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 the earliest event reported): March 4, 1997
---------------------------------
DISCOVERY ZONE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-21854 36-3877601
- ------------------------------ ----------------- -----------------------------
(State or other jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification Number)
110 East Broward Boulevard 33301
Ft. Lauderdale, Florida ------------------------
- ----------------------------------------------- (Zip code)
(Address of principal executive offices)
954-627-2400
---------------------------------------------------
Registrant's telephone number, including area code
Page 1 of 5 -- Exhibit Index appears on Page 5
<PAGE>
Item 4. Changes in Registrant's Certifying Accountant.
a. As reported in a Current Report on Form 8-K dated June 10, 1996 (the
"1996 Form 8-K"), Discovery Zone, Inc. (the "Registrant") was informed by its
independent accountants, Price Waterhouse LLP ("Price Waterhouse"), that Price
Waterhouse declined to stand for re-election as the Registrant's independent
accountants for the year ending December 31, 1996. The Board of Directors of the
Registrant did not recommend or approve this change in independent accountants.
The 1996 Form 8-K incorrectly reported that Coopers & Lybrand LLP ("Coopers")
was engaged to be the Registrant's independent accountants for the year ending
December 31, 1996. Coopers was retained by the Registrant to provide it with
financial advice in formulating a restructuring plan, but was never formally
retained or approved by the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") to serve as the Registrant's independent
accountants.
b. On April 9, 1997, the Board of Directors of the Registrant ratified the
engagement of Ernst & Young LLP ("Ernst & Young") to act as the Registrant's
independent accountants for the year ending December 31, 1996. Ernst & Young's
retention was approved by order of the Bankruptcy Court on March 5, 1997 and
made effective retroactively from and after February 24, 1997.
c. The report of Price Waterhouse on the Registrant's financial statements
for the fiscal year ended December 31, 1995 (the only period during which Price
Waterhouse reported on the Registrant's financial statements) did not contain an
adverse opinion or disclaimer of opinion, and was not qualified or modified as
to audit scope or accounting principals, but was qualified by a statement by
Price Waterhouse that the Registrant's increasing operating cash flow losses,
its default under certain indebtedness and its filing of a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") on March 25, 1996, raised substantial doubt about the
Registrant's ability to continue as a going concern.
d. In connection with its audit for the year ended December 31, 1995 and
through June 3, 1996, there were no disagreements with Price Waterhouse on any
accounting matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure ("Accounting Matters") which
disagreements, if not resolved to the satisfaction of Price Waterhouse, would
have caused them to make reference thereto in the financial statements for such
year. In addition, for the same period, there were no "reportable events" as
that term is described in Item 304(a)(1)(v) of Regulation S-K.
e. During the years ended December 31, 1995 and 1996 and through February
24, 1997, neither the Registrant nor anyone acting on its behalf consulted Ernst
& Young regarding either (i) the application of accounting principles to a
specified transaction, completed or proposed, or the type of audit opinion that
might be rendered on the Registrant's financial statements, with respect to
which a written report was provided to the Registrant or oral advice was
provided that Ernst & Young concluded was an important factor considered by the
Registrant in reaching a decision as to such accounting, auditing or
<PAGE>
financial reporting issue; or (ii) any matter that was either the subject of a
disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K) or a
"reportable event."
Item 5. Other Events.
On March 11, 1997 Discovery Zone, Inc. and nineteen subsidiaries
(collectively, "Discovery Zone") and Birch Holdings L.L.C. ("Birch"), the
largest senior unsecured creditor of Discovery Zone, filed the Third Amended
Joint Plan of Reorganization (the "Plan") and the Second Amended Joint
Disclosure Statement (the "Disclosure Statement" and, as modified by the
Supplement, as defined below, the "Supplemented Disclosure Statement"). On June
6, 1997 Discovery Zone filed a Supplement to the Disclosure Statement (the
"Supplement"). Pursuant to the Plan, Birch would become Discovery Zone's
controlling stockholder. The Supplemented Disclosure Statement was approved by
the Bankruptcy Court on June 19, 1997. The Plan remains subject to the
confirmation requirements of the Bankruptcy Code.
Under the Plan, holders of Discovery Zone's pre-petition bank debt,
holders of certain general unsecured claims, and holders of Discovery Zone's
Liquid Yield Option Notes would receive 100% of the common stock of the
reorganized Registrant in exchange for their claims, and Discovery Zone's
existing common stock and partnership interests would be extinguished.
The Disclosure Statement, the Plan and the Supplement are filed as
exhibits hereto and are incorporated by reference herein.
Item 7. Financial Statements and Exhibits
The Disclosure Statement, the Plan and the Supplement are filed as
exhibits hereto and are incorporated by reference herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
DISCOVERY ZONE, INC.
By: /s/ Robert Rooney
--------------------------------
Robert Rooney
Senior Vice President and Chief
Financial Officer
Dated: July 9, 1997
<PAGE>
DISCOVERY ZONE, INC.
EXHIBIT INDEX
Number and
Description of Exhibit
- ----------------------
16.1 Order of the Bankruptcy Court for the District of Delaware
entered March 4, 1997
99.1 Order of the United States Bankruptcy Court for the District
of Delaware entered June 19, 1997
99.2 Second Amended Joint Disclosure Statement filed March 11, 1997
99.3 Third Amended Joint Plan of Reorganization filed March 11,
1997
99.4 Supplement to the Second Amended Joint Disclosure Statement
filed June 6, 1997
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
DISCOVERY ZONE, INC., et al.* ) Case No. 96-411 (HSB)
)
)
Debtors. ) (Jointly Administered)
ORDER AUTHORIZING DEBTORS'
EMPLOYMENT AND RETENTION OF ERNST & YOUNG, L.L.P.
AS INDEPENDENT AUDITORS, NUNC PRO TUNC TO FEBRUARY 24,1997
Upon consideration of the Application for Order Authorizing
Employment and Retention of Ernst & Young L.L.P. as Independent Auditors, Nunc
Pro Tunc to February 24, 1997 (the "Application") filed by Discovery Zone, Inc.
and nineteen of its affiliates as debtors and debtors in possession in these
chapter 11 cases (collectively, the "Debtors") and it appearing that the relief
requested in the Application is in the best interest of the Debtors, their
estates and creditors; and it appearing that the Debtors' decision to engage
Ernst & Young L.L.P. ("E&Y") as independent auditors to audit the Debtors'
financial statements for the fiscal year ending December 31, 1996 is supported
by reasonable business judgment; and it appearing that the decision to E&Y to
review the Debtors' 1995 Federal tax returns and to
- --------
* Discovery Zone, Inc., Beaverton Fun Fitness, Inc., DJM Management, Inc.,
DZ of Connecticut, Inc., DZ of Georgia, Inc., DZ of Massachusetts, Inc.,
DZ of Missouri, Inc., DZ of New York, Inc., DZ of Pennsylvania, Inc., DZ
of Wisconsin, Inc., Portland Fun Fitness, Inc., Vancouver Fun Fitness,
Inc., Discovery Zone (Puerto Rico), Inc., Leaps & Bounds, Inc., Semborg
Corp., DZ Party, Inc., DZGP, Inc., Discovery Zone Children's Amusement
Corporation, Discovery Zone L.P. and Tumble for Fun Limited Partnership.
<PAGE>
2
review the Debtors' 1996 quarterly filings on Form 10-Q is supported by
reasonable business judgment and it appearing that due notice of the Application
having been given to all parties in interest, and that no other or further
notice need be given; and the Statutory Creditors' Committee having consented to
the relief requested by the Application subject to the conditions in the
Application and the Engagement Letter attached as Exhibit A to the Application;
and sufficient cause appearing therefor, it is
ORDERED that the Application is hereby granted to the extent set
forth below; and it is further
ORDERED that the Debtors are authorized to employ E&Y as independent
auditors for the purpose of auditing the Debtors' financial statements for the
year ended December 31, 1996, nunc pro tunc to February 24, 1997, and performing
the other related services set forth in the Application, including the review of
the Debtors' 1995 Federal tax return and Discovery Zone's 1996 quarterly filings
on Form 10-Q, subject to the conditions set forth in the Application and the
Engagement Letter attached as Exhibit A to the Application; and it is further
ORDERED that the Debtors are authorized to pay E&Y a fee of $120,000
for the audit services set forth in the Application in accordance with the
schedule set forth in the Application, without prejudice to E&Y's ability to
request supplemental fees depending on the number of hours expended during the
course of the audit;
ORDERED that, except as noted above, E&Y shall be compensated and
reimbursed for out-of-pocket expenses incurred, in accordance with the
procedures set forth
<PAGE>
3
in sections 330 and 331 of the Bankruptcy Code and such Federal Rules of
Bankruptcy Procedure as may then be applicable from time to time, and such
procedures as may be fixed by order of this Court; and it is further
ORDERED that, notwithstanding any other provision of this Order, E&Y
shall file a final application for all fees and expenses pursuant to section 330
of the Bankruptcy Code with respect to all fees and expenses in connection with
the audit services; and it is further
ORDERED that any and all other and further notice of the relief
requested in the Application be, and hereby is, dispensed with and waived.
Dated: Wilmington Delaware
March 4, 1997
/s/ Helen S. Balick
------------------------------------
CHIEF UNITED STATES BANKRUPTCY JUDGE
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- ---------------------------------------x
In re :
:
DISCOVERY ZONE, INC., et al.,* : Chapter 11
: Case No. 96-411 (HSB)
:
:
Debtors. : (Jointly Administered)
- ---------------------------------------x
ORDER (i) APPROVING THE SUPPLEMENTED DISCLOSURE STATEMENT
AND FORM OF SUPPLEMENTAL BALLOT, (ii) ESTABLISHING PROCEDURES
FOR RE-SOLICITATION OF VOTES ON THIRD AMENDED JOINT CHAPTER 11
PLAN, (iii) ESTABLISHING VOTING DEADLINE AND PROCEDURES FOR
TABULATION OF VOTES ON THIRD AMENDED JOINT CHAPTER 11 PLAN AND
(iv) SCHEDULING HEARING TO CONSIDER CONFIRMATION OF
THIRD AMENDED JOINT CHAPTER 11 PLAN
The Second Amended Joint Disclosure Statement (the "Disclosure
Statement" and, as modified by the Supplement, the "Supplemented Disclosure
Statement"), under chapter 11, title 11, United States Code (the "Bankruptcy
Code"), having been filed by Discovery Zone, Inc. and nineteen of its affiliates
as debtors and debtors in possession in these chapter 11 cases (collectively,
the "Debtors"), on March 11, 1997, accompanying the Third Amended Joint Plan of
Reorganization filed by the Debtors on March 11, 1997; the
- --------
* Discovery Zone, Inc., Beaverton Fun Fitness, Inc., DJM Management, Inc., DZ
of Connecticut, Inc., DZ of Georgia, Inc., DZ of Massachusetts, Inc., DZ of
Missouri, Inc., DZ of New York, Inc., DZ of Pennsylvania, Inc., DZ of
Wisconsin, Inc., Portland Fun Fitness, Inc., Vancouver Fun Fitness, Inc.,
Discovery Zone (Puerto Rico), Inc., Leaps & Bounds, Inc., Semborg Corp., DZ
Party, Inc., DZGP, Inc., Discovery Zone Children's Amusement Corporation,
Discovery Zone L.P. and Tumble for Fun Limited Partnership.
<PAGE>
Supplement to the Disclosure Statement having been filed by the Debtors on June
6, 1997; it appearing from the affidavits of service and certificates of service
on file with the Court that proper and timely notice of the hearing has been
given; it appearing that such notice was adequate and sufficient; each of the
objections, if any, filed to the Supplemented Disclosure Statement having been
either (a) withdrawn or rendered moot by modifications to the Supplemented
Disclosure Statement or (b) overruled by the Court; the Debtors making the
conforming additions, changes, corrections and deletions to the Supplemented
Disclosure Statement necessary to comport with the record of the hearing and the
agreements, if any, reached with parties, if any, that had filed objections to
the Supplemented Disclosure Statement; and, upon the record of the hearing held
before the Court on June 19, 1997, to consider the adequacy of the Supplemented
Disclosure Statement and the amendments and revisions set forth in the record of
the hearing; and
It having been determined after a hearing on notice that the
Supplemented Disclosure Statement contains adequate information within the
meaning of section 1125 of the Bankruptcy Code;
IT IS HEREBY ORDERED, and notice is hereby given, that:
1. The Supplemented Disclosure Statement, as modified to comply with
the record of the hearing, is hereby approved.
2. On or before June 23, 1997, the Debtors shall deposit or cause to
be deposited in the United States mail, postage prepaid, a sealed confirmation
package containing a copy of (i) the Supplement, (ii) the Notice of Order
Approving the Supplemented Disclosure Statement and Form of Supplemental ballot,
Establishing
2
<PAGE>
Procedures for Re-solicitation of Votes on Third Amended Joint Chapter 11 Plan,
Establishing Voting Deadline and Procedures for Tabulation of Votes on Third
Amended Joint Chapter 11 Plan and Scheduling Hearing to Consider Confirmation of
Third Amended Joint Chapter 11 Plan substantially in the form attached hereto as
Exhibit A (the "Notice of Order"), and (iii) the appropriate supplemental ballot
substantially in the form attached hereto as Exhibit B to creditors who timely
submitted a ballot to accept or reject the Plan (each, a "Voting Creditor")
other than those Class 9 Creditors (as this term is defined in the Plan) who are
beneficial owners holding LYONS through a brokerage firm, bank trust company or
other nominee (each, a "Nominee").
3. On or before June 23, 1997, the Debtors shall deliver
confirmation packages containing copies of (i) the Supplement, (ii) the Notice
of Order, and (iii) the appropriate supplemental and master supplemental ballots
substantially in the form attached hereto as Exhibit B to the Nominee for each
Class 9 Voting Creditor, and on or before June 26, 1997, each Nominee shall
deposit or cause to be deposited in the United States mail, postage prepaid, a
sealed confirmation package containing a copy of (i) the Supplement, (ii) the
Notice of Order to the applicable Class 9 Voting Creditors for which a Nominee
is the record holder of such LYONS.
4. Notice of the Supplement to the Disclosure Statement as set forth
in paragraphs 2 and 3 of this Order is sufficient and no other notice of the
Supplement to the Disclosure Statement is required.
5. Only Voting Creditors are entitled to cast a supplemental ballot.
No other creditor is entitled to cast a supplemental ballot accepting or
rejecting the Plan.
3
<PAGE>
6. Each Voting Creditor other than those Class 9 Creditors who are
beneficial owners holding LYONS through a Nominee shall deliver its supplemental
ballot by mail, hand delivery, overnight courier or facsimile no later than 5:00
p.m., Prevailing Eastern Time, on July 15, 1997 (a "Supplemental Voting
Deadline"), to Bankruptcy Services, Inc. (the "Balloting Agent") at the
following address:
Discovery Zone, Inc.
c/o Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
Facsimile: (212) 376-8989
7. Each Class 9 Voting Creditor who is a beneficial owner holding
LYONS through a Nominee shall deliver its supplemental ballot by mail, hand
delivery or overnight courier no later than 5:00 p.m., Prevailing Eastern Time,
on July 15, 1997 (a "Supplemental Voting Deadline"), to its Nominee at the
address provided by the Nominee.
8. Each Nominee shall deliver a first master supplemental ballot
(each, a "First Master Supplemental Ballot") by mail, hand delivery, overnight
courier or facsimile to the Balloting Agent at the address set forth above no
later than 5:00 p.m., Prevailing Eastern Time, on July 15, 1997 (a "Supplemental
Voting Deadline") with respect to all supplemental ballots received by the
Nominee prior to July 13, 1997 at 5:00 p.m. Each Nominee shall deliver, if
necessary, a second master supplemental ballot (each, a "Second Master
Supplemental Ballot") by mail, hand delivery, overnight courier or facsimile to
the Balloting Agent at the address set forth above no later than 10:00 a.m.,
Prevailing Eastern Time, on July 17, 1997 (a "Supplemental Voting Deadline")
with respect to all supplemental ballots
4
<PAGE>
received by the Nominee after July 13, 1997 at 5:00 p.m. and prior to July 15,
1997 at 5:00 p.m.
9. Supplemental ballots received by facsimile transmission by the
Balloting Agent on or prior to July 15, 1997 will not be counted unless the
original supplemental ballot is received by the Balloting Agent no later than
4:00 p.m., Prevailing Eastern Time, on June 16, 1997. First Master Supplemental
Ballots sent by facsimile transmission prior to the July 15, 1997 Supplemental
Ballot Deadline will not be counted unless the original First Master
Supplemental Ballot is received by the Balloting Agent no later than 5:00 p.m.,
Prevailing Eastern Time, on June 16, 1997. Second Master Supplemental Ballots
sent by facsimile transmission prior to the July 17, 1997 Supplemental Ballot
Deadline will not be counted unless the original First Master Supplemental
Ballot is received by the Balloting Agent no later than 12:00 p.m., Prevailing
Eastern Time, on June 17, 1997.
10. Any supplemental ballot which is properly completed, executed
and timely returned to the Balloting Agent that does not indicate an acceptance
or rejection of the Plan will be deemed to be a vote to accept the Plan. Any
supplemental ballot which is returned to the Balloting Agent indicating
acceptance or rejection of the Plan but which is unsigned will not be counted
for purposes of confirmation of the Plan.
11. Whenever a creditor casts more than one supplemental ballot
voting the same claim prior to the applicable Supplemental Voting Deadline, only
one supplemental ballot will be counted, and if a creditor casts duplicative
supplemental ballots voted inconsistently, they will count as one vote accepting
the Plan.
5
<PAGE>
12. Any supplemental ballot received after the deadlines set forth
above shall not be counted other than as provided for herein.
13. The hearing on confirmation of the Plan is scheduled for July
18, 1997, at 2:30 p.m., Prevailing Eastern Time, at the Bankruptcy Court, Marine
Midland Plaza, 824 North Market Street, Sixth Floor, Wilmington, Delaware.
14. Any objection to confirmation of the Plan must be filed with the
Clerk of the Bankruptcy Court, together with proof of service, no later than
4:00 p.m., Prevailing Eastern Time, on July 11, 1997, and must be served on each
of the persons listed on Schedule A hereto so as to be received by them no later
than 4:00 p.m., prevailing Eastern time, on July 11, 1997. Any confirmation
objection must be in writing and (a) must state the
6
<PAGE>
name and address of the objecting party and the amount of its claims or the
nature of its interest and (b) must state, with particularity, the nature of its
objection. Any objections to the Plan which were timely filed prior to the April
23, 1997 deadline will be treated as objections to the Plan. There is no need to
refile any such objections. Any confirmation objection not filed and served as
set forth herein shall be deemed waived and shall not be considered by the
Bankruptcy Court.
15. The Debtors are hereby authorized and empowered to take such
steps and perform such acts as may be reasonably necessary to implement and
effectuate this Order, including making non-material changes to any disclosure
items set forth in the Supplemented Disclosure Statement and updating Schedule 2
to the Plan and Exhibit 3 to the Supplemented Disclosure Statement.
Dated: June 19, 1997
/s/ Helen S. Balick
------------------------------------
CHIEF UNITED STATES BANKRUPTCY JUDGE
7
<PAGE>
SCHEDULE A
Shearman & Sterling
Douglas P. Bartner
599 Lexington Avenue
New York, New York 10022
Young, Conaway, Stargatt & Taylor
Laura Davis Jones
Scott D. Cousins
Rodney Square North, 11th Floor
P.O. Box 391
Wilmington, Delaware 19899-0391
Office of the United States Trustee
John D. McLaughlin
601 Walnut Street
Curtis Center, Suite 950 West
Philadelphia, Pennsylvania 19106
Wachtell, Lipton, Rosen & Katz
Chaim J. Fortgang
51 West 52nd Street
New York, New York 10019
Duane, Morris & Heckscher
Teresa K. D. Currier
1201 Market Street, Suite 1500
P.O. Box 195
Wilmington, Delaware 19899
Weil, Gotshal & Manges, LLP
Martin J. Bienenstock
767 Fifth Avenue
New York, New York 10153
Bayard, Handelman & Murdoch
Neil Glassman
1300 Delaware Trust Building
902 North Market Street
Wilmington, Delaware 19801
<PAGE>
Exhibit A
Notice of Order
<PAGE>
Exhibit B
Forms of Ballot
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- ---------------------------------------------------x
In re :
:
DISCOVERY ZONE, INC., et al.,* : Chapter 11
: Case No. 96-411 (HSB)
:
Debtors. : (Jointly Administered)
- ---------------------------------------------------x
SECOND AMENDED JOINT DISCLOSURE
STATEMENT PURSUANT TO U.S.C. ss. 1125
- --------
* Discovery Zone, Inc., Beaverton Fun Fitness, Inc., DJM Management, Inc., DZ
of Connecticut, Inc., DZ of Georgia, Inc., DZ of Massachusetts, Inc., DZ of
Missouri, Inc., DZ of New York, Inc., DZ of Pennsylvania, Inc., DZ of
Wisconsin, Inc., Portland Fun Fitness, Inc., Vancouver Fun Fitness, Inc.,
Discovery Zone (Puerto Rico), Inc., Leaps & Bounds, Inc., Semborg Corp., DZ
Party, Inc., DZGP, Inc., Discovery Zone Children's Amusement Corporation,
Discovery Zone L.P. and Tumble for Fun Limited Partnership.
<PAGE>
TABLE OF CONTENTS
Page
----
I. INTRODUCTION AND OVERVIEW OF THE PLAN.................................... 1
A. Plan Summary and Purpose of this Disclosure Statement........... 1
B. Brief Explanation of Chapter 11................................. 11
II. VOTING PROCEDURES AND REQUIREMENTS...................................... 12
A. Ballots and Voting Deadline..................................... 12
B. Parties Entitled to Vote........................................ 15
C. Votes Required for Class Acceptance of the Plan................. 18
D. Cramdown of the Plan............................................ 19
E. Confirmation Hearing............................................ 19
F. Special Note for Holders of LYONS............................... 20
III. BACKGROUND AND GENERAL INFORMATION..................................... 22
A. The Debtors' Business........................................... 22
B. Factors Leading to Chapter 11 Filing............................ 23
C. The Chapter 11 Case............................................. 24
1. Filing..................................................... 24
2. Operations; Administration of Case......................... 24
3. FunCenter Operations....................................... 24
4. Debtor in Possession Financing............................. 25
5. Store Closings, Lease Rejections and Related Transactions.. 27
6. Sales of Real Property..................................... 29
7. Corporate Downsizing and Related Transactions.............. 30
8. Employee Interim Stay Bonus Program........................ 30
9. Personal Injury Claims Insurance........................... 31
10. Insurance for the Benefit of Employees, Officers and
Directors.................................................. 35
11. McDonald's Corporation Settlement.......................... 36
12. Proposed Viacom Settlement................................. 37
13. Marketing the Debtors To Maximize Enterprise Value......... 38
14. Executive Transition....................................... 38
15. Matters Relating to Discovery Zone Securities.............. 39
16. Material Litigation........................................ 39
17. Avoidance Actions.......................................... 40
D. Additional Matters Concerning the Case.......................... 40
1. Appointment of the Creditors' Committee.................... 40
2. Retention of Professionals................................. 40
3. Claims Process and Bar Dates............................... 42
4. Extension of Exclusivity and Solicitation Periods.......... 42
5. Bankruptcy Court First Day Orders.......................... 43
i
<PAGE>
Page
----
IV. BUSINESS PLAN, PROJECTIONS AND REORGANIZATION VALUES................... 43
A. Business Plan................................................... 43
B. Projections..................................................... 44
C. Reorganization Values........................................... 44
V. DESCRIPTION OF PLAN OF REORGANIZATION................................... 47
A. Requirements for a Plan of Reorganization....................... 47
B. Distributable Property.......................................... 48
1. General Description of Reorganized DZ Units................ 48
2. General Description of Cash Distributions
to Classes 7, 8 and 10..................................... 49
C. Classification and Treatment of Claims and Interests............ 50
1. Class 1 - Administrative Expense Claims.................... 50
2. Class 1A - Small Claims.................................... 51
3. Class 2 - Tax Claims....................................... 52
4. Class 3 - Priority Claims.................................. 52
5. Class 4A - McDonald's Secured Claim........................ 53
6. Class 4B - McDonald's Secured Rent Deferral Claims......... 54
7. Class 5 - Miscellaneous Secured Claims..................... 55
8. Class 6 - Credit Agreement Claims.......................... 57
9. Class 7 - General Unsecured Claims......................... 58
10. Class 8 - Certain Unsecured Personal Injury Claims......... 59
11. Class 9 - LYONS Claims..................................... 61
12. Class 10 - Other Unsecured Claims.......................... 62
13. Class 11 - Insured Claims.................................. 63
14. Class 12 - Subordinated Unsecured Claims................... 64
15. Class 13 - Intercompany Claims............................. 64
16. Class 14 - Common Stock and Partnership Interests.......... 64
17. Distribution of Reorganized DZ Units....................... 65
18. Calculations for Certain Distributions to Classes 7 and 9.. 69
19. Distribution of the Class 8 Insurance Fund to Class 8...... 73
20. Distribution of Fractional Reorganized DZ Units............ 74
D. Exit Financing.................................................. 75
E. Conditions to Confirmation and the Effective Date............... 76
1. Condition to Confirmation.................................. 76
2. Conditions to the Effective Date........................... 76
F. Legal Effect of Plan Confirmation............................... 77
1. Discharge.................................................. 77
2. Revesting, Operation of Business........................... 77
3. Exculpation................................................ 78
4. Creditors' Committee....................................... 78
5. Injunction................................................. 78
G. Certain Other Provisions of the Plan............................ 80
1. Executory Contracts and Unexpired Leases................... 80
ii
<PAGE>
Page
----
2. Substantive Consolidation.................................. 80
3. Merger of Reorganized Debtors.............................. 83
4. Securities Law Matters..................................... 83
5. Stock Incentive Plan....................................... 85
6. Public Listing of New Common Stock......................... 95
7. Employee Retention Plan.................................... 96
8. Subordination.............................................. 98
9. Disputed Claims ........................................... 99
10. Method of Resolution for Personal Injury Disputed Claims...100
11. Unclaimed Distributions....................................103
12. Corporate Governance of Reorganized Discovery Zone ........103
13. Modification of the Plan;
Revocation or Withdrawal of the Plan.......................104
14. Retention of Jurisdiction..................................104
15. Plan Settlement Agreement..................................106
16. Rules of Construction......................................106
VI. LIQUIDATION ANALYSIS...................................................107
VII. CERTAIN RISK FACTORS TO BE CONSIDERED..................................108
VIII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................109
A. Income Tax Consequences to Creditors............................110
1. Creditors Whose Original Obligations Do Not Constitute
"Securities" and Creditors Who on the Effective Date
Receive Solely Cash or Cash and Other Consideration
That Does Not Include "Securities".......................111
2. Creditors Whose Original Obligations Constitute
"Securities" and Who Receive Securities or
Consideration that In Part Includes "Securities".........112
3. Distributions in Discharge of Accrued Interest.............112
4. New Obligations............................................113
B. Federal Income Tax Consequences to Stockholders.................115
C. Federal Income Tax Consequences to The Debtors/Reorganized
Discovery Zone................................................115
1. Discharge of Indebtedness..................................115
2. Net Operating Loss Carryforwards and Other Tax Attributes..115
IX. ACCEPTANCE AND CONFIRMATION OF THE PLAN................................117
A. Confirmation Hearing............................................117
B. Requirements for Confirmation...................................119
C. Cramdown........................................................121
D. Plan Meets Requirements for Confirmation........................122
1. Best Interests of Creditors--Liquidation Alternative........122
2. Feasibility of the Plan ....................................123
iii
<PAGE>
Page
----
E. Alternatives to Confirmation of the Plan.........................124
EXHIBITS
Exhibit 1 Third Amended Joint Plan of Reorganization
Exhibit 2 Reorganized Discovery Zone Board of Directors
Exhibit 3 Reorganized Discovery Zone Management Team
Exhibit 4 Financial Projections
Exhibit 5 Description of Operation of Distribution Protocol
Exhibit 6 Liquidation Analysis
iv
<PAGE>
This Second Amended Joint Disclosure Statement (this "Disclosure
Statement") has been prepared pursuant to section 1125 of Title 11 of the United
States Code on behalf of Discovery Zone, Inc. ("Discovery Zone") and nineteen of
its affiliates (collectively, the "Debtors") and describes the terms and
provisions of the Third Amended Joint Plan of Reorganization, dated March 11,
1997 (the "Plan"), in these cases (collectively, the "Chapter 11 Case") pending
before the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"), under Chapter 11 of the Bankruptcy Code, as amended (the
"Bankruptcy Code"). A copy of the Plan is attached hereto as Exhibit 1.
Capitalized terms used but not defined in this cover letter or this Disclosure
Statement shall have the meanings assigned to such terms in the Plan.
This Disclosure Statement has been prepared by the Debtors based
upon information contained in their books and records or, as noted, provided by
third parties. Birch Holdings LLC, a New York limited liability company ("Birch"
and, together with the Debtors, the "Plan Proponents") as the non-Debtor
proponent of the Plan, makes no representation that this Disclosure Statement
contains complete and accurate information. The information contained herein has
been prepared by the Debtors in good faith, based upon information available to
them. The information herein concerning the Plan has not been subject to a
verified audit. All financial information was compiled from the records of the
Debtors. The Debtors believe that this Disclosure Statement complies with the
requirements of the Bankruptcy Code.
