Creditor's Claim.
I.41 "Final Order" means a judgment, order or decree issued and entered
by the Bankruptcy Court or by any state or federal court or other tribunal
located in one of the states, territories or possessions of the United States or
the District of Columbia, which judgment, order or decree has not been reversed
or stayed and as to which the time to appeal therefrom has expired and as to
which no appeal or petition for review, rehearing or certiorari is pending. In
the event of an Order confirming the Debtors' Plan is challenged, if no stay is
obtained, the Plan shall become effective.
I.42 "Insider" has the same meaning ascribed to it by section 101(31)
of the Bankruptcy Code.
I.43 "Kraftsow Payment" means that certain payment by Stanley Kraftsow
in the amount of $200,000.00.
I.44 "L&P" shall mean the Debtors' secured creditor and post-petition
lender Leggett and Platt, Incorporated.
I.45 "L&P Secured Claim" shall be the indebtedness due under the L&P
Promissory Note, L&P Requirements Agreement, and L&P Revolving Credit Agreement.
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I.46 "L&P Promissory Note" means that certain promissory note dated
December 1, 1994 executed by both Debtors and L&P in the original principal
amount of $1,500,000.00.
I.47 "L&P Requirements Agreement" means that certain agreement dated
December 1, 1994 executed by Organization and L&P in the original amount of
$1,200,000.00.
I.48 "L&P Revolving Credit Agreement" means that certain agreement
evidenced by a promissory note dated October 28, 1994 executed by Organization
and L&P in the original principal amount of $900,000.00.
I.49 "Lien" shall have the meaning assigned to it in section 101(37) of
the Bankruptcy Code.
I.50 "Local Rules" means the Local Bankruptcy Rules of the Bankruptcy
Court, as amended, in effect as of the Effective Date.
I.51 "Other Secured Claim" means any Claim to the extent of the value
of the assets which the Creditor holding the Claim has a Lien except that Other
Secured Claims shall not include the L&P Secured Claim.
I.52 "Payoff Date" means the date that the obligations under this Plan
to holders of Allowed Claims are paid the full amount of their Allowed Claims.
I.53 "Person" shall have the meaning assigned to it in section 101(41)
of the Bankruptcy Code.
I.54 "Petition" means the voluntary chapter 11 bankruptcy Petitions
filed at the Bankruptcy Court by the Debtors on the Petition Date.
I.55 "Petition Date" means January 12, 1996 the date on which the
Debtors filed their petitions for relief under chapter 11 of the Bankruptcy Code
to commence the Chapter 11 Cases.
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I.56 "Plan" means the "Debtors' Plan of Reorganization", as same may be
further amended, and all exhibits hereto, which are incorporated herein by
reference, and any amendments or modifications thereof.
I.57 "Preferred Shareholder" means any person holding Series A
Convertible Preferred Shares of Industries.
I.58 "Priority Claim" means any Claim against the Debtor entitled to
priority in accordance with sections 507(a)(2)-(a)(6) and (a)(8) of the
Bankruptcy Code.
I.59 "Priority Tax Claim": (a) means any Tax Claim against the Debtor
entitled to priority in accordance with section 507(a)(8) of the Bankruptcy
Code; and (b) does not mean other types of Tax obligations, which are not
statutorily entitled to priority under section 507(a)(8) of the Bankruptcy Code,
which shall be Unsecured Claims.
I.60 "Priority Wage Claim" means any Claim against the Debtor entitled
to priority in accordance with sections 507(a)(3) and 507(a)(4) of the
Bankruptcy Code.
I.61 "Professional Administrative Expense Claim" means all awards of
compensation and/or reimbursement of expenses of Professional Persons made by
the Bankruptcy Court under sections 330 and/or 331 of the Bankruptcy Code.
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I.62 "Professional Persons" means Persons retained prior to the
Confirmation Date by a Final Order of the Bankruptcy Court pursuant to sections
327 or 1103 of the Bankruptcy Code.
I.63 "Property" with respect to the Debtors, has the meaning ascribed
to it in section 541 of the Bankruptcy Code.
I.64 "Reorganized Debtors" means Craftmatic Industries, Inc. and
Craftmatic Organization, Inc. on or after the Effective Date, corporations duly
organized under the State of Delaware and State of Pennsylvania, respectively.
I.65 "Reorganized Debtors Assets" means all Estate Property to be
surrendered or conveyed to the Reorganized Debtors pursuant to this Plan.
I.66 "Reserve Account" means the account holding funds in an amount in
excess of the amount necessary to satisfy the Allowed Amount of Disputed Claims.
I.67 "Schedules" means the schedules of assets and liabilities filed by
the Debtors with the Bankruptcy Court pursuant to Bankruptcy Rule 1007, as such
Schedules may be amended or supplemented from time to time pursuant to
Bankruptcy Rule 1009.
I.68 "Secured Claim" means any Claim against the Debtor which is
secured, in whole or in part, as of the Petition Date, by a Lien against Estate
Property, which Lien is valid, perfected and enforceable under applicable law
and is not subject to avoidance under the Bankruptcy Code or applicable
non-bankruptcy law, but only to the extent of the value of the assets securing
such Claim.
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I.69 "Tax" as used in "Priority Tax Claim" and elsewhere means all
taxes of any kind, including without limitation any interest, additions to tax
and penalties thereon.
I.70 "Unclaimed Property" means any Cash (together with any interest
earned thereon) that is unclaimed by a Claimant within six (6) months after such
Cash is distributed, and shall include: (i) checks (and the funds represented
thereby) that have been returned as undeliverable; (ii) funds for checks that
have not been paid or negotiated; and (iii) checks (and the funds represented
thereby) that were not mailed or delivered because of the absence of a proper
address to which to mail or deliver the same.
I.71 "Unsecured Claim" means any Claim other than a Non-Professional
Administrative Expense Claim, Professional Administrative Expense Claim,
Priority Claim, Priority Tax Claim, Priority Wage Claim, and Secured Claim, but
includes any claims arising as a result of the rejection of executory contracts
or unexpired leases pursuant to section 365 of the Bankruptcy Code.
I.72 "Unsecured Insider Claim" means any Claim held by an Insider.
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ARTICLE II
CLASSIFICATION AND TREATMENT OF
CLAIMS AND EQUITY INTERESTS
---------------------------
II.1 Summary. The categories of Claims and Equity Interests listed
below classify Allowed Claims and Allowed Equity Interests for all purposes,
including voting, confirmation, and distribution pursuant to the Plan.
<TABLE>
<CAPTION>
CLASS STATUS
----- ------
<S> <C> <C>
Class 1: Administration Expense Claims Unimpaired - not entitled to vote
Class 2: Priority Tax Claims Unimpaired - not entitled to vote
Class 3: Priority Claims Unimpaired - not entitled to vote
Class 4: Secured L & P Claim Impaired - entitled to vote
Class 5: Other Secured Claims Unimpaired - not entitled to vote
Class 6: General Unsecured Claims Impaired- entitled to vote
Class 7: Unsecured Insider Claims Impaired- entitled to vote
Class 8: Equity Interests: Impaired- entitled to vote
Preferred Shareholders
Class 9: Equity Interests: Impaired- entitled to vote
Common Shareholder
</TABLE>
II.2 Classification and Treatment. The Allowed Claims and certain
Disputed Claims against the Debtor shall be classified and receive the treatment
specified below.
II.3 Class 1: Administrative Expense Claims
(i) Treatment: Each holder of a Class 1 Claim shall be paid by the
Reorganized Debtors in full, in Cash, on the latest of (i) the date the Claim
becomes an Allowed Claim, provided however, that Administrative Expense Claims,
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that represent liabilities incurred by the Debtor in the ordinary course of its
business, will be paid or performed by the Debtor in the ordinary course of its
business and in accordance with any terms and conditions of any agreements
between the Debtor and the holders such Expense Claims; or (ii) upon such other
terms as may be agreed upon by the Debtors and the Holder of such an Allowed
Administrative Claim.
(ii) Voting: Class 1 is unimpaired and is not a class for voting
purposes. Class 1 is not entitled to vote to accept or reject the Plan.
II.4 Class 2: Priority Tax Claims
(i) Treatment: Except to the extent that the holder of an Allowed
Priority Tax Claim agrees to a different treatment, the Reorganized Debtors
shall pay to each holder of an Allowed Priority Tax Claim Cash, in an amount
equal to such Allowed Priority Tax Claim, on the later of (a) the Effective Date
or (b) the date the Debtors are otherwise obligated to pay such Allowed Claim in
accordance with the terms of the transaction giving rise to such Allowed Claim;
or (c) the date such Priority Tax Claim becomes an Allowed Priority Tax Claim.
(ii) Voting: Class 2 is unimpaired and is not a class for voting
purposes. Class 2 is not entitled to vote to accept or reject the Plan.
II.5 Class 3: Priority Claims and Priority Wage Claims
(i) Treatment: Each holder of an Allowed Class 3 Priority Claim,
including Allowed Priority Wage Claims, shall be paid the amount of such claim
entitled to priority in full, in Cash, on the later of the Effective Date (or as
soon thereafter as is practicable) if the Priority Claim or Priority Wage Claim
is an Allowed Claim on that date or, on the date the
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<PAGE>
Priority Claim or Priority Wage Claim becomes an Allowed Claim. Alternatively,
Priority Claims or Priority Wage Claims may be paid upon such terms and
conditions as may be agreed upon by and between the holder of such Claim and the
Debtor. Any remaining balance of the Allowed Priority Claims and including
Allowed Priority Wage Claims, not entitled to priority, will be treated as a
Class 6 General Unsecured Claim.
(ii) Voting: Class 3 is unimpaired by the Plan and the holders of
Claims in Class 4 are not entitled to vote to accept or reject the Plan.
II.6 Class 4: Secured L&P Claim
(i) Treatment: As the sole holder of the Class 4 L&P Claim, L&P
shall be paid as follows: lump sum payment of $338,000 on the L&P Promissory
Note on the Effective Date or such other date acceptable to L&P. The remaining
$338,000 due under the L&P Promissory Note shall be paid over a period of twelve
(12) months, with interest at two percent (2%) over the Prime Rate on the unpaid
balance, which payments shall begin on the first day of the month which begins
immediately after the Effective Date, and continuing each subsequent month until
paid in full.
The $516,000 due under the L&P Revolving Credit Agreement shall be paid
under the terms of such agreement, which shall survive according to its terms to
and for the benefit of each party.
The L&P Requirements Agreement shall modified to extinguish the
$1,200,000 indebtedness thereunder. However, all other terms of the Requirements
Agreement shall remain in full force and effect.
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(ii) Voting: Class 4 is impaired by the Plan and is entitled to
vote to accept or reject the Plan.
II.7 Class 5: Other Secured Claims
(i) Treatment; Other Secured Claims that constitute an Allowed
Claim shall be paid in full pursuant to the terms of the underlying agreement
governing such Claim.
(ii) Voting: Class 5 is unimpaired and is not entitled to vote on
the Plan.
II.8 Class 6: General Unsecured Claims
(i) Treatment: Each holder of an Allowed Class 6 General Unsecured
Claim shall be paid ten percent (10%) of such Claim, without interest, on the
latest of (a) the Effective Date; (b) the date such Claim becomes and Allowed
Claim; or (c) the date upon which the Debtors and the holder of such Allowed
Claim otherwise agree.
(ii) Voting: Class 6 is impaired by the Plan. All holders of Class
6 Claims, including those Disputed Claims which have not been objected to, are
entitled to vote to accept or reject the Plan. Holders of Class 6 Claims to
which a duly filed objection has been filed will not be entitled to vote to
accept or reject the Plan, unless the holder of a Class 6 Claim files an
appropriate motion pursuant to Bankruptcy Rule 3018.
II.9 Class 7: Unsecured Insider Claims
(i) Treatment: Each Class 7 Unsecured Insider Claim that
constitutes an Allowed Claim, shall be reconstituted as an obligation of the
Reorganized Debtors.
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However, no payments shall be made thereon until all Class 1,2,3 and 6 Allowed
Claims (as of the Effective Date) are paid in full. Thereafter, each such Claim
shall be paid as may be agreed by the Reorganized Debtors and the holder of such
Claims.
(ii) Voting: Class 7 is impaired and each holder of a Class 6 Claim
is entitled to accept or reject the Plan.
II.10 Class 8: Equity Interests: Preferred Shareholders (ESOP)
(i) Treatment: On the Effective Date, the ESOP holders (exclusive
of insiders Stanley and Carolyn Kraftsow) shall receive a lump sum payment of
$200,000.00 to be paid to the ESOP Trustee. The Series A Preferred Shares shall
be cancelled upon the payment of $200,000.00 to the ESOP Trustee on the
Effective Date or on a date agreeable to the ESOP Trustee, whether or not such
Shares are surrendered.
(ii) Voting: Class 8 is impaired and each holder of Class 8 Equity
Interest is entitled to vote to accept or to reject the Plan.
II.11 Class 9: Equity Interests: Common Shareholders
(i) Treatment: Allowed Claims and Equity Interests in Class 9 shall
receive .01 cents per share of Industries Common Shares (exclusive of insiders
Stanley and Carolyn Kraftsow and trusts for their children). Upon being paid
under the Plan, Class 9 Equity Interests (exclusive of the shares held by
Stanley Kraftsow, Carolyn Kraftsow and trusts for children) shall be cancelled,
whether or not surrendered to the Debtors or Reorganized Debtors.
(ii) Voting: Class 9 is impaired and each holder of Class 9 Equity
Interest is entitled to vote to accept or to reject the Plan.
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II.12 Form of Payments. Payments to be made by the Reorganized Debtors
to Creditors pursuant to this Plan shall be made as the Reorganized Debtors may
elect, either: (i) by a check drawn on a domestic bank; (ii) by wire transfer
from a domestic bank; or (iii) in another manner agreed to between the
Reorganized Debtors and the Creditor.
II.13 Time Limit for Objection to Claims. Objections to Claims shall be
filed by the Debtors with the Bankruptcy Court and served upon the holder of
each of the Claims to which objection is made not later than the later of sixty
(60) days subsequent to the Confirmation Date or thirty (30) days after the
filing of a Claim and service of a copy of such Claim upon the Debtors or within
such other time period as may be fixed by the Bankruptcy Court, except that,
unless otherwise extended by order of the Bankruptcy Court, the Debtors may file
an objection to the allowance of any Claim filed resulting from therejection of
an Executory Contract within the later of ninety (90) days following the
Effective Date or thirty (30) days after the filing of such Claim and service of
a copy of such Claim upon the Debtors.
II.14 Resolution of Disputed Claims. All objections to Claims shall be
litigated to Final Order, provided, however, that the Debtors may, in their sole
discretion, compromise and settle any Disputed Claim subject to the approval of
the Bankruptcy Court.
II.15 Payments. Payments and distributions to each holder of a Disputed
Claim that ultimately becomes, in whole or part, an Allowed Claim shall be made
in accordance with the provisions of Article 2 of this Plan, but shall not
include interest on the amount of such distribution from the date on which the
holder of the Allowed Claim would have been entitled to receive payment if its
Claim had not been a Disputed Claim.
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II.16 Right of Pre-Payment. At any time after the Effective Date, the
Reorganized Debtors shall have the right to prepay the Distributions required
hereunder by notifying, in writing, each holder if an Allowed Class Claim of
such intent to prepay.
II.17 No payments on Account of Disputed Claims. Notwithstanding any
other provision of the Plan, no payments or Distributions will be made on
account of a Disputed Claim or, if less than the entire Claim is a Disputed
Claim, the portion of a Claim that is a Disputed Claim, until such Claim or
portion of a Claim becomes an Allowed Claim.