The statements contained in this Disclosure Statement are made as of
the date hereof, unless another time is specified herein, and delivery of this
Disclosure Statement shall not imply that there has been no change in the facts
set forth herein since the date of this Disclosure Statement and the date the
materials relied on in preparation of this Disclosure Statement were compiled.
This Disclosure Statement may not be relied on for any purpose other
than to determine how to vote on the Plan. Nothing contained herein shall
constitute an admission of any fact or liability by any party, or be admissible
in any proceeding involving the Debtors or any other party, or be deemed
conclusive advice on the tax or other legal effects of the reorganization on
holders of Claims or Interests.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
The description of the Plan contained in this Disclosure Statement
is intended as a summary only and is qualified in its entirety by reference to
the Plan itself. If any inconsistency exists between the Plan and this
Disclosure Statement, the terms of the Plan are controlling. Each holder of a
Claim or Interest is encouraged to read, consider and carefully analyze the
terms and provisions of the Plan.
This Disclosure Statement, as supplemented, has been approved by
order of
<PAGE>
the Bankruptcy Court, dated March 11, 1997, as containing information of a kind
and in sufficient detail to enable a hypothetical reasonable investor typical of
holders of Claims or Interests of relevant classes to make an informed judgment
concerning the Plan. The Bankruptcy Court's approval of this Disclosure
Statement, however, does not constitute a recommendation by the Bankruptcy Court
either for or against the Plan.
A ballot may accompany this Disclosure Statement for use in voting
on the Plan. See "VOTING PROCEDURES AND REQUIREMENTS."
The Bankruptcy Court has scheduled a hearing on confirmation of the
Plan to commence on April 28, 1997 at 9:30 a.m. That hearing will be held at the
United States Bankruptcy Court for the District of Delaware, 824 Market Street,
6th Floor, Wilmington, Delaware before The Honorable Helen Balick. 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.
<PAGE>
I. INTRODUCTION AND OVERVIEW OF THE PLAN
A. Plan Summary and Purpose of this Disclosure Statement
On March 25, 1996 (the "Petition Date"), each of the Debtors filed a
voluntary petition under chapter 11 of the Bankruptcy Code. See "BACKGROUND--The
Chapter 11 Case."
On March 11, 1997, the proposed Plan, a copy of which is annexed
hereto as Exhibit 1, was filed with the Bankruptcy Court. The proponents of the
Plan are the Debtors and Birch (collectively, the "Plan Proponents"). Birch, the
Debtors' largest unsecured creditor, has no relationship with the Debtors other
than through the claims it holds against the Debtors and as described herein.
This Disclosure Statement describes various transactions
contemplated under the Plan, including how Claims and Interests will be
satisfied. See "DESCRIPTION OF PLAN OF REORGANIZATION." You are urged to review
the Plan and, if appropriate, to consult with counsel about the Plan and its
impact upon your legal rights before voting on the Plan.
DEBTORS' RECOMMENDATION
THE DEBTORS BELIEVE THAT CONFIRMATION OF THE PLAN IS IN THE BEST
INTERESTS OF CREDITORS AND THAT THE PLAN SHOULD BE CONFIRMED. THE DEBTORS
STRONGLY RECOMMEND THAT ALL CREDITORS WHO ARE ENTITLED TO VOTE ON THE PLAN VOTE
TO ACCEPT THE PLAN.
THE PLAN INCORPORATES A PROPOSED SETTLEMENT DEVELOPED BY THE
STATUTORY COMMITTEE OF UNSECURED CREDITORS, WHICH PROVIDES A PROTOCOL FOR
DISTRIBUTION OF (i) COMMON STOCK OF REORGANIZED DISCOVERY ZONE AND (ii) WARRANTS
TO PURCHASE COMMON STOCK OF REORGANIZED DISCOVERY ZONE TO UNSECURED CREDITORS IN
CLASSES 7 AND 9 (THE "DISTRIBUTION PROTOCOL").
THE PLAN PROPONENTS WERE NOT INVOLVED IN THE CREATION AND
NEGOTIATION OF THE DISTRIBUTION PROTOCOL AND THEREFORE EXPRESS NO OPINION AS TO
ITS MERITS. THE PLAN PROVIDES THAT THE DISTRIBUTION PROTOCOL WILL NOT BE
IMPLEMENTED IF CERTAIN EVENTS, DESCRIBED HEREIN, OCCUR. THE PLAN PROPONENTS
BELIEVE THAT THE PLAN MAY BE CONFIRMED REGARDLESS OF WHETHER THE DISTRIBUTION
PROTOCOL IS IMPLEMENTED.
<PAGE>
CREDITORS' COMMITTEE'S RECOMMENDATION
BEFORE AND DURING ITS CHAPTER 11 CASE, DISCOVERY ZONE HAS INCURRED
MILLIONS OF DOLLARS OF LOSSES. SEVERAL BUSINESS PLANS HAVE BEEN IMPLEMENTED BY
PREVIOUS MANAGEMENT. BUT NONE HAS BEEN SUCCESSFUL.
DURING THE CHAPTER 11 CASE, THE COMMITTEE RETAINED FINANCIAL EXPERTS
IN THE ENTERTAINMENT INDUSTRY TO TRY TO FIND THE RIGHT INVESTORS WITH THE RIGHT
BUSINESS PLAN TO MAKE DISCOVERY ZONE SUCCESSFUL. THUS FAR NO FIRM OFFER HAS BEEN
MADE. IN THIS CONTEXT, THE CURRENT PLAN OFFERS CREDITORS A SUPERIOR RESULT THAN
THE ONLY CURRENT ALTERNATIVE, WHICH IS LIQUIDATION. IF THE CURRENT PLAN BECOMES
EFFECTIVE, UNSUBORDINATED CREDITORS MAY RECEIVE UP TO 20 CENTS CASH ON THE
DOLLAR OR STOCK AND WARRANTS WHOSE VALUES ARE VERY DIFFICULT TO DETERMINE, BUT
WHICH MAY ULTIMATELY TRADE FOR MATERIAL VALUE IF DISCOVERY ZONE'S NEW BUSINESS
PLAN PROVES SUCCESSFUL. FOR THESE REASONS, THE COMMITTEE SUPPORTS THE PLAN.
BASED ON THE FOREGOING AND TO AVOID COSTLY LITIGATION, THE COMMITTEE
ENTERED INTO THE CHAPTER 11 PLAN AGREEMENT AMONG DEBTORS, BIRCH HOLDINGS LLC,
AND STATUTORY CREDITORS' COMMITTEE (THE "PLAN SETTLEMENT AGREEMENT"), A TRUE AND
COMPLETE COPY OF WHICH IS ANNEXED TO THE PLAN AS EXHIBIT H.
PURSUANT TO THE PLAN SETTLEMENT AGREEMENT, AND SUBJECT TO THE
COMMITTEE'S FIDUCIARY DUTIES, THE COMMITTEE WILL NOT OBJECT TO CONFIRMATION OF
THE PLAN. THE COMMITTEE HAS, HOWEVER, RESERVED THE RIGHT TO RECOMMEND TO
CREDITORS THAT THEY SUPPORT AN ALTERNATIVE CHAPTER 11 PLAN IF ONE MATERIALIZES
AND AFFORDS CREDITORS SUPERIOR TREATMENT.
THIS DISCLOSURE STATEMENT CONTAINS ENTERPRISE AND LIQUIDATION
VALUATIONS WHICH WERE PREPARED BY THE DEBTORS. ALTHOUGH THE COMMITTEE'S JOINT
FINANCIAL ADVISORS, ROTHSCHILD, INC. AND SBC WARBURG, INC., AND THE COMMITTEE'S
BANKRUPTCY ACCOUNTANTS, ERNST & YOUNG LLP, WERE PROVIDED WITH A COPY OF A
BUSINESS PLAN PREPARED BY THE PLAN PROPONENTS, NEITHER THE COMMITTEE'S FINANCIAL
ADVISORS NOR THE COMMITTEE'S BANKRUPTCY ACCOUNTANTS TOOK PART IN THE PREPARATION
OF EITHER THE BUSINESS PLAN OR THE VALUATIONS CONTAINED IN THIS DISCLOSURE
STATEMENT BASED ON THAT BUSINESS PLAN. MOREOVER, THE COMMITTEE AND ITS
PROFESSIONALS DISCLAIM ANY RESPONSIBILITY FOR THE ACCURACY OF THE FINANCIAL
PROJECTIONS AND BUSINESS
2
<PAGE>
FORECASTS CONTAINED IN THIS DISCLOSURE STATEMENT, OR THE ACCURACY OF ANY OF THE
HISTORICAL DISCUSSION/NARRATIVE CONTAINED HEREIN.
FINALLY, THE COMMITTEE FIRMLY SUPPORTS IMPLEMENTATION OF THE
DISTRIBUTION PROTOCOL PROVIDED FOR IN ARTICLE 5 OF THE PLAN AMONG CLASSES 6, 7
AND 9. THE COMMITTEE BELIEVES THAT ABSENT CREDITOR APPROVAL OF THE DISTRIBUTION
PROTOCOL, THERE IS A SIGNIFICANT LIKELIHOOD THAT PROTRACTED LITIGATION AMONG THE
HOLDERS OF THE ALLOWED CLASSES 6, 7 AND 9 CLAIMS COULD ENSUE WHICH COULD
SIGNIFICANTLY DELAY -- AND POTENTIALLY DIMINISH MATERIALLY -- THE DISTRIBUTIONS
CONTEMPLATED UNDER THE PLAN.
The principal provisions of the Plan are summarized below. As
defined in the Plan, the terms "Reorganized Discovery Zone" and "Reorganized
Debtors" refer to Discovery Zone and the Debtors, respectively, after the
Effective Date of the Plan.
THE FOLLOWING DESCRIPTION OF THE PLAN IS INTENDED AS A SUMMARY ONLY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN, WHICH IS ATTACHED AS
EXHIBIT 1 TO THIS DISCLOSURE STATEMENT. THE DEBTORS URGE EACH HOLDER OF A CLAIM
TO CAREFULLY REVIEW THE ENTIRE PLAN, TOGETHER WITH THIS DISCLOSURE STATEMENT,
BEFORE VOTING ON THE PLAN.
The Plan provides that holders of Allowed Claims in certain Classes
will be entitled to distributions of Cash, Reorganized DZ Units (New Common
Stock and Ten Year Reorganized DZ Warrants) and Rent Deferral Secured Notes, as
described below and as set forth below in the table of "Classification and
Estimation of Claims and Interests." Pursuant to the Plan, the assets and
liabilities of all of the Debtors will be substantively consolidated and,
simultaneously with the occurrence of the Effective Date, Reorganized Discovery
Zone, the U.S. Holding Company and the Merger Subsidiaries will take all such
actions as may be necessary or appropriate to effect the merger of each of the
Merger Subsidiaries with and into the U.S. Holding Company.
The Effective Date of the Plan shall be the first Business Day that
is at least 11 days after the Confirmation Date and not more than 14 days after
the first day on which (i) each of the conditions in Section 9.2 of the Plan
have either been satisfied or duly waived, (ii) no stay of the Confirmation
Order is in effect, (iii) the Merger Transactions have been consummated, and
(iv) Reorganized Discovery Zone's amended and restated Certificate of
Incorporation has been filed with the Secretary of State of Delaware.
In the event that any of Class 1A, 2, 3, 4A, 4B, 5, 6, 7, 8, 9 or 10
does not accept the Plan, the Plan Proponents reserve the right to request that
the Bankruptcy Court confirm the Plan in accordance with section 1129(b) of the
Bankruptcy Code or to modify the Plan in accordance with Section 11.4 of the
Plan. See "DESCRIPTION OF PLAN OF
3
<PAGE>
REORGANIZATION--Certain Other Provisions of the Plan--Modification of the Plan."
As to Classes 12, 13 and 14, the Plan Proponents will request that the
Bankruptcy Court confirm the Plan in accordance with section 1129(b) of the
Bankruptcy Code because the holders of Allowed Class 12 and Allowed Class 13
Claims and Allowed Class 14 Interests will receive no distribution under the
Plan in respect of such Allowed Claims and Interests and the holders of such
Allowed Claims and Interests are deemed to reject the Plan. See "VOTING
PROCEDURES AND REQUIREMENTS--Cramdown of the Plan" and "ACCEPTANCE AND
CONFIRMATION OF THE PLAN--Cramdown."
Set forth below is the form of a summary of the distributions to be
made under the Plan. The following will incorporate projected recoveries, based
on assumptions contained in Exhibit 4, entitled "Financial Projections." The
projected recoveries have been calculated, for Classes of Creditors to receive
Reorganized DZ Units, with reference only to the Financial Projections and not
with reference to any assumed trading level. There can be no assurance that the
New Common Stock would actually trade at prices corresponding to the values set
forth in this Disclosure Statement. See Section VII, entitled "Certain Risk
Factors to be Considered."
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 1 $40,000,000 Not impaired. The holders of Allowed Class 1 100%
Administrative Claims will be paid in full in Cash on the Effective
Expense Claims Date or, if any Class 1 Claim becomes Allowed after
the Effective Date, as soon as practicable after such
Claim becomes Allowed, or, if by its terms or by
agreement with the holder of such Allowed Class 1 Claim
any such Allowed Class 1 Claim is payable on a later
date or dates, such Allowed Class 1 Claim will be paid
in full in Cash on such later date or dates.
- -----------------------------------------------------------------------------------------------------------------------------------
Class 1A Small $1,100,000 Impaired. Class 1A has been created. Each holder of an 70%
Claims Allowed Class 1A Claim shall receive a single Cash
payment equal to 70% of its Class 1A Claim on the
Effective Date or, if such Claim becomes Allowed after
the Effective Date, as soon as practicable after such
Claim becomes Allowed. Any holder of a Class 6, 7 or 10
Claim which is less than or equal to $5,000 that would
not otherwise have been classified in Class 1A but for
the election by such holder to reduce its Claim to
$1,000 will not receive any other distribution under
the Plan on account of such Claim.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 2 Tax Claims $5,000,000 Impaired. Unless any holder of a Class 2 Claim shall 100%
agree to less favorable treatment, each holder of an over six
Allowed Class 2 Claim shall be paid in full in Cash years from
over a period not exceeding six years from the date of date of
assessment of such Claim. Payments will be made in assessment
equal annual installments of principal, plus simple with interest
interest accruing from the Effective Date at 10% per accruing
annum on the unpaid portion of each Class 2 Claim from the
or as determined by the Bankruptcy Court. Unless Effective
otherwise agreed by the holder of such Claim and the Date at the
Plan Proponents or Reorganized Discovery Zone, the 10% per
first payment will be payable one year after the annum
Effective Date, or if the Class 2 Claim is not allowed
within one year after the Effective Date, as soon as
practicable after such Claim becomes Allowed.
Interest will be due and payable on the date on which
each annual installment is due. The Reorganized
Debtors may elect to prepay without penalty all or
any portion of any Class 2 Claim.
- -----------------------------------------------------------------------------------------------------------------------------------
Class 3 Priority $0 Impaired. The holders of allowed Class 3 Claims 100%
Claims will be paid in Cash in full on the Effective Date or,
if any such Claim becomes Allowed after the Effective
Date, as soon as practicable after such Claim becomes
Allowed or, if by its terms or by agreement with the
holder of such Allowed Class 3 Claim any such Allowed
Class 3 Claim is payable on a later date or dates, such
Allowed Class 3 Claim will be paid in Cash in full on
such later date or dates.
- -----------------------------------------------------------------------------------------------------------------------------------
Class 4A McDonald's $4,666,000* Impaired. McDonald's shall retain its liens against 100%
Secured Claim the L&B Owned Properties to the extent of the over six
amount of its Allowed Class 4A Claim and its years
Allowed Class 4B Claim. McDonald's shall receive
deferred Cash payments equal to the value of the
Class 4A Claim in equal payments over six years
beginning on the first anniversary of the Effective
Date and thereafter on the five subsequent
anniversaries of the Effective Date, with simple
interest from the Effective Date on the unpaid balance
at the Prime Rate or as determined by the Bankruptcy
Court.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
* The Debtors and McDonald's Corporation have not reached final agreement
with respect to the Allowed amount of the Class 4A Claim.
5
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 4B McDonald's $133,000* Impaired. McDonald's shall retain its liens against 100%
Secured Rent Deferral the L&B Owned Properties to the extent of the at the
Claims amount of its Allowed Class 4B Claim and its expiration of
Allowed Class 4A Claim. On the Effective Date, the
McDonald's will receive a Rent Deferral Secured applicable
Note which corresponds to each L&B Sublease in lease term
respect of which McDonald's has granted the Debtors a
rent deferral under the McDonald's Stipulation. On the
Effective Date, the principal amount of each Rent
Deferral Secured Note will equal the aggregate amount
of rent deferrals which have accrued up to the
Effective Date pursuant to the McDonald's Stipulation
under the applicable L&B Sublease. After the Effective
Date, the principal amount of each Rent Deferral
Secured Note will increase by an amount equal to the
rent deferral for each month between the Effective Date
and the termination of the applicable L&B Sublease.
- -----------------------------------------------------------------------------------------------------------------------------------
Class 5 Miscellaneous $150,000 Impaired. Each holder of an Allowed Class 5 Claim 100%
Secured Claims shall receive one of four forms of treatment under the over time or
Plan in respect of its Allowed Claim. The Plan on the
Proponents, contemporaneously with the solicitation Effective
of acceptances of the Plan, shall select which Date,
treatment each holder is to receive. The Plan depending on
Proponents' selection shall be made by the Debtors' the treatment
filing of notice and serving it on the holder of the elected by
Allowed Class 5 Claim so indicating their selection the Plan
contemporaneously with the solicitation of acceptances Proponents
of the Plan, or if the Claim is a Disputed Claim at
such time, the Debtors or the Reorganized Debtors, as
the case may be, shall file and serve the notice of
selection within thirty (30) days after the Claim
becomes an Allowed Claim. If no form of treatment is so
selected, the first alternative described shall be
applicable. The alternative treatments for any Allowed
Class 5 Claims are described under "DESCRIPTION OF PLAN
OF REORGANIZATION--Classification and Treatment of
Claims and Interests."
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
* This estimated Claim amount is based on four months of rent deferrals
prior to the Effective Date. Any delay in the Effective Date will increase
the amount of McDonald's allowed Class 4B Claim by approximately $33,000
per month.
6
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 6 Credit $101,900,000 Impaired. Each holder of an Allowed Class 6 Claim 43%*
Agreement Claims will receive on the Effective Date or, if such Claim
becomes Allowed after the Effective Date, as soon as
such Claim becomes Allowed, its Pro Rata portion of
Reorganized DZ Units distributed to holders of Class 6
Claims under the Plan. All Ten Year DZ Warrants issued
in connection with Reorganized DZ Units to Class 6 will
be distributed to B1 Investments, LLC, unless otherwise
elected by the holder of an Allowed Class 6 Claim on
its ballot accepting or rejecting the Plan.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
* It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
7
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 7 General $34,750,000 Impaired. Each holder of an Allowed Class 7 Claim If the holder
Unsecured Claims may elect to receive either (i) its Pro Rata portion of receives a
Reorganized DZ Units distributed to holders of Class Class 7 Cash
7 Claims under the Plan, subject to Section 5.5(f) of Distribution,
the Plan, on the Effective Date or, if such Claim 20% on the
becomes Allowed after the Effective Date, as soon as Effective
such Claim becomes Allowed, or (ii) a Class 7 Cash Date, to the
Distribution (to the extent, if any, that the Plan extent the
Proponents determine to make such a distribution Claim is so
available). The terms and conditions with respect to satisfied
a Class 7 Cash Distribution are described under
"DESCRIPTION OF PLAN OF REORGANIZATION-- If the holder
Classification and Treatment of Claims and receives
Interests." Reorganized
DZ Units
A Holder of a Class 7 Claim less than or equal to and the
$5,000 may elect to reduce its Claim to $1,000 and Distribution
have such Claim treated as a Class 1A Claim. Protocol is
implemented,
15.2% on the
Effective
Date*
If the holder
receives
Reorganized
DZ Units
and the
Distribution
Protocol is
not
implemented,
19.2% on the
Effective
Date**
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
** It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions and no Cash Distributions will be made available.
8
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 8 Certain $8,850,000 Impaired. Each holder of an Allowed Class 8 Claim If the holder
Unsecured Personal may elect to receive either (i) its Pro Rata portion of receives a
Injury Claims Reorganized DZ Units distributed to holders of Class Class 8 Cash
8 Claims under this Plan on the Effective Date or, if Distribution,
such Claim becomes Allowed after the Effective 20% on the
Date, as soon as such Claim becomes Allowed or Effective
(ii) a Class 8 Cash Distribution (to the extent, if any, Date, to the
that the Plan Proponents determine to make such a extent the
distribution available). In addition, each holder of a Claim is so
Allowed Class 8 Claim shall receive Pro Rata satisfied
distributions, if any, from the Class 8 Insurance
Fund. If the holder
receives
Reorganized
DZ Units,
19.2% on the
Effective
Date*
- -----------------------------------------------------------------------------------------------------------------------------------
Class 9 LYONS $129,700,000 Impaired. Each holder of an Allowed Class 9 Claim 1.5% on the
Claims will receive on the Effective Date or, if such Claim Effective
becomes Allowed after the Effective Date, as soon as Date*
practicable after such Claim becomes Allowed, its
Pro Rata portion of Reorganized DZ Units distributed If the
to holders of Allowed Class 9 Claims under the Plan. subordination
The subordination provisions under the LYONS shall provisions
be enforced without exception and the holders of under the
Allowed Class 9 Claims shall not receive any LYONS are
distribution under the Plan if Class 9 rejects the Plan enforced,
and certain events, described herein, occur. See holders will
"Classification and Treatment Claims and not receive
Interests--Class 9 - LYONS Claims." any
distribution
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
9
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 10 Other $18,400,000 Impaired. Each holder of an Allowed Class 10 Claim If the holder
Unsecured Claims may elect to receive either (i) its Pro Rata portion of receives a
Reorganized DZ Units distributed to holders of Class Class 10
10 Claims under the Plan on the Effective Date or, if Cash
such Claim becomes Allowed after the Effective Distribution,
Date, as soon as such Claim becomes Allowed, or (ii) 20% on the
a Class 10 Cash Distribution (to the extent, if any, Effective
that the Plan Proponents determine to make such a Date, to the
distribution available). The terms and conditions with extent the
respect to a Class 10 Cash Distribution are described Claim is so
under "DESCRIPTION OF PLAN OF REORGANIZATION-- satisfied
Classification and Treatment of Claims and
Interests." If the holder
receives
A holder of a Class 10 Claim which is less than or Reorganized
equal to $5,000 may elect to reduce its Claim to DZ Units,
$1,000 and have such Claim treated as a Class 1A 19.2%
Claim. on the
Effective
Date*
- -----------------------------------------------------------------------------------------------------------------------------------
Class 11 Insured $155,334,000 Not impaired. The holders of Allowed Class 11 100%
Claims Claims will have recourse only to the proceeds of
insurance coverage carried by the Debtors.
- -----------------------------------------------------------------------------------------------------------------------------------
Class 12 Subordinated $37,800,000 Impaired. The subordination provisions under any 0%
Unsecured Claims applicable agreements or bankruptcy or nonbankruptcy
law shall be enforced without exception and the
holders of Allowed Class 12 Claims shall not receive
any distribution under the Plan.
- -----------------------------------------------------------------------------------------------------------------------------------
Class 13 $289,000,000 Impaired. On the Effective Date, all Intercompany 0%
Intercompany Claims Claims shall be expunged, released and discharged,
and the holders of such Claims shall receive no
distribution of any kind under the Plan.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
10
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 14 Common Not Applicable Impaired. All Existing Common Stock, Existing 0%
Stock and Partnership Common Stock Options and Existing Partnership
Interests Interests shall be cancelled, annulled and extinguished
as of the Effective Date and each holder of an Allowed
Common Stock Interest, Existing Common Stock Option and
Existing Partnership Interest shall not be entitled to
receive or retain any property or interest in property
on account of such Existing Common Stock, Existing
Common Stock Option or Existing Partnership Interest
under the Plan.
===================================================================================================================================
</TABLE>
For a description of the Plan's treatment of executory contracts and
unexpired leases, see "DESCRIPTION OF PLAN OF REORGANIZATION--Certain Other
Provisions of the Plan--Executory Contracts and Unexpired Leases."
The Plan contemplates and is predicated upon the substantive
consolidation of the estates of the Debtors into a single entity for purposes of
confirmation, consummation and implementation of the Plan. As a result of
substantive consolidation: (i) all intercompany Claims by and among Debtors will
be eliminated; (ii) all assets and all proceeds thereof and all liabilities of
the Debtors will be combined or treated as though the Debtors were merged; (iii)
any obligation of any of the Debtors and all guarantees thereof executed by any
of the Debtors will be deemed to be one obligation of the Debtors; (iv) any
Claims filed or to be filed in connection with any such obligation and such
guarantees will be deemed one Claim against the Debtors; (v) all duplicative
claims filed against more than one of the Debtors will be automatically expunged
so that only one claim survives against the Debtors; (vi) all Common Stock and
Partnership Interests of any Debtor in any other Debtor shall be deemed
automatically cancelled and retired by operation of law and shall cease to
exist; and (vii) the Debtors will be deemed, for purposes of determining the
availability of the right of setoff under section 553 of the Bankruptcy Code, to
be one entity, so that, subject to other provisions of section 553 of the
Bankruptcy Code, the debts due to a particular Debtor may be offset against
claims against such Debtor or another Debtor. Substantive consolidation is
warranted because (x) generally the Debtors' Creditors did not deal with each
Debtor as a single economic unit, but rather, the Debtors were dealt with
together as a single "Discovery Zone" entity and (y) the Claims against and the
other affairs of the Debtors are so intermingled that the denial of substantive
consolidation would result in a costly, time-consuming administrative burden.
B. Brief Explanation of Chapter 11
Chapter 11 is the principal reorganization chapter of the Bankruptcy
Code. Pursuant to chapter 11, a debtor in possession attempts to reorganize its
business for the benefit of the debtor, its creditors and other parties in
interest. The Debtors' chapter 11
11
<PAGE>
cases (referred to herein, collectively, as the "Chapter 11 Case") were
commenced with the filing of voluntary petitions for protection under chapter 11
of the Bankruptcy Code on the Petition Date.
The formulation of a plan of reorganization is the principal purpose
of a chapter 11 case. A plan of reorganization sets forth a proposed method of
compensating the holders of claims against and interests in the debtor. A claim
or interest is impaired under a plan of reorganization if the plan provides that
the legal, equitable or contractual rights of the holder of such claim or
interest are altered. A holder of an impaired claim or interest is entitled to
vote to accept or reject a plan of reorganization. Chapter 11 does not require
all holders of claims and interests to vote in favor of a plan of reorganization
in order for the bankruptcy court to confirm the plan. See "VOTING PROCEDURES
AND REQUIREMENTS--Vote Required for Class Acceptance of the Plan." However, the
bankruptcy court must find that the plan of reorganization meets a number of
statutory tests before it may confirm, or approve, the plan of reorganization.
These tests are designed to protect the interests of holders of claims or
interests who do not vote to accept the plan of reorganization, but who will
nonetheless be bound by the plan's provisions if it is confirmed by the
bankruptcy court.
Generally, in a chapter 11 case an official committee of unsecured
creditors is appointed by the United States Trustee, among other things, to
negotiate the plan of reorganization on behalf of the unsecured creditors of the
debtor. A committee of the Debtors' unsecured creditors (the "Creditors'
Committee") was appointed by the United States Trustee on April 11, 1996. See
"BACKGROUND AND GENERAL INFORMATION--Additional Matters Concerning the
Case--Appointment of Creditors' Committee."
II. VOTING PROCEDURES AND REQUIREMENTS
A. Ballots and Voting Deadline
A ballot to be used for voting to accept or reject the Plan,
together with a postage-paid return envelope, is enclosed with all copies of
this Disclosure Statement mailed to all Classes entitled to vote. After
carefully reviewing this Disclosure Statement and its exhibits, including the
Plan, please indicate your acceptance or rejection of the Plan by voting in
favor of or against the Plan on the enclosed ballot and return the ballot in the
enclosed envelope to the Debtors, as directed below.
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THE BANKRUPTCY COURT HAS DIRECTED THAT, TO BE COUNTED FOR VOTING
PURPOSES, BALLOTS FOR THE ACCEPTANCE OR REJECTION OF THE PLAN MUST BE RECEIVED
NO LATER THAN 4:00 P.M., PREVAILING EASTERN TIME, ON APRIL 23, 1997 BY THE
DEBTORS AT THE FOLLOWING ADDRESS:
Discovery Zone, Inc.
c/o Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
For purposes of voting on the Plan, the holders of each Claim
scheduled by any Debtor will receive ballots and are permitted to vote based
upon such scheduled amount, even if any such holder asserts a Claim which
differs from the scheduled Claim either with respect to amount or
classification. Holders of Disputed Claims who have settled their dispute with
the Debtors are entitled to vote the settled amount of their Claim. The
Bankruptcy Code provides that votes will be counted only if submitted by a
holder of a Claim whose Claim is scheduled by the Debtors as undisputed,
noncontingent and liquidated, or who has filed with the Bankruptcy Court a Proof
of Claim which is not disputed and has not been disallowed, disqualified or
suspended prior to computation of the vote on the Plan. A Claim to which an
objection has been filed is not an Allowed Claim unless and until the Bankruptcy
Court rules on the objection. Further, the Bankruptcy Code provides that the
Bankruptcy Court may, if requested to do so by the holder of such claim,
estimate or temporarily allow a Disputed Claim for purposes of voting on the
Plan.
In addition, the Debtors or another party in interest may take
action prior to the time for computation of ballots to disqualify certain
ballots which are or may be cast by holders of Disputed Claims, but as to which
no motion for disallowance has been filed.
If a person holds Claims in more than one Class entitled to vote on
the Plan, such person will receive a ballot for each such Class. IF YOU RECEIVE
MORE THAN ONE BALLOT YOU SHOULD ASSUME THAT EACH BALLOT IS FOR A SEPARATE CLASS.
THEREFORE, PLEASE COMPLETE AND RETURN EACH BALLOT THAT YOU RECEIVE UNLESS THESE
BALLOTS REPRESENT CLAIMS WHICH ARE DUPLICATIVE (i.e., multiple claims filed for
the same merchandise or service). IF YOU RETURN DUPLICATE BALLOTS, ONLY ONE
BALLOT WILL BE INCLUDED IN ANY CALCULATION TO DETERMINE WHETHER THE PARTIES
ENTITLED TO VOTE ON THE PLAN HAVE VOTED TO ACCEPT OR REJECT THE PLAN. IF YOU
RETURN DUPLICATIVE BALLOTS WHICH HAVE BEEN VOTED INCONSISTENTLY, THEY WILL BE
COUNTED AS ONE VOTE ACCEPTING THE PLAN.
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If you do not receive a ballot for a certain Claim that you believe
you hold and that is in a Class entitled to vote on the Plan, you should
contact:
Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
Telephone: (212) 376-8494
Telecopier: (212) 376-8989
IF A BALLOT IS DAMAGED OR LOST OR IF YOU HAVE ANY QUESTIONS
REGARDING THE PROCEDURES FOR VOTING ON THE PLAN, CONTACT:
Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
Telephone: (212) 376-8494
Telecopier: (212) 376-8989
All persons entitled to vote on the Plan may cast their vote for or
against the Plan by completing, dating and signing the Ballot accompanying this
Disclosure Statement and returning it in the enclosed postage-prepaid return
envelope, by first class mail, to the Debtors at the following address:
Discovery Zone, Inc.
c/o Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
IN ORDER TO BE COUNTED, ALL BALLOTS MUST BE EXECUTED AND RECEIVED BY
THE DEBTORS NO LATER THAN 4:00 P.M., PREVAILING EASTERN TIME, ON APRIL 23, 1997.
SINCE MAIL DELAYS MAY OCCUR, IT IS IMPORTANT THAT YOUR BALLOT BE MAILED OR
DELIVERED WELL IN ADVANCE OF THE SPECIFIED DATE. ANY BALLOTS RECEIVED AFTER 4:00
P.M., PREVAILING EASTERN TIME, ON APRIL 23, 1997 WILL NOT BE INCLUDED IN ANY
CALCULATION TO DETERMINE WHETHER THE PARTIES ENTITLED TO VOTE ON THE PLAN HAVE
VOTED TO ACCEPT OR REJECT THE PLAN.
BALLOTS MAY BE RECEIVED BY THE DEBTORS BY FACSIMILE TRANSMISSION TO
BANKRUPTCY SERVICES, INC. AT: (212) 376-8989. BALLOTS SENT BY FACSIMILE
TRANSMISSION WILL NOT BE COUNTED UNLESS THE ORIGINAL BALLOT IS RECEIVED BY
BANKRUPTCY SERVICES, INC. BY 4:00
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P.M., PREVAILING EASTERN TIME, ON APRIL 24, 1997.
WHEN A BALLOT IS SIGNED AND RETURNED WITHOUT FURTHER INSTRUCTION
REGARDING ACCEPTANCE OR REJECTION OF THE PLAN, THE SIGNED BALLOT SHALL BE
COUNTED AS A VOTE ACCEPTING THE PLAN.
WHEN A BALLOT IS RETURNED INDICATING ACCEPTANCE OR REJECTION OF THE
PLAN BUT IS UNSIGNED, THE UNSIGNED BALLOT WILL NOT BE INCLUDED IN ANY
CALCULATION TO DETERMINE WHETHER THE PARTIES ENTITLED TO VOTE ON THE PLAN HAVE
VOTED TO ACCEPT OR REJECT THE PLAN.
B. Parties Entitled to Vote
Pursuant to section 1126 of the Bankruptcy Code, each Class of
impaired Claims or 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
that is in an impaired Class under the Plan, and whose Class is not deemed to
reject the Plan, is entitled to vote.
A class is "impaired" unless that class is to have its legal,
equitable and contractual rights left unaltered by the reorganization effected
by a plan or if the plan reinstates the claims held by members of such class by
(i) curing any defaults which exist, (ii) reinstating the maturity of such
claim, (iii) compensating the holder of such claim for damages which result from
the reasonable reliance on any contractual provision or law that allows
acceleration of such claim and (iv) otherwise leaving unaltered any legal,
equitable or contractual rights of which the claim entitles the holder of such
claim. Because of their favorable treatment, classes that are not impaired are
conclusively presumed to accept a plan. Accordingly, it is not necessary to
solicit votes from the holders of claims in classes that are not impaired.
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
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.
VOTES TO ACCEPT THE PLAN ARE BEING SOLICITED ONLY FROM IMPAIRED
CLASSES.
CLASSES 12, 13 AND 14 ARE DEEMED TO HAVE REJECTED THE PLAN AND,
ACCORDINGLY, HOLDERS OF ALLOWED CLASS 12 SUBORDINATED UNSECURED CLAIMS, ALLOWED
CLASS 13 INTERCOMPANY CLAIMS AND ALLOWED CLASS 14 COMMON STOCK AND PARTNERSHIP
INTERESTS WILL
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NOT RECEIVE A BALLOT TO VOTE TO ACCEPT OR REJECT THE PLAN.
The following Classes of Claims are impaired under the Plan and are
not deemed to reject the Plan and persons holding Claims therein are entitled to
vote to accept or reject the Plan:
Class 1A: Small Claims
Class 2: Tax Claims
Class 3: Priority Claims
Class 4A: McDonald's Secured Claim
Class 4B: McDonald's Secured Rent Deferral Claims
Class 5: Miscellaneous Secured Claims
Class 6: Credit Agreement Claims
Class 7: General Unsecured Claims
Class 8: Certain Unsecured Personal Injury Claims
Class 9: LYONS Claims
Class 10: Other Unsecured Claims
ALL OTHER CLASSES ARE NOT ENTITLED TO VOTE WITH RESPECT TO
ACCEPTANCE OR REJECTION OF THE PLAN.
If no votes are received with respect to a particular Class of
Claims and no objections to confirmation are received from such Class, the
Bankruptcy Court may enter an order confirming the Plan.
As a creditor entitled to vote on the Plan, your vote is most
important. See "VOTING PROCEDURES AND REQUIREMENTS--Vote Required for Class
Acceptance of the Plan."
DEBTORS' RECOMMENDATION
THE DEBTORS BELIEVE THAT CONFIRMATION OF THE PLAN IS IN THE BEST
INTERESTS OF CREDITORS AND THAT THE PLAN SHOULD BE CONFIRMED. THE DEBTORS
STRONGLY RECOMMEND THAT ALL CREDITORS WHO ARE ENTITLED TO VOTE ON THE PLAN VOTE
TO ACCEPT THE PLAN.
THE PLAN INCORPORATES A PROPOSED SETTLEMENT DEVELOPED BY THE
STATUTORY COMMITTEE OF UNSECURED CREDITORS, WHICH PROVIDES A PROTOCOL FOR
DISTRIBUTION OF (i) COMMON STOCK OF REORGANIZED DISCOVERY ZONE AND (ii) WARRANTS
TO PURCHASE COMMON STOCK OF REORGANIZED DISCOVERY ZONE TO UNSECURED
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CREDITORS IN CLASSES 7 AND 9 (THE "DISTRIBUTION PROTOCOL").
THE PLAN PROPONENTS WERE NOT INVOLVED IN THE CREATION AND
NEGOTIATION OF THE DISTRIBUTION PROTOCOL AND THEREFORE EXPRESS NO OPINION AS TO
ITS MERITS. THE PLAN PROVIDES THAT THE DISTRIBUTION PROTOCOL WILL NOT BE
IMPLEMENTED IF CERTAIN EVENTS, DESCRIBED HEREIN, OCCUR. THE PLAN PROPONENTS
BELIEVE THAT THE PLAN MAY BE CONFIRMED REGARDLESS OF WHETHER THE DISTRIBUTION
PROTOCOL IS IMPLEMENTED.
CREDITORS' COMMITTEE'S RECOMMENDATION
BEFORE AND DURING ITS CHAPTER 11 CASE, DISCOVERY ZONE HAS INCURRED
MILLIONS OF DOLLARS OF LOSSES. SEVERAL BUSINESS PLANS HAVE BEEN IMPLEMENTED BY
PREVIOUS MANAGEMENT. BUT NONE HAS BEEN SUCCESSFUL.
DURING THE CHAPTER 11 CASE, THE COMMITTEE RETAINED FINANCIAL EXPERTS
IN THE ENTERTAINMENT INDUSTRY TO TRY TO FIND THE RIGHT INVESTORS WITH THE RIGHT
BUSINESS PLAN TO MAKE DISCOVERY ZONE SUCCESSFUL. THUS FAR NO FIRM OFFER HAS BEEN
MADE. IN THIS CONTEXT, THE CURRENT PLAN OFFERS CREDITORS A SUPERIOR RESULT THAN
THE ONLY CURRENT ALTERNATIVE, WHICH IS LIQUIDATION. IF THE CURRENT PLAN BECOMES
EFFECTIVE, UNSUBORDINATED CREDITORS MAY RECEIVE UP TO 20 CENTS CASH ON THE
DOLLAR OR STOCK AND WARRANTS WHOSE VALUES ARE VERY DIFFICULT TO DETERMINE, BUT
WHICH MAY ULTIMATELY TRADE FOR MATERIAL VALUE IF DISCOVERY ZONE'S NEW BUSINESS
PLAN PROVES SUCCESSFUL. FOR THESE REASONS, THE COMMITTEE SUPPORTS THE PLAN.
BASED ON THE FOREGOING AND TO AVOID COSTLY LITIGATION, THE COMMITTEE
ENTERED INTO THE CHAPTER 11 PLAN AGREEMENT AMONG DEBTORS, BIRCH HOLDINGS LLC,
AND STATUTORY CREDITORS' COMMITTEE (THE "PLAN SETTLEMENT AGREEMENT"), A TRUE AND
COMPLETE COPY OF WHICH IS ANNEXED TO THE PLAN AS EXHIBIT H.
PURSUANT TO THE PLAN SETTLEMENT AGREEMENT, AND SUBJECT TO THE
COMMITTEE'S FIDUCIARY DUTIES, THE COMMITTEE WILL NOT OBJECT TO CONFIRMATION OF
THE PLAN. THE COMMITTEE HAS, HOWEVER, RESERVED THE RIGHT TO RECOMMEND TO
CREDITORS
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THAT THEY SUPPORT AN ALTERNATIVE CHAPTER 11 PLAN IF ONE MATERIALIZES AND AFFORDS
CREDITORS SUPERIOR TREATMENT.
THIS DISCLOSURE STATEMENT CONTAINS ENTERPRISE AND LIQUIDATION
VALUATIONS WHICH WERE PREPARED BY THE DEBTORS. ALTHOUGH THE COMMITTEE'S JOINT
FINANCIAL ADVISORS, ROTHSCHILD, INC. AND SBC WARBURG, INC., AND THE COMMITTEE'S
BANKRUPTCY ACCOUNTANTS, ERNST & YOUNG LLP, WERE PROVIDED WITH A COPY OF A
BUSINESS PLAN PREPARED BY THE PLAN PROPONENTS, NEITHER THE COMMITTEE'S FINANCIAL
ADVISORS NOR THE COMMITTEE'S BANKRUPTCY ACCOUNTANTS TOOK PART IN THE PREPARATION
OF EITHER THE BUSINESS PLAN OR THE VALUATIONS CONTAINED IN THIS DISCLOSURE
STATEMENT BASED ON THAT BUSINESS PLAN. MOREOVER, THE COMMITTEE AND ITS
PROFESSIONALS DISCLAIM ANY RESPONSIBILITY FOR THE ACCURACY OF THE FINANCIAL
PROJECTIONS AND BUSINESS FORECASTS CONTAINED IN THIS DISCLOSURE STATEMENT, OR
THE ACCURACY OF ANY OF THE HISTORICAL DISCUSSION/NARRATIVE CONTAINED HEREIN.
FINALLY, THE COMMITTEE FIRMLY SUPPORTS IMPLEMENTATION OF THE
DISTRIBUTION PROTOCOL PROVIDED FOR IN ARTICLE 5 OF THE PLAN AMONG CLASSES 6, 7
AND 9. THE COMMITTEE BELIEVES THAT ABSENT CREDITOR APPROVAL OF THE DISTRIBUTION
PROTOCOL, THERE IS A SIGNIFICANT LIKELIHOOD THAT PROTRACTED LITIGATION AMONG THE
HOLDERS OF THE ALLOWED CLASSES 6, 7 AND 9 CLAIMS COULD ENSUE WHICH COULD
SIGNIFICANTLY DELAY -- AND POTENTIALLY DIMINISH MATERIALLY -- THE DISTRIBUTIONS
CONTEMPLATED UNDER THE PLAN.
C. Votes Required for Class Acceptance of the Plan
As a condition to confirmation, the Bankruptcy Code requires that
each impaired class of claims or interests accept the Plan, subject to the
exceptions described in the section entitled "Cramdown of the Plan" below. At
least one impaired Class of Claims must accept the Plan in order for the Plan to
be confirmed.
For a class of claims to accept a plan, section 1126 of the
Bankruptcy Code requires acceptance by creditors that hold at least two-thirds
in dollar amount and a majority in number of allowed claims of such class, in
both cases counting only those claims actually voting to accept or reject the
plan. The holders of claims who fail to vote are not counted as either accepting
or rejecting the plan.
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As indicated above, classes of claims that are not "impaired" under
a plan are deemed, as a matter of law, to have accepted the plan and therefore
are not required to vote on such plan.
A class is "impaired" under a plan if the legal, equitable, or
contractual rights attaching to the claims or equity interests of that class are
modified by the plan. See "VOTING PROCEDURES AND REQUIREMENTS--Parties Entitled
to Vote." Acceptances of the Plan in the Chapter 11 Case are being solicited
only from those persons who hold Claims in an impaired Class. As noted above,
votes will be counted only if submitted by a holder of a Claim whose Claim is
scheduled by the Debtors as undisputed, noncontingent and liquidated, or who has
filed with the Bankruptcy Court a Proof of Claim which is not disputed and has
not been disallowed, disqualified or suspended prior to computation of the vote
on the Plan. A Claim to which an objection has been filed is not an Allowed
Claim unless and until the Bankruptcy Court rules on the objection. Further, the
Bankruptcy Code provides that the Bankruptcy Court may, if requested to do so by
the holder of such claim, estimate or temporarily allow a Disputed Claim for
purposes of voting on the Plan.
If the Plan is confirmed, the Plan will be binding with respect to
all holders of Claims and Interests of each Class, including Classes and members
of such Classes that did not vote or that voted to reject the Plan.
D. Cramdown of the Plan
If the Plan is not accepted by all of the impaired Classes of
Claims, the Plan may still be confirmed by the Bankruptcy Court pursuant to
section 1129(b) of the Bankruptcy Code (the "cramdown" provisions), if the Plan
has been accepted by at least one impaired Class of Claims, without counting the
acceptances of any insiders of the Debtors, and the Bankruptcy Court determines,
among other things, that the Plan "does not discriminate unfairly" and is "fair
and equitable" with respect to each nonaccepting impaired Class of Claims or
Interests. The Plan Proponents will request that the Bankruptcy Court confirm
the Plan pursuant to the cramdown provisions because Classes 12, 13 and 14 are
deemed to have rejected the Plan. See "ACCEPTANCE AND CONFIRMATION OF THE
PLAN--Cramdown."
E. Confirmation Hearing
The Bankruptcy Court has scheduled a hearing on confirmation of the
Plan to commence on April 28, 1997 at 9:30 a.m. The Confirmation Hearing will be
held at the United States Bankruptcy Court for the District of Delaware, 824
Market Street, 6th Floor, Wilmington, Delaware 19801, before the Honorable Helen
S. Balick, Chief United States Bankruptcy Judge. At that hearing, the Bankruptcy
Court will consider whether the Plan
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satisfies the various requirements of the Bankruptcy Code, including whether it
is feasible and whether it is in the best interests of the Creditors of the
Debtors. At that time, the Debtors will submit a report to the Bankruptcy Court
concerning the votes for acceptance or rejection of the Plan by the parties
entitled to vote thereon. See "ACCEPTANCE AND CONFIRMATION OF THE PLAN."
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
served in the manner described in Article IX of this Disclosure Statement no
later than April 21, 1997 by 4:00 p.m., Prevailing Eastern Time. See "ACCEPTANCE
AND CONFIRMATION OF THE PLAN--Confirmation Hearing." UNLESS AN OBJECTION TO
CONFIRMATION IS TIMELY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE
BANKRUPTCY COURT.
F. Special Note for Holders of LYONS
(a) Beneficial Owners
(i) Any beneficial owner holding LYONS as record holder in
its own name should vote on the Plan by completing and
signing the enclosed Ballot and returning it directly to
the Debtors, care of Bankruptcy Services, Inc. at the
address set forth above, so that it is received on or
before April 23, 1997 at 4:00 p.m., Prevailing Eastern
Time, using the enclosed postage-prepaid return
envelope.
(ii) Any beneficial owner holding LYONS in "street name"
through a brokerage firm, bank, trust company or other
nominee should vote on the Plan through such nominee by
following these instructions:
(A) Complete and sign the Ballot.
(B) Return the Ballot to your brokerage firm, bank,
trust company or other nominee as promptly as
possible and in sufficient time to allow such
nominee to process the Ballot and return it to the
Debtors, care of Bankruptcy Services, Inc. at the
address set forth above, so that it is received by
April 23, 1997 at 4:00 p.m., Prevailing Eastern
Time. If no self-addressed, stamped envelope was
enclosed for this purpose, contact Bankruptcy
Services, Inc. at (212) 376-8494 for instructions.
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Any Ballot returned to a nominee by a beneficial owner will not be
counted for purposes of acceptance or rejection of the Plan until such nominee
properly completes and delivers to the Debtors a master ballot (the "Master
Ballot") that reflects the vote of such beneficial owner.
If any beneficial owner owns LYONS through more than one broker,
bank, or other nominee, such beneficial owner may receive multiple mailings
containing the Ballots. Each such beneficial owner should execute a separate
Ballot for each block of LYONS that it holds through any particular nominee and
return each Ballot to the respective nominee in the return envelope provided
therewith.
Beneficial owners who execute multiple Ballots with respect to LYONS
held through more than one nominee must indicate on each Ballot the names of all
such other nominees and the additional amounts of the LYONS.
If a beneficial owner holds a portion of the LYONS through a nominee
and another portion as a record holder, such owner should follow the procedures
described in (i) above to vote the portion held of record and the procedures
described in (ii) above to vote the portion held through a nominee or nominees.
(b) Brokerage Firms, Banks And Other Nominees
An entity (other than a beneficial owner) which is the registered
holder of LYONS should vote on behalf of the beneficial owners of such LYONS by
(i) immediately distributing a copy of the appropriate Disclosure Statement and
accompanying materials, all appropriate Ballots, and self-addressed return
envelopes to all beneficial owners for whom it holds such LYONS, (ii) collecting
all such Ballots, and (iii) completing a Master Ballot compiling the votes and
other information from the Ballots collected, and transmitting such Master
Ballot to the Debtors, care of Bankruptcy Services, Inc. at the address set
forth above, so that it is received on or before April 23, 1997 at 4:00 p.m.,
Prevailing Eastern Time. Such entity may also pre-validate a ballot by
completing all information to be entered on the Ballot (the "Pre-Validated
Ballot") and forwarding the Pre-Validated Ballot to the beneficial owner for
voting. A proxy intermediary acting on behalf of a brokerage firm or bank may
follow the procedures outlines in the preceding sentence to vote on behalf of
such party.
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(c) Record Date
The record date for determining which holders of LYONS are entitled
to vote on the Plan is March 11, 1997. The Indenture Trustee for the LYONS will
not vote on behalf of the holders of the LYONS. Holders must submit their own
Ballots in accordance with the instructions set forth above.
Please note that if you hold debt securities evidencing your claim
through a broker or other financial intermediary, you may have to return your
ballot to such broker or financial intermediary sufficiently in advance of the
Voting Deadline so as to permit such broker or financial intermediary
sufficiently in advance of the Voting Deadline.
III. BACKGROUND AND GENERAL INFORMATION
A. The Debtors' Business
The Debtors are principally engaged in the operation of children's
indoor entertainment and fitness facilities, which are commonly referred to as
Discovery Zone FunCenters (each, a "FunCenter"). A typical FunCenter includes
the following features: (i) a play zone composed of a series of tubes, slides,
ball bins, climbing mountains, air and water trampolines and other devices for
crawling, jumping, swinging and climbing; (ii) a skill zone of games which
emphasize hand-eye coordination, most of which award tickets for successful play
that can be redeemed for prizes; (iii) a diner serving a variety of beverages
and foods; (iv) several party rooms for birthdays and other group events; and
(v) a merchandise counter offering Discovery Zone(R) apparel, toys and other
products.
The primary target market for FunCenter customers is children
between the ages of two and twelve, who are accompanied by their parents or
guardians or, in FunCenters located in New York and Texas, who may be supervised
by the Debtors' employees, referred to as FunSitters, for a fee. Admission is
only charged for children, and adults accompanying a child are admitted free of
charge.
Two of the Debtors, DZ Party, Inc. and Semborg Corp., do not operate
FunCenters. DZ Party, Inc. operates two adult-oriented facilities which offer
dining, bar service and video games. Semborg Corp. designs and manufactures
interactive entertainment hardware and software, such as "Jake," a robot which
is under wireless remote control and can interact with people on a real-time
basis.
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B. Factors Leading to Chapter 11 Filing
Under prior management, the Debtors developed and acquired
FunCenters at an aggressive pace between July 1992 and December 1994. Prior to
July 1992, Discovery Zone's predecessor operated two facilities. During the
period beginning July 1992 and ending December 31, 1994, the Debtors developed
or acquired 180 additional facilities, seven of which closed by December 31,
1994. In October 1993, Discovery Zone issued, in part to finance the Debtors'
growth strategy, $293,250,000 in aggregate principal amount at maturity of
liquid yield option notes due October 14, 2013. Discovery Zone received proceeds
of approximately $111 million from such issuance.
In 1994 alone, the Debtors increased the number of FunCenters by
more than seventy percent, primarily as a result of two transactions. In August
1994, Discovery Zone acquired Leaps & Bounds, Inc. ("Leaps & Bounds") from
McDonald's Corporation ("McDonald's") in exchange for Discovery Zone common
stock. At the time of the acquisition, Leaps & Bounds owned 48 children's indoor
recreational facilities and certain related real estate. In September 1994,
Discovery Zone acquired certain companies (the "Blockbuster Entities") from an
indirect, wholly-owned subsidiary of Blockbuster Entertainment Corporation
("Blockbuster Entertainment") in exchange for Discovery Zone common stock. The
Blockbuster Entities owned 60 franchised FunCenters and certain franchised
territories in the United States and Canada.
Although the Debtors' aggressive growth and expansion strategy
permitted the Debtors to penetrate domestic markets, it did not produce the
expected efficiencies and revenues. In fact, revenue and operating profits of
certain FunCenters declined due to various factors, including cannibalization
resulting from the close proximity of certain FunCenters to one another. The
Debtors also encountered significant difficulties and inefficiencies with
respect to both corporate and FunCenter operations. Under prior management, the
Debtors' accounting, finance, human resources and marketing departments were not
centralized in a single location, but were spread among a central and several
regional corporate offices. In addition, the Debtors did not consistently engage
in cost containment practices which would have been appropriate for the Debtors,
given the size and nature of their business. The Debtors also generally failed
to develop and implement uniform, efficient procedures for operating and
staffing FunCenters.
Beginning in May 1995, the Debtors began to replace their
management. Discovery Zone hired Donna Moore as President and Chief Operating
Officer in July 1995. Ms. Moore was appointed Chief Executive Officer and
President of Discovery Zone on March 24, 1996 when the existing Chief Executive
Officer resigned, and was also appointed the Chief Executive Officer and
President of each of the corporate Debtors other than DZ Party. Ms. Moore was
also appointed to serve on the board of directors of Discovery Zone
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on March 24, 1996. In addition, beginning in May 1995, the Debtors hired new
vice presidents in charge of Concept Development, Marketing and Store
Operations, respectively.
The Debtors' new management team recognized that the Debtors were
unable to generate sufficient Cash flow from operations to satisfy the Debtors'
obligations in full on a timely basis. In August 1995, the Debtors began
discussions with their bank group with respect to a restructuring of their $175
million credit facility, which discussions continued throughout January 1996.
Despite the new management team achieving significant corporate overhead
reductions and substantially improving the quality of FunCenter operations, the
Debtors concluded that filing for chapter 11 protection was the most prudent way
to protect the interests of their suppliers, creditors, employees and customers
and their viability as ongoing businesses.
C. The Chapter 11 Case
1. Filing
On March 25, 1996, the Debtors filed petitions for relief under
chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware.
2. Operations; Administration of Case
Since the commencement of the Chapter 11 Case, the Debtors have
continued to operate their business as debtors in possession, subject to the
jurisdiction and supervision of the Bankruptcy Court. No trustee has been
appointed in the Chapter 11 Case. By order of the Bankruptcy Court, the Chapter
11 Case is being jointly administered for procedural purposes as In re Discovery
Zone, Inc., et al., Case No. 96-411 (HSB). The Plan is predicated on the
substantive consolidation of the assets and liabilities of the Debtors.
3. FunCenter Operations
During the course of the Chapter 11 Case, the Debtors have developed
and implemented a business plan with the goal of stabilizing the Debtors'
business. On an operational level, the Debtors' new management has evaluated
personnel at all levels of management and determined where improvements were
possible through the hiring of key personnel. A payroll matrix has been
implemented to more efficiently correlate staffing with FunCenter staffing
needs, enabling the Debtors to reduce their payroll at the FunCenter level while
maintaining appropriate staffing of FunCenters. The Debtors have installed a
point of sale system in their FunCenters which allows the Debtors to control and
track admissions and Cash receipts. The Debtors are in the process of installing
an inventory control and standard cost system to monitor margins and shrinkage.
A FunCenter Management Incentive Program was implemented for 1997 which rewards
managers for improving FunCenter operating
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results while maintaining quality. Other cost savings being implemented include
more cost effective management of the third party central reservation service
used for birthday party bookings.
4. Debtor in Possession Financing
During the course of the Chapter 11 Case, the Debtors obtained
debtor in possession financing pursuant to two credit agreements. The Debtors
required such financing (i) to pay operating expenses during the course of the
Chapter 11 Case, including for employee salaries, payroll, taxes, collection of
accounts, purchases of inventory, lease obligations and other general operating
and working capital purposes in the ordinary course of their businesses; (ii) to
permit the Debtors to maintain or obtain unsecured credit from their vendors on
commercially reasonable terms; and (iii) to permit the Debtors to place
television and radio commercials in order to effectively establish a media
presence during the Chapter 11 Case and inform customers about new Discovery
Zone marketing concepts.
Pursuant to a Final Order of the Bankruptcy Court dated May 20,
1996, the Debtors were authorized to enter into the Revolving Credit Agreement
dated as of April 30, 1996 (the "Revolving Credit Agreement") among Discovery
Zone, as borrower, the other Debtors, as guarantors, and Madeleine LLC
("Madeleine"), as lender. Under the Revolving Credit Agreement, Madeleine agreed
to lend Discovery Zone up to the aggregate principal amount of $17,000,000,
inclusive of a $7,000,000 subfacility for the issuance of letters of credit.
Under the Revolving Credit Agreement, Madeleine was granted (i) superpriority
administrative expense claim status over administrative expenses of the Debtors,
(ii) first priority liens on and security interests in all of the Debtors' owned
or subsequently acquired unencumbered assets, (iii) liens on and security
interests senior to any liens on or security interests in all owned or
subsequently acquired encumbered assets, other than collateral securing certain
permitted liens, and (iv) junior liens on and security interests in collateral
securing such permitted liens. The Revolving Credit Agreement was amended by the
First Amendment, dated as of May 28, 1996, which changed certain of the
financial covenants contained in the Revolving Credit Agreement.
As noted above, the Debtors' businesses did not generate revenue
which was comparable, on a store-by-store basis, to that generated during 1995.
Therefore, in August, the Debtors requested that Madeleine make available
additional funds to insure the Debtors sufficient liquidity to timely satisfy
their postpetition obligations during the months of September and October, 1996.
By motion dated August 16, 1996, the Debtors requested authority from the
Bankruptcy Court to enter into a Second Amendment to the Revolving Credit
Agreement (the "Proposed Second Amendment"), which provided for, among other
things, an increase from $17,000,000 to $20,000,000 in the aggregate principal
amount of loans available under the Revolving Credit Agreement and an adjustment
to certain financial covenants contained therein.