II.18 Reserve for Disputed Claims. To the extent that any Claim is a
Disputed Claim, on the Effective Date, the Reorganized Debtors shall create a
reserve for the benefit of each holder of a Disputed Claim who timely filed a
proof of claim and hold in the Reserve Account that Cash which would otherwise
be distributable to such holder on the Effective Date were such Disputed Claim
an Allowed Claim on the Effective Date. The Reorganized Debtors shall hold such
reserved amount in the Reserve Account pending such time as the Disputed Claim
either becomes an Allowed Claim or is disallowed by order of the Bankruptcy
Court. In the event that the Disputed Claim becomes an Allowed Claim, the
Reserved Amount will be Distributed to such holder pursuant to the provisions of
this Plan governing the Class of Claims to which the respective holder belongs,
to the extent such Disputed Claim is Allowed, within ten (10) days after such
Disputed Claim becomes an Allowed Claim. However, with respect to any Attorney
General Claims, no reserve shall be made for any such claimant who did not
timely file a proof of claim, and who thereby waives a right to a distribution.
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In the event that the Disputed Claim is disallowed by order of the Bankruptcy
Court, then the Reserved Amount shall become property of the Reorganized
Debtors.
The holder of any Disputed Claim shall not be entitled to interest on
the reserved amount.
II.19 Nonconsensual Confirmation/Cramdown. In the event that any
Impaired Class of Claims or Interests shall fail to accept the Plan in
accordance with section 1129(a)(8) of the Bankruptcy Code, the Debtors reserve
the right to either (a) request that the Bankruptcy Court confirm the Plan in
accordance with section 1129(b) of the Bankruptcy Code or (b) modify the Plan,
with the consent of the Committee as provided in section 10.1 below.
ARTICLE III
ACCEPTANCE OR REJECTION OF THE PLAN
-----------------------------------
III.1 Voting Classes. Each holder of an Allowed Claim in Classes 4, 6,
7, 8 and 9, shall be entitled to vote to accept or reject the Plan, unless
otherwise ordered by the Court.
III.2 Acceptance by Impaired Classes. An impaired Class of Claims shall
have accepted the Plan if: (a) the holders (other than a holder designated under
section 1126(e) of the Bankruptcy Code) of at least two-thirds in amount of the
Allowed Claims voting in such Class have voted to accept the Plan; and (b) more
than one-half in number of holders (other than the holders designated under
subject 1126(e) of the Bankruptcy Code) of such Allowed Claims voting in such
Class have voted to accept the Plan.
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III.3 Presumed Acceptance of Plan. Classes 1, 2, 3 and 5 are unimpaired
under the Plan, and, therefore, are conclusively presumed to accept the Plan.
III.4 Confirmability of the Plan. The confirmation requirements of
section 1129 of the Bankruptcy Code must be satisfied with respect to the
Debtors and the Plan. If the Bankruptcy Court determines that any provisions of
the Plan are prohibited by the Bankruptcy Code, or render the Plan unconfirmable
under section 1129 of the Bankruptcy Code, the Debtors reserve the right to
sever such provisions from the Plan, and to request that the Plan, as so
modified, be confirmed.
III.5 Controversy Concerning Impairment. In the event of a controversy
as to whether any Class of Claims or Equity Interests is impaired under the
Plan, the Bankruptcy Court will, after notice and a hearing prior to the
Confirmation Date, determine such controversy.
ARTICLE IV
MEANS FOR EXECUTION OF THE PLAN
-------------------------------
IV.1 Reorganized Debtors' Ability to Make the Distribution Provided For
in the Plan. This Plan will be funded by the cash on hand and from proceeds of
the Reorganized Debtors' business.
VI.2 Vesting of Assets. Pursuant to sections 1123(a)(5)(A) and 1141 of
the Bankruptcy Code, on the Effective Date, except as set forth herein, title to
all assets and property of the Estate of the Debtors, including (without
limitation) all service marks, trade
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names, logotypes, copyrights and other intellectual property, shall pass to, and
vest in, the Reorganized Debtors free and clear of all claims, interests, Liens,
charges and other interests of Creditors arising prior to the Effective Date. As
of the Effective Date, all property and assets of the Reorganized Debtors,
including (without limitation) all service marks, trade names, logotypes,
copyrights and other intellectual property, shall be free and clear of all
Claims and Equity Interests of such holders, except as otherwise provided
herein. Except as set forth herein, any rights or causes of action owned by or
accruing in favor of the Debtors (including those arising from the Bankruptcy
Code or from the Chapter 11 Case) shall remain assets of the Reorganized
Debtors.
IV.3 Prior to the Effective Date. The Confirmation Order shall empower
and authorize the Debtor or the Reorganized Debtors to take or cause to be
taken, prior to the Effective Date, all actions which are necessary and
appropriate to enable the Debtor to (a) implement effectively the provisions of
this Plan, and (b) satisfy any and all other conditions precedent to
consummation of this Plan.
IV.4 Powers and Duties of the Reorganized Debtors' Operation of
Business. On and after the Effective Date, the Reorganized Debtors may operate
their businesses, and shall use, acquire and dispose of property free of any
restrictions of the Bankruptcy Code, the Bankruptcy Rules and the Bankruptcy
Court, except as otherwise provided herein or in the Confirmation Order. On the
Effective Date, the management, control and operation of the Reorganized Debtors
shall become the general responsibility of the Board of Directors of the
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Reorganized Debtors, who shall thereafter have the responsibility for the
management, control and operation of the Reorganized Debtors.
IV.5 Preferences and Fraudulent Conveyances. The Debtors reserve the
right to pursue preference, fraudulent conveyance, or other types of claims
under sections 544 and 547-550 of the Bankruptcy Code, or applicable state law,
that are not otherwise released under this Plan. However, the Debtors shall not
commence any such actions without the consent of the Committee.
IV.6 Authority to Object to Claims, Compromise Litigation and Contested
Matters, and Abandon Estate Assets. In addition to the powers and duties set
forth above, the Reorganized Debtors or the Committee (through the Effective
Date) shall have the authority before, on and after the Effective Date to:
(a) object to and subject to Bankruptcy Court Order, compromise any
Claim not expressly Allowed pursuant to the terms of this Plan and compromise
any causes of action vested in the Reorganized Debtors and any matter relating
to the Estate Property in the manner the Reorganized Debtors deems advisable,
and
(b) abandon any Estate Property that is burdensome to the
Reorganized Debtors or of inconsequential value upon the notice prescribed by
Bankruptcy Rule 6007 and subject to Bankruptcy Court Order.
IV.7 Further Authorization. The Reorganized Debtors shall be authorized
and empowered to take such actions and seek such orders, judgments, injunctions
and rulings as may be necessary to further fulfill the intentions and purposes,
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and to give full effect to the provisions of the Plan. The Reorganized Debtors
shall further be authorized and empowered to file or record in any state or
other political subdivision any documents necessary to (i) effectuate or
demonstrate the transfer (which transfer is self-executing by the Plan) of
Estate Property to the Reorganized Debtors or (ii) effectuate any other aspect
of the Plan.
ARTICLE V
EFFECTS OF CONFIRMATION
-----------------------
V.1 Discharge of Claims. Except as otherwise provided herein or to the
extent discharge is denied by a Final Order of the Bankruptcy Court, the rights
afforded in this Plan shall be in exchange for and in complete satisfaction,
discharge and release of all Claims of any nature whatsoever, including any
interest and/or penalty accrued therein whether before or after the Filing Date,
against the Debtors, their Estate(s), or any of their assets or properties.
Except as otherwise provided herein or in the Confirmation Order, upon the
Effective Date, all such Claims shall be discharged in accordance with sections
524 and 1141 of the Bankruptcy Code. Except as otherwise provided herein, all
Claimants shall be precluded from asserting against the Debtors, their
Estate(s), assets or properties any other or further Claim based upon any act or
omission, transaction or other activity of any kind or nature of the Debtors
that occurred prior to the Effective Date.
V.2 Binding Effect/Injunction. Except as otherwise expressly provided
in the Plan and in the provisions of the Bankruptcy Code and Bankruptcy Rules,
on and after the Effective Date, the terms of the Plan shall bind all holders of
Claims and Equity Interests, whether or not they accept the Plan. Except as set
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forth herein and except as provided in the Bankruptcy Code and Bankruptcy Rules,
on and after the Confirmation Date all Entities who have held, hold or may hold
Claims against the Debtors are permanently enjoined on and after the Effective
Date: (i) from commencing or continuing in any manner, directly or indirectly,
any action or other proceeding of any kind with respect to any such Claim
against the Debtors or the Property of the Debtors with respect to any such
Claim, (ii) from the enforcement, attachment, collection or recovery by any
manner or means, directly or indirectly, of any judgment, award, decree, or
order against the Debtors or the Property of the Debtors, with respect to any
such Claim, (iii) from creating, perfecting or enforcing, directly or
indirectly, any encumbrance of any kind against the Debtors, or against the
Property of the Debtors, with respect to any such Claim, (iv) from asserting,
directly or indirectly, any setoff, right of subrogation or recoupment of any
kind against any obligation due the Debtors, or against the Property of the
Debtors, with respect to any such Claim, and (v) from any act, in any manner, in
any place whatsoever, that does not conform to or comply with the provisions of
this Plan. Nothing contained in this Plan, including this Section 5.2 hereof,
shall (a) prohibit the holder of a timely filed Claim to which the Debtors has
timely filed an objection from litigating its right to seek to have such Claim
declared an Allowed Claim, or (b) enjoin or prohibit the enforcement by any
Claimant of any of the obligations of the Debtors under this Plan.
V.3 Pursuit of Available Claims and Causes of Action and Objections to
Claims. The Reorganized Debtors shall be vested with the power and authority to
assert, commence, pursue, defend, object to and settle all Claims and causes of
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action available to the Debtors (including, without limitation, State or Federal
preference and fraudulent conveyance or similar claims and all avoidance actions
under Chapter 5 of the Bankruptcy Code), all of which causes of action are
explicitly reserved as set forth in Section 3.8 of this Plan.
ARTICLE VI
CONDITIONS PRECEDENT TO THE PLAN BECOMING EFFECTIVE
---------------------------------------------------
VI.1 Conditions. The following are conditions precedent to the Plan
becoming effective: (a) the payment by Stanley Kraftsow of $200,000; and (b) the
Confirmation Order which incorporates all of the terms of the Plan and
Disclosure Statement becomes a Final Order.
ARTICLE VII
EXECUTORY CONTRACTS AND NONRESIDENTIAL REAL PROPERTY LEASES
-----------------------------------------------------------
VII.1 Assumption of Executory Contracts. As of the Confirmation Date,
any and all Executory Contracts to which the Estate is a party and to which have
not already been assumed or rejected by order of the Bankruptcy Court shall be
deemed assumed pursuant to sections 365 and 1123(b)(2) of Bankruptcy Code unless
specifically rejected as set forth below.
VII.2 Treatment of Allowed Rejection Claims. Pursuant to Bankruptcy
Code section 365(a), the Debtors are rejecting the executory contract with Kent
Advertising under the Plan. Any Entity whose Claim arises from rejection of an
Executory Contract shall, to the extent such Claim becomes an Allowed Claim,
have the rights of a Class 6 Claimant with respect thereto, and must file a
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proof of claim for rejection damages within twenty five (25) days of the
Confirmation Order.
ARTICLE VIII
RETENTION OF JURISDICTION
-------------------------
VIII.1 Retention of Jurisdiction. The Bankruptcy Court shall retain
jurisdiction of this case for the following purposes:
(a) to consider any modification of the Plan;
(b) to determine any and all objections to the allowance of Claims
and any and all amendments of the Schedules, including any determination sought
by either the Reorganized Debtors or the Committee during the term of this Plan
with respect to the nature, extent, propriety, perfection and/or enforceability
of any Lien on any assets;
(c) to determine any and all applications for allowance of
compensation and/or reimbursement of expenses arising out of or related to the
Chapter 11 Case or the administration of this Plan for periods from the Petition
Date to the Confirmation Date and, thereafter, to the extent there is any
dispute with respect to any request for compensation or reimbursement of
expenses by the Reorganized Debtors's or the Estate Committee's professionals
incurred after the Confirmation Date;
(d) to determine any and all applications pending on the
Confirmation Date for the rejection of executory contracts and unexpired leases
to which the Debtor is a party and the allowance of any Claims resulting
therefrom;
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<PAGE>
(e) to consider objections to any proposed abandonment of Estate
Property;
(f) to determine any and all disputes and controversies arising
under or relating to the Plan;
(g) to determine any and all applications, adversary proceedings
and contested and litigated matters pending in the Chapter 11 Case on or prior
to the Effective Date or commenced by the Reorganized Debtors during the
administration of this Plan or Estate Property;
(h) to determine any and all matters in connection with the
Attorney General Actions;
(i) to correct any defect, cure any omission or reconcile any
inconsistency in the Plan or the Confirmation Order as may be necessary to carry
out the purposes and intent of this Plan and to effectuate payments under this
Plan;
(j) to enforce all orders, judgments, injunctions and rulings
entered in connection with the Chapter 11 Case;
(k) to determine the value of any or all property to be
administered under the Plan;
(l) to determine such other matters and enter such orders as may be
necessary or appropriate in aid of Confirmation and to facilitate implementation
of the Plan;
(m) to enter a Final Decree closing the Chapter 11 Case.
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<PAGE>
ARTICLE IX
THE COMMITTEE
-------------
IX.1 Committee. The Committee shall continue in existence until the
latter of (i) the Effective Date or (ii) the payment in full of Class 6
Unsecured Creditors, to exercise those powers and perform those duties specified
in section 1103 of the Bankruptcy Code and the Plan, and shall perform such
other duties as they may have been assigned by the Bankruptcy Court. On and
after the Effective Date, the Committee shall remain in existence to assist and
advise the Reorganized Debtors in the performance of its duties under the Plan.
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<PAGE>
ARTICLE X
MODIFICATION OF THIS PLAN
-------------------------
X.1 Modification. Except as otherwise specifically provided in this
Plan, the Debtor, with the written consent of the Committee, may alter, amend,
or modify this Plan under section 1127 of the Bankruptcy Code at any time prior
to the Confirmation Date. After the Confirmation Date and prior to substantial
consummation of this Plan, the Debtor, with the written consent of the
Committee, so long as it does not adversely affect the treatment of holders of
Claims or Ownership Interests under this Plan, may institute proceedings in the
Bankruptcy Court to remedy any defect or omission or reconcile any
inconsistencies in this Plan or the Confirmation Order, and such matters as may
be necessary to carry out the purposes and effects of this Plan; provided,
however, that prior notice of such proceedings is served in accordance with
Bankruptcy Rules 2002 and 9014.
ARTICLE XI
SUBSTANTIVE CONSOLIDATION
-------------------------
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<PAGE>
XI.1 Substantive Consolidation. The Plan contemplates and is predicated
upon entry of the Substantive Consolidation Order which will effect the
substantive consolidation of the Cases of the Debtors into a single chapter 11
case solely for the purposes of all actions associated with confirmation and
consummation of the Plan. On the Confirmation Date or such other date as may be
set by a Final Order of the Bankruptcy Court, but subject to the occurrence of
the Effective Date: (i) all intercompany Claims by and among the Debtors shall
be eliminated; (ii) all assets and liabilities of the Debtors shall be merged or
treated as though they were merged; (iii) all prepetition cross-corporate
guarantees of the Debtors shall be eliminated; (iv) any obligation of any Debtor
and all guarantees thereof executed by one or more of the Debtors shall be
deemed to be one obligation of the consolidated Debtors; (v) any Claims Filed or
to be Filed in connection with any such obligation and such guarantees shall be
deemed one Claim against the consolidated Debtors; and (vi) each and every Claim
Filed in the individual chapter 11 case of any of the Debtors shall be deemed
Filed against the consolidated Debtors in the consolidated Case and shall be
deemed a single obligation of all of the Debtors under the Plan on and after the
Confirmation Date. On the Confirmation Date, and in accordance with the terms of
the Plan and the consolidation of the assets and liabilities of the Debtors, all
Claims based upon guarantees of collection, payment or performance made by the
Debtors as to the obligations of another Debtor or of any other Person shall be
discharged, released and of no further force and effect; provided, however, that
nothing herein shall affect the obligations of each of the Debtors under the
Plan.