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Both prior to and following the filing of the motion requesting
authority to enter into the Proposed Second Amendment, the Debtors conducted
negotiations with other prospective lenders regarding the provision of
additional financing. These negotiations resulted in a commitment from Perry
Partners L.P. ("Perry Partners") to provide financing on substantially the same
terms as the Revolving Credit Agreement, as amended by the Proposed Second
Amendment, but up to the aggregate principal amount of $25,000,000. Because of
this opportunity to obtain enhanced credit, the Debtors, with the consent of
Madeleine, withdrew the motion requesting authority to enter into the Proposed
Second Amendment at a hearing held on September 13, 1996.
By order dated October 25, 1996, the Debtors obtained authority from
the Bankruptcy Court to enter into a Replacement Revolving Credit Agreement (the
"Replacement Credit Agreement"), among Discovery Zone, as borrower, the other
Debtors, as guarantors, and Perry Partners, as Lender. Under the Replacement
Credit Agreement, Perry Partners agreed to lend Discovery Zone up to the
aggregate principal amount of $25,000,000, inclusive of a $7,000,000 subfacility
for the issuance of letters of credit. Perry Partners was granted (i)
superpriority administrative expense claim status over administrative expenses
of the Debtors, (ii) first priority liens on and security interests in all of
the Debtors' owned or subsequently acquired unencumbered assets, (iii) liens on
and security interests senior to any liens on or security interests in all owned
or subsequently acquired encumbered assets, other than collateral for certain
permitted liens, and (iv) junior liens on and security interests in collateral
for such permitted liens.
The Replacement Credit Agreement contains covenants similar to those
contained in the Revolving Credit Agreement, as amended by the Proposed Second
Amendment. The Debtors have used proceeds made available under the Replacement
Credit Agreement to repay in full all outstanding obligations under the
Revolving Credit Agreement, as amended by the First Amendment, and the Revolving
Credit Agreement, as amended, has been terminated. Approximately $16,250,000 of
the $25,000,000 was used to satisfy all obligations under the Revolving Credit
Agreement.
During the fourth quarter of 1996, the Debtors determined that they
would require an additional $5,000,000 in postpetition financing to satisfy
obligations which would become due and payable during the first quarter of 1997.
The Debtors and Perry traded proposals with respect to the terms of a proposed
extension of an additional $5 million under the Replacement Credit Agreement,
but were unable to reach agreement. In view of the earlier status of the
negotiations with Perry and the Debtors' need for additional financing to
satisfy obligations which will become due and payable in early January 1997, the
Debtors requested that Birch assist the Debtors in obtaining the necessary
financing.
Birch provided the Debtors with a written term sheet on December 6,
1996 and those terms were incorporated in a loan agreement (the "Birch Loan
Agreement") for
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which the Debtors sought Bankruptcy Court approval by Motion dated December 19,
1996 (the "Debtors' DIP Motion"). Notwithstanding the filing of the Debtors' DIP
Motion, the Debtors continued to negotiate with Perry regarding the terms of
obtaining an additional $5,000,000 of borrowing availability pursuant to the
Replacement Credit Agreement. After additional negotiations with Perry, the
Debtors, by motion dated December 27, 1996, requested authority from the
Bankruptcy Court to enter into a First Amendment to the Replacement Credit
Agreement (the "First Replacement Amendment") pursuant to which the aggregate
principal amount which could be advanced to the Debtors by Perry would be
increased from $25,000,000 to $30,000,000. By interim order dated December 31,
1996, the amount which the Debtors were authorized to borrow from Perry was
increased from $25,000,000 to $28,500,000. By final order dated March 4, 1997,
this amount was increased to $30,000,000. The First Replacement Amendment, as
approved by the Bankruptcy Court, also authorized the Debtors to borrow
$5,000,000 from Birch, with Birch's right of repayment in respect of such
borrowing by the Debtors being subordinate to the prior repayment of Perry in
full under the Replacement Credit Agreement, as amended by the First Replacement
Amendment.
5. Store Closings, Lease Rejections and Related Transactions
Prior to the Petition Date and continuing during the pendency of the
Chapter 11 Case, the Debtors reviewed and analyzed their overall FunCenter
operations and, specifically, the potential contributions of their FunCenters
located in various markets to the future configuration of the Debtors' overall
FunCenter operations. Twenty-seven FunCenters which consistently operated at a
significant loss were closed by the Debtors prior to the Petition Date. The
Debtors received authority to reject the leases for these stores pursuant to
section 365 of the Bankruptcy Code by orders of the Bankruptcy Court dated April
17, 1996 and May 2, 1996.
As of the Petition Date, the Debtors operated 297 FunCenters. As a
result of their analysis of FunCenter operations, the Debtors determined that
certain FunCenters, which either consistently lost money or generated minimal
positive earnings before interest, taxes, depreciation and amortization, would
not be profitable in the future absent rent concessions from the landlords for
such FunCenters. The Debtors' special real estate consultants, Retail Consulting
Services, Inc. ("Retail Consulting"), conducted lease negotiations with the
Debtors' landlords which resulted in 39 leases being amended on terms
sufficiently favorable to the Debtors to justify continued operation at that
location. As a result of the concessions negotiated by Retail Consulting, the
Debtors have decreased their operating costs by approximately $2,000,000 each
year. Certain of the leases which have been amended to reduce the Debtors' rent
obligations permit either the landlord or the Debtors to terminate the lease on
as little as ninety days' notice. In the event the landlord provides a notice of
termination, certain of these leases permit the Debtors to remain in the
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location for the lease term so long as they pay the full rent reserved under the
lease, without any reduction provided for under the amendment to the lease.
In addition to the 39 leases amended through the efforts of Retail
Consulting, the Debtors have been granted rent concessions by McDonald's
Corporation ("McDonald's"). McDonald's, as lessor under several leases of former
Leaps & Bounds locations purchased by the Debtors from McDonald's, has provided
rent deferrals on nine properties at an annual rent deferral of approximately
$400,000. As a result, current operating costs have decreased by approximately
$33,000 each month. McDonald's will receive Rent Deferral Secured Notes on the
Effective Date for rent deferrals granted to the Debtors, and will retain its
liens against the properties to the extent of the amount of its Rent Deferral
Secured Notes and its Allowed Class 4A Claim.
Sufficient rent concessions, however, could not be obtained from
certain landlords. The Debtors decided, therefore, to close and reject the
leases for 88 FunCenters during the course of the Chapter 11 Case. Authority to
close and reject the leases for these FunCenters was granted by the Bankruptcy
Court by orders dated April 17, 1996, May 2, 1996, May 10, 1996, June 27, 1996,
October 29, 1996, November 14, 1996, November 21, 1996 and December 17, 1996. In
addition, by order dated November 21, 1996, the Debtors were granted authority
to reject the primary leases and subleases entered into by the Debtors as
sublandlord for five locations where the Debtors previously operated FunCenters.
On September 2, 1994, Discovery Zone acquired the Blockbuster
Entities from Blockbuster Fun & Fitness Holding Corporation, an indirect wholly
owned subsidiary of Blockbuster Entertainment. At the time of the acquisition,
the Blockbuster Entities owned 60 franchised Discovery Zone facilities and
certain franchised territories in the United States and Canada. See "BACKGROUND
AND GENERAL INFORMATION--Factors Leading to Chapter 11 Filing." Blockbuster
Entertainment, under applicable law, remained an obligor under the leases for
these facilities. Pursuant to the merger of Blockbuster Entertainment into
Viacom Inc. ("Viacom"), which was effective as of September 29, 1994, Viacom
became an obligor under certain of the Debtors' real property leases which were
initially entered into by the Blockbuster Entities.
The Debtors were unable to obtain rent concessions with respect to
these FunCenters because, the Debtors and Retail Consulting believe, the
landlords were unwilling to grant rent reductions where Viacom remained
obligated under the applicable lease. By orders of the Bankruptcy Court dated
April 17, 1996, May 10, 1996 and June 27, 1996, the Debtors closed eight
FunCenters where Viacom remained obligated under the applicable lease. The
Debtors did not immediately seek authority to reject the leases for these
FunCenters, however, because they were engaged in negotiations to assume and
assign the leases to Viacom or a subsidiary of Viacom. On February 28, 1997, the
Debtors requested authority to assume and assign certain leases to Viacom. For a
discussion of the treatment of
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the leases under which Viacom remained obligated as guarantor, see "BACKGROUND
AND GENERAL INFORMATION-- Proposed Viacom Settlement."
The Debtors also anticipate receiving rent concessions totaling
approximately $275,000 per year on certain leases guaranteed by Viacom or its
affiliates pursuant to the Proposed Viacom Settlement Agreement (as described
below).
As a result of the FunCenter closings authorized by the Bankruptcy
Court, as of the date of this Disclosure Statement, the Debtors currently
operate 209 FunCenters.
Following the closing of a FunCenter, the Debtors follow a protocol
whereby (i) useful assets, including existing inventory, computerized point of
sale systems, office supplies and marketing materials are transferred from the
closed FunCenter to operating FunCenters, and (ii) the Debtors enter into
liquidation contracts pursuant to which the remaining fixtures, furniture and
equipment, including tables, chairs, kitchen equipment, play games and other
equipment, are liquidated. The Debtors received authority to enter into
liquidation contracts pursuant to an order of the Bankruptcy Court dated
September 24, 1996.
In addition to the lease rejections and store closings discussed
above, the Debtors assumed a lease between Discovery Zone Children's Amusement
Corp. and Rancon Realty Fund IV for a building located in San Bernadino,
California and assigned such lease to Salvesen, Inc. As of the Petition Date,
the Debtors had not opened a FunCenter at the location and, due to the projected
cost of approximately $900,000 to develop the building as a FunCenter and
because the Debtors had ceased their expansion of FunCenters, the Debtors
decided that the San Bernadino building was no longer needed for the operation
of their businesses. Pursuant to the assignment to Salvesen, Inc., the Debtors
were relieved of all obligations under the lease and avoided any damages which
the Debtors would potentially have owed had they rejected the lease.
Finally, the Bankruptcy Court granted the Debtors authority to
assume the leases for FunCenters located in the following locations: Topeka,
Kansas; Lafayette, Louisiana; Danvers, Massachusetts; Madison, Wisconsin;
Louisville, Kentucky; Ridgeland, Mississippi; Stockton, California; Wausau,
Wisconsin; Jacksonville, Florida and Tulsa, Oklahoma. In addition, the Debtors
have requested but not received authority to assume the leases for the
FunCenters located in Merrillville, Indiana and West Springfield, Massachusetts.
6. Sales of Real Property
Over the course of the Chapter 11 Case, the Debtors analyzed each of
their non-core assets to determine if any of such assets could be sold to
generate value for the Debtors' estates. The Debtors determined that a parcel of
undeveloped real property, located
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in Columbia, Maryland, should be sold because it was not necessary for the
Debtors' future operations. The property located in Columbia, Maryland was sold,
pursuant to an order of the Bankruptcy Court dated May 20, 1996, for $935,000 to
M.O.R. Snowden Square 3 Limited Partnership. The proceeds of the sale of the
Columbia, Maryland property were used to make payments required to cure defaults
under leases assumed by the Debtors where McDonald's Corporation is the
sublessor and Leaps & Bounds is the sublessee. See "BACKGROUND AND GENERAL
INFORMATION--The Chapter 11 Case--McDonald's Corporation Settlement."
7. Corporate Downsizing and Related Transactions
At one point prior to the Petition Date, the Debtors employed
approximately 500 people at their central corporate and four regional offices.
To reduce corporate overhead, the Debtors have centralized their accounting,
finance, human resources and marketing operations. As a result, the Debtors have
reduced the number of corporate employees by approximately 410 employees as of
the date of this Disclosure Statement and all of the Debtors' approximately 90
remaining corporate employees now work at the Debtors' corporate headquarters in
Fort Lauderdale, Florida. The Debtors' annual regional and corporate overhead
has been reduced from $33 million in 1994 and $44 million in 1995 to $18 million
in 1996, before capitalized costs. The Debtors anticipate that annual regional
and corporate overhead for the first year after emerging from bankruptcy will be
approximately $10 million.
The Debtors rejected the leases for each of their four regional
offices by order of the Bankruptcy Court dated April 17, 1996. In addition to
the regional corporate offices, prior to the Petition Date, the Debtors operated
a warehouse in Harvey, Illinois. The Debtors stored equipment in the warehouse
which they would transport to, and install in, new FunCenters. Because the
Debtors ceased their expansion of FunCenters, the Harvey, Illinois warehouse was
no longer needed. The Debtors closed the warehouse and rejected the lease
pursuant to an order of the Bankruptcy Court dated April 17, 1996.
8. Employee Interim Stay Bonus Program
The commencement and continuation of the Chapter 11 Case led, not
unexpectedly, to uncertainty among the Debtors' employees regarding the
employees' long-term futures with the Debtors. The Debtors found it increasingly
difficult to retain management-level and other key employees given the
uncertainties which necessarily attend a restructuring undertaken pursuant to a
chapter 11 proceeding. During the period beginning on the Petition Date and
ending July 8, 1996, two directors and fifteen managers at the corporate level
voluntarily resigned to accept positions with other companies.
The primary, if not overriding, reason why these persons sought
other employment was the perceived financial risk of working for a company which
is the subject
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of a bankruptcy proceeding. The departure of experienced employees impairs the
Debtors' ability to successfully reorganize and to maximize their going concern
value for all parties in interest. It is not only difficult and expensive to
replace these employees, but the departure of additional management-level
personnel further erodes employee morale and the Debtors' ability to stabilize
operations and emerge from the Chapter 11 Case as a viable enterprise. The
departure of key management-level employees not only impacts the Debtors'
ability to conduct business due to their absence, but their departures can serve
as an important factor in other employees' decisions to resign.
In view of these departures, by motion dated June 30, 1996, the
Debtors sought the Bankruptcy Court's approval (i) to implement an employee
retention program which provided for annual and emergence from chapter 11 bonus
payments, (ii) to assume certain employment contracts and (iii) to continue to
perform under the Debtors' severance plan (collectively, the "Employee Retention
Program"). The Debtors withdrew their motion to approve the Employee Retention
Program on October 24, 1996. The Employee Retention Program has been
incorporated into the Plan. See "DESCRIPTION OF PLAN OF REORGANIZATION--Certain
Other Provisions of the Plan--Employee Retention Plan."
By motion dated October 24, 1996, the Debtors sought the authority
of the Bankruptcy Court to implement an interim stay bonus program (the "Interim
Stay Bonus Program") which was designed to reward management-level employees who
remained with the Debtors throughout the Chapter 11 Case. The Interim Stay Bonus
Program provides for each eligible employee to receive an interim bonus payment
which is equal to one-third of the maximum annual bonus payment which that
employee would receive based on that employee's service during 1996, up to a
maximum per employee of $5,000. The employees eligible to receive interim stay
bonus payments are Vice Presidents and the Controller, Corporate and Regional
Directors, and Corporate and Regional Managers. The Debtors were authorized by
the Bankruptcy Court to implement the Interim Stay Bonus Program by order dated
November 14, 1996. The aggregate amount of Interim Stay Bonuses which were paid
was $80,300.
9. Personal Injury Claims Insurance
As with any business providing goods or services to the general
public, certain of the Debtors' customers may injure themselves and may assert
that the Debtors are liable for any damage suffered as a result of the injury.
Furthermore, certain persons may assert that the Debtors are liable in respect
of injuries caused by the Debtors' alleged failure to maintain their premises or
the areas outside the premises' entrance which are in the Debtors' control.
Therefore, although the Debtors' equipment is designed to provide a safe, fun
experience for customers, and the Debtors properly maintain their facilities and
premises in accordance with the highest industry practices, the Debtors have
established a risk
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management program for the administration, reconciliation and payment of general
liability Claims, which include personal injury Claims.
As described below, the Debtors maintained insurance coverage which
required the Debtors to satisfy a certain amount of damages and costs in
connection with a personal injury Claim before the Debtors' insurance carriers
were responsible for any damages and costs in connection with such Claim.
Accordingly, the Plan generally provides that each personal injury Claim may be
divided into two or more Classes, depending on whether and to what extent the
Debtors or their insurance carriers are required to satisfy a personal injury
Claim.
To the extent that the Debtors are responsible for satisfying an
Allowed Claim under the applicable insurance policy, the personal injury
claimant will hold an Allowed Claim against the Debtors which is classified in
Class 10. The recovery which holders of Class 10 Claims will obtain in respect
of their Class 10 Claims is described below in "DESCRIPTION OF PLAN OF
REORGANIZATION--Classification of Treatment of Claims and Interests--Class 10
Other Unsecured Claims." Except with respect to Class 8 Claims, to the extent an
insurance carrier is responsible for satisfying an Allowed Claim, the personal
injury claimant will hold an Allowed Claim against the insurance carrier. All
Allowed Claims for which the Debtors are insured are classified in Class 11 and
all Allowed Class 11 Claims will be satisfied in full in Cash on the Effective
Date or, if such Claims become Allowed after the Effective Date, as soon as such
Claims become Allowed.
a. 1992-1993 Policy Year
For the period beginning June 16, 1992 and ending June 16, 1993, the
Debtors maintained insurance coverage for personal injury claims through an
insurance policy issued by Maryland Casualty Insurance Company ("Maryland
Casualty Insurance"), policy number EPA16863772. This insurance policy had a
deductible of $5,000 per occurrence and a coverage limit of $1,000,000 per
claim. The first $5,000 of all Allowed Claims which arose during this policy
period are classified in Class 10 and any portion of such Claims in excess of
$5,000 are classified in Class 11. Together with umbrella and excess policies,
the Debtors have total insurance limits of $10,000,000 per occurrence for this
policy period.
b. 1993-1994 Policy Year
For the period beginning June 16, 1993 and ending June 16, 1994, the
Debtors maintained insurance coverage for personal injury claims through an
insurance policy issued by Lexington Insurance Company ("Lexington"), a
subsidiary of American International Group ("AIG"), policy number ERGL2840173
(the "Lexington 1993-1994 Insurance Policy"). In accordance with the terms of
the Lexington 1993-1994 Insurance Policy, the self-insurance retention limit has
been reduced to $10,000 per occurrence.
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Claims with respect to this policy year are classified in Class 10
with respect to the first $10,000 of such Claims. Any amounts of such Allowed
Claims in excess of $10,000 are classified in Class 11. Together with excess and
umbrella policies, insurance limits for this policy period were $25,000,000 per
occurrence.
c. Leaps & Bounds Policy Years
Before the purchase of Leaps and Bounds, Inc. ("Leaps & Bounds") by
the Debtors, McDonald's Corporation maintained insurance coverage for personal
injury claims through an insurance policy issued by Illinois National Insurance
Company, a subsidiary of AIG, policy number GL 590-79-23 RA. The term of this
policy was from September 1, 1993 to September 1, 1994 and has a self-insured
retention limit ("SIR") of $2,500 per occurrence, such that Leaps & Bounds is
responsible for the first $2,500 in damages for each Claim that arises during
the policy period. Coverage for the period from September 1, 1992 to September
1, 1993 was substantially the same, except that the policy was written by
National Union Fire Insurance Company of Pittsburgh which is also a subsidiary
of AIG, policy number GL 590-63-14 RA. Allowed Claims presented against these
policies will be classified in Class 10 for the first $2,500 and all amounts in
excess of $2,500 will be classified in Class 11. Together with excess and
umbrella limits, Leaps & Bounds has insurance policy limits of $9,000,000 per
occurrence under these policies.
d. 1994-1995 Policy Year
For the period beginning June 16, 1994 and ending May 31, 1995, the
Debtors maintained insurance coverage for personal injury Claims through an
insurance policy issued by Lexington Insurance Company ("Lexington"), policy
number SLGL2828086 (the "Lexington 1994-1995 Insurance Policy"). The Lexington
1994-1995 Insurance Policy has a SIR of $100,000, such that the Debtors are
responsible for the payment of the first $100,000 in damages (defined broadly
under the Lexington 1994-1995 Insurance Policy to include loss expenses, loss
adjustment expenses and legal expenses) for each Claim which arises during the
coverage period for the Lexington 1994-1995 Insurance Policy. The SIR is reduced
to $25,000 per Claim once the Debtors have satisfied $3,700,000 in damages for
Claims which arise during the coverage period for the Lexington 1994-1995
Insurance Policy.
For this policy year, the first $25,000 of each Allowed Claim will
be placed in Class 10, the next $75,000 in Class 8 and all amounts in excess of
$100,000 in Class 11.
Given the potential reduction in the SIR under the Lexington
1994-1995 Insurance Policy, there is a possibility that Cash would be payable by
Lexington in respect of Claims which arise during the coverage period for the
Lexington 1994-1995 Insurance Policy to the extent that such Claims exceed
$25,000 and are less than or equal to $100,000. These portions of the personal
injury Claims are classified under the Plan as Class 8 Claims.
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However, absent the treatment of Class 8 Creditors under the Plan, similarly
situated Class 8 Creditors would receive different recoveries in respect of
their Class 8 Claims solely due to the timing of the allowance of such Claims.
For example, a holder of a $50,000 Claim against the Debtors in respect of
personal injury which occurred between June 16, 1994 and May 31, 1995 would hold
a $25,000 Claim in Class 7 and a $25,000 Claim in Class 8. If such Claims were
to be Allowed when the SIR was $100,000, absent the treatment afforded to a
Class 8 Creditor under the Plan, such Creditor would not be eligible to receive
any Cash from Lexington in respect of its Class 8 Claim. However, if such Claim
were to be Allowed when the SIR was $25,000, such Creditor would receive $25,000
in Cash from Lexington in respect of its Class 8 Claim, absent the treatment
afforded to a Class 8 Creditor under the Plan.
In view of the Bankruptcy Code's policy of equitable and fair
treatment of similarly situated Creditors, the Plan ensures that all Class 8
Creditors do not accept different recoveries solely due to the date their
personal injury Claims become Allowed and the level of the SIR at such time.
Under the Plan, to the extent Cash is paid by Lexington in respect of any Class
8 Claims after the SIR is reduced to $25,000, such Cash will be placed into the
Class 8 Insurance Fund. The holders of Class 8 Claims shall receive Pro Rata
distributions of Cash (after setting off the value of Cash or Reorganized DZ
Units previously received by such holders other than from the Class 8 Insurance
Fund) from the Class 8 Insurance Fund. For a more detailed description, see
"DESCRIPTION OF PLAN OF REORGANIZATION--Classification and Treatment of Claims
and Interests--Class 8 Certain Unsecured Personal Injury Claims" and
"--Distribution of the Class 8 Insurance Fund to Class 8."
e. 1995-1996 Policy Year
Under the Management Services Agreement, effective May 24, 1995 (the
"MSA"), among Discovery Zone, Inc., Blockbuster Entertainment Group, a division
of Viacom Inc. ("Blockbuster"), and Viacom Inc. ("Viacom"), Viacom endorsed the
Debtors onto its general liability insurance policy, effective June 1, 1995.
This type of policy is known in the insurance industry as a guaranteed cost
insurance policy. Under this policy, the premium is paid to The Aetna Life and
Casualty Company ("Aetna") and all Claims incurred are settled by Aetna with no
further cost to the Debtors. This insurance policy, together with umbrella and
excess policies, provided the Debtors with policy limits of $185 million and was
in effect until May 31, 1996. All Allowed Claims which are covered by this
policy are classified in Class 11 under the Plan.
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f. 1996-1997 Policy Year
As a result of discussions between Viacom and the Debtors with
respect to services provided under the MSA and the Debtors' analysis of their
business operations, the Debtors implemented their own insurance program,
effective June 1, 1996. In order to provide better Cash flow, and in accordance
with standard industry practice, the Debtors have not obtained third party
insurance in respect of their anticipated liability for general liability
Claims, but instead maintain a self-insured retention up to certain limits. The
Debtors have a primary liability policy providing a limit of $1 million per
occurrence, and together with umbrella excess liability policies, have aggregate
limits of $100 million per occurrence in general liability insurance which is
available after the Debtors have paid or become legally obligated to pay
$100,000 per Claim. All personal injury Allowed Claims which arose on or after
June 1, 1996 are classified in Class 1 to the extent such Allowed Claims are
equal to or less than $100,000 and are classified in Class 11 to the extent such
Claims are Allowed in excess of $100,000.
By order of the Bankruptcy Court dated July 15, 1996, the Debtors
were authorized to enter into a postpetition contract with GAB North America
Robins, Inc. to provide Claims administration, reconciliation and satisfaction
services for general liability Claims which occur during the period beginning
June 1, 1996 and ending May 31, 1997.
Because of the high cost of insurance and the need, cognizant of the
goal of stabilizing the Debtors' business, to preserve their available Cash and
maintain a consistent Cash flow position, the Debtors decided to finance the
annual premiums due under their insurance policies. Pursuant to a motion dated
July 12, 1996, the Debtors requested authority from the Bankruptcy Court to
obtain secured insurance premium financing from AFCO Credit Corporation
("AFCO"). The Debtors withdrew the motion on July 18, 1996 when AFCO informed
the Debtors that AFCO would not provide financing pursuant to the proposed
financing agreement. By order dated August 1, 1996, the Debtors were granted
authority by the Bankruptcy Court to enter into an insurance premium financing
agreement with A.I. Credit Corporation ("A.I. Credit"). The amounts financed by
A.I. Credit are not secured by liens on any property of the Debtors, but instead
are secured solely by the portion of premiums paid in advance by the Debtors
under the financed insurance policies which have not yet been earned by the
applicable insurance provider.
10. Insurance for the Benefit of Employees, Officers and Directors
Prior to the Petition Date, the Debtors provided life insurance and
accidental death and dismemberment benefits to their full-time employees and
satisfied the medical and dental claims of their full-time employees and their
dependents pursuant to an insurance contract (the "Insurance Contract") between
Discovery Zone and Guardian Life Insurance Company of America ("Guardian"). Due
to actions occurring prior to the Petition Date,
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Guardian claimed that the Insurance Contract had been terminated prepetition, a
charge that the Debtors disputed. After extensive negotiations, the Debtors and
Guardian reached agreement as to performance under the Insurance Contract, and
the Debtors were authorized, by order of the Bankruptcy Court dated July 16,
1996, to assume the Insurance Contract, as amended by a postpetition letter
agreement.
One component of the stabilization of the Debtors' business is
stability in senior management. In order to retain their skilled and experienced
directors, officers and certain key employees, the Debtors must provide adequate
assurance that these persons will be reimbursed for any loss these persons incur
in connection with a Claim which is threatened or made against such persons in
connection with the discharge of these persons' duties to the Debtors. The
Debtors provide this adequate assurance by maintaining directors' and officers'
liability insurance.
11. McDonald's Corporation Settlement
By order dated November 15, 1996, the Debtors were granted authority
by the Bankruptcy Court to enter into, and perform under, a stipulation with
McDonald's (the "McDonald's Stipulation") which provides for a global resolution
of issues relating to, among other things, (i) the assumption and rejection of
nonresidential leases of nonresidential real property where McDonald's is the
sublessor and Leaps & Bounds is the sublessee (the "L&B Subleases"); (ii) rent
deferrals which McDonald's will grant to Leaps & Bounds in respect of certain
assumed L&B Subleases; and (iii) the treatment of secured Claims which
McDonald's holds against the Debtors arising from the rejection and assumption
of the L&B Subleases, as well as the future rent deferrals to be granted in
respect of certain of the L&B Subleases. The McDonald's Stipulation is attached
as Exhibit G to the Plan and is incorporated therein as if set forth in its
entirety such that in the event of any inconsistency between the Plan and the
McDonald's Stipulation, the terms and conditions of the McDonald's Stipulation
shall control.
The McDonald's Stipulation provides for Leaps & Bounds to assume the
L&B Subleases with respect to 21 FunCenters (the "Assumption Locations") and to
reject the L&B Sublease with respect to one FunCenter, which the Debtors also
requested the Court's authority to close. The Debtors, upon Leaps & Bounds
assuming the L&B Subleases for the Assumption Locations, cured all unpaid rent
and other charges under these subleases pursuant to section 365(b) of the
Bankruptcy Code, which cure payments total approximately $500,000. Pursuant to
the McDonald's Stipulation, the cure payments were made first from the proceeds
of the sale of real property located in Columbia, Maryland and second from the
Debtors' general funds. See "BACKGROUND AND GENERAL INFORMATION--The Chapter 11
Case--Sales of Real Property."
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McDonald's granted the Debtors rent deferrals (the "Rent Deferrals")
under the L&B Subleases totalling approximately $400,000 annually for nine
Assumption Locations. Pursuant to the McDonald's Stipulation, McDonald's will
have an undisputed Allowed Administrative Claim with respect to Rent Deferrals
which accrue prior to the effective date of the Plan which Claim is secured by
real property owned by Leaps & Bounds. For a discussion of the treatment of the
Secured and Administrative Claims held by McDonald's in respect of the rejection
of the L&B Subleases, the Rent Deferrals or otherwise, see "DESCRIPTION OF PLAN
OF REORGANIZATION--Classification and Treatment of Claims and Interests--Class
4A--McDonald's Secured Claim" and "Class 4B--McDonald's Secured Rent Deferral
Claims."
12. Proposed Viacom Settlement
The Plan Proponents, the Creditors' Committee and Viacom Inc. and
its affiliates (collectively, "Viacom") have reached an agreement in principle,
subject to Bankruptcy Court approval, with respect to the treatment of (i) all
prepetition Claims which Viacom may hold against the Debtors, and (ii) all
Claims which the Debtors or the holders of Claims against the Debtors may hold
against Viacom. This agreement will be documented in a Settlement Agreement in
form and substance satisfactory to the Plan Proponents, the Creditors' Committee
and Viacom.
Viacom's prepetition unsecured Claims against the Debtors arose
primarily in connection with (i) services provided to the Debtors by Viacom and
advances made by Viacom under the MSA, (ii) the Discovery Zone L.P. Subordinated
Promissory Note, dated May 24, 1995, in the original principal amount of
$13,214,550 made by Discovery Zone L.P. in favor of Blockbuster Family Fun,
Inc., an affiliate of Viacom Inc. (the "Note Claim") and (iii) rights of
subrogation and similar rights under or in respect of numerous guaranties made
by Viacom of leases and other obligations of the Debtors.
In settlement of all of Viacom's prepetition general unsecured
Claims against the Debtors and all Claims which the Debtors or the holder of
Claims against the Debtors may hold against Viacom, the Debtors, Viacom and the
Creditors' Committee have agreed, subject to Bankruptcy Court approval, that
Viacom shall receive no property under the Plan in respect of its prepetition
claims. In exchange for this treatment, the Debtors will (i) satisfy in full,
after all Claims having higher priorities are paid in full, a Claim which Iwerks
Studios, Inc. ("Iwerks") holds against the Debtors, and which is guarantied by
Blockbuster, in the amount of $61,500, or obtain a release of the Claim of like
amount held by Iwerks against Viacom under Viacom's guaranty of the obligations
of the Debtors to Iwerks, (ii) assume thirty leases of the Debtors, which are
guarantied by Viacom, and assign them to Blockbuster as previously proposed by
Viacom to the Debtors and the Creditors' Committee and (iii) pay Viacom's
postpetition administrative Claims with respect to insurance payments advanced
by Viacom on behalf of the Debtors in the amount of $943,906
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plus any amounts owing under the MSA for postpetition services, each subject to
the exercise of the Debtors' rights of setoff. Viacom will also receive the
protections of the limitations on liability provided by, and the injunction
issued under, Sections 11.2 and 11.3 of the Plan.
13. Marketing the Debtors To Maximize Enterprise Value
The Debtors and the Creditors' Committee have been engaged in a
joint and cooperative effort to market the Debtors so as to maximize the
Debtors' enterprise value (the "M&A Process"). The Debtors' investment bankers,
Peter J. Solomon Company Limited, and the Creditors' Committee's financial
advisors, Rothschild, Inc. and SBC Warburg, Inc., have widely solicited interest
in a potential business combination with Reorganized Discovery Zone and
separately met with several potential strategic partners, investors and
acquirors. Neither the Debtors nor the Creditors' Committee received a written
bid or offer which could serve as the basis of an alternative plan of
reorganization which would enhance creditors' recoveries. No serious discussions
with any strategic partners, investors and acquirors with respect to a sale of
the Debtors or an alternative plan of reorganization are currently taking place.
Accordingly, the Debtors determined that they were required, in the exercise of
their fiduciary duties, to file the Plan, and have concluded that it is in the
best interests of Creditors for the Debtors to exit from chapter 11 as quickly
as possible pursuant to the Plan.
14. Executive Transition
On December 10, 1996, the Debtors filed a Motion with the Bankruptcy
Court requesting authority to appoint Scott Bernstein as Chief Executive Officer
and President of Discovery Zone and to continue to honor their contractual
obligations to Donna Moore for her continued service as Chairperson of the Board
of Directors of Discovery Zone (the "Transition Motion"), pursuant to an
Executive Transition Agreement dated December 5, 1996 (the "Transition
Agreement"). The Debtors believe that Mr. Bernstein, who has been employed by
Birch as a consultant in connection with the Chapter 11 Case, will enable the
Debtors and the Reorganized Debtors to more effectively implement the business
plan developed by Birch with the assistance of the Debtors. See "BUSINESS PLAN
AND PROJECTIONS." The Debtors were authorized to appoint Mr. Bernstein pursuant
to a hearing held before the Bankruptcy Court on January 23, 1997. Ms. Moore
will continue to serve as Chairperson of the Discovery Zone Board of Directors
until the Effective Date, subject to applicable nonbankruptcy law.
In connection with the executive transition, Ms. Moore, the Debtors,
the Creditors' Committee and Birch are engaged in discussions regarding a
settlement pursuant to which Ms. Moore, in the event such discussions are
successful, will be paid $300,000 on the Effective Date in satisfaction of (i)
Claims Ms. Moore may have against the Debtors and (ii) in respect of consulting
services which Ms. Moore will provide to the Reorganized Debtors. If settlement
is reached, Ms. Moore's $300,000 Administrative Claim shall be
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treated as a Class 1 Administrative Claim under the Plan, and is defined under
the Plan as the "Moore Administrative Claim." Furthermore, in connection with
the executive transition, Ms. Moore continued to receive her salary and other
benefits under her employment contract through February 28, 1997. Beginning
March 1, 1997, Ms. Moore receives standard Director's fees and reimbursement of
expenses in respect of her services as Chairperson of the Discovery Zone Board
of Directors.
On February 26, 1997, the Debtors were authorized to appoint Robert
Rooney as Senior Vice President, Chief Financial and Administrative Officer and
Sharon Rothstein as Senior Vice President, Marketing and Entertainment.
15. Matters Relating to Discovery Zone Securities
Prior to and immediately following the Petition Date, Discovery
Zone's securities were listed on the Nasdaq Stock Market ("Nasdaq"). Effective
Mary 23, 1996, however, Discovery Zone's securities were delisted from Nasdaq
due to the failure of Discovery Zone to meet the net tangible assets and bid
price requirements of the NASD By-Laws.
Discovery Zone is not current in the submission of the periodic
reports on its business and finance which it is required to file with the
Securities and Exchange Commission pursuant to Section 13 of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Debtors estimate that Discovery
Zone will become current in its required Form 10-Q filings approximately three
months after the Effective Date. With respect to the Form 10-K which is required
to be filed by March 31, 1997, Discovery Zone expects to file a 12b-25 Notice of
Late Filing and will file its Form 10-K approximately three months after the
Effective Date. Discovery Zone's failure to file its periodic reports in a
timely manner may, among other things, hinder Discovery Zone's ability to raise
equity and debt financing in the U.S. public capital markets. The Debtors do not
believe, however, that this failure will preclude the Plan Proponents from
obtaining the Exit Financing once Discovery Zone becomes current in such
filings.
16. Material Litigation
The Debtors are not aware of any current or potential litigation or
administrative proceedings which could have a material effect on the
distributions to be made pursuant to the Plan. In addition, Section 11.1 of the
Plan provides that the Debtors shall be discharged from any debt and liability
that arose before confirmation of the Plan.
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17. Avoidance Actions
The Debtors have been primarily focused on stabilizing and improving
their business operations and have therefore not completed their investigation
of any possible avoidance actions pursuant to sections 544, 545, 547, 548, 549
or 553 of the Bankruptcy Code. Pending confirmation of the Plan, the Debtors
will continue their review and investigation of any such possible actions and
will commence any warranted avoidance actions within the applicable statutory
time periods.
D. Additional Matters Concerning the Case
1. Appointment of the Creditors' Committee
On April 11, 1996, the United States Trustee for the District of
Delaware appointed the Creditors' Committee, consisting of nine creditors. Since
that date, four members of the Creditors' Committee have resigned from the
Creditors' Committee because they sold the Claims they held against the Debtors
and a fifth member has also resigned. No other official committees have been
appointed in the Chapter 11 Case.
2. Retention of Professionals
a. Debtors' Professionals
At the commencement of the Chapter 11 Case, the Debtors retained
Shearman & Sterling and Young, Conaway, Stargatt & Taylor ("Young, Conaway") as
bankruptcy co-counsel, and Coopers & Lybrand, L.L.P. ("Coopers & Lybrand") as
accountants and financial advisors. The retention of each of Shearman &
Sterling, Young, Conaway and Coopers & Lybrand was authorized by order of the
Bankruptcy Court entered on the Petition Date.
During the pendency of the Chapter 11 Case, it has been necessary
for the Debtors to retain the following additional professionals:
Retail Consulting Services, Inc. Special real estate consultant nunc
pro tunc as of March 25, 1996 (by order entered June 7, 1996).
Berger & Davis P.A. Special real estate counsel nunc pro tunc as of
April 22, 1996 (by order entered August 7, 1996).
Bankruptcy Services, Inc. Claims reconciliation consultant nunc pro
tunc as of April 8, 1996 (by order entered July 25, 1996).
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Peter J. Solomon Company Limited. Investment bankers nunc pro tunc
as of August 1, 1996 (by order entered September 27, 1996).
DJM Asset Management, Inc. Lease asset consultant (by order entered
November 14, 1996).
Ernst & Young, LLP. Auditors nunc pro tunc (by order entered March
4, 1997).
Jefferies & Company, Inc. Exclusive Placement Agent in connection
with the Exit Financing (retention subject to Bankruptcy Court
approval).
In addition, several other counsel have been retained to prosecute
and defend, to the limited extent necessary during the pendency of the Chapter
11 Case, actions which were pending as of the Petition Date. By order dated May
30, 1996, the Bankruptcy Court authorized the Debtors to retain and compensate
these and various other professionals in the ordinary course of business.
b. Creditors' Committee's Professionals
Section 1103 of the Bankruptcy Code authorizes official committees
such as the Creditors' Committee to employ professionals. The following
professionals have been retained by order of the Bankruptcy Court to act on
behalf of the Creditors' Committee:
Weil, Gotshal & Manges LLP. Bankruptcy co-counsel to the Creditors'
Committee nunc pro tunc as of April 12, 1996 (by order entered May
10, 1996).
Bayard, Handleman & Murdoch. Bankruptcy co-counsel to the Creditors'
Committee nunc pro tunc as of April 12, 1996 (by order entered May
11, 1996).
Ernst & Young LLP. Accountants for the Creditors' Committee nunc pro
tunc as of April 18, 1996 (by order entered May 22, 1996).
Rothschild, Inc. and SBC Warburg, Inc. Financial advisors for the
Creditors' Committee nunc pro tunc as of August 1, 1996 (by order
entered September 27, 1996).
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3. Claims Process and Bar Dates
a. General
The Debtors filed their Schedules of Assets and Liabilities and
Statements of Financial Affairs on May 20, 1996 and amended those schedules on
October 1, 1996. As part of the chapter 11 reorganization process, the Debtors
have notified all known or potential Creditors of the commencement of the
Chapter 11 Case and the date by which proofs of Claim identifying all
prepetition Claims against any of the Debtors must be filed with the Bankruptcy
Court.
On August 16, 1996, the Bankruptcy Court established November 29,
1996 (the "Bar Date") as the deadline for filing proofs of Claim against the
Debtors. Commencing immediately after the Bar Date, the Debtors, with the
assistance of their professionals, undertook an analysis and reconciliation of
the Claims filed. The Debtors believe that the aggregate amount of Claims is
grossly overstated and that many of the Claims are frivolous and duplicative.
b. Administrative Expense Claims Bar Date
The Administrative Expense Claims Bar Date will be set by the
Bankruptcy Court and will be a date at least thirty days after the Effective
Date. All holders of Class 1 Administrative Expense Claims (other than
professional fees and expenses) must file their proofs of Claim in the Chapter
11 Case by the Administrative Expense Claims Bar Date.
c. Fee Auditor
By order of the Bankruptcy Court dated July 31, 1996, Stuart, Maue,
Mitchell & James, Ltd. and Stone, Leyton & Gershman, P.C., were collectively
appointed as fee auditor in the Chapter 11 Case. Each Person retained or
requesting compensation and reimbursement in the Chapter 11 Case pursuant to
section 327, 328, 330, 331, 503(b) or 1103 of the Bankruptcy Code will be
entitled to file an application for allowance of final compensation and
reimbursement of expenses in the Chapter 11 Case on or before the Administrative
Expense Claims Bar Date. Objections to each such application, other than
objections submitted by the fee auditor, must be filed on or before the sixtieth
day after the Effective Date.
4. Extension of Exclusivity and Solicitation Periods
Section 1121 of the Bankruptcy Code grants a debtor in possession
the exclusive right to file a plan of reorganization for 120 days (the
"Exclusive Period") after the filing of a voluntary petition for relief under
chapter 11. Unless a trustee is appointed, only
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the debtor may propose and file a plan during the Exclusive Period. However,
section 1121(d) of the Bankruptcy Code permits the bankruptcy court to extend or
reduce the Exclusive Period upon a showing of cause. After the Exclusive Period
has expired, any creditor, equity security holder or any other party in interest
may file a plan, so long as the debtor has not filed a plan within the Exclusive
Period. If a debtor does file a plan within the Exclusive Period, the Bankruptcy
Code provides the debtor an additional 60 days (the "Solicitation Period")
during which it may solicit acceptances of its plan, and during which time no
other entity may file a plan of reorganization. The Solicitation Period may also
be extended or reduced by the bankruptcy court upon a showing of cause.
The Debtors in this Chapter 11 Case sought and obtained an extension
of the Exclusive Period through and including November 14, 1996 and an extension
of the Solicitation Period through and including January 13, 1997. The Debtors
filed a Joint Plan of Reorganization on November 14, 1996 and Birch was the
co-proponent of that plan. The Debtors, pursuant to an order of the Bankruptcy
Court dated November 14, 1996, did not file an accompanying disclosure statement
with that Joint Plan of Reorganization. The Bankruptcy Court extended the period
within which the Debtors must file a disclosure statement to November 27, 1996.
5. Bankruptcy Court First Day Orders
On the first day of the Chapter 11 Case, the Bankruptcy Court
entered a number of orders granting the Debtors various forms of relief. Among
the relief obtained was an order granting the Debtors authority to maintain
their existing Cash management system, to keep their existing bank accounts in
place, and to continue using their existing business forms. In addition, the
Debtors obtained authority to invest funds generated by the daily operations of
their business pursuant to certain approved investment guidelines. The Debtors
also obtained authority to pay certain prepetition employee obligations,
including employee wages, severance and vacation pay, and to continue certain
prepetition customer-related practices. Finally, the Debtors obtained an order
enjoining utility companies providing services to the Debtors from altering,
refusing or discontinuing service. The Bankruptcy Court orders obtained on the
first day of the Chapter 11 Case enabled the Debtors to continue in their
businesses with a minimum of disruption and loss of productivity.
IV. BUSINESS PLAN, PROJECTIONS AND REORGANIZATION VALUES
A. Business Plan
The Debtors and Birch have developed a business plan for the
operation of Reorganized Discovery Zone (the "Business Plan"). The Business Plan
provides for improvements in FunCenter operations, adding theme-based
entertainment, revamping each
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FunCenter's redemption and arcade game area, and improving the quality and
pricing of food operations through the introduction of branded foods. In
addition, the Business Plan provides for improvements in birthday party
operations and developing new weekday toddler and afterschool programs.
B. Projections
Financial Projections which are based on the Business Plan are
attached as Exhibit 4 to the Disclosure Statement.
C. Reorganization Values
The Debtors have been advised by Peter J. Solomon Company Limited
("PJSC") with respect to the value of Reorganized Discovery Zone. The Plan
provides that the Debtors and the Creditors' Committee will attempt to agree as
to the value of Reorganized Discovery Zone. In the event the Debtors and the
Creditors' Committee are unable to consensually determine the value of
Reorganized Discovery Zone, the Bankruptcy Court shall determine such value.
The range of reorganization values (which includes the value of
Discovery Zone's business and the value of certain other assets) of Reorganized
Discovery Zone was assumed for purposes of the Plan by Discovery Zone, based on
advice from PJSC, to be approximately $110,000,000 to $130,000,000 as of an
assumed Effective Date of May 1, 1997. Such assumed reorganization value
represents the range of values prepared by PJSC during February and March 1997
in respect of the business and assets of Reorganized Discovery Zone. Based upon
the assumed reorganization value of Reorganized Discovery Zone and an assumed
net debt (including the Exit Financing and capital lease obligations less
projected Cash balances assuming the creation of Class 1A) of approximately
$53,800,000, Discovery Zone has employed an assumed range of distributable
equity values for Reorganized Discovery Zone of approximately $47,800,000 to
$64,800,000 or approximately $11.94 per share to $16.19 per share of New Common
Stock based upon a distribution of approximately 4,000,000 shares of New Common
Stock and Ten Year Reorganized DZ Warrants to purchase approximately 10% of the
shares of New Common Stock estimated by Reorganized Discovery Zone on the
Effective Date to be issued to the holders of Claims under the Plan and assuming
dilution from the exercise of any warrants associated with the Exit Financing.
See "DESCRIPTION OF PLAN OF REORGANIZATION--EXIT FINANCING."
These valuations are based on a number of assumptions, including a
successful reorganization of the Debtors' business and finances in a timely
manner, the achievement of the forecasts reflected in the financial projections,
the amount of available financing at the Effective Date, the availability of
certain tax attributes, the continuation of current market
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conditions through the Effective Date and the Plan becoming effective in
accordance with its terms. These valuations also assume that the Exit Financing
contemplated by the Plan will be successfully completed and will require the
issuance of warrants to purchase New Common Stock calculated at the mid-point of
the range of expected dilution in connection with such financing. These
valuations do not reflect the favorable tax effects, if any, associated with the
reorganization of Discovery Zone. Each of these assumptions is set forth in the
Financial Projections attached as Exhibit 4 to this Disclosure Statement.
Estimates of value do not purport to be appraisals or necessarily
reflect the values which may be realized if assets are sold. The estimates of
value represent hypothetical reorganization values of Reorganized Discovery Zone
as the continuing owner and operator of its business and assets. Such estimates
reflect computations of the reorganization value of Reorganized Discovery Zone
through the application of various valuation techniques and do not purport to
reflect or constitute appraisals, liquidation values or estimates of the actual
market value that may be realized through the sale of any securities to be
issued pursuant to the Plan, each of which may be significantly different than
the amounts set forth herein. The value of an operating business such as
Discovery Zone is subject to uncertainties and contingencies which are difficult
to predict and will fluctuate with changes in factors affecting the financial
conditions and prospects of such a business. AS A RESULT, THE ESTIMATE OF THE
RANGE OF REORGANIZATION VALUES SET FORTH HEREIN IS NOT NECESSARILY INDICATIVE OF
ACTUAL OUTCOMES, WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN THOSE
SET FORTH THEREIN. BECAUSE SUCH ESTIMATE IS INHERENTLY SUBJECT TO UNCERTAINTIES,
NEITHER DISCOVERY ZONE, NOR PJSC NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR
ITS ACCURACY. IN ADDITION, THE VALUATION OF NEWLY ISSUED SECURITIES SUCH AS THE
NEW COMMON STOCK IS SUBJECT TO ADDITIONAL UNCERTAINTIES AND CONTINGENCIES, ALL
OF WHICH ARE DIFFICULT TO PREDICT. Actual market prices of such securities at
issuance will depend upon, among other things, prevailing interest rates,
conditions in the financial markets, the anticipated initial securities holdings
of prepetition creditors, some of which may prefer to liquidate their
investments rather than hold them on a long-term basis, and other factors which
generally influence the prices of securities. It should be noted that there is
presently no trading market for the New Common Stock and there can be no
assurance that such a trading market will develop.
PJSC has undertaken its valuation analysis for purposes of
determining the value available to distribute to creditors pursuant to the Plan
and analyzing relative recoveries to creditors thereunder. The analysis is based
on the projections as well as current market conditions and statistics. The
values are as of the assumed Effective Date, May 1, 1997, and were prepared by
PJSC during February and March 1997. PJSC used the discounted Cash flow and
comparable company multiple methodologies to value Discovery Zone's business.
These valuation techniques reflect both the market's current view of Discovery
Zone's value
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as well as a longer-term focus on the intrinsic value of the Cash flow
projections in the Business Plan.
In preparing a range of the estimated reorganization value of
Reorganized Discovery Zone, PJSC: (i) reviewed certain historical financial
information of Discovery Zone for recent years and interim periods; (ii)
reviewed certain internal financial and operating data of Discovery Zone
including financial projections provided by the Plan Proponents relating to its
business and prospects; (iii) met with certain members of senior management of
Discovery Zone to discuss operations and future prospects; (iv) reviewed
publicly available financial data and considered the market values of public
companies deemed generally comparable to the operating business of Discovery
Zone; (v) considered certain economic and industry information relevant to the
operating business, and conducted such other analyses as PJSC deemed
appropriate; and (vi) solicited interest in a potential business combination
with Reorganized Discovery Zone with potential strategic partners, investors and
acquirors. Although PJSC conducted a review and analysis of Discovery Zone's
business, operating assets and liabilities and business plans, PJSC assumed and
relied on the accuracy and completeness of all (i) financial and other
information furnished to it by the Plan Proponents and by other firms retained
by the Plan Proponents, and (ii) publicly available information. In addition,
PJSC did not independently verify the Plan Proponents' projections in connection
with such valuation, and no independent evaluations or appraisals of the
Debtor's assets were sought or were obtained in connection therewith.
The Plan contemplates the distribution of Ten Year Reorganized DZ
Warrants to holders of Allowed Claims in certain Classes. The exercise price of
each Ten Year Reorganized DZ Warrant issued under the Plan is based on the
estimated reorganization equity value per share and exercise of the Ten Year
Reorganized DZ Warrants requires the payment to Reorganized Discovery Zone of
Cash in the amount of the exercise price. While warrants may be valued using
complex mathematical computations, these computations are based upon highly
subjective assumptions, including, among others, the estimated trading prices of
the equity securities into which the warrants may be exercised and the projected
volatility of price movements of those shares. Moreover, actual trading values
for warrants frequently differ materially from those values derived from
mathematical computations. Accordingly, no value has been ascribed to the
warrants under the Plan due to the significant uncertainty regarding (i) the
projected trading value of the New Common Stock, (ii) the projected volatility
of the New Common Stock due to the lack of an established market for the New
Common Stock, and (iii) the potential dilutive value of the Ten Year Reorganized
DZ Warrants.
THE VALUATIONS REPRESENT ESTIMATED REORGANIZATION VALUES AND DO NOT
NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE
MARKETS. THE EQUITY VALUE ASCRIBED IN THE ANALYSIS DOES NOT PURPORT TO BE AN
ESTIMATE OF THE
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POST-REORGANIZATION MARKET TRADING VALUE. SUCH TRADING VALUE, IF ANY, MAY BE
MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY VALUE RANGES ASSOCIATED WITH
THE VALUATION ANALYSIS.
V. DESCRIPTION OF PLAN OF REORGANIZATION
A. Requirements for a Plan of Reorganization
The Debtors believe that (i) through the Plan, Creditors will obtain
a substantially greater recovery from the estates of the Debtors than the
recovery which would be available if the assets of the Debtors were liquidated
under chapter 7 of the Bankruptcy Code and (ii) the Plan will afford the Debtors
the opportunity and ability to continue in business as a viable going concern
and preserve ongoing employment for the Debtors' employees.
After a plan of reorganization has been filed, the holders of claims
against a debtor are permitted to vote to accept or reject the plan. Before
soliciting acceptances of the proposed plan, however, section 1125 of the
Bankruptcy Code requires the debtor to prepare a disclosure statement containing
adequate information of a kind, and in sufficient detail, to enable a
hypothetical reasonable investor to make an informed judgment about the plan.
This Disclosure Statement is presented to holders of Claims against the Debtors
to satisfy the requirements of section 1125 of the Bankruptcy Code.
Chapter 11 does not require that each holder of a claim against or
interest in the debtor vote in favor of a plan of reorganization in order for
the bankruptcy court to confirm the plan. At a minimum, however, if a class of
claims is impaired under the plan, the plan must be accepted by a majority in
number and two-thirds in amount of those claims actually voting in at least one
class of claims impaired under the plan, with such class acceptance determined
without including any acceptances of the plan by insiders of the debtor. See
"VOTING PROCEDURES AND REQUIREMENTS--Vote Required for Class Acceptance."
Even if all classes of claims and equity interests accept a plan of
reorganization, in order to be confirmed the plan must still satisfy the
requirements set forth in section 1129 of the Bankruptcy Code. Among other
things, section 1129 requires that a plan of reorganization be in the "best
interests" of creditors and shareholders and that the plan of reorganization be
"feasible." See "DESCRIPTION OF PLAN OF REORGANIZATION--Plan Meets Requirements
for Confirmation."
A proponent of a plan of reorganization also must meet all
applicable requirements of section 1129(a) of the Bankruptcy Code (except
section 1129(a)(8) if the
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proponent proposes to seek confirmation of the plan under the "cramdown"
provisions of section 1129(b) of the Bankruptcy Code). Section 1129(a) requires,
among other things, that the plan comply with applicable provisions of Title 11
of the United States Code and other applicable law, that the plan be proposed in
good faith, and that, if a class of claims is impaired under the plan, at least
one impaired class of creditors has voted to accept the plan. See "ACCEPTANCE
AND CONFIRMATION OF THE PLAN--Requirements for Confirmation." A court may
confirm a plan of reorganization, even though fewer than all the classes of
impaired Claims and interests accept such plan, on request of the proponent of
the plan pursuant to the provisions of section 1129(b) of the Bankruptcy Code.
See "ACCEPTANCE AND CONFIRMATION OF THE PLAN--Cramdown."
B. Distributable Property
Under the Plan, on the Effective Date, the Debtors will distribute
Cash and, as described below, Reorganized DZ Units to holders of certain Claims
which arose prior to the Petition Date against the Debtors. How much holders of
Claims will receive under the Plan will depend on how such Claims have been
classified under the Plan. See "OVERVIEW OF THE PLAN" for a tabular summary of
the distributions to be made under the Plan. Set forth below is a summary of the
Classes of Claims and Interests provided for under the Plan and the treatment of
Claims and Interests encompassed by such Classes. See "DESCRIPTION OF PLAN OF
REORGANIZATION--Classification and Treatment of Claims and Interests." The
Debtors have estimated what they anticipate will be the aggregate amount of
Allowed Claims in each Class described below.
1. General Description of Reorganized DZ Units
As of the Effective Date, Reorganized Discovery Zone will be
authorized to issue 10,000,000 shares of New Common Stock, par value $.01 per
share. On or about the Effective Date, Reorganized Discovery Zone will issue
approximately 444,400 Reorganized DZ Units. Each Reorganized DZ Unit will
consist of nine shares of New Common Stock
and one Ten Year Reorganized DZ Warrant.
All holders of New Common Stock will be entitled to receive
dividends from funds legally available for the payment of dividends when and as
declared by the Board of Directors of Reorganized Discovery Zone. Reorganized
Discovery Zone may enter into loan or other agreements that will contractually
restrict the Company's ability to pay dividends. There can be no assurance that
dividends will be declared on the New Common Stock in the foreseeable future. It
is likely that the post-confirmation financing arrangements of Reorganized
Discovery Zone will significantly limit the payment of dividends for the
foreseeable future.
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With respect to voting rights, each share of New Common Stock will
entitle the holder thereof to one vote, in person or by proxy, for each share of
stock owned. The holders of the New Common Stock will have the right to elect
the board of directors of Reorganized Discovery Zone, subject to the right of
the Creditors' Committee to appoint one director to the Board of Directors of
Reorganized Discovery Zone for a term of three years. See "DESCRIPTION OF PLAN
OF REORGANIZATION--Certain Other Provisions of the Plan--Corporate Governance of
Reorganized Discovery Zone." Although each Reorganized DZ Unit includes a Ten
Year Reorganized DZ Warrant which gives the holder the right to purchase a share
of New Common Stock, the New Common Stock itself does not carry with it any
preemptive or preferential rights to purchase or subscribe to any additional
shares of capital stock issued in the future by Reorganized Discovery Zone,
whether of a presently existing class of stock or one that may later be
authorized by Reorganized Discovery Zone. The Certificate of Incorporation of
Reorganized Discovery Zone provides that preemptive rights, and restrictions
with respect to the transfers of shares of capital stock, may be contained in
the By-laws of Reorganized Discovery Zone or in any agreement among some or all
of its stockholders. It is anticipated that Reorganized Discovery Zone will
grant preemptive rights and registration rights to certain stockholders and
their affiliates following the Effective Date.
The Ten Year Reorganized DZ Warrants will be issued pursuant to the
Warrant Agreement, a form of which is attached as Exhibit E to the Plan. The
Warrant Agreement and the accompanying form of Ten Year Reorganized DZ Warrant
set forth, among other things, the terms and conditions respecting the exercise
of the Ten Year Reorganized DZ Warrants including the exercise price of such
warrants (the exercise price shall be calculated by taking the opening book
value of Reorganized Discovery Zone on the Effective Date and dividing by the
number of shares outstanding issued under this Plan to Creditors on the
Effective Date), the expiration date of such warrants (May 1, 2007) and
adjustments to the exercise price and number of shares of New Common Stock
purchasable upon the exercise of the warrants under certain circumstances.
2. General Description of Cash Distributions to Classes 7, 8 and
10.
To the extent the Debtors obtain Exit Financing in excess of the sum
of $30,000,000 (or such other amount as the Plan Proponents determine, in their
sole discretion, is sufficient to fund working capital, capital expenditures and
other operating needs) plus the amount of Cash required to make distributions to
Classes 1, 1A and 3, the Debtors will make Cash Distributions of all such excess
funds up to twenty percent (20%) of the aggregate Allowed Claims in Classes 7, 8
and 10 held by Creditors that have elected to receive Cash Distributions (such
Creditors being "Electing Holders") and make Cash Deposits in respect of
Disputed Claims the holders of which are estimated to become Electing Holders of
Allowed Claims. If the Debtors cannot make the Complete Cash Distribution and
Deposit, the Debtors will make Cash Distributions to all Electing Holders
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Pro Rata (both among Classes and within each relevant Class) based upon the
amount of Allowed Claims held by such Electing Holders and make Cash Deposits
Pro Rata (among Disputed Claims Reserves) based upon the amount of Disputed
Claims the holders of which are estimated to become Electing Holders of Allowed
Claims. As described more fully in "DESCRIPTION OF PLAN OF
REORGANIZATION--Classification and Treatment of Claims and Interests," Electing
Holders will receive Reorganized DZ Units to the extent the Cash Distributions
do not satisfy their Claims.