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<PAGE>
XI.2 Order Granting Substantive Consolidation. Unless substantive
consolidation has been approved by a prior order of the Bankruptcy Court, this
Plan shall serve as a motion seeking entry of an order substantively
consolidating these cases. Unless an objection to substantive consolidation is
made in writing by any Creditor affected by the Plan as herein provided on or
before five (5) days prior to the date that is fixed to the Bankruptcy Court as
the last date on which acceptances to this Plan may be received, or such other
date as may be fixed by the Bankruptcy Court, the Substantive Consolidation
Order (which may be the Confirmation Order) may be entered by the Bankruptcy
Court. In the event any such objections are timely Filed, a hearing with respect
thereto shall be scheduled by the Bankruptcy Court, which hearing may, but need
not, coincide with the hearing to consider confirmation of the Plan.
ARTICLE XII
MISCELLANEOUS PROVISIONS
------------------------
XII.1 Net Operating Loss. The Reorganized Debtors shall have the
authority to take any actions necessary to preserve and utilize any net
operating losses that they may have.
XII.2 Transfers Free and Clear of Taxes. All mortgages, assignments,
agreements and other instruments of transfer to be executed or delivered under
this Plan, if any, in connection with any transfer of property or an interest in
property shall be recorded or filed, as appropriate, in the appropriate
Register's Office, and shall be free and clear of, and without the payment of,
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<PAGE>
any and all stamp taxes or similar taxes pursuant to section 1146(c) of the
Bankruptcy Code and/or any similar tax on the recording of mortgages or other
security instruments imposed by the laws of the State of New York, or any other
State, or any political subdivision thereof.
XII.3 Amendment and Restatement of Debtors Certificates of
Incorporation. On or after the Effective Date, both Debtors' Certificates of
Incorporation and by laws will be amended and restated to the extent necessary
to effectuate the provisions of this Plan.
XII.4 Exculpation and Releases. Neither the Debtors, the Reorganized
Debtors nor the Committee nor any of their respective members, officers,
directors, employees, attorneys, advisors or agents, including (without
limitation) the ESOP Trustee, shall have or incur any liability to any holder of
a Claim or Interest for any act or omission in connection with, or arising out
of, the operations of the Debtors prior to the filing of the bankruptcy cases,
the Confirmation of the Plan, the consummation of the Plan or the administration
of the Plan or the property to be distributed under the Plan except for willful
misconduct or gross negligence, and, in all respects, the Debtors, the
Reorganized Debtors, the Committee, and each of their respective members,
officers, directors, employees, advisors and agents, including (without
limitation) the ESOP Trustee, shall be entitled to rely upon the advice of
counsel with respect to their duties and responsibilities under the Plan.
Upon the Effective Date, pursuant to section 1123(b)(3)(A) of the
Bankruptcy Code, any and all claims held by the Debtors, or any person claiming
derivatively through the Debtors, against any present or former officers or
directors shall be forever settled, waived, released and discharged, and will
-34-
<PAGE>
not be retained or enforced by the Reorganized Debtors or such person. Further,
to the extent allowable under applicable bankruptcy law, upon the Effective
Date, any and all claims and causes of action, whether direct or derivative,
against any present officer or director of the Debtor, or the ESOP Trustee,
arising out of or relating to the conduct of the Debtor by any holder of a Claim
or Interest under the Plan shall similarly be forever settled, waived, released
and discharged, and not retained or enforced by such holder.
XII.5 Fractional Cents and Cents. Whenever any payment of a fraction of
a cent or cent amount would otherwise be called for, the actual payment may, in
the Debtor's discretion, reflect a rounding of such amount or fraction to the
nearest whole cent or dollar (rounding down in the case of $.50, $.005 in the
event of rounding to the cent, or less, and rounding up in the case of more than
$.50, $.005 in the event of rounding to the cent).
XII.6 Cancellation of Interests. On the Effective Date, each share of
Industries Common Stock (exclusive of those held by insiders Stanley and Carolyn
Kraftsow and trusts for their children) and Industries Series A Preferred Stock
shall be cancelled, whether or not surrendered to the Reorganized Debtors or
ESOP Trustee.
XII.7 Unclaimed Property. Any Person who fails to claim any
Distribution ("Unclaimed Property") within one year from the date of the
Distribution or from such other date as a Claim becomes an Allowed Claim shall
forfeit all rights to any Distribution under the Plan, and shall have no Claim
whatsoever against the Debtor or Reorganized Debtors or any holder of an Allowed
Claim to whom Distributions are made.
-35-
<PAGE>
XII.8 Amendment of the Plan This Plan may be amended, modified or
supplemented by the Debtor before or after the Confirmation Date, in the manner
provided for by section 1127 of the Bankruptcy Code or as otherwise permitted by
law without additional disclosure pursuant to section 1125 of the Bankruptcy
Code, except as the Bankruptcy Court may otherwise direct.
XII.9 Severability. Should the Bankruptcy Court determine, prior to the
Confirmation Date, that any provision of this Plan is either illegal on its face
or illegal as applied to any Claim or Interest, such provision shall be
unenforceable as to all holders of Claims or Interests or to the specific holder
of such Claim or Interest, as the case may be, as to which the provision is
illegal. Such a determination of unenforceability shall in no way limit or
affect the enforceability and operative effect of any other provision of this
Plan.
XII.10 Revocation. The Debtors reserve the right to revoke and withdraw
this Plan prior to the Confirmation Date. If the Debtors revoke or withdraws
this Plan, then this Plan shall be null and void and, in such event, nothing
contained herein shall be deemed to constitute a waiver or release of any Claims
by or against the Debtors or any other Person or to prejudice in any manner the
rights of any of the Debtors or any Person in any further proceedings involving
the Debtors.
XII.11 Binding Effect. The Plan shall be binding upon and inure to the
benefit of the Debtor, the holders of Claims and Interests, and their respective
successors and assigns.
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<PAGE>
XII.12 Successors and Assigns. The rights and obligations of any Entity
named or referred to in the Plan are binding upon, and inure to the benefit of,
the successors and assigns of such Entity.
XII.13 Governing Law. Except to the extent the Bankruptcy Code or the
Bankruptcy Rules or the Local Bankruptcy Rules of the Bankruptcy Court are
applicable, the rights, duties and obligations arising under this Plan shall be
governed by, and construed and enforced in accordance with, the laws of the
State of New York, including the laws of the State of New York with respect to
issues of conflicts of law.
XII.14 Headings. The headings used in this Plan are inserted for
convenience only and neither constitute a portion of this Plan nor in any manner
affect the construction of the provisions of this Plan.
XII.15 Notices. Any notice, demand, claim or other communication under
this Plan shall be in writing, and shall be deemed to have been given: (i) upon
the personal delivery thereof; (ii) upon the day of transmission, if sent by
telecopy; (iii) upon the next day following if sent by overnight delivery; or
(iv) upon the seventh (7th) day following mailing thereof, if sent by registered
or certified mail, return receipt requested, postage prepaid. Notices shall be
sent to the respective addresses of the parties set forth below, or such other
address as the party may specify by notice given as herein provided:
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<PAGE>
(a) if to the Debtors or to the Reorganized Debtors to:
Mr. Stanley Kraftsow, President
Craftmatic Industries, Inc.
2500 Interplex Drive
Trevose, PA 19053
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: Joel Lewittes, Esq.
Adam H. Friedman, Esq.
(b) if to the Committee to:
Gersten Savage Kaplowitz Fredericks & Curtin, LLP
101 E. 52nd Street
New York, New York 10022
Attn: Harold Jones, Esq.
XII.16 Rules of Interpretation. For purposes of this Plan (a) any
reference in the Plan to a contract, instrument, release, indenture or other
agreement or document being in a particular form or on particular terms and
conditions means that such document shall be substantially in such form or
substantially on such terms and conditions; (b) any reference in the Plan to an
existing document or exhibit filed or to be filed means such document or
exhibit, as it may have been or may be amended, modified or supplemented; (c)
unless otherwise specified, all references in the Plan to Sections, Schedules
and Exhibits are references to Sections, Schedules and Exhibits of or to the
Plan; (d) the words "herein" and "hereto" refer to the Plan in its entirety
rather than to a particular portion of the Plan; and (e) the rules of
construction set forth in section 102 of the Bankruptcy Code and in the
Bankruptcy Rules shall apply.
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<PAGE>
XII.17 Releases of Professionals. On the Effective Date, the Debtors'
Professionals and Committee Professionals (including counsel, accountants and
advisors retained) shall be deemed to be released in full from any and all
claims and liability arising in connection with any act, omission, transaction
or other activity of any kind or nature that occurred prior to the Effective
Date relating to or arising from any act or omission taken by or on behalf of
the Debtors.
XII.18 Confirmation Order. The Confirmation Order shall ratify all
transactions effected by the Debtors during the period commencing on the
Petition Date and ending on the Confirmation Date.
XII.19 Computation of Time. In computing any period of time prescribed
or allowed by this Plan, unless otherwise expressly provided, the provisions of
Bankruptcy Rule 9006 shall apply.
XII.20 No Admissions. Notwithstanding anything herein to the contrary,
nothing in the Plan shall be deemed as an admission by the Debtors with respect
to any matter set forth herein, including, without limitation, liability on any
Claim.
Dated: March __, 1997 CRAFTMATIC INDUSTRIES, INC.
CRAFTMATIC ORGANIZATION, INC.
Debtors and Debtors-in-Possession
By:
-------------------------------
Stanley Kraftsow
PARKER CHAPIN FLATTAU & KLIMPL, LLP
Attorneys for Debtors and Debtors-in-Possession
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
Joel Lewittes, Esq.
Adam H. Friedman, Esq.
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<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- ----------------------------------------------------X
In re
: In Proceedings For
CRAFTMATIC INDUSTRIES, INC., and Reorganization Under
CRAFTMATIC ORGANIZATION, INC., : Chapter 11
d/b/a/ EAK Advertising Co., Case Nos. 96 B 40154
: 96 B 40155 (SMB)
Debtors. Jointly Administered
- ----------------------------------------------------X
AMENDED DISCLOSURE STATEMENT PURSUANT TO
SECTION 1125 OF TITLE 11 OF THE UNITED STATES
CODE WITH RESPECT TO DEBTORS' PLAN OF
REORGANIZATION
PARKER CHAPIN FLATTAU & KLIMPL, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
Attorneys for Debtors and Debtors-in-Possession
Joel Lewittes, Esq.
Adam H. Friedman, Esq.
Dated: May 15, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
I. INTRODUCTION...........................................................................................1
A. The Bankruptcy Case...........................................................................1
B. Accompaniments and Exhibits to this Disclosure Statement......................................2
C. Balloting, and Recommendation to "Accept" The Plan............................................2
D. Classification Under The Plan.................................................................5
II. PLAN SUMMARY...........................................................................................7
A. Introduction..................................................................................7
B. The Payment of New Money Into the Reorganized Debtor..........................................8
C. Summary Description Of Class Distributions....................................................8
III. GENERAL INFORMATION REGARDING THE DEBTORS.............................................................10
A. Description of the Debtors' Business.........................................................10
B. Description Of The Debtors' Capital Structure................................................11
C. Formation of the Debtors.....................................................................13
D. Description of Principal Assets in Debtors' Estate...........................................13
E. Debtors' Interest in Real Property...........................................................14
F. Events Leading to the Filing of the Petition.................................................15
G. The Creditor Body............................................................................16
IV. THE BANKRUPTCY CASE...................................................................................17
A. The Commencement of the Case.................................................................17
B. Pre-Petition and Post-Petition Financing.....................................................17
C. Retention of Professionals and Appointment of Committee......................................18
D. The Creditors' Committee.....................................................................19
E. First Day and Other Early Orders.............................................................20
F. Exclusive Right to File Plans................................................................21
G. Joint Administration of the Debtors' Cases...................................................22
H. The Bar Date.................................................................................22
I. The Attorney General Actions.................................................................23
J. The Recalcitrant Distributors................................................................24
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<PAGE>
TABLE OF CONTENTS
Page
----
K. The Plan Offers Creditors The Best Recovery From This Case...................................24
V. PLAN OF REORGANIZATION................................................................................25
VI. OTHER PROVISIONS OF THE PLAN..........................................................................30
A. Cancellation of Interests....................................................................30
B. Substantive Consolidation of the Debtors' Estates............................................30
C. Prepayment Under the Plan....................................................................32
D. The Creditors' Committee.....................................................................33
E. Exculpation and Releases.....................................................................33
F. Means For Execution Of The Plan..............................................................34
G. Officers and Directors of the Reorganized Debtor, and Their
Compensation.................................................................................34
H. Section 1930 Fees............................................................................34
I. Retiree Benefits.............................................................................34
J. Discharge, Injunction and Legal Effect of the Plan...........................................35
K. Modification.................................................................................36
L. Revesting of Property of the Estate..........................................................36
M. Administrative Expense Claims Bar Date.......................................................37
N. Objections to Claims.........................................................................37
O. Reserve for Disputed Claims..................................................................38
P. Binding Effect...............................................................................38
Q. Successors And Assigns.......................................................................39
R. Conditions Precedent to the Effective Date...................................................39
S. Preferences, Fraudulent Conveyances and Turnover Actions.....................................39
T. Retention of Jurisdiction....................................................................39
U. Restatement of Debtors' Certificates of Incorporation and Bylaws.............................40
VII. EXECUTORY CONTRACTS...................................................................................40
A. Assumption or Rejection of Executory Contracts And Unexpired
Leases.......................................................................................40
VIII. ACCEPTANCE AND CONFIRMATION...........................................................................41
A. Confirmation Hearing.........................................................................41
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<PAGE>
TABLE OF CONTENTS
Page
----
B. General Discussion...........................................................................42
C. Classification of Claims and Interests.......................................................43
D. Acceptance...................................................................................44
E. Unfair Discrimination and Fair and Equitable Tests...........................................44
F. Feasibility..................................................................................45
G. Best Interests Test..........................................................................46
H. Consummation.................................................................................48
IX. ALTERNATIVES TO THE PLAN..............................................................................49
X. RISK FACTORS TO BE CONSIDERED.........................................................................49
A. Projections..................................................................................50
B. Attorney General Actions.....................................................................50
XI. TAX CONSEQUENCES OF THE PLAN..........................................................................51
A. General Remarks..............................................................................51
B. Tax Consequences to the Estate...............................................................52
C. Tax Consequences to Creditors................................................................55
XII. CONCLUSION............................................................................................56
</TABLE>
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<PAGE>
IMPORTANT: THIS DISCLOSURE STATEMENT CONTAINS INFORMATION THAT
MAY BEAR UPON YOUR DECISION TO ACCEPT OR REJECT THE
ACCOMPANYING PLAN OF REORGANIZATION (the "Plan"). PLEASE READ THIS
DISCLOSURE STATEMENT IN ITS ENTIRETY AND WITH CARE.
THE STATEMENTS AND INFORMATION ABOUT THE DEBTORS AND THE FINANCIAL
INFORMATION OF THE DEBTORS, INCLUDING ALL FINANCIAL PROJECTIONS AND INFORMATION
REGARDING CLAIMS OR EQUITY INTERESTS CONTAINED HEREIN, HAVE BEEN PREPARED FROM
DOCUMENTS AND INFORMATION PROVIDED BY THE DEBTORS.
ALL CREDITORS AND EQUITY INTEREST HOLDERS ARE HEREBY ADVISED AND
ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY
BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. PLAN SUMMARIES AND STATEMENTS MADE
IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
PLAN, OTHER EXHIBITS HERETO AND OTHER DOCUMENTS REFERENCED AS FILED WITH THE
COURT PRIOR TO OR CONTEMPORANEOUSLY WITH THE FILING OF THIS DISCLOSURE
STATEMENT.