C. Classification and Treatment of Claims and Interests
Pursuant to section 1123(a)(1) of the Bankruptcy Code, a plan of
reorganization must designate classes of claims and classes of interests. The
Plan classifies all Claims and Interests into 16 Classes. The classification of
Claims and Interests is made for the purposes of voting on the Plan and making
distributions thereunder, and for ease of administration of the Plan. A Claim or
Interest is classified in a particular Class only to the extent that the Claim
or Interest qualifies within the description of that Class and is classified in
a different Class to the extent that the Claim or Interest qualifies within the
description of such different Class. A Claim or Interest is entitled to vote in
a particular Class and to receive distributions in such Class only to the extent
that such Claim or Interest is an Allowed Claim or Allowed Interest in that
Class and has not been paid prior to the Effective Date.
Under the Plan, a Claim or Interest is an Allowed Claim against or
an Allowed Interest in any of the Debtors to the extent that (a) proof of the
Claim or Interest was (i) timely filed; or (ii) deemed filed under applicable
law or by reason of an order of the Bankruptcy Court; and (b) (i) no Debtor, or
any other party in interest entitled to do so, has filed an objection within a
time fixed by the Bankruptcy Court; or (ii) the Claim or Interest is allowed by
a Final Order; and (c) with respect to an application for compensation or
reimbursement of an Administrative Expense Claim, the amount of such
Administrative Expense Claim which has been approved by the Bankruptcy Court.
Set forth below is a description of the Classes of Claims and
Interests under the Plan and their respective treatment. THE FOLLOWING
DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN ATTACHED AS
EXHIBIT 1 HERETO.
1. Class 1 - Administrative Expense Claims
Class 1 will consist of all Claims against the Debtors or portion of
a Claim against the Debtors for payment of an administrative expense of a kind
specified in section 503(b) of the Bankruptcy Code, the Birch Administrative
Claim and the Moore Administrative Claim. Administrative expenses include the
actual and necessary costs and
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expenses of the Debtors incurred after the Petition Date. Such expenses may
include expenses incurred in the operation of the Debtors' business after the
commencement of the Chapter 11 Case and the actual and necessary fees and
expenses of professionals retained by the Debtors and the Creditors' Committee
during the Chapter 11 Case. Class 1 Claims are not impaired under the Plan.
The Birch Administrative Claim is the Claim held by Birch for
reimbursement of fees and expenses which Birch has incurred in respect of the
Substantial Contribution which Birch has made to these cases. The Birch
Administrative Claim includes reimbursement for (i) salary and benefits paid or
provided to Mr. Bernstein by Birch prior to December 5, 1996; (ii) a $200,000
bonus payment made by Birch to Mr. Bernstein; and (iii) Birch's attorney's fees
and expenses.
The Debtors estimate that there will be a maximum of approximately
$40,000,000 in Allowed Administrative Expense Claims paid under the Plan.
The holders of Allowed Class 1 Claims will be paid in full in Cash
on the Effective Date or, if any Class 1 Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes Allowed, or, if
by its terms or by agreement with the holder of such Allowed Class 1 Claim any
such Allowed Class 1 Claim is payable on a later date or dates, such Allowed
Class 1 Claim will be paid in full in Cash on such later date or dates.
The holders of Administrative Expense Claims are deemed to accept
the Plan and are not entitled to vote to accept or reject the Plan.
2. Class 1A - Small Claims
Class 1A has been created. Class 1A consists of all Allowed
Unsecured Claims, or Claims in an amount greater than $1,000 and less than or
equal to $5,000 which the holder elects to reduce to $1,000 and which would
otherwise be classified in Class 6, 7 or 10.
The Debtors estimate that there will be a maximum of approximately
$1,100,000 in Allowed Class 1A Claims paid under the Plan.
Each holder of an Allowed Class 1A Claim shall receive a single Cash
payment equal to seventy percent (70%) of its Class 1A Claim on the Effective
Date or, if such Claim becomes Allowed after the Effective Date, as soon as
practicable after such Claim becomes Allowed. Any holder of a Class 6, 7 or 10
Claim that would not otherwise have been classified in Class 1A but for the
election by such holder to reduce its Claim to $1,000 will not receive any other
distribution under this Plan on account of such Claim.
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Pursuant to Section 3.2 of the Plan, Class 1A has been created.
The holders of Allowed Class 1A Small Claims are entitled to vote to
accept or reject the Plan.
3. Class 2 - Tax Claims
Class 2 will consist of all Allowed Tax Claims. Class 2 Claims are
impaired under the Plan. A Tax Claim is that portion of any Claim for an amount
entitled to priority under section 507(a)(8) of the Bankruptcy Code, other than
a Claim for a penalty.
The Debtors estimate that there will be a maximum of approximately
$5,000,000 in Allowed Tax Claims paid under the Plan.
Unless any holder of a Class 2 Claim shall agree to less favorable
treatment, each holder of an Allowed Class 2 Claim shall be paid in full in Cash
over a period not exceeding six years from the date of assessment of such Claim.
Payments will be made in equal annual installments of principal, plus simple
interest accruing from the Effective Date at 10% on the unpaid portion of each
Class 2 Claim (or upon such other terms determined by the Bankruptcy Court to
provide the holders of Class 2 Claims with deferred Cash payments having a
value, as of the Effective Date, equal to such Claims). Unless otherwise agreed
by the holder of such Claim and the Plan Proponents or Reorganized Discovery
Zone, the first payment will be payable one year after the Effective Date or, if
the Class 2 Claim is not Allowed within one year after the Effective Date, as
soon as practicable after such Claim becomes Allowed. Interest will be due and
payable on the date on which each annual installment is due. Reorganized
Discovery Zone may prepay all or any portion of any Class 2 Claim without
penalty.
The holders of Allowed Tax Claims are entitled to vote to accept or
reject the Plan.
4. Class 3 - Priority Claims
Class 3 will consist of all Allowed Claims which are entitled to
priority under sections 507(a)(2)-(a)(7) and (a)(9) of the Bankruptcy Code.
Class 3 Claims are impaired under the Plan.
The Debtors estimate that there will be no Allowed Priority Claims
paid under the Plan.
The holders of Allowed Class 3 Claims will be paid in Cash in full
on the Effective Date or, if any such Claim becomes Allowed after the Effective
Date, as soon as
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practicable after such Claim becomes Allowed or, if by its terms or by agreement
with the holder of such Allowed Class 3 Claim any such Allowed Class 3 Claim is
payable on a later date or dates, such Allowed Class 3 Claim will be paid in
Cash in full on such later date or dates.
The holders of Allowed Priority Claims are entitled to vote to
accept or reject the Plan.
5. Class 4A - McDonald's Secured Claim
Class 4A will consist of the Allowed Secured Claim of McDonald's
other than the Class 4B McDonald's Secured Rent Deferral Claims. The Class 4A
Claim is impaired under the Plan.
The Debtors estimate that the Allowed McDonald's Secured Claim paid
under the Plan will be approximately $4,666,000. The Debtors and McDonald's
Corporation have not reached final agreement with respect to the amount of the
Class 4A Claim.
McDonald's shall retain its liens against (i) the fourteen (14)
parcels of real property which are owned by Leaps & Bounds and as to which
McDonald's holds valid and enforceable first priority mortgages and (ii) any
proceeds obtained from the sale of a parcel of undeveloped real property in
Columbia, Maryland and the sale of any of the parcels described in (i) which
have not been applied, as of the Effective Date, against Claims held by
McDonald's pursuant to the McDonald's Stipulation (the "L&B Owned Properties"),
to the extent of the amount of its Allowed Class 4A Claim and its Allowed Class
4B Claim. McDonald's shall receive deferred Cash payments equal to the value of
the Class 4A Claim in equal annual payments over six (6) years beginning on the
first anniversary of the Effective Date. Interest will be paid from the
Effective Date on the unpaid balance at the Prime Rate (or upon such other terms
determined by the Bankruptcy Court to provide the holder of Class 4A Claims with
deferred Cash payments having a value, as of the Effective Date, equal to such
Claims). Reorganized Discovery Zone may prepay such Claim in full or in part at
any time without penalty. In the event that Reorganized Discovery Zone sells any
of the L&B Owned Properties after the Effective Date, those proceeds will be
immediately applied, to the extent available, to satisfy McDonald's Class 4A
Claim.
Any debt issued in respect of McDonald's Allowed Class 4A Claims
will contain cross-defaults to any other debt issued, or credit obtained, by any
of the Debtors or successor entities, the aggregate principal amount of which is
equal to or greater than $2,500,000. Reorganized Discovery Zone will be in
default of any debt issued in respect of McDonald's Allowed Class 4A Claims in
the event McDonald's terminates any two assumed L&B Subleases as a result of
Reorganized Discovery Zone's breach of those subleases.
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In the event that the terms of the Plan conflict with the terms and
conditions of the McDonald's Stipulation, the McDonald's Stipulation, which is
attached as Exhibit G to the Plan and is incorporated therein by reference as if
set forth in its entirety, will control. The remaining terms and conditions with
respect to the treatment of Class 4A Claims remain the subject of negotiations
between the Plan Proponents and McDonald's Corporation. The final resolution of
such terms and conditions will not materially effect the treatment of any other
Creditors under the Plan.
The holder of the Allowed McDonald's Secured Claim is entitled to
vote to accept or reject the Plan.
6. Class 4B - McDonald's Secured Rent Deferral Claims
Class 4B will consist of Allowed Secured Claims held by McDonald's
as of the Effective Date in respect of rent deferrals granted to the Debtors
pursuant to the McDonald's Stipulation in respect of obligations under certain
of the L&B Subleases. Class 4B Claims are impaired under the Plan.
The Debtors estimate that there will be approximately $133,000 in
Allowed Class 4B Claims treated under the Plan.
McDonald's will retain its liens against the L&B Owned Properties to
the extent of the amount of its Allowed Class 4B Claim and its Allowed Class 4A
Claim. On the Effective Date, McDonald's will receive a secured note (each, a
"Rent Deferral Secured Note") which corresponds to each L&B Sublease in respect
of which McDonald's has granted the Debtors a rent deferral under the McDonald's
Stipulation. On the Effective Date, the principal amount of each Rent Deferral
Secured Note will equal the aggregate amount of rent deferrals which have
accrued up to the Effective Date pursuant to the McDonald's Stipulation under
the applicable L&B Sublease. After the Effective Date, the principal amount of
each Rent Deferral Secured Note will increase by an amount equal to the rent
deferral for each month between the Effective Date and the termination of the
applicable L&B Sublease. Each Rent Deferral Secured Note will be due and payable
on the date on which the current term of the applicable L&B Sublease expires,
without giving effect to any unexercised right to extend or option to renew such
sublease.
Each Rent Deferral Secured Note will bear interest at a rate per
annum which is the greater of (i) the highest effective interest cost on a yield
to maturity basis in respect of any secured non-subordinated debt of Reorganized
Discovery Zone issued under the Plan which has a maturity comparable to that of
the Rent Deferral Secured Notes or (ii) a rate which McDonald's and the Plan
Proponents agree would ensure that the Rent Deferral Secured Notes trade at par.
In the event that the parties are unable to agree as to the interest rate
described under (ii) above, an independent investment banker selected by the
parties will
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provide an opinion as to such rate. Interest will be payable upon maturity or if
the "maturity" is accelerated. On each anniversary of the Effective Date, all
accrued interest not previously paid or capitalized will be capitalized and
added to the principal amount of the Rent Deferral Secured Note.
The Rent Deferral Secured Notes will contain cross-defaults to any
other debt issued, or credit obtained, by any of the Debtors or any successor
entities, the aggregate principal amount of which is equal to or greater than
$2,500,000. Reorganized Discovery Zone will be in default of the Rent Deferral
Secured Notes in the event that McDonald's terminates any two assumed L&B
Subleases as result of Reorganized Discovery Zone's breach of those subleases.
In addition, the Rent Deferral Secured Notes will contain terms, conditions and
covenants of the type commonly contained in notes issued pursuant to a plan of
reorganization.
In the event that the terms of the Plan conflict with the terms and
conditions of the McDonald's Stipulation, the McDonald's Stipulation, which is
attached as Exhibit G to the Plan and is incorporated therein by reference as if
set forth in its entirety, will control. The remaining terms and conditions with
respect to the treatment of Class 4B Claims remain the subject of negotiations
between the Plan Proponents and McDonald's Corporation. The final resolution of
such terms and conditions will not materially effect the treatment of any other
Creditors under the Plan.
The holders of the Allowed McDonald's Secured Rent Deferral Claims
are entitled to vote to accept or reject the Plan.
7. Class 5 - Miscellaneous Secured Claims
Class 5 will consist of all Allowed Secured Claims that are not
otherwise classified in Class 4A or 4B. Class 5 Claims, other than those treated
under Section 4.7(b)(ii) of the Plan, described below in subsection (ii), are
impaired under the Plan. Each Allowed Class 5 Claim shall be in its own subclass
and each such Claim shall be treated as being in a separate Class for voting
purposes.
The Debtors estimate that there will be approximately $150,000 in
Allowed Miscellaneous Secured Claims paid under the Plan.
Each holder of an Allowed Class 5 Claim shall receive one of four
forms of treatment under the Plan, to be selected by the Plan Proponents at the
time acceptances of the Plan are solicited. The Debtors will file a notice
indicating the Plan Proponents' selection and serve it on each holder of an
Allowed Class 5 Claim contemporaneously with the solicitation of acceptances of
the Plan. The Debtors shall file and serve a notice of selection on each holder
of a Disputed Class 5 Claim, even though such holder, unless otherwise
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ordered by the Bankruptcy Court, does not have the ability to vote to accept or
reject the Plan. In the event that a holder of an Allowed Class 5 Claim secured
by property of the Debtors holds a Disputed Class 5 Claim which is also secured
by such property, the election which the Debtors make with respect to the
Allowed Class 5 Claim shall also apply to the Disputed Class 5 Claim in the
event such Disputed Claim subsequently becomes an Allowed Class 5 Claim. If no
form of treatment is so selected, the first alternative described below shall be
applicable. The alternative treatments for any Allowed Class 5 Claims are:
(i) Deferred Payments. Unless a holder of an Allowed Class 5
Claim and the Debtors, prior to the Effective Date, or the Reorganized
Debtors, after the Effective Date, agree to less favorable treatment, a
holder of an Allowed Class 5 Claim shall retain its lien securing its
Allowed Class 5 Claim to the extent of the Allowed amount of its Secured
Claim. The holder of such Claim shall receive deferred Cash payments equal
to the value, as of the Effective Date, of such holder's interest in the
Debtor's interest in the property securing such holder's Allowed Class 4A
Claim. The deferred Cash payments shall be made in equal annual payments
over six (6) years beginning on the first anniversary of the Effective
Date or, if any such Claim becomes Allowed after the Effective Date, as
soon as practicable after such Claim becomes Allowed but not before the
first anniversary of the Effective Date. Interest will be paid from the
Effective Date on the unpaid balance at the Prime Rate (or upon such other
terms determined by the Bankruptcy Court to provide the holders of Class 5
Claims with deferred Cash payments having a value, as of the Effective
Date, equal to such Claims). Reorganized Discovery Zone may prepay such
Claims in full or in part at any time without penalty.
(ii) Maintain Existing Rights. Unless a holder of an Allowed
Class 5 Claim and the Debtors, prior to the Effective Date, or the
Reorganized Debtors, after the Effective Date, agree to less favorable
treatment, a holder of an Allowed Class 5 Claim shall retain its lien
securing its Allowed Class 5 Claim to the extent of the Allowed amount of
its Secured Claim. Additionally: (A) any default other than a default of
the kind specified in section 365(b)(2) of the Bankruptcy Code shall be
cured; (B) the maturity of the Claim shall be reinstated as the maturity
existed before any default; (C) the holder of the Claim shall be
compensated for any damages which occurred as the result of any reasonable
reliance by the holder on any provision that entitled the holder to
accelerate the maturing of the Claim; and (D) the other legal, equitable
and contractual rights to which the Claim entitles the holder shall not
otherwise be altered.
(iii) Present Full Payment. Unless an Allowed Class 5 Claim
holder and the Debtors, prior to the Effective Date, or the Reorganized
Debtors, after the Effective Date, agree to less favorable treatment, a
holder of the Allowed Class 5 Claim shall receive Cash in the amount of
its Allowed Class 5 Claim on the Effective
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Date or, if such Claim becomes Allowed after the Effective Date, as soon
as practicable after such Claim becomes Allowed.
(iv) Abandonment of Collateral. Unless an Allowed Class 5
Claim holder and the Debtors, prior to the Effective Date, or the
Reorganized Debtors, after the Effective Date, agree to less favorable
treatment, a holder of a Class 5 Claim shall receive back its collateral
in full satisfaction of its Class 5 Claim no later than ten (10) Business
Days after the Effective Date or, if such Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes Allowed.
Pending the return of the collateral, such holder shall retain its liens
securing its Allowed Class 5 Claim to the extent of the Allowed amount of
its Secured Claim. Each Allowed Class 5 Claim shall be in its own subclass
and each such Claim shall be treated as being in a separate class for
voting purposes.
8. Class 6 - Credit Agreement Claims
Class 6 will consist of all Allowed Claims arising under or related
to the Credit Agreement dated as of December 22, 1994, as amended, by and among
Discovery Zone, Inc., the lenders named therein and NationsBank, N.A., as
co-agent, and Bank of Montreal, as co-agent. Class 6 Claims are impaired under
the Plan.
The Debtors estimate that there will be approximately $101,900,000
in Allowed Credit Agreement Claims satisfied under the Plan. The Debtors
understand that all Allowed Class 6 Claims are held by Birch and certain
investors associated with Birch and that these holders of Class 6 Claims support
the Plan.
Each holder of an Allowed Class 6 Claim will receive its Pro Rata
portion of Reorganized DZ Units distributed to holders of Class 6 Claims under
the Plan on the Effective Date or, if such Claim becomes Allowed after the
Effective Date, as soon as such Claim becomes Allowed. All Ten Year Warrants
issued in connection with Reorganized DZ Units to Class 6 shall be distributed
to B1 Investments, LLC, unless otherwise elected by the holder of an Allowed
Class 6 Claim on its ballot accepting or rejecting this Plan. See "DESCRIPTION
OF PLAN OF REORGANIZATION--Classification and Treatment of Claims and
Interests--Distribution of Reorganized DZ Units."
Holders of Allowed Class 6 Claims will receive New Common Stock and
Ten Year Reorganized DZ Warrants which will have an aggregate value of
approximately 43% of their Allowed Class 6 Claims satisfied through such
distribution of Reorganized DZ Units, assuming no Cash Distributions are made
available and Class 9 receives a distribution under the Plan.
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The holders of Allowed Credit Agreement Claims are entitled to vote
to accept or reject the Plan.
9. Class 7 - General Unsecured Claims
Class 7 will consist of all Allowed Unsecured Claims which arose
prior to the Petition Date and that are in respect of goods or services provided
to any of the Debtors or under leases of nonresidential real property to which
any Debtor is a party. Class 7 includes all Deficiency Claims and Claims arising
as a result of the rejection of executory contracts and unexpired leases
pursuant to section 365 of the Bankruptcy Code. Class 7 Claims are impaired
under the Plan.
The Debtors estimate that there will be a maximum of approximately
$34,750,000 in Allowed General Unsecured Claims satisfied under the Plan.
Each holder of an Allowed Class 7 Claim may elect to receive either
(i) its Pro Rata portion of Reorganized DZ Units distributed to holders of Class
7 Claims under the Plan on, subject to Section 5.5(f) of the Plan, the Effective
Date or, if such Claim becomes Allowed after the Effective Date, as soon as such
Claim becomes Allowed or (ii) a Cash distribution (the "Class 7 Cash
Distribution").
The Debtors are seeking to raise sufficient funds in connection with
the Exit Financing to make the Class 7 Cash Distribution available will respect
to the Allowed amount of all Class 7 Claims, the holders of which have elected
to receive Cash under the Plan. The Plan Proponents will determine, based on the
amount of Cash raised in connection with the Exit Financing, whether to make a
Class 7 Cash Distribution available with respect to all, none, or a portion of
Class 7 Claims, the holders of which have elected to receive a Class 7 Cash
Distribution. Any such determination will be made prior to the Confirmation
Date.
If the Class 7 Cash Distribution is made available with respect to
the full amount of Allowed Class 7 Claims, the holders of which have elected a
Class 7 Cash Distribution, each of those electing Creditors will receive a
single Cash payment equal to twenty percent (20%) of its Allowed Class 7 Claim.
To the extent that a Class 7 Cash Distribution is made available with respect to
only a portion of such Class 7 Claims, each of those electing Creditors will
receive a single Cash payment equal to twenty percent (20%) of its Allowed Class
7 Claim which is satisfied through a Class 7 Cash Distribution. The remainder of
such Claims which are not satisfied through a Class 7 Cash Distribution shall be
satisfied through a distribution of the Pro Rata portion of Reorganized DZ Units
distributed to holders of Class 7 Claims on, subject to operation of the
Distribution Protocol, the Effective Date or, if such Claim becomes Allowed
after the Effective Date, as soon as practicable after such Claim becomes
Allowed.
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In the event the Class 7 Cash Distribution is not made available
with respect to any portion of an Allowed Class 7 Claim, each holder of an
Allowed Class 7 Claim that elected to receive a Class 7 Cash Distribution shall
receive its Pro Rata portion of Reorganized DZ Units distributed to holders of
Class 7 Claims.
In any event, all holders of Allowed Class 7 Claims who elect to
receive a Class 7 Cash Distribution shall be treated in identical fashion. For
example, if the Class 7 Cash Distribution is made available with respect to
one-half of the amount of Class 7 Claims, the holders of which have elected the
Class 7 Cash Distribution, each such Claim will be satisfied as follows. The
holder of such Class 7 Claim will receive a Class 7 Cash Distribution with
respect to one-half of its Class 7 Claim and a Pro Rata portion of Reorganized
DZ Units with respect to the remaining one-half of its Class 7 Claim.
Holders of Allowed Class 7 Claims which receive their Pro Rata
portion of Reorganized DZ Units under the Plan will receive New Common Stock and
Ten Year Reorganized DZ Warrants which will have an aggregate value of
approximately 15.2% of their Allowed Class 7 Claims, assuming the Distribution
Protocol is implemented and no Class 7 Cash Distribution is made available. In
the event the Distribution Protocol is not implemented and no Class 7 Cash
Distribution is made available, Class 7 Creditors will receive New Common Stock
and Ten Year Reorganized DZ Warrants which have an aggregate value of
approximately 19.2% of their Allowed Class 7 Claims.
The holders of General Unsecured Claims are entitled to vote to
accept or reject the Plan.
10. Class 8 - Certain Unsecured Personal Injury Claims
Class 8 will consist of all Allowed Unsecured Claims which either
Lexington Insurance Company or the Debtors are obligated to satisfy in
accordance with the terms of the insurance policy, number SLGL2828086, issued by
Lexington Insurance Company for the policy period beginning June 16, 1994 and
ending May 31, 1995, but only to the extent that such Claims are in excess of
$25,000 and are equal to or less than $100,000. Class 8 Claims are impaired
under the Plan.
The Debtors estimate that there will be a maximum of approximately
$8,850,000 in Allowed Certain Unsecured Personal Injury Claims satisfied under
the Plan.
Each holder of an Allowed Class 8 Claim may elect to receive either
(i) its Pro Rata portion of Reorganized DZ Units distributed to holders of Class
8 Claims under the Plan on the Effective Date or, if such Claim becomes Allowed
after the Effective Date, as soon as such Claim becomes Allowed, or (ii) a Cash
distribution (the "Class 8 Cash Distribution").
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In addition, holders of Class 8 Claims may receive distributions
from the Class 8 Insurance Fund. See "DESCRIPTION OF PLAN OF
REORGANIZATION--Classification of Claims and Interests--Distribution of the
Class 8 Insurance Fund to Class 8."
The Debtors are seeking to raise sufficient funds in connection
with the Exit Financing to make the Cash 8 Cash Distribution available will
respect to the Allowed amount of all Class 8 Claims, the holders of which have
elected to receive Cash under the Plan. The Plan Proponents will determine, in
their sole discretion, based on the amount of Cash raised in connection with the
Exit Financing, whether to make a Class 8 Cash Distribution available with
respect to all, none, or a portion of Class 8 Claims, the holders of which have
elected to receive a Class 8 Cash Distribution. Any such determination will be
made prior to the Confirmation Date. The Debtors are seeking to raise sufficient
funds in connection with the Exit Financing to make the Cash 8 Cash Distribution
available will respect to the Allowed amount of all Class 8 Claims, the holders
of which have elected to receive Cash under the Plan.
If the Class 8 Cash Distribution is made available with respect to
the full amount of Allowed Class 8 Claims, the holders of which elected, a Class
8 Cash Distribution, each of those electing Creditors will receive a single Cash
payment equal to twenty percent (20%) of its Allowed Class 8 Claim. To the
extent that the Class 8 Cash Distribution is made available with respect to only
a portion of such Class 8 Claims, each of those electing Creditors will receive
a single Cash payment equal to twenty percent (20%) of its Allowed Class 8 Claim
which is satisfied through a Class 8 Cash Distribution. The remainder of such
Claims which are not satisfied through the Class 8 Cash Distribution shall be
satisfied through a distribution of the Pro Rata portion of Reorganized DZ Units
distributed to holders of Class 8 Claims on the Effective Date or, if such Claim
becomes Allowed after the Effective Date, as soon as practicable after such
Claim becomes Allowed.
In the event the Class 8 Cash Distribution is not made available,
each holder of an Allowed Class 8 Claim that elected to receive a Class 8 Cash
Distribution shall receive its Pro Rata portion of Reorganized DZ Units
distributed to holders of Class 8 Claims.
In any event, all holders of Allowed Class 8 Claims who elect, to
receive a Class 8 Cash Distribution shall be treated in identical fashion. For
example, if the Class 8 Cash Distribution is made available with respect to
one-half of the amount of Class 8 Claims, the holders of which have elected the
Class 8 Cash Distribution, each such Claim will be satisfied as follows. The
holder of such Class 8 Claim will receive a Class 8 Cash Distribution with
respect to one-half of its Class 8 Claim and a Pro Rata portion of Reorganized
DZ Units with respect to the remaining one-half of its Class 8 Claim.
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Holders of Allowed Class 8 Claims which receive their Pro Rata
portion of Reorganized DZ Units under the Plan will receive New Common Stock and
Ten Year Reorganized DZ Warrants which will have an aggregate value of
approximately 19.2% of their Allowed Class 8 Claims, assuming no Class 8 Cash
Distribution is made available.
The holders of Allowed Certain Unsecured Personal Injury Claims are
entitled to vote to accept or reject the Plan.
11. Class 9 - LYONS Claims
Class 9 will consist of all Allowed Claims in respect of the Liquid
Yield Option Notes, due 2013, issued by Discovery Zone, Inc. on October 14, 1993
and outstanding as of the Petition Date (the "LYONS"). Under the terms of the
indenture governing the LYONS, the Class 9 LYONS Claims are contractually
subordinated to the payment in full of the Class 6 Credit Agreement Claims.
Class 9 Claims are impaired under the Plan.
The Debtors estimate that there will be a maximum of approximately
$128,700,000 in Allowed LYONS Claims satisfied under the Plan.
Each holder of an Allowed Class 9 Claim will receive on, subject to
Section 5.5(f) of the Plan, the Effective Date or, if such Claim becomes Allowed
after the Effective Date as soon as practicable after such Claim becomes
Allowed, its Pro Rata portion of Reorganized DZ Units distributed to holders of
Class 9 Claims under the Plan. See "DESCRIPTION OF PLAN OF
REORGANIZATION--Classification and Treatment of Claims and
Interests--Distribution of Reorganized DZ Units."
Notwithstanding the preceding sentence, the subordination provisions
under the LYONS shall be enforced without exception and the holders of Allowed
Class 9 Claims shall not receive any distribution under this Plan in the event
that Class 9 rejects the Plan and one or more of the following occur: (i) any
holder of an Allowed Class 9 Claim files, or causes to be filed, an objection to
confirmation of the Plan in respect of its treatment of Class 9 Claims which
objection is not withdrawn at least three (3) business days prior to the
Confirmation Hearing Date, (ii) the Indenture Trustee files, or causes to be
filed, any objection to confirmation of the Plan (other than an objection
relating solely to the payment of the Indenture Trustees' fees and expenses), or
(iii) the holder of Class 9 Claims and Class 1 Claims files any objection to
confirmation of the Plan (other than an objection described in the following
paragraph).
Notwithstanding the preceding paragraph, if the holder of both Class
9 Claims and Class 1 Claims files an objection to those aspects of the Plan
reasonably calculated to protect that holder's Class 1 Claims, the filing of
such objection shall in no way affect the
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distribution of Reorganized DZ Units to the holders of Allowed Class 9 Claims
under the Plan.