ALL CREDITORS AND EQUITY INTEREST HOLDERS SHOULD READ AND CAREFULLY
CONSIDER THE "RISK FACTORS" SECTION HEREOF BEFORE VOTING FOR OR AGAINST THE
PLAN. DISTRIBUTIONS UNDER THE PLAN MAY BE SUBJECT TO SUBSTANTIAL DELAYS FOR
-1-
<PAGE>
CREDITORS AND EQUITY INTEREST HOLDERS WHOSE CLAIMS AND INTERESTS ARE CLASSIFIED
IN CLASSES THAT CONTAIN DISPUTED CLAIMS OR INTERESTS.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS, OTHER ACTIONS,
THREATENED ACTIONS OR ANY LITIGATION WHATSOEVER, THIS DISCLOSURE STATEMENT SHALL
NOT BE CONSTRUED AS AN ADMISSION OR STIPULATION, BUT RATHER AS A STATEMENT MADE
IN SETTLEMENT NEGOTIATIONS.
THE DEBTORS SUBMIT THIS DISCLOSURE STATEMENT PURSUANT TO SECTION 1125
OF THE BANKRUPTCY CODE IN CONNECTION WITH THE SOLICITATION OF ACCEPTANCES OF THE
PLAN. THE PURPOSE OF THIS DISCLOSURE STATEMENT IS TO PROVIDE INFORMATION
CONCERNING THE PLAN TO CREDITORS AND EQUITY INTEREST HOLDERS WHO ARE ENTITLED TO
VOTE TO ACCEPT OR REJECT THE PLAN.
THIS DISCLOSURE STATEMENT HAS BEEN APPROVED BY ORDER OF THE BANKRUPTCY
COURT, DATED MAY 15, 1997, WHICH ORDER CONCLUDED THAT THIS DISCLOSURE STATEMENT
CONTAINS INFORMATION OF A KIND AND IN SUFFICIENT DETAIL TO ENABLE A
HYPOTHETICAL, REASONABLE INVESTOR, TYPICAL OF AN IMPAIRED CREDITOR OR EQUITY
INTEREST HOLDER, TO MAKE AN INFORMED JUDGMENT WHETHER TO VOTE TO ACCEPT OR
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<PAGE>
REJECT THE PLAN. APPROVAL OF THIS DISCLOSURE STATEMENT BY THE BANKRUPTCY COURT
DOES NOT CONSTITUTE A RULING AS TO THE FAIRNESS OR MERITS OF THE PLAN.
EACH CREDITOR OR EQUITY INTEREST HOLDER SHOULD CONSULT ITS INDIVIDUAL
ATTORNEY AND ACCOUNTANT AS TO THE EFFECT OF THE PLAN ON SUCH INDIVIDUAL CREDITOR
OR EQUITY INTEREST HOLDER.
FOR EQUITY INTEREST HOLDERS ONLY:
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION
CONTAINED IN THE DISCLOSURE STATEMENT.
The Bankruptcy Court, pursuant to section 1128 of the Bankruptcy Code,
has scheduled the Confirmation Hearing to consider the Confirmation of the Plan
and objections to Confirmation, if any, to be held on June 25, 1997, 10:00 a.m.,
New York time, or as soon thereafter as counsel may be heard, in the courtroom
of the Honorable Stuart M. Bernstein of the United States Bankruptcy Court,
Alexander Hamilton Custom House, One Bowling Green, New York, New York 10004.
The Confirmation Hearing may be adjourned from time to time by the Bankruptcy
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<PAGE>
Court without further notice except for an announcement of the adjourned date
made at the Confirmation Hearing. Objections to Confirmation of the Plan, if
any, must be in writing, and filed and served as described below.
-4-
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- ------------------------------------------------X
In re
: In Proceedings For
CRAFTMATIC INDUSTRIES, INC., and Reorganization Under
CRAFTMATIC ORGANIZATION, INC., : Chapter 11
d/b/a/ EAK Advertising Co., Case Nos. 96 B 40154
: 96 B 40155 (SMB)
Debtors. : Jointly Administered
- ------------------------------------------------X
DISCLOSURE STATEMENT PURSUANT TO
SECTION 1125 OF TITLE 11 OF THE UNITED
STATES CODE WITH RESPECT TO THE DEBTORS'
PLAN OF REORGANIZATION
I.
INTRODUCTION
------------
A. The Bankruptcy Cases
Craftmatic Industries, Inc. ("Industries") and Craftmatic
Organization, Inc. ("Organization"), debtors and debtors-in-possession (the
"Debtors"), submit this disclosure statement (the "Disclosure Statement")
pursuant to section 1125 of the Bankruptcy Code to all holders of claims against
and interests in the Debtors. These cases were commenced on January 12, 1996
(the "Petition Date") in the United States Bankruptcy Court for the Southern
District of New York, and are pending before the Honorable Stuart M. Bernstein,
United States Bankruptcy Judge.
-1-
<PAGE>
B. Accompaniments and Exhibits
to this Disclosure Statement
Accompanying this Disclosure Statement are copies of:
i. A "Notice" fixing (i) the time and manner for filing
acceptances or rejections of the Plan, and (ii) the
date and time of a hearing to consider confirmation of
the Plan; and
ii. A ballot (the "Ballot") which is to be used for voting
to accept or reject the Plan.
Annexed hereto are copies of the following:
i. The Plan, annexed as Exhibit A;
ii. Schedule B of the Debtors' Bankruptcy Schedules, which
schedules show substantially all of Debtors' personal
property, annexed as Exhibit B; and
iii. A liquidation analysis of the Debtors' assets, which
when viewed together with the Debtors' liabilities,
shows that this Plan provides the best possible
recovery to all Creditors, annexed as Exhibit C.
iv. A valuation of the Employee Stock Ownership Plan,
annexed as Exhibit D.
v. Projections for the Debtors operations for the next
three-year period, annexed as Exhibit E.
C. Balloting, and Recommendation to "Accept" The Plan
After carefully reviewing the Plan and this Disclosure Statement
and all the exhibits annexed hereto, please indicate your vote to "Accept" or
"Reject" the plan on the enclosed ballot and forward it to the following
addresses:
For Class 6 Unsecured Creditors, ballots must be forwarded to:
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<PAGE>
Harold Jones, Esq.
Gersten Savage Kaplowitz Fredericks & Curtin, LLP
101 East 52nd Street, 9th Floor
New York, New York 10022
All other Creditors and Equity Interest Holders must forward ballots
to:
Adam H. Friedman, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
THE DEBTORS AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS BELIEVE
THAT THE PLAN PROVIDES THE BEST POSSIBLE RECOVERY TO CREDITORS. THE DEBTORS AND
THE COMMITTEE THEREFORE BELIEVE THAT ACCEPTANCE OF THE PLAN IS IN THE BEST
INTERESTS OF ALL CREDITORS AND OTHER PARTIES IN INTEREST, INCLUDING, BUT NOT
LIMITED TO, EQUITY INTEREST HOLDERS. THE DEBTORS AND THE COMMITTEE RECOMMEND
THAT YOU VOTE TO ACCEPT THE PLAN.
i. Voting Instructions
The Ballot has been specifically designed for the purpose of soliciting
votes on the Plan for each Class of Claims or Equity Interests entitled to vote.
Accordingly, in voting, for or against the Plan, use only the Ballot sent to you
with this Disclosure Statement.
If a Creditor or Equity Interest Holder is the holder of an unimpaired
Claim, such Creditor or Equity Interest Holder, being deemed, as a matter of
law, to have accepted the Plan, is not required to vote on the Plan and
therefore has not received a Ballot herewith.
BALLOTS SHOULD BE RETURNED IN THE ACCOMPANYING ENVELOPE TO:
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<PAGE>
For Class 6 Unsecured Creditors, ballots must be forwarded to:
Harold Jones, Esq.
Gersten Savage Kaplowitz Fredericks & Curtin, LLP
101 East 52nd Street, 9th Floor
New York, New York 10022
All other Creditors and Equity Interest Holders must forward ballots
to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
Attn: Adam H. Friedman, Esq.
ALL RETURNED BALLOTS WHICH NEITHER INDICATE THAT THEY "ACCEPT" NOR "REJECT" THE
PLAN WILL BE DEEMED ACCEPTANCES.
ii. Parties Entitled to Vote
Pursuant to section 1126 of the Bankruptcy Code, each Class of Impaired
Claims or Equity Interests which is not deemed to reject the Plan is entitled to
vote on acceptance or rejection of the Plan. Any holder of an Allowed Claim or
Interest that is in an Impaired Class under the Plan, and whose Class is not
deemed to reject the Plan, is entitled to vote.
Under section 1124 of the Bankruptcy Code, a class is "impaired" under
a plan unless, with respect to each claim or interest in such class, such plan:
(1) leaves unaltered the legal, equitable, and
contractual rights to which such claim or interest
entitles the holder of such claim or interest; or
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<PAGE>
(2) notwithstanding any contractual provision or
applicable law that entitled the holder of a claim or
interest to receive accelerated payment of such claim
or interest after the occurrence of a default:
(a) cures any such default that occurred before
or after the commencement of the case under
the Bankruptcy Code, other than a default of
a kind specified in Section 365(b)(2) of the
Bankruptcy Code;
(b) reinstates the maturity of such claim or
interest as such maturity existed before
such default;
(c) compensates the holder of such claim or
interest for damages incurred as a result of
reasonable reliance on such contractual
provision or applicable law; and
(d) does not otherwise alter the legal,
equitable, or contractual rights to which
such claim or interest entitles the holder
of such claim or interest.
Classes of claims and interests that are not "impaired" under a plan
are deemed, as a matter of law, under section 1126(f) of the Bankruptcy Code, to
have accepted the Plan and are therefore not permitted to vote on such Plan.
Classes of claims or interests that will not receive or retain any
property under a plan on account of such claims or interests are deemed, as a
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<PAGE>
matter of law, under section 1126(g) of the Bankruptcy Code, to have rejected
the Plan and are likewise not entitled to vote on the Plan.
D. Classification Under The Plan
The Plan contemplates that the Debtors will treat the Classes
designated therein as follows:
<TABLE>
<CAPTION>
CLASS STATUS
----- ------
<S> <C> <C>
Class 1: Administration Expense Claims Unimpaired - not entitled to vote
Class 2: Priority Tax Claims Unimpaired - not entitled to vote
Class 3: Priority Claims Unimpaired - not entitled to vote
Class 4: Secured L & P Claim Impaired - entitled to vote
Class 5: Other Secured Claims Unimpaired - not entitled to vote
Class 6: General Unsecured Claims Impaired - entitled to vote
Class 7: Unsecured Insider Claims Impaired - entitled to vote
Class 8: Equity Interests: Impaired - entitled to vote
Preferred Shareholders
Class 9: Equity Interests: Impaired - entitled to vote
Common Shareholders
</TABLE>
If no votes are received with respect to a particular Class of Claims
or Equity Interests and no objections to Confirmation are received from such
Class, the Bankruptcy Court may enter an order confirming the Plan.
VOTES TO ACCEPT THE PLAN ARE BEING SOLICITED ONLY FROM IMPAIRED CLASSES
WITH THE RIGHT TO VOTE.
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<PAGE>
i. Deadline For Balloting
BALLOTS MUST BE ACTUALLY RECEIVED AT THE ABOVE ADDRESS ON OR BEFORE
4:00 P.M. NEW YORK TIME ON JUNE 18, 1997; OTHERWISE THEY WILL NOT BE COUNTED.
II.
PLAN SUMMARY
------------
A. Introduction
The Debtors filed their chapter 11 cases on January 12, 1996. The
filing was precipitated by the erosion of the Debtors' cash position that
occurred as a result of (i) substantial declines in sales as a result of the
declined economy (ii) substantial uncollectible receivables from several of the
Debtors' distributors; and (iii) defending several lawsuits commenced against
the Debtors by various State Attorney Generals' offices. During the course of
the chapter 11 proceedings, the Debtors have worked to significantly reduce
costs and improve sales and resolve the aforementioned lawsuits. The Plan
represents the culmination of these efforts, providing Creditors with a
distribution, and a surviving, financially stable operating entity with which to
continue doing business.
The Plan results from the Debtors' efforts to negotiate an
arrangement with the Creditors' Committee to maximize the recovery for the
Debtors' Class 6 Unsecured Creditors. Briefly, the Plan provides for: (i) full
payment of the priority portions of all Administrative Claims, Priority Wage
Claims, Priority Tax Claims, and Priority Claims; (ii) partial payment and
restructuring of the Claim of the Debtors' secured lender, Leggett & Platt, Inc.
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<PAGE>
("L & P"); and (iii) a ten percent (10%) distribution to general unsecured
creditors. Holders of Common Stock of Industries shall be paid $.01 per share
and upon the Effective Date, all outstanding shares of Common Stock of
Industries will be extinguished under the Plan.
The Debtors' Employee Stock Ownership Plan (the "ESOP"), shall not
retain its Preferred Shares, but will receive a lump sum cash payment on the
total amount of $200,000.
The Debtors believe that the Plan provides the maximum possible
recovery to all Creditors and Equity Interest Holders and creates a viable
foundation for the Reorganized Debtor to continue to do business in the future.
B. The Payment of New Money Into the Reorganized Debtor
Stanley Kraftsow, the Debtors' President shall pay $ 200,000 to the
Estate in new value for the purpose of funding the Plan. Mr. Kraftsow is also
waiving his right of distribution in respect of his Series A Preferred Shares in
the ESOP and his common shares.
C. Summary Description Of Class Distributions
The Distributions to each Class of Claimants and Equity Interest
Holders are summarized below. This summary is a snapshot of the more detailed
and complete descriptions set forth in subsequent sections of this Disclosure
Statement, and in the Plan.
Class Description and Description of Distribution
Estimated Amount of Claims Under the Plan
- -------------------------- --------------
Class 1: Administrative Claims Payment in full, in Cash,
on the latest of (i) the
Effective Date; (ii) when
allowed by the Court, if
subsequent to the
Effective Date; or
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<PAGE>
(iii) upon such other
terms as may be agreed
upon by the Debtors and
the holder of such Allowed
Claim.
Class 2: Priority Tax Claims Payment in full, in Cash,
on the latest of (i) the
Effective Date; or (ii)
the date such Priority Tax
Claims come due.
Class 3: Priority Claims Payment in full, in Cash,
and Priority Wage Claims, on the Effective Date of
other than Class 2 the amounts entitled to
Priority Tax Claims priority. Any Priority
Claims or Priority Wage
Claims which exceed the
priority set forth in the
Bankruptcy Code, will be
treated as Class 6 General
Unsecured Claims.
Class 4: Secured L & P Claim Lump sum payment of
(approximately $2,392,000) $338,000 under the L&P
Promissory Note, with the
balance of $338,000
thereunder paid over 12
months. Payment on the
Revolving Credit Agreement
shall be made under the
existing terms of such
agreement. The
Requirements Agreement
shall be modified solely
to extinguish the
$1,200,000 claim against
the Debtors; all other
terms shall remain in
place.
Class 5: Other Secured Claims Other Secured Claims shall
be paid in full pursuant
to the underlying
agreements between the
respective parties.
Class 6: Unsecured Claims (approximately Ten percent (10%) lump sum
$1.8 million) payment, in full, in cash,
without interest on the
latest to occur of (i) the
Effective Date; (ii) the
date such Unsecured Claim
becomes Allowed; or (iii)
the upon which the Debtors
and the holder of such
Unsecured Claim otherwise
agree.
Class 7: Unsecured Insider Claims No payments shall be made
thereon until all Classes
1, 2, 3 and 6 Allowed
Claims are paid in full.
Thereafter, each such
Claim shall be paid as may
be agreed by the
Reorganized Debtor and the
holder of such Claims.
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<PAGE>
Class 8: Equity Interest of Industries' Lump sum cash payment of
Preferred Shareholders (ESOP Holders) $200,000 to the ESOP
Trustee to occur after the
Confirmation Date on a
date agreeable to the ESOP
Trustee. After such lump
sum payment, the Preferred
Shares held by the ESOP
shall be canceled. Stanley
Kraftsow and Carolyn
Kraftsow shall not be paid
for their ESOP Preferred
Shares.
Class 9: Equity Interest of Industries' Class 9 Equity Interest
Common Stock shareholders Holders shall be paid .01
cents per share of
Industries Common Stock.
After such payment, all
Common Stock of
Industries, with the
exception of the shares
held by Stanley Kraftsow,
Carolyn Kraftsow and
trusts held for their
children (the "Kraftsow
Shares") shall be
canceled. Neither Stanley
Kraftsow, Carolyn Kraftsow
nor trusts for their
children shall be paid for
their Common Stock.
The Debtors expect that all conditions can and will be satisfied to
enable it to treat the above Classes in the above indicated manner.
III.
GENERAL INFORMATION REGARDING THE DEBTORS
-----------------------------------------
A. Description of the Debtors' Business
Industries is a corporation organized and existing under the laws
of the State of Delaware.
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<PAGE>
Industries is a marketing and sales organization engaged in the
distribution and sale, primarily in the United States, of the "Craftmatic
Adjustable Bed", which is an electric adjustable bed specifically designed for
residential use incorporating certain features found in hospital beds.
Industries directly, or indirectly, owns all of the issued and outstanding
common stock of Organization. Currently, the Debtors conduct direct sales
operations in eastern Pennsylvania, Southern New York, New Jersey, Delaware,
eastern Connecticut, Florida, southwestern Alabama, and southeastern Georgia and
are wholesale distributors of adjustable beds to independent direct sales
organizations in other market areas.
The Debtors' direct sales of beds are made by direct in-house sales
presentations (by appointment) to prospective customers who respond to the
Debtors' marketing programs. The bed is manufactured to the Debtors'
specifications by Leggett & Platt, the Debtors' largest secured creditor, and
uses a specially designed mattress manufactured and supplied to the Debtors by
various suppliers, many of whom are Creditors in this Case.
B. Description Of The Debtors Capital Structure
Industries is a Delaware corporation whose shares of Common Stock
are registered under Section 12(g) of the Securities Exchange Act of 1934, as
amended. As of the Petition Date, approximately 2,440,224 shares of Common Stock
were issued and outstanding, which are held by approximately 128 beneficial
equity holders of record. The common stock of Industries was traded on the
over-the-counter market and until February 2, 1994, was quoted on the NASDAQ
National Market System under the symbol CRCC. As of February 2, 1994, the Common
Stock of Industries was no longer eligible to trade on the NASDAQ National
Market System and was traded on the NASDAQ SmallCap Market under the symbol
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<PAGE>
CRCC. On March 4, 1994, the Common Stock of Industries was delisted from the
NASDAQ SmallCap Market. As a result of such delisting, there is no established
trading market for the Common Stock of Industries. Trading, if any, in the
Common Stock is conducted in the over-the-counter market in the so-called "pink
sheets." Therefore, stockholders of Industries will likely find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
their shares of Common Stock. Stanley Kraftsow, President of the Debtors,
directly or indirectly, through family trusts, owns 42.6% of Industries Common
Stock.
Industries also is authorized to issue an aggregate of 500,000
shares of Preferred Stock, of which 453,600 shares of Series A Convertible
Preferred Stock are issued and outstanding, all of which are held by the
Employee Stock Ownership Plan (the "ESOP") of Industries. The Series A
Convertible Preferred Stock has a liquidation preference of $13.75 per share and
provides for a cumulative dividend payable in cash at $1.375 per share per
annum. The Series A Preferred Stock is convertible into two shares of Common
Stock, with a 25% conversion premium and has voting rights equal to the number
of shares into which it is convertible and votes with the Common Stock as a
single class. No dividends have been paid on the Series A Preferred Shares since
1994.
The ESOP Trustee retained the services of Wharton Valuation
Associates, Inc. to determine the fair market value of the Series S Convertible
Preferred Stock held by the ESOP. The valuation concluded that the Series A
Convertible Preferred Stock was worth approximately three percent (3%) of its
liquidation preferences as of September 30, 1996, or $0.41 per share.
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<PAGE>
As of September 30, 1996, there were 260,030 outstanding Series A Convertible
Preferred Shares. Since that date, 480 shares have been retired by the Company,
leaving 259,550 outstanding. Accordingly, as of this date, the value of the
Series A Convertible Preferred Shares is $106,415.50. A copy of the ESOP
valuation is annexed hereto as Exhibit D.
Stanley Kraftsow, the Debtor's President and Chief Executive
Officer, has an interest in 15,732.22 Series A Convertible Preferred Shares
under the ESOP. Carolyn Kraftsow, the Debtor's secretary, has an interest in
7,401.15 Series A Convertible Preferred Shares under the ESOP. Mr. and Mrs.
Kraftsow shall not be paid for their interests in the ESOP under the Plan.
C. Formation of the Debtors
Industries is the parent company of Organization. As of the
Petition Date, Organization was one of six wholly owned subsidiaries of
Industries. The remaining five wholly owned subsidiaries of Industries are (i)
Craftmatic/Contour Holding Co., (ii) Craftmatic/Contour Delivery Service, Inc.;
(iii) Chicken Wizard of Aston, Inc.; (iv) Chicken Wizard of City Line Avenue,
Inc.; and (v) Chicken Wizard of Media, Inc.. These subsidiaries are not
operating companies and are not in Chapter 11.
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<PAGE>
D. Description of Principal Assets in Debtors' Estate
Annexed, as Exhibit B, is a copy of Schedule B to the Debtors'
Schedules of Assets and Liabilities, which Schedule identifies the Debtors'
assets as of the Petition Date. The assets of Industries were valued at
$40,050.00. The assets of Organization were valued at $4,027,520.15. In the
event of a liquidation, as shown below, the Debtors' assets would likely realize
far less than the above amounts, since the valuations of the vast majority of
the assets reflect a going concern value, rather than a liquidation value. See,
Liquidation Analysis, annexed hereto as Exhibit C. In fact, a liquidation of the
Estate would result in no distribution to Class 6 Allowed Claims, rather than
the ten percent (10%) Distribution proposed by the Plan. Likewise, under the
Liquidation Analysis, neither Common Shareholders nor Preferred Shareholders
would receive a distribution if the Estate was liquidated.
E. Debtors' Interest in Real Property
The Debtors do not own any real property and, as of the Petition
Date, occupied office and warehouse space at the locations listed below:
Location Purpose
-------- -------
2500 Interplex Drive Sales/Executive Office
Trevose, PA 19053
2161 Blount Road Sales/Warehouse
Pompano Beach, FL 33069
4701 East 7th Avenue Warehouse
Tampa, FL 33606
106 Century Park Circle West Warehouse (post-petition)
Tallahassee, FL 32304
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<PAGE>
Prior to the Petition Date, Organization owned the property located
in Pompano Beach. On or around January 11, 1996, Organization transferred this
property to its secured lender Leggett & Platt, Inc. to reduce the secured debt
by the amount of $900,000, less certain credits due Leggett & Platt. Thereafter,
Leggett & Platt entered into a lease with Organization for the continued use and
occupation of a portion of the building.
During the bankruptcy case, the Debtors obtained three extensions
to assume or reject both leases, the most recent extension extending the time up
to the earlier of April 15, 1997 or the Effective Date. As set forth more fully
below, the Debtors are assuming both these unexpired leases, under the Plan,
pursuant to section 365(a) of the Bankruptcy Code.
F. Events Leading to the Filing of the Petition
Notwithstanding their sound business fundamentals, for the two
years immediately preceding the Petition Date, the Debtors were confronted with
a very difficult retail environment resulting in the decline of sales and
pressures on gross margins. As the Debtors sell a "high end" specialty product,
the declining economic climate negatively affected sales.
The Debtors' net revenues decreased 30.9% to $21,815,000 for the
fiscal year ended September 30, 1995, from $31,547,000 for the preceding fiscal
year. The decrease in net revenues was attributable to both the Debtors' retail
and wholesale operations. Net revenues from the retail segment decreased to
$9,388,000 in fiscal 1995 from $15,649,000 in fiscal 1994 due to the continued
downsizing of the Company's retail operations. Net revenues from the Debtors'
wholesale and advertising services segment decreased to $12,427,000 in fiscal
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<PAGE>
1995 from $15,898,000 in fiscal 1994 as a result of the Debtors' decision to
suspend its national sales program in the third quarter of fiscal 1995 due to
the high costs associated with direct response advertising. The Debtors' total
gross profit margin as a percentage of net revenues for fiscal 1995 and 1994
were 44.4% and 46.2%, respectively. The decrease in gross profit margin resulted
from a slight change in the mix of revenues, which was partially offset by price
increases in the Debtors' wholesale segment.
Additionally, the Debtors lost substantial money as a result of
uncollectible receivables from their distributors. In fiscal year 1995,
Industries recorded provision for doubtful accounts and notes receivable as a
result of poor performance by certain distributors in a sluggish economic
environment. The provision for doubtful accounts and notes receivable increased
to $2,356,000 in 1995 from $640,000 in 1994.
Finally, prior to the Petition Date, the Debtors were the target of
several state Attorney General's actions alleging that the Debtors violated
various state consumer protection laws. As of, and subsequent to the Petition
Date, the states of Missouri, Wisconsin, Florida, Arizona, North Dakota and
Idaho had all commenced actions or investigations for alleged violation of their
fair trade and consumer laws against the Debtors. The legal fees required to
defend these actions, together with the time that management had to expend
defending these actions, which time necessarily detracted from the Debtors'
day-to-day operations, also negatively affected the Debtors' business.
Therefore, as a result of (i) declining sales and margins; (ii)
uncollected receivables; and (iii) the defense of several lawsuits, management
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<PAGE>
for the Debtors concluded that it was in the best interest of the Debtors, their
creditors and estates, to reorganize their operations and seek voluntary relief
under Chapter 11 of the Bankruptcy Code.
G. The Creditor Body
As of the Petition Date, the Debtors' consolidated estate had a
creditor body exceeding approximately 650 individual creditors with total
scheduled claims of $5,259,244.77 ($2,817,494.50 in secured claims, $117,571.20
in priority claims, and $2,324,179.07 in Unsecured Claims.) See Schedules, on
file with the Court.
In accordance with the Debtors' Claims Objection Motion, the
Debtors reduced and/or expunged numerous Unsecured Claims. As of the date
hereof, there exists approximately $1.8 million in Allowed Unsecured Claims.
IV.
THE BANKRUPTCY CASE
-------------------
A. The Commencement of the Case
The Debtors commenced these Bankruptcy Cases on January 12, 1996
with the filing of their respective chapter 11 petitions.
B. Pre-Petition and Post-Petition Financing
As of the Filing Date, Organization was indebted (and continues to
be so indebted) to L&P, pursuant to a Promissory Note (Demand), dated October
28, 1994, executed by Organization in the original principal amount of
$900,000.00 ("Revolving Credit Agreement") which had an unpaid principal balance
of approximately $575,000.
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<PAGE>
As of the Filing Date, the Debtors were indebted to L & P (and
continue to be so indebted), pursuant to a promissory note, dated December 1,
1994, executed by both Debtors in the original principal amount of $1,500,000.00
("L & P Promissory Note") which has an unpaid principal balance of approximately
$676,311.80. Interest continues to accrue on L & P Note No. 2 at the per diem
interest rate of two percent (2%) over the Prime Rate. L & P Note No. 2 is
governed by and subject to the terms of a certain loan agreement executed by the
Debtors on December 1, 1994 (the "Loan Agreement").
As of the Filing Date, Organization was indebted to L & P (and
continues to be so indebted), pursuant to a requirements agreement, dated
December 1, 1994, executed by Organization and L & P (the "Requirements
Agreement") in the original amount of $1,200,000, which amount does not accrue
interest. The unpaid balance of the amounts owed under the Requirements
Agreement was $1,200,000 as of the Petition Date. (The indebtedness under L & P
Note No. 1, L & P Note No. 2 and the Requirements Agreement shall hereinafter be
referred to as the "L & P Indebtedness".)
Organization secured the L & P Indebtedness by executing a security
agreement dated December 1, 1994 (the "Security Agreement") granting L & P a
first priority security interest in substantially all of the Debtors' property
(the "Collateral").
By stipulation, dated January 12, 1996 (the "Stipulation"), the
Debtors and L&P agreed to an interim order permitting post-petition financing
and for use of cash collateral and grant of adequate protection pursuant to
sections 362(c)(2), 363 and 364 of the Bankruptcy Code. The Debtor filed an
order to show cause authorizing use of cash collateral and post-petition
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<PAGE>
financing and providing adequate protection dated January 16, 1996. The Court
authorized the interim use of up to $200,000.00 of cash collateral and
thereafter entered an Order dated February 1, 1996 granting the Debtors' use of
cash collateral and obtaining post-petition financing (the "Financing Order").
The Financing Order authorized Organization to make post-petition draws under
the terms of L & P Note No. 1 up to $900,000.00.
C. Retention of Professionals and Appointment of Committee
The Debtors' bankruptcy counsel, as approved by an Order of the
Bankruptcy, dated January 30, 1996, is Parker Chapin Flattau & Klimpl, LLP.
Pursuant to separate Bankruptcy Court orders, the Debtors also retained the
following professionals to assist in the reorganization case: (i) Mesirov Gelman
Jaffe & Jamieson as special tax and securities counsel, (ii) Davis & Kuelthau as
special litigation counsel in connection with an action commenced by the
Wisconsin Attorney General's Office, (iii) Friedman Alpren & Green, as
accountants to the Debtors, and (iv) Retail Credit Solutions, Inc. as retail
credit consultants for the Debtors.
(i) Compensation to Professionals
As of the date hereof, professionals have been paid once
pursuant to filed first interim applications seeking payment for services
rendered and reimbursement of expenses. Pursuant to Order dated November 7,
1996, all fees and expenses sought in the first interim applications were
granted, subject to a 25% holdback and final review of all fees and
disbursements by the Bankruptcy Court. Annexed hereto as Exhibit F is a true
copy of the Order granting the first interim applications, setting forth the
amounts awarded.
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<PAGE>
D. The Creditors Committee
Shortly after the Petition Date, the United States Trustee, as is
customary in chapter 11 cases, pursuant to section 1102 of the Bankruptcy Code,
appointed an Official Committee of Unsecured Creditors (the "Committee") to
represent the interests of the Debtors' unsecured creditors. The Committee was
officially formed on February 28, 1996 and is comprised of the following
creditors:
David Avrick
18 East Canon Pedrido
Santa Barbara, CA 93101
AZ Marketing Services, Inc.
ABA AZ List Managers
31 River Road
Cos Cob, CT 06807
Patrick McNamara
c/o Stevens Knox & Associates, Inc.
304 Park Avenue
New York, NY 10010
Starcrest Products of California Inc.
19401 Brennan Avenue
Perris, CA 92730
Fingerhut Corporation
4400 Baker Road
Minnetonka, MN 55343
Southerlands Inc. of Tennessee
P.O. Box 70129
Nashville, TN 37207
Kent Advertising
Attn: Larry Miller
600 Madison Avenue
New York, NY 10022
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<PAGE>
The Committee retained the services of Pryor Cashman Sherman &
Flynn ("Pryor Cashman") as its counsel. The retention of Pryor Cashman was
approved by Order of the Court dated March 28, 1996. By Order dated November 26,
1996, the firm of Gersten Savage Kaplowitz Fredericks and Curtin, LLP, 101 East
52nd Street, 9th Floor, New York, New York 10022 was substituted as counsel to
the Committee.
E. First Day and Other Early Orders
To facilitate the smooth and orderly transition of operations into
Chapter 11, and to minimize the disruption of their business affairs, the
Debtors filed certain motions on the Filing Date for emergency relief. By
motion, presented on the Petition Date, the Court authorized the joint
administration of both cases for procedural purposes. The Debtors also received
Court authorization to pay their pre-petition wages, salaries and certain
employee business expenses, by Order dated January 19, 1996. The Debtors
obtained further authorization to continue their customer services programs,
including refund, finance and layaway policies, by Order dated January 19, 1996.
The Debtors also obtained authorization (i) to continue maintaining
their bank accounts and business forms; and (ii) extending the twenty day period
to confirmation, during which utilities could not alter, refuse or discontinue
services to the Debtors.