Holders of Allowed Class 9 Claims will receive their Pro Rata
portion of Reorganized DZ Units distributed to holders of Class 9 Claims under
the Plan which, in the event the Distribution Protocol is implemented, will have
an aggregate value of approximately 1.5% of their Allowed Class 9 Claims. In the
event the Distribution Protocol is not implemented, Class 9 Creditors will
receive New Common Stock and Ten Year Reorganized DZ Warrants which have an
aggregate value of approximately 0.4% of their Allowed Class 9 Claims.
The holders of LYONS Claims are entitled to vote to accept or reject
the Plan.
12. Class 10 - Other Unsecured Claims
Class 10 will consist of all Allowed Unsecured Claims which arose
prior to the Petition Date and that are not otherwise classified in Class 1A, 6,
7, 8, 9 or 12. Class 10 Claims are impaired under the Plan.
The Debtors estimate that there will be a maximum of approximately
$18,400,000 in Allowed Other Unsecured Claims satisfied under the Plan.
Each holder of an Allowed Class 10 Claim may elect to receive either
(i) its Pro Rata portion of Reorganized DZ Units distributed to holders of Class
10 Claims under the Plan on the Effective Date or, if such Claim becomes Allowed
after the Effective Date, as soon as such Claim becomes Allowed or (ii) a Cash
distribution (the "Class 10 Cash Distribution").
The Debtors are seeking to raise sufficient funds in connection
with the Exit Financing to make the Cash 10 Cash Distribution available will
respect to the Allowed amount of all Class 10 Claims, the holders of which have
elected to receive Cash under the Plan. The Plan Proponents will determine,
based on the amount of Cash raised in connection with the Exit Financing,
whether to make a Class 10 Cash Distribution available with respect to all,
none, or a portion of Class 10 Claims, the holders of which have elected to
receive a Class 10 Cash Distribution. Any such determination will be made prior
to the Confirmation Date.
If the Class 10 Cash Distribution is made available with respect to
the full amount of Allowed Class 10 Claims, the holders of which elected a Class
10 Cash Distribution, each of those electing Creditors will receive a single
Cash payment equal to twenty percent (20%) of their Allowed Class 10 Claims. To
the extent that a Class 10 Cash Distribution is made available with respect to
only a portion of such Class 10 Claims, each
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of those electing Creditors will receive a single Cash payment equal to 20% of
its Allowed Class 10 Claim which is satisfied through a Class 10 Cash
Distribution. The remainder of such Claims which are not satisfied through the
Class 10 Cash Distribution shall be satisfied through a distribution of the Pro
Rata portion of Reorganized DZ Units distributed to holders of Class 10 Claims
on the Effective Date or, if such Claim becomes Allowed after the Effective
Date, as soon as practicable after such Claim becomes Allowed.
In the event the Class 10 Cash Distribution is not made available,
each holder of an Allowed Class 10 Claim that elected to receive a Class 10 Cash
Distribution shall receive its Pro Rata portion of Reorganized DZ Units
distributed to holders of Class 10 Claims.
In any event, all holders of Allowed Class 10 Claims who elect to
receive a Class 10 Cash Distribution shall be treated in identical fashion. For
example, if the Class 10 Cash Distribution is made available with respect to
one-half of the amount of Class 10 Claims, the holders of which have elected the
Class 10 Cash Distribution, each such Claim will be satisfied as follows. The
holder of such Class 10 Claim will receive a Class 10 Cash Distribution with
respect to one-half of its Class 10 Claim and a Pro Rata portion of Reorganized
DZ Units with respect to the remaining one-half of its Class 10 Claim.
Holders of Allowed Class 10 Claims which receive their Pro Rata
portion of Reorganized DZ Units under the Plan will receive New Common Stock and
Ten Year Reorganized DZ Warrants which will have an aggregate value of
approximately 19.2% of their Allowed Class 10 Claims, assuming no Class 10 Cash
Distribution is made available.
The holders of Other Unsecured Claims are entitled to vote to accept
or reject the Plan.
13. Class 11 - Insured Claims
Class 11 will consist of the portion of all Unsecured Claims for
damages against which the Debtors are insured. Allowed Contingent or
Unliquidated Claims are Claims that have been filed as contingent or
unliquidated with the Court prior to the Bar Date or that are listed as
contingent or unliquidated in the Debtors' Statements of Financial Affairs filed
with the Bankruptcy Court, as such statements may have been or may be amended,
supplemented or otherwise modified from time to time in a filing with the
Bankruptcy Court in accordance with the applicable Bankruptcy Rules. Class 11
Claims are not impaired under the Plan.
The holders of Allowed Class 11 Claims will have recourse only to
the proceeds of insurance coverage carried by the Debtors.
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The holders of Insured Claims are deemed to accept the Plan and are
not entitled to vote to accept or reject the Plan. The Debtors estimate that
there will be a maximum of approximately $155,334,000 in Insured Claims
satisfied under the Plan.
14. Class 12 - Subordinated Unsecured Claims
Class 12 will consist of all Allowed Unsecured Claims, other than
Class 9 Claims, which are subordinated, whether by agreement or applicable law,
to Allowed Class 1A, 6, 7, 8, 9 or 10 Claims.
The Debtors estimate that approximately $37,800,000 in Allowed
Subordinated Unsecured Claims are held by Creditors.
The subordination provisions under any applicable agreements or
bankruptcy or nonbankruptcy law shall be enforced without exception. The holders
of Allowed Class 12 Claims shall not receive any distribution under the Plan and
the Class 12 Claims shall not be used for any purpose in connection with the
Plan, including, but not limited to, voting on the Plan by any impaired Class
and determining any distribution of Cash or Reorganized DZ Units to any Person
under the Plan.
The holders of Subordinated Unsecured Claims are deemed to reject
the Plan and are not entitled to vote to accept or reject the Plan.
15. Class 13 - Intercompany Claims
Class 13 will consist of all Allowed Claims asserted by any Debtor
against any other Debtor. Class 13 Claims are impaired under the Plan.
On the Effective Date, all Intercompany Claims shall be expunged,
released and discharged, and the holders of such Claims shall receive no
distribution of any kind under the Plan.
The holders of Intercompany Claims are deemed to reject the Plan and
are not entitled to vote to accept or reject the Plan.
16. Class 14 - Common Stock and Partnership Interests
Class 14 will consist of all Allowed Interests in respect of common
stock issued by Discovery Zone and each Subsidiary Debtor and outstanding on the
Petition Date ("Existing Common Stock"), any and all rights, warrants or options
to purchase shares of Existing Common Stock outstanding on the Petition Date
("Existing Common Stock Options"), and all general and limited partnership
interests in the Partnership Debtors
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outstanding on the Petition Date ("Existing Partnership Interests"). Class 14
Interests are impaired under the Plan.
All Existing Common Stock, Existing Common Stock Options and
Existing Partnership Interests shall be cancelled, annulled and extinguished as
of the Effective Date and each holder of an Allowed Common Stock Interest,
Existing Common Stock Option and Existing Partnership Interest shall not be
entitled to receive or retain any property or interest in property on account of
such Existing Common Stock, Existing Common Stock Option or Existing Partnership
Interest under the Plan.
The holders of Common Stock and Partnership Interests are deemed to
reject the Plan and are not entitled to vote to accept or reject the Plan.
17. Distribution of Reorganized DZ Units
Each Reorganized DZ Unit shall consist of (a) nine (9) shares of
common stock of Reorganized Discovery Zone issued pursuant to the Plan and (b)
one (1) Ten Year Reorganized DZ Warrant.
a. Initial Calculation For Distribution of Reorganized DZ
Units
The number of Reorganized DZ Units which shall be separately
distributed to holders in respect of Allowed Class 6, 7, 8, 9 and 10 Claims (in
the case of Classes 7, 8 and 10, whose holders will or are estimated to receive
Reorganized DZ Units) will be calculated in accordance with the following
formula and any other applicable provisions of the Plan. The number of
Reorganized DZ Units that will be distributed in respect of each dollar of
applicable Allowed Unsecured Claims shall equal the fraction obtained by
dividing (x) the aggregate number of Reorganized DZ Units to be distributed
under the Plan, by (y) the sum of all Claims which are classified in Classes 6,
7, 8, 9 and 10 (but only to the extent that holders of such Classes 7, 8 and 10
Claims will or are estimated to receive Reorganized DZ Units) which are either
Allowed as of the Effective Date, or which either (i) the Plan Proponents and
the Creditors' Committee jointly estimate, as such estimate is approved by the
Bankruptcy Court, or (ii) if the Plan Proponents and the Creditors' Committee do
not so consensually estimate, the Bankruptcy Court estimates, will be Allowed
after the Effective Date (such fraction being the "Per Claim Distribution").
This calculation will not be affected by the acceptance or rejection of the Plan
by holders of any Class which is entitled to vote to accept or reject the Plan.
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b. Distribution of Reorganized DZ Units to Class 6
In the event that the Debtors (i) make the Class 7 Cash
Distribution, the Class 8 Cash Distribution and the Class 10 Cash Distribution
(collectively, the "Cash Distributions") in respect of the total amount of all
Allowed Claims held by Creditors that have elected to receive Cash Distributions
on the Effective Date in such Classes, and (ii) deposit Cash into the respective
Disputed Claims Reserves for each Class (collectively, the "Cash Deposits") in
an amount which the Bankruptcy Court determines is sufficient to satisfy all
Disputed Claims which, once Allowed, will receive a Cash Distribution in respect
of the total amount of the Allowed amount of such Claims the holders of which
are anticipated to elect a Cash Distribution (such Cash Distributions and Cash
Deposits being a "Complete Cash Distribution and Deposit"), the aggregate number
of Reorganized DZ Units which will be distributed to holders of Allowed Class 6
Claims will be equal to the difference of (i) the product of (x) the Per Claim
Distribution multiplied by (y) the sum of the Allowed amounts of Classes 6 and 9
Claims minus (ii) one percent (1%) of the aggregate number of Reorganized DZ
Units to be distributed under this Plan; provided, however, in the event that
Class 9 is not entitled to a distribution of Reorganized DZ Units pursuant to
Section 4.11 of the Plan, the aggregate number of Reorganized DZ Units
distributed to holders of Allowed Class 6 Claims will be equal to the product
obtained in clause (i) above without reduction.
In the event that the Debtors do not make a Complete Cash
Distribution and Deposit, a number of shares of New Common Stock which (i) have
a value on the Effective Date equal to fifteen percent (15%) of the amount of
the Birch Administrative Claim and (ii) that otherwise would be distributed to
holders of Class 6 Claims in accordance with the preceding paragraph if a
Complete Cash Distribution and Deposit had been made, shall be distributed Pro
Rata to the holders of Classes 7, 8 and 10 Claims.
As described above, the Ten Year Reorganized DZ Warrants issued in
connection with Reorganized DZ Units to holders of Allowed Class 6 Claims shall
be distributed to B1 Investments, LLC, except as such holders may otherwise
elect on their ballots accepting or rejecting the Plan.
c. Distribution of Reorganized DZ Units to Class 7
The aggregate number of Reorganized DZ Units which will be
distributed to holders of Class 7 Claims will be determined in accordance with
the formulas set forth below under "Calculations for Certain Distributions to
Classes 7 and 9." However, if either Class 9 is not entitled to a distribution
(as described in the following section) or Class 7 rejects the Plan and the
holder of any Class 7 Claim files an objection to confirmation of the Plan which
objection is not withdrawn at least three (3) business days prior to the
Confirmation Hearing Date and which contests the validity of the distribution
formula set
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forth below under "Calculations for Certain Distributions to Classes 7 and 9,"
then, in either event, the formulas set forth below shall not apply and the
aggregate number of Reorganized DZ Units which will be distributed to holders of
Class 7 Claims pursuant to the Plan will be equal to the product of (i) the Per
Claim Distribution multiplied by (ii) the sum of the Allowed amounts of Class 7
Claims, the holders of which have elected a distribution of Reorganized DZ
Units.
d. Distribution of Reorganized DZ Units to Class 9
The aggregate number of Reorganized DZ Units which will be
distributed to holders of Class 9 Claims will be determined in accordance with
the formulas set forth below under "Calculations for Certain Distributions to
Classes 7 and 9." If, however, Class 7 rejects the Plan and the holder of any
Class 7 Claim files an objection to confirmation of the Plan which objection is
not withdrawn at least three (3) business days prior to the Confirmation Hearing
Date and which contests the validity of the distribution formula set forth below
under "Calculations for Certain Distributions to Classes 7 and 9," then the
formulas set forth below shall not apply and the holders of Class 9 Claims will
receive only one percent (1%) of the Reorganized DZ Units in satisfaction of
their Allowed Claims. The Reorganized DZ Units which are not distributed to
holders of Class 9 Claims on account of the interposition and non-withdrawal of
any aforementioned objection to confirmation shall be distributed to the holders
of Allowed Class 7 Claims.
In no event, however, shall the holders of Allowed Class 9 Claims
receive any distribution under the Plan in the event that Class 9 rejects the
Plan and one or more of the following occur: (a) any holder of an Allowed Class
9 Claim files, or causes to be filed, an objection to confirmation of the Plan
in respect of its treatment of Class 9 Claims which objection is not withdrawn
at least three (3) business days prior to the Confirmation Hearing Date, (b) the
Indenture Trustee files, or causes to be filed, any objection to confirmation of
the Plan (other than an objection relating solely to the payment of the
Indenture Trustees' fees and expenses), or (c) the holder of Class 9 Claims and
Class 1 Claims files any objection to confirmation of the Plan (other than an
objection described in the following paragraph).
Notwithstanding the preceding paragraph, if the holder of both Class
9 Claims and Class 1 Claims files an objection to those aspects of the Plan
reasonably calculated to protect that holder's Class 1 Claims, the filing of
such objection shall in no way affect the distribution of Reorganized DZ Units
to the holders of Allowed Class 9 Claims provided for in Section 5.4 of the
Plan.
At the close of business on the Record Date, the transfer ledgers of
the Indenture Trustee of the LYONS shall be closed, and there shall be no
further transfers of registration on the books of the Indenture Trustee of the
record holders of the LYONS.
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Reorganized Discovery Zone and the Indenture Trustee for the LYONS shall have no
obligation to recognize any transfer of the LYONS occurring after the Record
Date. Reorganized Discovery Zone and the Indenture Trustee for the LYONS shall
be entitled instead to recognize and deal for all purposes hereunder with only
those record holders stated on the transfer ledgers as of the close of business
on the Record Date.
Distributions to holders of Allowed Class 9 Claims shall be made by
the Indenture Trustee at the addresses contained in the official records of the
Indenture Trustee. If any holder's distribution is returned as undeliverable, no
further distributions to such holder shall be made unless and until Reorganized
Discovery Zone or the Indenture Trustee is notified of such holder's then
current address, at which time all missed distributions shall be made to such
holder. Amounts in respect of undeliverable distributions made through the
Indenture Trustee shall be returned to Reorganized Discovery Zone until such
distributions are Claimed.
On the Effective Date, except as otherwise provided for herein, (i)
the LYONS shall be cancelled, and (ii) the obligations of Discovery Zone under
the indenture governing the LYONS shall be discharged; provided, however, that
the indenture that governs the rights of the holder of a Class 9 Claim and that
is administered by the Indenture Trustee shall continue in effect solely for the
purposes of allowing the Indenture Trustee to make the distributions to be made
on account of such Claims under the Plan as provided in Section 9 hereof,
provided, further however that nothing herein shall discharge Reorganized
Discovery Zone from its liabilities under the Bankruptcy Code and the
Confirmation Order. Upon the completion of distributions to be made to the
holders of the LYONS, including payment of the fees and expenses of the
Indenture Trustee, the Indenture Trustee shall be discharged from any further
obligation or powers under the indenture.
On the Effective Date, or as soon thereafter as is practicable, each
holder of an instrument evidencing a Class 9 Claim (a "Certificate") shall
surrender such certificate to the Indenture Trustee and such Certificate shall
be cancelled. No distribution of property hereunder shall be made to or on
behalf of any such holder unless the Certificate is received by the Indenture
Trustee or the unavailability of such Certificate is reasonably established to
the satisfaction of the Indenture Trustee. Any such holder that fails to
surrender such Certificate or to execute and deliver an affidavit of loss and
indemnity reasonably satisfactory to the Indenture Trustee within two years
after the Effective Date shall be deemed to have forfeited all rights, Claims
and interests related thereto and shall not participate in any distribution
hereunder and all property in respect of such forfeited distribution shall be
redistributed to the holders of Class 9 Claims in accordance with the Plan
unless the distribution is de minimis.
To the extent that, as of the Effective Date, (i) any pending
Unsecured Claims or Administrative Expense Claims of the Indenture Trustee
(including a good faith estimate
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submitted to the Debtors by the Indenture Trustee of its fees and expenses
accruing through the Effective Date), or (ii) any pending Unsecured Claims or
Administrative Expense Claims of the Indenture Trustee for its fees and expenses
are not yet allowed as of the Effective Date, the Debtors shall establish on the
Effective Date a separate Cash reserve (the "Indenture Trustee Reserve") for the
Indenture Trustee in the amount of any such outstanding Claims or Administrative
Expenses including the estimated fees and expenses, which shall not exceed
$25,000.
The obligation of the Reorganized Discovery Zone to pay the
Indenture Trustee its fees and expenses shall be secured by the amounts in the
Indenture Trustee Reserve established for the Indenture Trustee and the lien
rights of the Indenture Trustee under the indenture governing the LYONS shall be
deemed to attach to the Cash in the Indenture Trustee Reserve to the same extent
as if the Cash in the Indenture Trustee Reserve were property received by the
Indenture Trustee pursuant to the Plan; provided, however, that the Indenture
Trustee shall be conclusively deemed to have taken any and all action required
to perfect its lien rights as to the Cash in the Indenture Trustee Reserve,
including, without limitation, any requirement of possession for such
perfection.
In consideration for the foregoing, and subject to the establishment
of the Indenture Trustee Reserve, the Indenture Trustee is deemed to have waived
its lien rights in the property to be distributed under the Plan to the holders
of the LYONS. The Indenture Trustee shall be entitled to Allowed Claims for the
reasonable fees and expenses incurred under the indenture. Upon the payment by
the Debtors or the Reorganized Discovery Zone of such Claims and administrative
expenses the lien rights of the Indenture Trustee shall be extinguished.
18. Calculations for Certain Distributions to Classes 7 and 9
a. General Description of the Distribution Protocol
Subject to the exceptions described above in "Distribution of
Reorganized DZ Units," the number of Reorganized DZ Units which will be
distributed to holders of Allowed Class 7 and 9 Claims will be determined in
accordance with the formulas and calculations set forth in Section 5.5 of the
Plan, described below. Section 5.5 incorporates the material economic terms of a
distribution protocol which has been developed by the Creditors' Committee (the
"Distribution Protocol"). The Plan provides that the Debtors and the Creditors'
Committee will attempt to agree as to the value of the Reorganized DZ Units to
be distributed under the Plan. In the event the Debtors and Creditors' Committee
are unable to consensually determine the value of the Reorganized DZ Units, the
Bankruptcy Court shall determine such value.
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The Distribution Protocol generally provides that the distributions
of Reorganized DZ Units in satisfaction of Classes 7 and 9 Claims will be in
accordance with the following statements:
(i) If the Reorganized DZ Units distributed to Classes 7 and 9,
collectively, have a value of less than $9 million, the
percentage return from Reorganized DZ Units which holders of
Class 7 Claims obtain on their Claims will be ten times
greater than the percentage return which holders of Class 9
Claims obtain therefrom.
(ii) If the Reorganized DZ Units distributed to Classes 7 and 9,
collectively, have a value which is equal to $9 million or
greater, but not greater $12 million, the percentage return
from Reorganized DZ Units which holders of Class 7 Claims
obtain on their Claims will be eight times greater than the
percentage return which holders of Class 9 Claims obtain
therefrom.
(iii) To the extent that the Reorganized DZ Units distributed to
Classes 7 and 9, collectively, have a value which is greater
than $12 million, the percentage return from Reorganized DZ
Units which holders of Class 7 Claims obtain on their Claims
with respect to the value of Reorganized DZ Units above $12
million will be three times greater than the percentage return
which holders of Class 9 Claims obtain therefrom with respect
to the value of Reorganized DZ Units above $12 million.
The calculations which are used to implement the Distribution
Protocol are set forth below. In addition, attached as Exhibit 5 to the
Disclosure Statement is a description of how the Distribution Protocol would
operate, based upon the valuation of Reorganized Discovery Zone. Also attached
as Exhibit 5 to the Disclosure Statement is a description of the recoveries
which holders of Allowed Classes 7 and 9 Claims would obtain in respect of
Reorganized DZ Units if the Distribution Protocol is not implemented.
b. Benefits of Implementing the Distribution Protocol
The LYONS holders are Creditors in accordance with an indenture
which contains, among other things, a subordination provision. Certain holders
of Class 9 LYONS Claims assert that, for various reasons, the indenture's
subordination provision may be unenforceable and that therefore the holders of
Class 9 LYONS Claims may share pari passu with, if not before, holders of Class
6 Credit Agreement Claims. Rather than embroiling Creditors and the Debtors in
litigation with respect to the enforceability of the indenture's subordination
provision, certain representatives of the holders of Class 9 LYONS Claims
(including certain holders of the LYONS who were members of the Creditors'
Committee)
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and the Creditors' Committee have agreed to support the Distribution Protocol
contained in the Plan. These representatives of the holders of LYONS and the
Creditors' Committee firmly support implementation of the Distribution Protocol
because these parties believe that absent Creditor approval of the same, there
is a significant likelihood that protracted litigation among the holders of
Classes 6, 7 and 9 Claims could ensue which could significantly delay -- and
potentially diminish materially -- the distributions under the Plan.
The Plan Proponents were not involved in the creation and
negotiation of the Distribution Protocol and therefore express no opinion as to
its merits.
c. Description of Calculations
For the purpose of all calculations required to make the
calculations required by Section 5.5 of the Plan, the following defined terms
will apply:
(v) "Class 7 Calculation Claims Amount" means the aggregate
amount of all Allowed Class 7 Claims satisfied through the
distribution of Reorganized DZ Units and Disputed Class 7 Claims
which the Plan Proponents or the Bankruptcy Court estimate will
become Allowed Class 7 Claims and which will be satisfied through
the distribution of Reorganized DZ Units.
(w) "LYONS Calculation Claims Amount" means the aggregate
amount of all (A) allowed Class 9 Claims and (B) Disputed Class 9
Claims which the Plan Proponents or the Bankruptcy Court estimate
will become Allowed Class 9 Claims.
(x) "Section 5.5 Claims Amount" means the sum of (A) the Class
7 Claims Calculation Amount and (B) the LYONS Calculation Claims
Amount.
(y) "Section 5.5 Distribution Value" means the sum of the
aggregate value, as determined by the Debtors and the Creditors'
Committee or the Bankruptcy Court, of (A) an amount of Reorganized
DZ Units which is equal to the product of (I) the Per Claim
Distribution multiplied by (II) the Class 7 Calculation Claims
Amount, and (B) one percent (1%) of the aggregate number of
Reorganized DZ Units to be distributed under the Plan, and (C) the
shares of New Common Stock, if any, distributed to holders of Class
7 Claims pursuant to Section 5.2(b) of the Plan.
(z) "Section 5.5 Ratio" shall be (A) ten (10) in the event
that the Section 5.5 Distribution Value is less than $9 million, (B)
eight (8) in the event that the Section 5.5 Distribution Value is
equal to or greater than $9
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million or equal to or less than $12 million, and (C) three (3) for
any incremental Section 5.5 Distribution Value that is greater than
$12 million.
The first step in determining the number of the Reorganized DZ Units
to be distributed to Classes 7 and 9 under Section 5.5 of the Plan shall be
determined by solving for X in the following equation: the sum of (y) and (z)
equals one (1). For the purposes of this equation, (y) shall equal the product
of (A) the product of the Section 5.5 Ratio and X and (B) the Class 7
Calculation Claims Amount divided by the Section 5.5 Claims Amount. Furthermore,
for the purposes of this equation, (z) shall mean the product of (A) the LYONS
Calculation Claims Amount and (B) X divided by the Section 5.5 Claims Amount. In
the event that the Section 5.5 Distribution Value is greater than $12 million,
the foregoing calculation must be undertaken twice, first to determine the value
of X where the Section 5.5 Distribution Value is $12 million and second to
determine the value of X to the extent that the Section 5.5 Distribution Value
exceeds $12 million.
The second step in determining the number of Reorganized DZ Units to
be distributed to Classes 7 and 9 under Section 5.5 of the Plan is to conduct
the following calculations. First, determine the product of (x) the product of
the Section 5.5 Ratio and X and (y) the fraction obtained by dividing the Class
7 Calculation Claims Amount by the Section 5.5 Claims Amount. Second, multiply
this product by one hundred (100), and express the resulting number as a
percentage which will be referred to as the "Class 7 Distribution Percentage."
Third, determine the sum of one hundred (100) percent minus the Class 7
Distribution Percentage and express this sum as a percentage which will be
referred to as the "Class 9 Distribution Percentage."
The number of Reorganized DZ Units which will be distributed Pro
Rata to holders of Class 7 Claims in satisfaction of such Claims will be
determined by multiplying the Class 7 Distribution Percentage and the Section
5.5 Distribution Value and dividing by the value of one Reorganized DZ Unit. The
number of the Reorganized DZ Units which will be distributed to holders of Class
9 Claims in satisfaction of such Claims will be determined by multiplying the
Class 9 Distribution Percentage and the Section 5.5 Distribution Value and
dividing by the value of one Reorganized DZ Unit.
In the event that either (i) the Debtors and the Creditors'
Committee do not consensually determine the Section 5.5 Distribution Value, or
(ii) any holders of Allowed Class 7 or 9 Claims dispute the Section 5.5
Distribution Value, as determined by the Debtors and the Creditors' Committee,
the Bankruptcy Court shall determine the Section 5.5 Distribution Value. In the
event the Bankruptcy Court does not make this determination on or before the
Effective Date, all Reorganized DZ Units which comprise the Section 5.5
Distribution Value will be held in reserve pending the Bankruptcy Court's
determination and, upon the Bankruptcy Court making such determination pursuant
to a Final Order, will thereafter be distributed in accordance with Section 5.5
of the Plan. In the event the
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Bankruptcy Court does not determine the Section 5.5 Distribution Value as of the
three (3) month anniversary of the Effective Date, Reorganized Discovery Zone
shall accept and adopt the Section 5.5 Distribution Value proposed by the
Creditors' Committee.
19. Distribution of the Class 8 Insurance Fund to Class 8
The purpose of the Class 8 Insurance Fund is to ensure that all
Class 8 Creditors, regardless of when their Claims become Allowed, do not
receive a different distribution in respect of Cash, if any, which the Lexington
Insurance Company may be obligated to pay under the Lexington 1994-1995
Insurance Policy. The Debtors, based on information obtained to date, do not
know and express no opinion as to whether the Lexington Insurance Company will
be required to deposit Cash into the Class 8 Insurance Fund.
On the Effective Date, the Reorganized Debtors shall establish a
segregated interest-bearing account (the "Class 8 Insurance Fund"). All Cash
paid by Lexington Insurance Company in respect of Allowed Class 8 Claims shall
be deposited into the Class 8 Insurance Fund.
Distributions of Cash from the Class 8 Insurance Fund shall be made,
to the extent practicable, on each anniversary of the Effective Date (each, a
"Class 8 Insurance Fund Payment Date") until all property in the Class 8
Insurance Fund has been distributed. Reorganized Discovery Zone shall not be
required to make any distribution of Cash from the Class 8 Insurance Fund of
less than $50,000 on any Class 8 Insurance Fund Payment Date other than on the
final Class 8 Insurance Fund Payment Date. In the event Reorganized Discovery
Zone does not make a distribution on a Class 8 Insurance Fund Payment Date in
accordance with the preceding sentence, the Class 8 Insurance Fund Payment Date
shall occur as soon thereafter as a Cash distribution of $50,000 may be made to
holders of Class 8 Claims and Reorganized Discovery Zone. Notwithstanding any
other provision of this Section 5.6(b), Reorganized Discovery Zone shall make a
final distribution from the Class 8 Insurance Fund in the event the Cash to be
distributed on the final Class 8 Insurance Fund Payment Date is of an amount not
less than $2,000.
Reorganized Discovery Zone shall determine, as of each Class 8
Insurance Fund Payment Date, the amount of Cash which shall be distributed to
each holder of a Class 8 Claim and which shall be distributed to Reorganized
Discovery Zone. Reorganized Discovery Zone shall first calculate the holder's
Pro Rata portion of Cash then held in the Class 8 Insurance Fund, such portion
determined, solely for the purpose of this calculation, as if all Disputed Class
8 Claims were Allowed Claims (such amount being the "Class 8 Initial Pro Rata
Calculation Value"). Reorganized Discovery Zone shall also determine the sum of
(i) the amount of Cash, if any, previously distributed to such holder in respect
of its Class 8 Claim from the Class 8 Insurance Fund, plus (ii) any sums
previously distributed to
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Reorganized Discovery Zone from the Class 8 Insurance Fund in respect of such
holder's Claim, less (iii) the Cash or the value of Reorganized DZ Units
(determined as of the Effective Date) previously distributed to such holder in
respect of its Class 8 Claim other than from the Class 8 Insurance Fund (such
sum being "Section 5.6 Calculation Sum").