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<PAGE>
F. Exclusive Right to File Plans
By operation of section 1121 of the Bankruptcy Code, the Debtors
have the exclusive right to file a plan of reorganization during the 120 days
following the Petition Date, and the exclusive right to solicit acceptances
thereof, during the following 60 days. By motion dated April 25, 1996 (the
"First Exclusivity Motion"), the Debtors sought to extend the exclusive periods
for an additional 120 days. On May 9, 1996, the Bankruptcy Court held a hearing
on the Exclusivity Motion, at which hearing the Debtors' exclusive periods were
extended. Specifically, the Court extended the Debtors' exclusive period to file
a plan of reorganization up to and including September 10, 1996 and their
exclusive periods to solicit acceptances thereto up to and including November 8,
1996. The Debtors sought additional extensions of exclusivity by Motion dated
August 14, 1996 and by Motion dated January 3, 1997. At a hearing held on
January 21, 1997, the Court further extended exclusive period through April 10,
1997 and June 12, 1997, respectively.
G. Joint Administration of the Debtors' Cases
By motion dated January 11, 1996, the Debtors moved for an order
directing the joint administration of both of the bankruptcy cases. The Debtors
sought this relief, in accordance with Bankruptcy Rule 1015(b), which authorizes
the entry of an order for the joint administration of estates of affiliates. By
order dated January 19, 1996, the Court granted the Debtors' motion and the
cases were thereafter jointly administered for procedural purposes only.
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<PAGE>
The Debtors' Plan contemplates the substantive consolidation of
both cases. This will result in the individual Debtors being treated as one
entity and the plan shall merge the assets and liabilities of the Debtors
therein. See, infra.
H. The Bar Date
In accordance with Rule 3003(c)(3) of the Bankruptcy Rules, the
Court fixed July 17, 1996 (the "Bar Date"), as the last date by which Creditors
and Interest Holders would be permitted to file Claims in the Debtors' chapter
11 case. In accordance with the Bar Date, the Debtors, pursuant to Court Order,
published notice of the Bar Date in the National Edition of the New York Times
on May 17, 1996. Pursuant to Bankruptcy Rule 3003(c)(2) and the Plan, any
creditor whose claim had not been scheduled by the Debtors or had been scheduled
as disputed, contingent or unliquidated, and who failed to file a proof of claim
on or before the Bar Date is deemed not to be a creditor with respect to such
Claim for purposes of voting on, and receiving Distributions under, the Plan.
An Administrative Expense Claim Bar Date was set for December 18,
1996, pursuant to Order of the Bankruptcy Court, dated October 22, 1996. The
Debtors believe they are current in the payment of all Administrative Expense
Claims.
I. The Attorney General Actions
As of the Petition Date, the states of Wisconsin and Missouri had
pending actions against the Debtors. The State of Missouri commenced an action
in January 1993 against Organization and a distributor selling under a
distribution agreement with Organization. During the pendency of the Bankruptcy
Case, Organization vigorously defended this action. On
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<PAGE>
October 23, 1996, that action was dismissed as against Organization and the
State has not opposed the dismissal.
The State of Wisconsin commenced an action against Organization, a
distributor and one of the distributors sales representatives. Organization and
the State of Wisconsin have reached an agreement settling the action, and a
formal consent judgment has been executed by the parties. Under the consent
judgment, the State agreed to withdraw its action for an Allowed Unsecured Claim
of $25,000.
Subsequent to the Petition Date, the States of Arizona, North
Dakota and Idaho have all served investigative subpoenas on Organization and
Stanley Kraftsow. The Assistant Attorney General for Arizona has advised that
she will act as coordinating counsel for all of these States. North Carolina is
contemplating issuing an identical investigative subpoena. Organization has
asserted that these States lack jurisdiction over Organization. Presently
Organization has undertaken discussions with these States to determine if the
concerns raised by these States can be resolved without litigation.
The State of Florida has issued an investigative subpoena against
Organization and Stanley Kraftsow. Discussions are underway with the Assistant
Attorney General to resolve the matter without litigation.
J. The Recalcitrant Distributors
As mentioned in Section II(F) above, as of the Petition Date,
several of the Debtors' independent distributors owed money to the Debtors for
various fees due under binding distributor agreements. Each respective
distributor agreement provides each distributor the exclusive right to market
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<PAGE>
and sell beds in specific territories. Under the distributor agreements the
Debtors are reimbursed for advertising and promotional costs expended on their
behalf. Under the distributor agreements, the distributors are also required to
purchase their beds from the Debtors.
As of the Petition Date, approximately six of the Debtors
distributors had delinquent accounts, representing approximately $3 million in
uncollected receivables. During the course of the bankruptcy cases, the Debtors
have attempted to reach agreements with these distributors, and expect to
collect a portion such receivables in the future. The Debtors are unable to
forecast the percentage of uncollected receivables that they will ultimately
reduce to collection.
K. The Plan Offers Creditors The Best Recovery From This Case
The Debtors in the course of their Chapter 11 cases have made
substantial progress stabilizing their business and regaining their vendors' and
customers' support. If the Plan is not confirmed, it will signal to vendors and
customers that there has been a loss of confidence in the Debtors in their
reorganization effort, and the resulting tailspin may jeopardize the Debtors
reorganization. The Plan is, in the Debtors' view, as well as the view of the
unsecured creditors committee, the best possible vehicle for each Creditor and
Equity Interest Holder to recover from the Debtors.
As demonstrated in the liquidation analysis, annexed hereto as
Exhibit C, at a liquidation, as of the confirmation date, Class 6 Unsecured
Creditors and Class 8 and 9 Equity Interests would receive 0% of their Allowed
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Claims and Interests. In contrast, the Plan proposes to pay Unsecured Creditors
10% of their total Allowed Claims. The Plan also provides for distributions to
Class 8 and 9 Shareholders (see, Part V). Therefore, the Plan provides for a
significantly greater distribution than a liquidation scenario under Chapter 7,
and is clearly in the best interests of Creditors and Equity Interest Holders.
V.
PLAN OF REORGANIZATION
----------------------
Class 1 Claims: Administrative Expense Claims.
Class 1 Claims consist of all Administrative Expense Claims, i.e.,
claims for the actual and necessary costs and expenses of administration of the
Case entitled to priority in accordance with sections 503(b) and 507(a)(1) of
the Bankruptcy Code, including, without limitation, (i) any actual and necessary
expenses of preserving the Debtors' estate and operating the business of the
Debtors, and (ii) allowances of compensation and reimbursement of expenses to
Professional Persons to the extent allowed by the Court.
Administrative Expense Claims will be paid in full, in Cash, on the
latest of (i) the Effective Date; (ii) when allowed by the Court, if subsequent
to the Effective Date; or (iii) upon such other terms as may be agreed upon by
the Debtors and the holder of such Allowed Claim. Administrative Expense Claims,
that represent liabilities incurred by the Debtors, in the ordinary course of
their business, will be paid or performed by the Debtors in the ordinary course
of business and in accordance with any terms and conditions of any agreements
between the Debtors and the holders of such Administrative Expense Claims.
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Class 1 claims are not deemed a Class for impairment purposes.
Class 2 Priority Tax Claims.
----------------------------
Class 2 Claims consist of all Priority Claims entitled to priority
in accordance with section 507(a)(8) of the Bankruptcy Code. These Claims
consist of certain unsecured Claims of governmental units for unpaid taxes. As
of May 5, 1997, the Debtors estimate that, as a result of negotiations with
taxing authorities, no such Class 2 Priority Tax Claims exist.
If, however, any Priority Tax Claims shall be asserted and allowed,
such Allowed Claims shall be paid in full, in Cash, on the latest of (i) the
Effective Date; (ii) the date the Debtors are otherwise obligated to pay such
Allowed Claim, in accordance with the terms and provisions of the particular
transaction given rise to such Claim; or (iii) the date such Priority Tax Claim
comes due.
Class 2 Claims are not deemed a Class for impairment purposes.
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Class 3 Priority Claims and Priority Wage Claims.
-------------------------------------------------
Class 3 Claims consist of all Priority Claims entitled to priority
pursuant to section 507(a) of the Bankruptcy Code (other than Administration
Expense Claims and Class 2 Priority Tax Claims) except those pursuant to section
507(a)(8) of the Bankruptcy Code. Such Claims include (i) unsecured claims for
accrued employee compensation earned within ninety (90) days of the Petition
Date to the extent of $4,000 per employee, unless otherwise paid by order of the
Court; (ii) contributions to employee benefit plans arising from services
rendered within 180 days prior to the Petition Date, but only for each such plan
to the extent of (x) the number of employees covered by such plan multiplied by
$4,000, less (y) the aggregate amount paid to such employee from the Estate for
wages, salaries and commissions; and (iii) unsecured claims of individuals who
deposited up to $1800.00 with the Debtors prior to the Petition Date for the
purchase of a bed.
Each holder of a Class 3 Priority Claim shall be paid the amount of
such claim entitled to Priority in full, in Cash, on the Effective Date, for the
amounts entitled to priority. Alternatively, Priority Claims or Priority Wage
Claims may be paid upon such terms and conditions as may be agreed upon by and
between the holder of such Claim and the Debtors. Any remaining balance of the
Class 3 Priority Claims, not entitled to priority, will be treated as a Class 6
General Unsecured Claim.
Class 3 is not impaired under the Plan.
Class 4 Secured L&P Claims.
---------------------------
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Class 4 consists of the Secured Claim of L&P (estimated at
$2,392,000). Class 4 shall receive a lump sum payment of $338,000 on the
Promissory Note on the Effective Date or such other date acceptable by L&P. The
remaining $338,000, due under the Promissory Note, shall be paid over a period
of twelve (12) months, with interest at two percent (2%) over the Prime Rate.
The $516,000 due, under the Revolving Credit Agreement, shall be
paid under the terms of such agreement, which shall survive according to its
terms.
The Requirement Agreement shall be modified solely to extinguish
the $1,200,000 indebtedness thereunder. The Debtor and L&P shall continue to
comply with all other provisions thereunder.
The Class 4 Secured L&P Claims are impaired.
Class 5 Other Secured Claims
----------------------------
Other Secured Claims means any Claim, to the extent of the value of
assets, as to which the Creditor holding the Claim has as lien, except Other
Secured Claims shall not include the L&P Claims.
Other Secured Claims are generally held by secured equipment
lessors or secured insurance premium finance companies. Payments to Class 5
Creditors shall be paid in full pursuant to the terms of each respective
agreement.
Class 5 Other Secured Claims are not impaired under the Plan.
Class 6 General Unsecured Claims
--------------------------------
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Class 6 Claims consist of the non-priority Unsecured Claims.
Generally, a non-priority Unsecured Claim is a Claim against the Estate, the
repayment of which is not secured by an asset of the Debtors. The Debtors
estimate that the total amount of Class 6 Allowed Claims will be approximately
$1.8 million. The members of this Class shall be paid ten percent (10%) of the
Allowed Claim in full in cash, without interest on the latest to occur of (i)
the Effective Date; (ii) the date such Unsecured Claim becomes Allowed; or (iii)
the date upon which the Debtors and the holder of such Unsecured Claim otherwise
agree.
Class 6 Unsecured Creditors are impaired under the Plan.
Class 7 Unsecured Insider Claims
--------------------------------
Unsecured Insider Claim means any Unsecured Claim held by an
Insider or Affiliate, such as Craftmatic U.K. The Plan provides that each
Unsecured Insider Claim, that constitutes an Allowed Claim, shall be
reconstituted as an obligation of the Reorganized Debtor. However, no payments
shall be made thereon until all Class 1, 2, 3 and 5 Allowed Claims (as of the
Effective Date) are paid in full. Thereafter, each such Claim shall be paid, as
may be agreed by the Reorganized Debtor and the holder of such Claims, however,
in no instance shall Class 6 Claims be paid more than ten percent (10%) of such
Allowed Claim. As of May 5, 1997, the Debtors estimate that the total amount of
Unsecured Insider Claims is $42,778.67.
Class 7 Unsecured Insider Claims are impaired under the Plan.
Class 8 Equity Interests: Preferred Shareholders
------------------------------------------------
Class 8 consists of Equity Interests of Series A Preferred
Shareholders. Currently, Industries' ESOP holds 100% of the outstanding
preferred shares.
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The ESOP shall receive a lump sum payment of $200,000 to be paid to
the ESOP Trustee, which amount does not include payment for Stanley and Carolyn
Kraftsow's interest in the ESOP, which interests are being voluntarily
surrendered by Mr. and Mrs. Kraftsow without payment. The Series A Preferred
Shares shall be canceled upon the payment of such $200,000 to the ESOP Trustee
on the Effective Date or on a date agreeable to the ESOP Trustee.
Class 8 Equity Interests are impaired under the Plan.
Class 9 Equity Interests: Common Shareholders
---------------------------------------------
Class 9 consists of the Equity Interests in the Debtors. Allowed
Claims and Equity Interests in Class 9, other than Claims and Equity Interests
of Stanley Kraftsow, Carolyn Kraftsow, and trusts held for children, shall
receive .01 cent per share of Industries Common Stock. After such payment,
all Common Stock, except the Kraftsow Shares, shall be cancelled.
Class 9 Interest Holders are impaired under the Plan.
VI.
OTHER PROVISIONS OF THE PLAN
----------------------------
A. Cancellation of Interests
On the Effective Date, each share of Industries Common Stock, other
than the Kraftsow Shares, shall be canceled, whether or not surrendered to the
Reorganized Debtors.
Upon the payment to the ESOP Trustee, Industries Preferred Shares
shall be canceled, whether or not surrendered to the Reorganized Debtor.
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B. Substantive Consolidation of the Debtors' Estates
The Plan contemplates and is predicated upon entry of the
Substantive Consolidation Order which will effect the substantive consolidation
of the Cases of the Debtors into a single chapter 11 Case solely for the
purposes of all actions associated with confirmation and consummation of the
Plan. On the Confirmation Date, or such other date as may be set by a Final
Order of the Bankruptcy Court, but subject to the occurrence of the Effective
Date: (i) all intercompany Claims by and among the Debtors will be eliminated;
(ii) all assets and liabilities of the Debtors will be pooled or treated as
though they were pooled; (iii) all prepetition cross- corporate guarantees of
the Debtors will be eliminated; (iv) any obligation of any Debtor and all
guarantees thereof executed by one or more of the Debtors will be deemed to be
one obligation of the consolidated Debtors; (v) any Claims filed or to be filed
in connection with any such obligation and such guarantees will be deemed one
Claim against the consolidated Debtors; and (vi) each and every Claim Filed in
the individual chapter 11 case of any of the Debtors will be deemed Filed
against the consolidated Debtors to the consolidated Reorganization Case and
will be deemed a single obligation of all of the Debtors under the Plan on and
after the Confirmation Date. On the Confirmation Date, and in accordance with
the terms of the Plan and the consolidation of the assets and liabilities of the
Debtors, all Claims based upon guarantees of collection, payment or performance
made by the Debtors as to the obligations of another Debtor or of any other
Person will be discharged, released and of no further force and effect;
provided, however, that nothing herein will affect the obligation of each of the
Debtors under the Plan.
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The power to substantively consolidate interrelated chapter 11
cases is based upon the Bankruptcy Court's general equitable powers which are
set forth in section 105 of the Bankruptcy Code. Within this framework, the
factors to which courts have looked to determine the appropriateness of
substantive consolidation include: (i) whether creditors dealt with the debtor
entities as a single economic unit and did not rely on their separate identities
in extending credit, and (ii) whether the affairs of the debtors are so
entangled that the consolidation will benefit all creditors of the debtors'
estates. Additional factors include: (i) the presence or absence of consolidated
financial statements; (ii) the existence of inter-company guarantees or loans;
(iii) the unity of interest and ownership between the various corporate
entities; (iv) the transfer of assets without formal observance of corporate
formalities; (v) the degree of difficulty in segregating and ascertaining
individual assets and liabilities; (vi) the parents, its affiliates and the
subsidiaries having common directors and/or officers; (vii) the parent or its
affiliates financing one another; and (viii) the commingling of assets and
business functions.(1)
The Debtors believe that the aforementioned factors are satisfied
under the facts of this case, and that substantive consolidation of the Debtors'
Estates will facilitate confirmation of the Plan and foster similarity and
fairness of treatment of holders of Claims.
- ----------
(1) Procedural consolidation is the administrative process (contemplated by
Bankruptcy Rule 1015(b)) whereby the cases of two or more affiliated
debtors are conducted as part of a single case for the convenience of the
bankruptcy court and parties in interest. Procedural consolidation does
not affect the substantive rights of the debtors or their respective
creditors and interest holders. These Cases were procedurally consolidated
by prior order of the Bankruptcy Court.
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C. Prepayment Under the Plan
At any time, after the Effective Date, the Reorganized Debtors
shall have the option to prepay the Distributions required to be paid to holders
of the Allowed Class Claims by notifying, in writing, each holder of an Allowed
Class Claim of the Reorganized Debtors' intent to prepay the Distributions and
paying each holder of an Allowed Claim in such Class.
D. The Creditors' Committee
The Committee shall continue in existence until the latter of (i)
the Effective Date or (ii) the payment in full of Class 6 Unsecured Creditors,
to exercise those powers and perform those duties specified in section 1103 of
the Bankruptcy Code and the Plan, and shall perform such other duties as they
may have been assigned by the Bankruptcy Court. On and after the Effective Date,
the Committee shall remain in existence to assist and advise the Reorganized
Debtors in the performance of its duties under the Plan.
E. Exculpation and Releases
It is the Debtors position that upon confirmation of the Plan,
neither the Debtors, Reorganized Debtors, their officers, directors, employees,
legal advisors or agents, the ESOP Trustee, Committee, nor any of its legal
advisors or members will have or incur any liability to any holder of a Claim or
Interest for any act or omission in connection with, or arising out of the pre-
bankruptcy operations of the Debtors, the pursuit of confirmation of the Plan,
the consummation of the Plan or the administration of the Plan or the property
to be distributed under the Plan, except for willful misconduct or gross
negligence, and, in all respects, the Reorganized Debtors, the ESOP Trustee,
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Committee and each of their respective members, officers, directors, employees,
advisors and agents will be entitled to rely upon the advice of counsel with
respect to their duties and responsibilities under the Plan.
F. Means For Execution Of The Plan
As demonstrated in the projections, annexed hereto as Exhibit F,
the Debtors will have the necessary Cash on hand and available credit on the
Effective Date to fund the payments required hereunder. The payment by Stanley
Kraftsow and the funds received from existing and future operations will
provide adequate monies to satisfy the Plan payments.
G. Officers and Directors of the Reorganized
Debtor, and Their Compensation
Exhibit G reveals the identity and affiliations of the parties who
will serve as Directors and Officers (the "Officers and Directors") of the
Reorganized Debtor and their respective compensation. The Debtors submit that it
will benefit the Estates, substantially if the Officers and Directors continue
to act for the Reorganized Debtor since they have valuable experience, which
will further the Reorganized Debtors' operations. Absent their expert services,
the Reorganized Debtor could suffer real economic harm.
H. Section 1930 Fees
All fees and charges payable under section 1930 of Title 28 of the
United States Code, as determined by the hearing on Confirmation of the Plan,
will be paid upon the Effective Date of the Plan.
I. Retiree Benefits
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The Plan does not adversely affect any retiree benefits, as that
term is defined in Bankruptcy Code section 1114.
J. Discharge, Injunction and Legal Effect of the Plan
(i) Discharge. The treatment of, and consideration to be received
by, holders of Allowed Claims and Allowed Interests pursuant to the Plan will be
in full satisfaction, release and discharge of their respective Claims against
or Equity Interests in the Debtors and their officers, directors, employees,
legal advisors or agents, including the ESOP Trustee. Except as otherwise
expressly provided in the Plan, it is the Plan proponent's position that
pursuant to sections 524 and 1141 of the Bankruptcy Code, on and after the
Effective Date, the terms of the Plan shall bind all holders of Claims and
Interests, whether or not they accept the Plan, and discharge the Debtors from
any Claim and any "debt" (as the term is defined in section 101(12) of the
Bankruptcy Code) incurred before the Confirmation Date, regardless of whether a
proof of claim was filed, whether the Claim is allowed, or whether the holder
thereof voted to accept the Plan, and the liability of the Debtors in respect
thereof is extinguished completely, including without limitation, any liability
of a kind specified in section 502(g) of the Bankruptcy Code.
(ii) Injunction. Pursuant to the provisions of section 524 of the
Bankruptcy Code, the discharge provided for in section 1141(d) of the Bankruptcy
Code results in an injunction staying, restraining and enjoining all Persons and
governmental units from taking any actions for the purpose of collecting,
recovering or receiving payment, on or with respect to any Claim (other than
actions brought to enforce any right or obligation under the Plan), as against
the Debtors.
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(iii) Legal Effect of the Plan. The Plan represents a proposed
legally binding agreement among the Debtors, Debtors' Estates, Creditors and
Equity Interest holders. The Distributions provided for in the Plan will be in
exchange for and in complete satisfaction, settlement, release and discharge of
all Claims as against the Debtors. Upon confirmation of the Plan, but subject to
the occurrence of the Effective Date, all Claims against the Debtors will be
deemed to have been satisfied, discharged and released in full. The presently
existing debtor/creditor relationship will be replaced by one of
obligor/obligee, with the Plan being the operative binding agreement.
K. Modification.
Section 10.1 of the Plan provides that, except as otherwise
specifically provided in the Plan, the Debtors, with the consent of the
Committee, may alter, amend, or modify the Plan under section 1127 of the
Bankruptcy Code at any time prior to the Confirmation Date. After the
Confirmation Date and prior to substantial consummation of the Plan, the
Debtors, so long as it does not adversely affect the treatment of holders of
Claims or Equity Interests under the Plan, may institute proceedings in the
Bankruptcy Court to remedy any defect or omission or reconcile any
inconsistencies in the Plan or the Confirmation Order, and such matters as may
be necessary to carry out the purposes and effects of this Plan; provided,
however, that prior notice of such proceedings is served in accordance with
Bankruptcy Rules 2002 and 9014.
L. Revesting of Property of the Estate
Section 4.2 of the Plan provides that, except as otherwise provided
in the Plan, any contract, instrument, or other agreement or document created in
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connection with the Plan, or the Confirmation Order, on the Effective Date, all
assets and Property of the Estate, wherever situated, including (without
limitation) all patents, trademarks and other intellectual property, shall
revest in the Reorganized Debtor free and clear of all Claims, mortgages, deeds
of trust, liens, security interests, encumbrances, and other interests of any
Entity and the Reorganized Debtor may thereafter operate its business and may
use, acquire, and dispose of property and compromise or settle any Claims or
interests without the supervision or approval of the Bankruptcy Court, free of
any restrictions of the Bankruptcy Court for the Southern District of New York,
and the guidelines and requirements of the Office of the United States for the
Southern District of New York.
M. Administrative Expense Claims Bar Date
The Plan provides that the last day to file administrative expense
claims requesting payment pursuant to Bankruptcy Code Sections 327, 328, 3301,
331, 503, 506 or 1103 shall be within sixty (60) days after the Confirmation
Date, which date may be further extended by the Bankruptcy Court for cause.
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N. Objections to Claims
The Debtors shall have the exclusive right, except with respect to
claims of officers, directors, and Professional Persons, to object to any Claims
by filing an objection with the Court and serving a copy thereof on the holder
of the Claim within the later of sixty (60) days after confirmation of the Plan
(or such extension of time as the Bankruptcy Court may grant), or thirty (30)
days after the filing of a Claim and service of a copy of such Claim upon the
Debtor as provided for herein, in which the event the Claim objected to will not
be treated as an Allowed Claim under the Plan. All objections to Claims and
Equity Interests will be litigated to Final Order, unless the parties are able
to compromise and settle any objection, subject to the approval of the
Bankruptcy Court.
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<PAGE>
O. Reserve for Disputed Claims
On and after the Effective Date, no distributions will be made by
the Debtors or Reorganized Debtor to the holders of Disputed Claims who timely
filed a proof of claim. At the time of any distributions, pursuant to the
provisions of the Plan, the Debtors will reserve and will not distribute Cash
equal to the amount that the holders of Disputed Claims at the time of the
distribution would have received had the Disputed Claims been Allowed Claims.
Within ten (10) business days of a Final Order disallowing all or any portion of
a Disputed Claim, the reserved amount in excess of the amount necessary to
satisfy the Allowed Amounts of such Disputed Claim will be paid into the
Reorganized Debtor's account. At such time as a Disputed Claim becomes an
Allowed Claim, the distribution that would have been disbursed in all prior
distributions, had the Disputed claim been an Allowed Claim on the Effective
Date, will be distributed by the Debtor, without interest, to the holder of such
Allowed Claim within ten (10) business days after such disputed claim becomes an
Allowed Claim. However, with respect to the Attorney General Claims, no reserve
shall be made for any such Claimant who did not file a proof of claim, thereby
waiving any right to a distribution under the Plan.
P. Binding Effect
The provisions of the Plan shall be binding upon and inure to the
benefit of the Debtors, the Reorganized Debtor, any holder of a Claim, any
holder of an Equity Interest, and their respective predecessors, successors,
assigns, agents, officers and directors.
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Q. Successors And Assigns
The Plan provides that the rights and obligations of any Entity,
named or referred to in the Plan, will be binding upon, and will inure to the
benefit of, the successors and assigns of such Entity.
R. Conditions Precedent to the Effective Date
The Plan will not become effective unless and until (1) the
Bankruptcy Court shall have entered a Confirmation Order which adopts all the
terms and conditions of this Disclosure Statement and the Plan; and (2) Stanley
Kraftsow shall have paid $200,000.00 to the Debtors.
S. Preferences, Fraudulent Conveyances and Turnover Actions
The Plan provides that, with the consent of the Committee, the
Debtors reserve the right to pursue preference, fraudulent conveyance, turnover
actions or other types of claims under Section 541-550 of the Bankruptcy Code,
or applicable state laws that are not otherwise released under the Plan.
However, after analysis of the Debtors books and records, there exist no
fraudulent transfers or preferences exist. Therefore, no such actions will be
commenced post-confirmation.
T. Retention of Jurisdiction
Article 8 of the Plan includes provisions regarding the retention
of jurisdiction by the Bankruptcy Court over a variety of matters that may be
pending on the Confirmation Date or which may arise subsequent thereto. In
essence, the Bankruptcy Court will retain jurisdiction over any and all matters
that relate to the enforcement or administration of the Plan.
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<PAGE>
U. Restatement of Debtors' Certificates of Incorporation and Bylaws
The Certificates of Incorporation and Bylaws of both Debtors will
be amended and restated effective on the Effective Date to the extent necessary
to effectuate the provisions of the Plan, as set forth herein.
VII.
EXECUTORY CONTRACTS
-------------------
A. Assumption or Rejection of Executory
Contracts And Unexpired Leases
Article 7 of the Plan provides that upon the Confirmation Date, but
subject to the occurrence of the Effective Date, the Reorganized Debtors shall
be deemed to have assumed, without the need for any further documents or orders,
in accordance with section 365(a) of the Bankruptcy Code, any executory
contract(s) or leases of nonresidential real property to which the Debtors were
parties (either one or both of them) on the Petition Date except the executory
contract with Kent Advertising, which will be rejected under the Plan, and those
which: (a) prior to the Confirmation shall have been rejected by Final Order(s);
(b) at the Confirmation Date shall be the subject of a pending motion to reject;
(c) prior to the Confirmation Date shall have been assumed by Final Order; or
(d) are otherwise addressed in the Confirmation Order.
Article VII.1 of the Plan provides that all proofs of claim with
respect to Claims for rejection of executory contracts, which rejection did not
occur by Final Order entered prior to Confirmation Date, must be filed within
twenty five (25) days after the Confirmation Date. All claims arising from the
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rejection of executory contracts or unexpired leases shall be treated as Class 6
Unsecured Claims.
VIII.
ACCEPTANCE AND CONFIRMATION
---------------------------
A. Confirmation Hearing.
The Bankruptcy Court has scheduled a hearing on Confirmation of the
Plan to commence on June 25, 1997, at 10:00 a.m. That hearing will be held at
the Bankruptcy Court for the Southern District of New York, Alexander Hamilton
Custom House, One Bowling Green, New York, New York 10004, before the Hon.
Stuart M. Bernstein, United States Bankruptcy Judge. At that hearing, the
Bankruptcy Court will consider whether the Plan satisfies the various
requirements of the Bankruptcy Code, including whether it is feasible, and
whether it is in the best interests of the Creditors and Equity Interest Holders
of the Debtors. At that time, the Debtors and the Committee will respectfully
certify to the Bankruptcy Court a tally of the votes for acceptance or rejection
of the Plan by the parties entitled to vote thereon.
The hearing on confirmation may be adjourned from time to time by
the Bankruptcy Court without further notice, except for an announcement made at
the hearing or any adjournment thereof.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of the Plan. Any objections to confirmation
of the Plan must be made in writing and filed with the Bankruptcy Court and
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served, as to be received by the following persons no later than June 18, 1997,
5:00 p.m., New York Time:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: Joel Lewittes, Esq.
Adam H. Friedman, Esq.
Gersten Savage Kaplowitz Fredericks & Curtin, LLP
101 East 52nd Street, 9th Floor
New York, New York 10022
Attn: Harold Jones, Esq.
Office of the United States Trustee
80 Broad Street
New York, New York 10004
Objections to confirmation of the Plan are governed by Rule 9014 of
the Federal Rules of Bankruptcy Procedure. UNLESS AN OBJECTION TO CONFIRMATION
IS TIMELY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
B. General Discussion.
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In order to confirm the Plan, the Bankruptcy Code requires that the
Court make a series of determinations concerning the Plan, including, inter
alia, that (a) the classification of claims in the Plan was done in a rational
and permissible manner; (b) the Plan complies with the technical requirements of
Chapter 11 of the Bankruptcy Code; (c) the Debtors have proposed the Plan in
good faith; and (d) the Debtors' disclosures concerning the Plan have been
adequate and have included information concerning all payments made or promised
under the Plan. The Debtors believe that all of the above conditions will be met
by the date set for the hearing on Confirmation of the Plan, and will seek
rulings of the Bankruptcy Court to this effect at said hearing.
The Bankruptcy Code also requires that the Plan be accepted by the
requisite votes of creditors (except to the extent that "cram down" is available
and utilized under section 1129(b) of the Bankruptcy Code); that the Plan be
feasible (i.e., that confirmation of the Plan is not likely to be followed by
the need for further reorganization of the Debtors or any successor to the
Debtors under the Plan); and that confirmation of the Plan is in the "best
interests" of all creditors (i.e., they will receive at least as much under the
Plan as they would in a liquidation under Chapter 7 of the Bankruptcy Code). To
confirm the Plan, the Court must find that all of these conditions have been met
(unless the applicable "cram down" provisions of section 1129(b) of the
Bankruptcy Code are employed). Thus, even if the Creditors and Equity Interest
Holders of the Debtors accept the Plan by the requisite votes contemplated, the
Court must nevertheless make independent findings respecting the Plan's
feasibility and whether the Plan is in the best interests of the Creditors and
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Equity Interest Holders before it may confirm the Plan. The classification, best
interests, acceptance and feasibility conditions to confirmation are discussed
below.
C. Classification of Claims and Interests.
The Bankruptcy Code requires that the Plan place each Claim and
each Interest in a class with other Claims or interests which are "substantially
similar". The Plan establishes seven (7)(2) Classes of Claims and two (2)
Classes of Equity Interests. Creditors of similar or like kind have been
included in the same class each member of such class will be treated in exactly
the same or in a substantially similar manner. The Debtors believe that the Plan
meets the classification requirements of the Bankruptcy Code.
D. Acceptance
Classes 4, 6, 7, 8 and 9 of the Plan are impaired under the Plan
and are entitled to vote to accept or reject the Plan. The Plan permits holders
of disputed Class 5 Claims to vote the face amount of their Claims, unless the
Debtors have objected to such Claim. The Debtors reserve the right to seek
nonconsensual confirmation of the Plan under section 1129(b) of the Bankruptcy
Code with respect to any Class of Claims or Interests that rejects or is deemed
to reject the Plan.
- ----------
2 As indicated previously, Class 1 and Class 2 are designated for ease of
reference only, and not for purposes of applying the provisions of
sections 1122-1129 of the Bankruptcy Code dealing with, among other
things, the voting rights and impairment of designated creditor Classes.
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E. Unfair Discrimination and Fair and Equitable Tests.
To obtain nonconsensual confirmation of the Plan, by "cram down",
it must be demonstrated to the Bankruptcy Court that the Plan "does not
discriminate unfairly" and is "fair and equitable" with respect to each
impaired, nonaccepting Class. The Bankruptcy Code provides a non-exclusive
definition of the phrase "fair and equitable." The Bankruptcy Code establishes
"cram down" tests for secured creditors, unsecured creditors and equity holders,
as follows:
i. Secured Creditors. Either (i) each impaired secured creditor
retains its liens securing its secured claim and receives on
account of its secured claim deferred cash payments having a
present value equal to the amount of its allowed secured
claim, (ii) each impaired secured creditor realized the
"indubitable equivalent" of its allowed secured claim or
(iii) the property securing the claim is sold free and clear
of liens with such liens to attach to the proceeds of the
sale and the treatment of such liens on proceeds is provided
in clause (i) or (ii) of this subparagraph.
ii. Unsecured Creditors. Either (i) each impaired unsecured
creditor receives or retains under the plan property of a
value equal to the amount of its allowed claim or (ii) the
holders of claims and interests that are junior to the
claims of the dissenting class will not receive or retain
any property under the plan.
iii. Equity Interests. Either (i) each holder of an equity
interest will receive or retain under the plan property of a
value equal to the greatest of the fixed liquidation
preference to which such holder is entitled, the fixed
redemption price to which such holder is entitled or the
value of the interest or (ii) the holder of an interest that
is junior to the nonaccepting class will not receive or
retain any property under the plan.
The Debtors believe that the Plan and the treatment of all
Classes of Claims and Equity Interests under the Plan satisfy the foregoing
requirements for nonconsensual confirmation of the Plan.
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F. Feasibility.
The Bankruptcy Code requires that confirmation of a Plan is not
likely to be followed by liquidation or the need for further financial
reorganization. For purposes of determining whether the Plan meets this
requirement, the Debtors have analyzed their ability to meet their obligations
under the Plan. As part of this analysis, the Debtors have prepared projections
of their financial performance for the three (3) fiscal years ending 2000. These
projections, and the assumptions on which they are based, are included in the
Debtors' Projected Financial Information annexed. Based upon such projections,
the Debtors believe that they will be able to make all of the payments required
under the Plan and that confirmation of the Plan is not likely to be followed by
liquidation or the need for further reorganization.
G. Best Interests Test.
With respect to each impaired Class of Claims and Equity Interests,
confirmation of the Plan requires that each holder of a Claim or Equity Interest
either (i) accept the Plan or (ii) receive or retain under the Plan property of
a value, as of the Effective Date, that is not less than the amount such holder
would receive or retain if the Debtors were liquidated under chapter 7 of the
Bankruptcy Code. To determine what holders of Claims and Equity Interests of
each impaired class would receive if the Debtors were liquidated under chapter
7, the Bankruptcy Court must determine the dollar amount that would be generated
from the liquidation of the Debtors' assets of the Debtors, augmented by the
unencumbered cash held by the Debtors at the time of the commencement of the
liquidation case. Such cash amount would be reduced by the amount of the costs
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and expense of the liquidation and by such additional administrative and
priority claims that may result from the termination for the Debtors' business
and the use of chapter 7 for the purposes of liquidation.
The Debtors estimate that, under a liquidation scenario, not even
the holder of the Class 4 L&P Secured Claim would receive 100% of its Claims.
The Debtors' costs of liquidation, under chapter 7, would include
the fees payable to a trustee in Bankruptcy, as well as those payable to
attorneys and other professionals that such a trustee may engage. In addition,
claims would arise by reason of the breach or rejection of obligations incurred,
and leases and executory contracts assumed or entered into by the Debtors-in-
Possession during the pendency of the Chapter 11 Case. The foregoing types of
claims and other claims which may arise in a liquidation case, or result from
the pending Chapter 11 Case, including any unpaid expenses incurred by the
Debtors in Possession during the Chapter 11 Case, such as compensation for
attorneys and accountants, would be paid in full from the liquidation proceeds
before the balance of those proceeds would be made available to pay pre-petition
Unsecured Claims.
To determine if the Plan is in the best interests of each Impaired
Class, the present value of the distributions from the proceeds of the
liquidation of the Debtors' unencumbered assets and properties, after
subtracting the amounts attributable to the foregoing Claims, are then compared
with the value of the property offered to such Classes of Claims and Equity
Interests under the Plan.
After considering the effects that a chapter 7 liquidation would
have on the ultimate proceeds available for distribution to Creditors in a
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Chapter 11 Case, including (i) the increased costs and expenses of a liquidation
under chapter 7 arising from fees payable to a trustee in bankruptcy and
professional advisors to such trustee, (ii) the erosion in value of assets in a
chapter 7 case in the context of the expeditious liquidation required under
chapter 7 and the "forced sale" atmosphere that would prevail and (iii) the
substantial increases in Claims which would be satisfied on a priority basis or
in parity with creditors in the Chapter 11 Case, the Debtors have determined
that confirmation of the Plan will provide each holder of an Allowed Claim or
Equity Interest with a recovery that is not less than such holder would receive
pursuant to liquidation of the Debtors under chapter 7.
The Debtors' Liquidation Analysis is attached hereto as Exhibit D.
The information set forth in Exhibit D provides a summary of the liquidation
values of the Debtors' assets assuming a chapter 7 liquidation in which a
trustee appointed by the Bankruptcy Court liquidates the assets of the Debtors'
Estate. Reference should be made to the Liquidation Analysis for a complete
discussion and presentation of the Liquidation Analysis. The Liquidation
Analysis was prepared by the Debtors' management in consultation with the
accountants retained by the Debtors.
H. Consummation.
The Plan will be consummated following the Effective Date. The
Effective Date of the Plan is the tenth (10th) Business Day after the date on
which the conditions precedent to the effectiveness of the Plan, as set forth
above, are satisfied or waived.
The Plan is to be implemented pursuant to the provisions of the
Bankruptcy Code.
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IX.
ALTERNATIVES TO THE PLAN
------------------------
If the Plan is not confirmed by the Bankruptcy Court and
consummated, the alternatives to the Plan include: (a) dismissal of the Chapter
11 Case; (b) liquidation of the Debtors under Chapter 7 of the Bankruptcy Code;
or (c) confirmation of an alternative plan of reorganization.
If the Plan is not confirmed, and in the absence of confirmation of
a different plan, the Chapter 11 Case, would either continue for some brief
period, be converted to a case under chapter 7, or be dismissed. Since dismissal
would not allow for the financial liquidation of the Debtors and settlements of
Claims against the Debtors in a timely, prioritized or organized manner, the
Debtors do not believe that dismissal is in the best interest of Creditors.
Conversion to chapter 7 would likely return less to Creditors than this Plan
because of delays in distribution and incurred Administrative Claims. The
Debtors believe that the Plan is confirmable, and the Debtors urge all Creditors
and Equity Interest Holders to vote in favor of confirmation of the Plan.
X.
RISK FACTORS TO BE CONSIDERED
-----------------------------
The risk factors discussed below assume Confirmation and
consummation of the Plan and the transactions contemplated by the Plan, and do
not include unforseen circumstances that could prevent confirmation or
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consummation. Prior to voting on the Plan, each Creditor and Equity Interest
Holder should carefully consider the risk factors referred to below as well as
all of the information contained in this Disclosure Statement, including the
Plan and the other exhibits hereto.
A. Projections.
The financial projections included in this Disclosure Statement are
dependent on the successful implementation of the Debtors' business plan and the
reliability of the assumptions contained therein. These projections reflect
numerous assumptions, including confirmation and consummation of the Plan in
accordance with its terms, the anticipated future performance of the Reorganized
Debtor, the ability of the Debtor to retain its net operating loss ("NOL"),
industry performance, general business and economic conditions and other
matters, most of which are beyond the control of the Reorganization Debtor and
some of which may well not materialize. In addition, unanticipated events and
circumstances occurring subsequent to the preparation of the projections may
affect the actual financial results of the Reorganized Debtor. Therefore, the
actual results achieved throughout the periods covered by the projections will
vary from the projected results.
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B. Attorney General Actions
There are special factors inherent in the Reorganized Debtor's
industry of direct sales and marketing that may cause operating results of wider
variation than investments in other industries. These factors include the
resolution of the Debtor's business and consumer practices by state regulators
like the Attorney General's who have investigated and/or filed civil actions
against the Debtors for alleged violations. Unanticipated investigations and/or
civil actions require extensive time and money to defend. Therefore, the
financial expectations and projections may vary even if such actions arise in
the future.
XI.
TAX CONSEQUENCES OF THE PLAN
----------------------------
A. General Remarks.
The following is a general summary of certain material federal
income tax consequences to the Estate and the Creditors under the Plan. Certain
tax consequences are subject to substantial uncertainty due to the unsettled
state of the tax law regarding bankruptcy reorganizations and the lack of
authority regarding various issues.
In addition, the tax consequences to a Creditor may be affected by
the Creditor's own tax situation, including without limitation by special rules
applicable to certain types of Creditors, how and when the Creditor acquired its
claim, the Creditor's method of accounting and its prior treatment of the claim.
Moreover, this summary does not discuss any of the state, local or foreign
income tax or other tax considerations that may be applicable.
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NO REPRESENTATION IS BEING MADE WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN AS TO ANY CREDITOR.
EACH CREDITOR SHOULD CONSULT WITH ITS OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES OF THE PLAN.
B. Tax Consequences to the Estate.
i. Net Operating Losses
(1) Internal Revenue Code Sections 269 and 382
If a corporation undergoes an "ownership change", Internal Revenue
Code ("IRC") Section 382 limits the corporations right to use its net operating
loss ("NOL") carryovers. In general, under IRC Section 382, if a corporation
undergoes an "ownership change" of more than fifty percent (50%), IRC sets forth
a limitation on the ability to carry forward losses.
In general, an ownership change for these purposes occurs when the
percentage of stock (determined on the basis of value) of a corporation owned by
one or more holders (or certain groups of holders) of at least 5% of the stock
of the corporation has increased by more than 50 percentage points over the
lowest percentage of such stock that was owned by such 5% stockholders at any
time during the applicable testing period. The testing period is generally the
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shorter of (i) three years or (ii) the period of time since the corporation's
most recent ownership change.
IRC Section 382(1)(5) may apply to an ownership change which occurs
in a title 11 case if the action resulting in the ownership change is ordered by
the court or is pursuant to a plan approved by the court.
IRC Section 382(l)(5) contains its own loss limitation rules. Under
IRC Section 382(1)(5), the general rule does not apply to an ownership change if
the corporation (i) is in bankruptcy; and (ii) "the shareholders and creditors
of the old loss corporation (determined immediately before such ownership
change) own (after such ownership change as a result of being shareholders or
creditors immediately before such change) stock of the new loss corporation
which total more than fifty percent (50%) in both voting power and total
interest in the corporation."
Under the Plan, Stanley Kraftsow and family will own one hundred
percent (100%) of the Reorganized Debtor "as a result of being a shareholders
immediately before the ownership change." The Debtors believe that they will
retain their NOL by virtue of the IRC Section 382(1)(5) rules. However, the
Internal Revenue Service has the right to challenge the Debtors' ownership
change and preservation of the NOL.
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ii. Internal Revenue Code Section 269
IRC Section 269 operates in conjunction with the Section 382
limitation to limit the use of NOLs and other tax attributes when a change of
ownership occurs. Under IRC Section 269, if any person or persons acquire, or
acquired directly or indirectly, control of a corporation, and the principal
purpose for which such acquisition was made is evasion or avoidance of federal
income tax by securing the benefit of a deduction, credit, or other allowance
which such person or corporation would not otherwise enjoy, then the IRS may
disallow such deduction, credit, or other allowance. For this purpose, control
means the ownership of stock possessing at least 50 percent of the total
combined voting power of all classes of stock entitled to vote or at least 50
percent of the total value of shares of all classes of stock of the corporation.
The Debtors believe that IRC Section 269 does not apply to the transactions
under the Plan.
iii. Tax Consequences to Debtors.
Under the Internal Revenue Code, upon the commencement of a Chapter
11 case such as this one, a new taxable entity (the Estate) is deemed created
separate from the Debtors. The Debtors must file tax returns for the Estate.
Post-petition, the estate's taxable income is generally determined in the same
manner as it was pre-petition.
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By reason of the commencement of the Debtors' chapter 11 cases, the
Debtors' assets were automatically deemed transferred to the Estate. This
transfer from the Debtors to the Estate is not treated as a taxable disposition
for federal tax purposes. Moreover, as of the Petition Date, the Estate
succeeded to various tax attributes of the Debtors, its method of accounting and
the basis, holding period and character of the assets acquired. Upon the
termination of the Estate, assets will revert to the Debtors in a non-taxable
transfer and the Debtors will succeed to the tax attributes of the Estate.
Administrative expenses paid by the Estate are deductible to the
extent not disallowed by provisions of the Internal Revenue Code.
iv. Cancellation of Indebtedness Income.
A debtor generally realizes "cancellation of indebtedness income"
to the extent its debt is canceled or satisfied for less than its face amount.
If the indebtedness is canceled in a Title 11 case, however, any such
cancellation of indebtedness income is not recognized. Instead, the Estate must
reduce certain tax attributes, including its net operating loss carryovers and
the bases of its assets (but not below zero), by the amount of the income which
is realized but not recognized. The reductions are made only after the tax for
the year of the discharge is determined. Any cancellation of indebtedness income
remaining after the attribute reduction has no further federal income tax
consequences.
C. Tax Consequences to Creditors.
i. Income Upon Recovery.
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Upon a Distribution, a Creditor will recognize gain in an amount
equal to the excess, if any, of the cash received over its basis in the Claim.
The Creditor's basis in its claim depends on, among other things, the origin of
the Claim, the Creditor's method of accounting, and tax actions previously taken
by the Creditor with respect to the Claim. For example, a recovery on a Claim
for services rendered, interest or lost profits would generally be taxable as
ordinary income, whereas a repayment of the principal amount of a loan of money
would generally be a non-taxable return of capital. To the extent a Creditor
previously included the amount of its recovery in its income pursuant to its
method of accounting, it would not be included again. On the other hand, if the
Creditor previously claimed a bad debt deduction, its recovery would be taxable
to the extent of such deduction. Each Creditor should consult with its own tax
advisors as to the tax consequences of any Distribution to the Creditor.
ii. Bad Debt Deduction.
A Creditor who loaned money or who accrued income with respect to
payments due for services it performed or goods it provided may be entitled to a
bad debt deduction for its unrecovered basis in the Claim. In the case of a
business bad debt, the deduction is classified as an ordinary loss and is
allowable to the extent the Claim becomes totally or partially worthless. On the
other hand, a short-term capital loss is allowed with respect to non-business
bad debts in the year in which it becomes totally worthless. Creditors are urged
to consult with their own tax advisors as to the availability of a bad debt
deduction.
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XII.
CONCLUSION
----------
THE DEBTORS AND THE COMMITTEE URGE
THE ACCEPTANCE OF THE PLAN AND
BELIEVE IT IS IN THE BEST INTERESTS OF
ALL CREDITORS AND EQUITY INTEREST
HOLDERS TO ACCEPT THE PLAN
Dated: May 6, 1997
CRAFTMATIC INDUSTRIES, INC.,
and CRAFTMATIC ORGANIZATION, INC.
Debtors and Debtors-in-Possession
By: /s/ Carolyn Kraftsow
----------------------------
Carolyn Kraftsow, Secretary
PARKER CHAPIN FLATTAU & KLIMPL, LLP
Joel Lewittes, Esq.
Adam H. Friedman, Esq.
Attorneys for Debtors and Debtors-in-Possession
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
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