In the event the Section 5.6 Calculation Sum is a negative number,
on the Class 8 Insurance Fund Payment Date: (i) Reorganized Discovery Zone shall
receive Cash from the Class 8 Insurance Fund in an amount equal to the Section
5.6 Calculation Sum expressed as a positive number but, in any event, not
exceeding the holder's Class 8 Initial Pro Rata Calculation Value, and (ii) the
holder of the Class 8 Claim shall receive Cash from the Class 8 Insurance Fund
in an amount equal to the positive sum, if any, of its Class 8 Initial Pro Rata
Calculation Value and the Section 5.6 Calculation Sum. In the event the Section
5.6 Calculation Sum is a positive number, the holder of the Class 8 Claim shall
receive Cash equal to the amount of its Class 8 Initial Pro Rata Calculation
Value on the Class 8 Insurance Fund Payment Date.
20. Distribution of Fractional Reorganized DZ Units
Fractional Reorganized DZ Units will not be distributed. Instead,
each Creditor which would, except for the operation of the preceding sentence,
be a holder of a fractional Reorganized DZ Unit shall receive a whole number of
shares of New Common Stock determined in accordance with the calculations
contained in Section 5.8(b) of the Plan and described below.
The first step in determining the number of shares which a Creditor
will receive pursuant to Section 5.7 of the Plan is to determine the product of
0.9 (there are 9 shares of Common Stock in each Reorganized DZ Unit) and the
holder's fractional interest in a Reorganized DZ Unit, such fractional interest
rounded to the first decimal place (rounding down in the case of 0.05 or less
and rounding up in the case of more than 0.05). The holder shall receive a whole
number of shares of New Common Stock equal to this product rounded to a single
integer (rounding down in the case of 0.5 or less and rounding up in the case of
more than 0.5). No fractional shares of New Common Stock will be issued.
All Ten Year Reorganized DZ Warrants (there is one DZ Warrant in
each Reorganized DZ Unit) not distributed due to the operation of Section 5.8(a)
of the Plan shall be cancelled and no Person shall have any rights with respect
to such Ten Year Reorganized DZ Warrants.
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D. Exit Financing
The effectiveness of the Plan is conditioned on the Debtors raising
financing (the "Exit Financing") on terms acceptable to the Plan Proponents and
in an amount necessary to make the payments required to be made under the Plan
to satisfy Claims in Classes 1, 1A and 3 and for working capital purposes. The
Plan Proponents estimate that Cash payments required to satisfy Claims in
Classes 1, 1A and 3 will be approximately $40,900,000. The Plan Proponents
presently estimate that the amount of financing required for working capital and
capital expenditures and transaction costs will be approximately $30,000,000.
Accordingly, the Plan Proponents presently anticipate that approximately
$70,000,000 of Exit Financing proceeds will be sufficient to satisfy the
condition to effectiveness of the Plan.
In addition, the Debtors are seeking to raise additional funds to
make the Cash distributions available to all Unsecured Creditors electing to
receive Cash under the Plan. The Debtors' ability to make the Cash Distributions
available with respect to the full amount of all Allowed Claims is dependent on
both obtaining sufficient financing and successfully resolving Claims in Classes
7, 8 and 10 for $50 million or less.
The Plan Proponents contemplate that the Exit Financing will be
raised through the sale of debt securities of Reorganized Discovery Zone (the
"Debt Securities"), a revolving credit or term loan facility for Reorganized
Discovery Zone (the "Credit Facility") or the sale of preferred stock (the
"Preferred Stock") of Reorganized Discovery Zone or any combination of the
foregoing. The sale of Debt Securities or Preferred Stock would likely require
the issuance of warrants to purchase New Common Stock (the "Exit Financing
Warrants"). The final maturity of any Debt Securities and Preferred Stock which
are issued as part of the Exit Financing is expected to be between five and ten
years from the Effective Date, while the final maturity of any Credit Facility
which may be entered into as part of the Exit Financing is expected to be
between three to seven years from the Effective Date. Any Exit Financing
Warrants would be exercisable within ten years of issuance. The Plan Proponents
anticipate that collateral will not be necessary for the issuance of Debt
Securities or Preferred Stock, and that collateral composed of substantially all
of Reorganized Discovery Zone's assets would be required for any Credit
Facility, subject to pre-existing liens.
The weighted average of the interest rates and/or dividend rates of
any Debt Securities, the Credit Facility and Preferred Stock which is issued as
part of the Exit Financing is likely to be between 12% and 14%. Any Exit
Financing Warrants which are issued as part of the Exit Financing are likely to
represent the right, upon exercise thereof, to purchase between 10% and 20% of
the New Common Stock on a fully diluted basis, subject to adjustment upon the
occurrence of certain events, at a nominal exercise price. The
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specific terms of the Exit Financing are subject to market conditions and will
be determined by the Debtors at the time of the closing of the Exit Financing.
The net proceeds to the Reorganized Debtors from the Exit Financing
will be used to (i) satisfy all Class 1 Administrative Expense Claims, including
any Claims held by Perry with respect to the Replacement Credit Agreement, as
amended by the First Replacement Amendment, as well as Class 1A and Class 3
Claims, (ii) finance a major capital improvement program, (iii) provide
additional availability for working capital purposes and (iv) satisfy fees and
expenses associated with the Exit Financing. If sufficient financing is
obtained, the net proceeds of the Exit Financing will also be used to satisfy
Class 7, 8 and 10 Claims in Cash, to the extent that holders of such Claims
elect to receive Cash under the Plan, as described in more detail above in
"DESCRIPTION OF PLAN AND REORGANIZATION--Classification and Treatment of Claims
and Interests."
E. Conditions to Confirmation and the Effective Date
1. Condition to Confirmation
The Bankruptcy Court shall not begin a hearing on confirmation of
the Plan and thereafter enter the Confirmation Order unless the Debtors'
investment bankers have provided the Debtors and the Creditors' Committee with
reasonable assurance that they have obtained commitments from investors,
conditioned upon confirmation of this Plan, sufficient to consummate the Exit
Financing within 14 days of the Confirmation Date.
2. Conditions to the Effective Date
The occurrence of the Effective Date is subject to the following
conditions precedent:
(a) The Debtors shall have consummated the Exit Financing on terms
acceptable to the Plan Proponents in an amount necessary to make the cash
payments required to be made under this Plan on the Effective Date and for
working capital purposes.
(b) The Confirmation Order, in form and substance satisfactory to
the Plan Proponents, shall have become a Final Order.
(c) The Bankruptcy Court shall have entered a substantive
consolidation order, in form and substance satisfactory to the Plan
Proponents, which shall have become a Final Order.
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(d) All documents contemplated to be executed or implemented in
connection with the Plan, including, without limitation, Exhibit 1 annexed
to this Disclosure Statement and Exhibits A through H to the Plan, shall
be executed or implemented in a form satisfactory to the Plan Proponents.
The Plan Proponents expressly reserve the right to waive any of the
conditions to the occurrence of the Effective Date set forth above.
F. Legal Effect of Plan Confirmation
1. 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
Interests in the Debtors. The Confirmation Order shall discharge each Debtor
from any debt and liability that arose before Confirmation, as provided in
sections 524 and 1141 of the Bankruptcy Code, and any debt and liability of a
kind specified in section 502(g), 502(h) or 502(i) of the Bankruptcy Code,
whether or not:
(i) a proof of Claim based on such debt or liability is filed or
deemed filed under section 501 of the Bankruptcy Code;
(ii) a Claim based on such debt or liability is Allowed; or
(iii) the holder of a Claim based on such debt or liability has
accepted the Plan.
2. Revesting, Operation of Business
All property of each Estate shall revest in the applicable
Reorganized Debtor on the Effective Date free and clear of all Claims, liens,
charges, encumbrances and Interests, except as otherwise provided in the Plan.
However, any liens on or security interests in property of each Estate which
secure postpetition Claims shall attach to such property on and after the
Effective Date until such postpetition Claims have been satisfied in full.
Liabilities incurred in Debtors' purchase, lease or use of goods and
services in the ordinary course of their business, including Administrative
Expense Claims for amounts due on account of services rendered to the Debtors,
including, without limitation, fees and expenses of professionals, after the
Confirmation Date shall be paid by the Reorganized Debtors pursuant to the terms
and conditions of the particular transaction giving rise to such Claims, without
any further action by the holders of such Claims.
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3. Exculpation
None of the directors, officers, agents, representatives,
accountants, financial advisors, attorneys or employees of (i) any Debtor during
the Chapter 11 Case, (ii) any Reorganized Debtor, (iii) the Creditors'
Committee, (iv) any member of the Creditors' Committee during the Chapter 11
Case, (v) Birch, (vi) any member of Birch, or (vii) Viacom, and neither the
Debtors, the Reorganized Debtors, the Creditors' Committee, any member of the
Creditors' Committee, Birch nor any member of Birch shall have any liability for
actions taken or omitted to be taken in good faith under or in connection with
the Plan or in connection with the Chapter 11 Case or the operation of the
Debtors during the pendency of the Chapter 11 Case.
4. Creditors' Committee
The Creditors' Committee shall continue to have all the rights,
powers and duties conferred upon it pursuant to section 1103 of the Bankruptcy
Code until the Effective Date, subject to the following sentence. On the
Effective Date, the Creditors' Committee will be disbanded and terminate;
provided, however, that if the Bankruptcy Court is required to determine the
Section 5.5 Distribution Value, and has not done so on or before the Effective
Date, the Creditors' Committee shall continue solely for the purpose of, and in
connection with, the Bankruptcy Court's determination of such value, until the
earlier of (i) such date that the Bankruptcy Court has made such determination
pursuant to a Final Order or (ii) the three (3) month anniversary of the
Effective Date. The Creditors' Committee's fees and expenses, including all
professional fees, which may be reimbursed pursuant to Section 5.18 of the Plan
during such post-Effective Date period shall not exceed $10,000 per month.
5. Injunction
Except as otherwise expressly provided in the Plan, the Confirmation
Order will provide, among other things, that all Persons who have held, hold or
may hold Claims or who have held, hold or may hold any Interest are permanently
enjoined from and after the Effective Date from (i) commencing or continuing in
any manner any action or other proceedings of any kind with respect to any such
Claim or Interest against any Debtor, any Reorganized Debtor, any Indemnified
Person, any member of the Creditors' Committee, Viacom, Birch or any member of
Birch or any of their respective agents, employees, representatives,
accountants, financial advisors or attorneys, (ii) enforcing, attaching,
collecting or recovering by any manner or means any judgment, award, decree or
order against any Debtor, any Reorganized Debtor, any Indemnified Person, any
member of the Creditors' Committee, Viacom, Birch or any member of Birch or any
of their respective agents, employees, representatives, accountants, financial
advisors or attorneys, or against the property of any Debtor, any Reorganized
Debtor, any Indemnified Person, any member
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of the Creditors' Committee, Birch or any member of Birch with respect to any
such Claim, (iii) creating, perfecting or enforcing any encumbrance of any kind
against any Debtor, any Reorganized Debtor, any Indemnified Person, any member
of the Creditors' Committee, Viacom, Birch or any member of Birch or any of
their respective agents, employees, representatives, accountants, financial
advisors or attorneys, or against the property of any Debtor, any Reorganized
Debtor, any Indemnified Person, any member of the Creditors' Committee, or Birch
with respect to any such Claim, except that holders of security interests in or
liens, charges or other encumbrances on property may perfect such security
interests, liens, charges or other encumbrances, (iv) asserting any setoff,
right of subrogation, or recoupment of any kind against any obligation due any
Debtor, any Reorganized Debtor, any Indemnified Person, any member of the
Creditors' Committee, Viacom, Birch or any member of Birch or against the
property of any Debtor, any Reorganized Debtor, any Indemnified Person, any
member of the Creditors' Committee, Viacom, Birch or any member of Birch or any
of their respective agents, employees, representatives, accountants, financial
advisors or attorneys, with respect to any such Claim, (v) commencing or
continuing in any manner any action or other proceeding of any kind with respect
to any Claim as to which such Person shall be deemed to have covenanted not to
sue as provided in Section 11.3 of the Plan and (vi) commencing any action,
collecting or recovering by any manner or means any judgment, award, decree or
order against the immediate or any mediate transferee of any property
distributed pursuant to the Plan or the securities issued hereunder based upon a
Claim that the transferor's receipt of such property constituted a fraudulent
conveyance, preference, violation of a bulk sales law or based upon any other
Claim that receipt and or distribution of property by transfer pursuant to the
Plan is wrongful. The injunction provided for by the Confirmation Order will
not, however, prevent any person from taking any action to enforce any rights
under the Plan or from taking the actions described in (i) through (vi) above
against the following former officers and directors of Discovery Zone: Donald
Flynn, Robert Mitchum, Victor Casini, Gerard Seegers and John McCarthy. These
persons are the five remaining defendants in a securities fraud class action
pending in the Northern District of Illinois entitled In re Discovery Zone
Securities Litigation. Furthermore, notwithstanding anything contained herein,
the injunction to be provided by the Confirmation Order, as described above,
shall not prevent any lessor of nonresidential real property from exercising its
rights under any lease or guaranty against Viacom.
The term "Indemnified Person" means (i) each Person serving as an
officer or director of any of the Debtors on or after the Petition Date and up
to and including the Effective Date, and each employee indemnified by a Debtor
as of the Confirmation Date pursuant to the applicable Debtor's articles of
incorporation, by-laws, applicable state law or specific agreement, and (ii)
professionals retained in these Cases and having an indemnity from the Debtors.
The term "Indemnified Person" does not include the following former officers and
directors of Discovery Zone: Donald Flynn, Robert Mitchum, Victor Casini, Gerard
Seegers and John McCarthy.
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G. Certain Other Provisions of the Plan
1. Executory Contracts and Unexpired Leases
Each executory contract or unexpired lease shall be deemed rejected
as of the Effective Date, except those executory contracts or unexpired leases
listed in Schedule 2 to the Plan, which the Debtors will assume on the
Confirmation Date; provided, however, that the Debtors or the Reorganized
Debtors shall have the right, at any time prior to sixty (60) days after the
Effective Date, to amend Schedule 2; any executory contract or unexpired lease
which is added to or deleted from Schedule 2 will be assumed or rejected,
respectively, as of the date of such amendment.
All cure and other payments required by section 365(b)(1) of the
Bankruptcy Code under any executory contract or unexpired lease which is assumed
or assumed and assigned under the Plan shall be made by the Reorganized Debtors.
In the event of a dispute regarding the amount of any cure or other payment, the
ability of any Reorganized Debtor or an assignee to provide adequate assurance
of future performance, or any other matter pertaining to assumption or
assignment, the Reorganized Debtors shall make such cure or other payments
required by section 365(b)(1) of the Bankruptcy Code following the entry of a
Final Order resolving such dispute. The Reorganized Debtors shall cure all other
defaults existing under any executory contract or unexpired lease which is
assumed under the Plan.
Each Person who is a party to an executory contract or unexpired
lease rejected pursuant to Section 7.1 of the Plan shall be entitled to file,
not later than thirty (30) days after such rejection, a proof of Claim for
damages alleged to arise from the rejection of such executory contract or
unexpired lease to which such Person is a party. Objections to any such proof of
Claim shall be filed not later than sixty (60) days after such proof of Claim is
filed, and the Bankruptcy Court shall determine any such objections. Payment of
such Claim shall be made on the later of (i) ten Business Days after the
expiration of the sixty-day period for filing an objection in respect of any
proof of Claim filed in respect of a rejected executory contract or unexpired
lease and (ii) ten Business Days after the Claim has been Allowed by a Final
Order, provided that no such payments shall be made before the Effective Date.
Allowed Claims arising out of the rejection of executory contracts
or unexpired leases shall be Class 7 Claims.
2. Substantive Consolidation
The Plan is predicated upon the Bankruptcy Court entering an order
granting the Debtors' motion for substantive consolidation of the Chapter 11
Case. The Debtors' motion for an order directing the substantive consolidation
of the Chapter 11 case and a
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memorandum of law in support thereof will be filed shortly with the Bankruptcy
Court and will be returnable at or shortly before the Plan Confirmation hearing.
Notice of the motion will be provided to all entities receiving ballots, and
copies of the motion and memorandum of law will be made available upon request
at the Debtors' expense.
Substantive consolidation is an equitable remedy which a bankruptcy
court may be asked to apply in those Chapter 11 cases involving affiliated
debtors. As contrasted with procedural consolidation (which has already been
accomplished pursuant to the Bankruptcy Court's Joint Administration Order),(1)
substantive consolidation may affect the substantive rights and obligations of
creditors and debtors. Substantive consolidation involves the pooling of the
assets and liabilities of the affected debtors (to be substantively
consolidated). All the debtors in the substantively consolidated group are
treated as if they were a single corporate/economic entity.
Consequently, a creditor of the substantively consolidated debtors
is treated as a creditor of the substantively consolidated group of debtors and
issues of individual corporate ownership of property and individual corporate
liability on obligations are ignored. Substantive consolidation, however, does
not affect the debtors' separate corporate existence or independent ownership of
property for any purpose other than for making distributions of property under a
plan of reorganization or otherwise as necessary to implement such plan.
Pursuant to the Plan, however, the Merger Subsidiaries will be merged with and
into the U.S. Holding Company. See "DESCRIPTION OF PLAN OF
REORGANIZATION--Certain Other Provisions of the Plan--Merger of Reorganized
Debtors."
The granting of substantive consolidation by the Bankruptcy Court
turns on two primary factors: (i) whether creditors dealt with the entities as a
single economic unit and did not rely on their separate identity in extending
credit; or (ii) whether the affairs of the Debtors are so entangled that
consolidation would benefit creditors. The Bankruptcy Court will review the
record to determine whether substantive consolidation results in fairness to the
Debtors' creditors.
As mentioned above, the Plan contemplates and is predicated upon the
substantive consolidation of the estates of all the Debtors into a single entity
solely for the purpose of the Plan and all actions with respect to confirmation
and consummation of the Plan. On the Effective 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
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(1) Procedural consolidation or joint administration has no effect on the
substantive rights of debtors and their respective creditors, interest
holders or other parties. Rather, it is simply an administrative process
under Bankruptcy Rule 1015(b) whereby the affiliated debtors remain
separate entities while there is a joint handling of purely administrative
matters to expedite the cases.
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Claims by and among the Debtors will be released; (ii) all assets and all
proceeds thereof and all liabilities of the Debtors will be deemed merged or
treated as though they were merged; (iii) any obligation of any Debtor and all
guarantees thereof executed by any of the Debtors will be deemed to be one
obligation of the Debtors; (iv) any Claims filed or to be filed in connection
with any such obligation and such guarantees will be deemed one Claim against
the Debtors; (v) each and every Claim filed in the individual Chapter 11 Case of
any of the Debtors will be deemed one Claim filed against the Debtors; (vi) all
duplicative Claims filed against more than one of the Debtors will be
automatically expunged so that only one Claim survives against the Debtors;
(vii) all Equity Interests of any Debtor in any other Debtor shall be deemed
automatically cancelled and retired by operation of law and shall cease to
exist; and (viii) the Debtors will be deemed, for purposes of determining the
availability of the right of set-off under section 553 of the Bankruptcy Code,
to be one entity, so that, subject to other provisions of section 553 of the
Bankruptcy Code, the debts due to a particular Debtor may be offset against
Claims against such Debtor or another Debtor.
On the Effective 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. Absent substantive
consolidation, the allowance of these multiple Claims has the effect of diluting
the amounts payable to holders of General Unsecured Claims generally, as a
consequence of such unsecured creditors having to share their distributions with
additional creditors holding large Claims.
The Debtors believe that the substantive consolidation contemplated
herein is proper and shall not affect any intercompany Claims and equity
interests between any of the Debtors and any of the non-Debtor subsidiaries of
Discovery Zone, which shall remain outstanding. Additionally, the Debtors
believe that they will be successful on their motion for substantive
consolidation (to be filed shortly as discussed above) for a number of reasons
(not limited to the following). First, the Debtors' creditors did not deal with
each Debtor as a single economic unit, but rather, the Debtors were dealt with
together as a single "Discovery Zone" entity. Second, with only few exceptions,
the Debtors shared overhead, management, accounting and related expenses.
Finally, the Claims against and the other affairs of the Debtors are so
intermingled that the denial of substantive consolidation would result in a
costly, time-consuming administrative burden.
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3. Merger of Reorganized Debtors
Simultaneously with the commencement of the Effective Date,
Reorganized Discovery Zone, the U.S. Holding Company and the Merger
Subsidiaries(1) will take all such actions as may be necessary or appropriate to
effect the Merger Transactions on the terms and subject to the conditions set
forth in the Merger Agreement. Without limiting the generality of the foregoing
sentence, promptly upon the satisfaction or waiver of each of the conditions set
forth in the Merger Agreement, the U.S. Holding Company and the Merger
Subsidiaries will cause the Merger Agreement, a certificate of merger or other
appropriate documentation conforming to the applicable provisions of the laws of
its jurisdiction of organization to be appropriately filed in such jurisdiction
pursuant to applicable provisions of such laws and will take or cause to be
taken all other actions, including making appropriate filings or recordings,
that may be required by such laws or other applicable laws in connection with
the Merger Transactions.
4. Securities Law Matters
In reliance upon an exemption from the registration requirements of
the Securities Act and state and local securities laws afforded by section 1145
of the Bankruptcy Code, the New Common Stock and the Ten Year Reorganized DZ
Warrants to be issued on the Effective Date to holders of Allowed Class 6, 7, 8,
9 and 10 Claims as provided in the Plan, as well as the shares of common stock
of Reorganized Discovery Zone (the "Warrant Shares") issuable upon the exercise
of the Ten Year Reorganized DZ Warrants, will not need to be registered under
the Securities Act of 1933, as amended (the "Securities Act"), or any state or
local securities law. Section 1145, generally, exempts from such registration
requirements the offer or sale of (A) a debtor's securities under a chapter 11
plan if such securities are offered or sold in exchange for a claim against, or
interest in, or an administration expense claim against such debtor, or if such
securities are offered or sold principally in such exchange and partly for Cash
and (B) a security through or upon the exercise of any warrant, option, right to
subscribe or conversion privilege offered or sold in the manner specified in
clause (A).
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(1) The Merger Subsidiaries are Beaverton Fun Fitness, Inc., DJM Management,
Inc., DZ of Connecticut, Inc., DZ of Georgia, Inc., DZ of Massachusetts,
Inc., DZ of Missouri, Inc., DZ of New York, Inc., DZ of Pennsylvania,
Inc., DZ of Wisconsin, Inc., Portland Fun Fitness, Inc., Vancouver Fun
Fitness, Inc., Leaps & Bounds, Inc., DZ Party, Inc., DZGP, Inc., Discovery
Zone Children's Amusement Corporation, Discovery Zone L.P., Tumble for Fun
Limited Partnership, Metrozone, Inc. and Enchanted Castle II, Inc.
Metrozone, Inc. and Enchanted Castle II, Inc., which are not Debtors, are
each a Delaware corporation and a wholly owned subsidiary of Discovery
Zone, Inc. and have neither assets nor creditors.
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The shares of New Common Stock and the Ten Year Reorganized DZ
Warrants issued to holders of Allowed Class 6, 7, 8, 9 and 10 Claims pursuant to
the Plan on the Effective Date and the Warrant Shares generally may be resold by
any holder without registration under the Securities Act or other federal
securities laws pursuant to the exemption provided by Section 4(1) of the
Securities Act, unless the holder is an "underwriter" with respect to such
securities, as that term is defined in the Bankruptcy Code (a "statutory
underwriter"). In addition, such securities generally may be resold by the
recipients thereof without registration on the state level pursuant to various
exemptions provided by the respective laws of the several states. However,
recipients of securities issued under the Plan are advised to consult with their
own counsel as to the availability of any such exemption from registration under
state law in any given instance and as to any applicable requirements or
conditions to the availability thereof.
Section 1145(b) of the Bankruptcy Code defines "underwriter" for
purposes of the Securities Act as one who (i) purchases a claim or interest with
a view to distribution of any security to be received in exchange for such claim
or interest, or (ii) offers to sell securities issued under a plan for the
holders of such securities, or (iii) offers to buy securities issued under a
plan from persons receiving such securities, if the offer to buy is made with a
view to distribution of such securities, or (iv) is a person directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the issuer of the securities (in this case, Reorganized Discovery
Zone).
Holders of New Common Stock, Ten Year Reorganized DZ Warrants or
Warrant Shares who are deemed to be statutory underwriters may not reoffer or
resell such securities except pursuant to an effective registration or an
exemption from registration under the Securities Act and state securities or
blue laws. Such holders who believe they may be statutory underwriters under the
definition contained in section 1145 of the Bankruptcy Code are advised to
consult their own counsel with respect to the availability of such an exemption.
THE FOREGOING SUMMARY DISCUSSION IS GENERAL IN NATURE AND HAS BEEN
INCLUDED IN THIS DISCLOSURE STATEMENT SOLELY FOR INFORMATIONAL PURPOSES. THE
PLAN PROPONENTS MAKE NO REPRESENTATIONS CONCERNING, AND DO NOT HEREBY PROVIDE
ANY OPINION OR ADVICE WITH RESPECT TO, THE SECURITIES LAW AND BANKRUPTCY LAW
MATTERS DESCRIBED ABOVE. IN LIGHT OF THE COMPLEX AND SUBJECTIVE INTERPRETIVE
NATURE OF WHETHER A PARTICULAR RECIPIENT OF NEW SECURITIES MAY BE DEEMED TO BE
AN "UNDERWRITER" WITHIN THE MEANING OF SECTION 1145(b)(1) OF THE BANKRUPTCY CODE
AND/OR AN "AFFILIATE" UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS, AND
THE UNCERTAINTY CONCERNING THE AVAILABILITY OF THE EXEMPTIONS FROM THE
REGISTRATION
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REQUIREMENTS OF THE SECURITIES ACT AND EQUIVALENT STATE SECURITIES AND "BLUE
SKY" LAWS FOR OFFERS AND RESALES OF NEW COMMON STOCK, TEN YEAR REORGANIZED DZ
WARRANTS AND WARRANT SHARES, THE PLAN PROPONENTS ENCOURAGE POTENTIAL RECIPIENTS
OF NEW COMMON STOCK AND TEN YEAR REORGANIZED DZ WARRANTS TO CONSIDER CAREFULLY
AND CONSULT WITH THEIR OWN LEGAL ADVISOR(S) WITH RESPECT TO SUCH (AND ANY
RELATED) MATTERS. THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREWITH.
5. Stock Incentive Plan
Subject to approval by the Board of Directors of Reorganized
Discovery Zone (the "New Board"), subsequent to the Effective Date, Reorganized
Discovery Zone shall implement a Stock Incentive Plan, substantially in the form
annexed to the Plan as Exhibit F. The purposes of the Stock Incentive Plan are
to give Reorganized Discovery Zone a competitive advantage in attracting,
retaining and motivating officers and employees and to provide Reorganized
Discovery Zone with a stock plan providing incentives more directly linked to
the profitability of Reorganized Discovery Zone's businesses and increases in
shareholder value. The general, material terms of the Stock Incentive Plan are
as follows:
a. Anticipated Stock Option Grants
Total Amount of Options Available (as % of New Common Stock on a fully
diluted basis):
Participants:
Chief Executive Officer 5%
Other Key Employees 5%
--
Total 10%
Pricing:
Options will have a strike price based upon the fair market value of
the New Common Stock as determined in good faith by the Compensation
Committee (as defined below) of the New Board.
The stock option component of the Stock Incentive Plan shall in no
event result in a dilution of the amount of New Common Stock to be issued to
holders of Allowed Claims pursuant to the Plan of greater than 10%.
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Section 5.10 of the Plan provides that, by voting to accept the
Plan, all holders of Claims in Classes 6, 7, 8, 9 and 10 (who, immediately
following the effectiveness of the Plan, shall comprise the stockholders of
Reorganized Discovery Zone) shall be deemed to have ratified and approved the
Stock Incentive Plan. In addition, after the Effective Date, for purposes of
becoming exempt from the deduction limits set forth in Section 162(m) of the
Internal Revenue Code, it is expected that holders of a majority of the
then-outstanding New Common Stock will approve the material terms of the Stock
Incentive Plan. In connection therewith, the following is a summary of the
material terms of the Stock Incentive Plan.
b. Administration and Eligible Participants
The Stock Incentive Plan is to be administered by a committee (the
"Compensation Committee") of the New Board which consists of two or more members
of the New Board designated by the New Board to administer the plan, each of
whom is intended to be a "Non-Employee Director" (within the meaning of Rule
16b-3 promulgated under the Securities Exchange Act of 1934) and an "outside
director" (within the meaning of Internal Revenue Code section 162(m)).
Officers and employees of Reorganized Discovery Zone and its
subsidiaries and affiliates shall be eligible to be granted awards under the
Stock Incentive Plan.
Reorganized Discovery Zone anticipates granting awards to its Chief
Executive Officer and other as-yet unidentified key employees. The Compensation
Committee has the authority to determine the participants to whom awards shall
be granted under the Stock Incentive Plan; to determine whether and to what
extent incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock and performance units or any combination thereof are to
be granted; to determine the number of shares of New Common Stock to be covered
by each award granted; to determine the terms and conditions of any award
granted hereunder (including, but not limited to, the option price), any vesting
condition, restriction or limitation and any vesting acceleration or forfeiture
waiver regarding any award and the shares of New Common Stock relating thereto,
based on such factors as the Compensation Committee shall determine; to modify,
amend or adjust the terms and conditions of any award, at any time or from time
to time, including but not limited to performance goals; provided, however, that
the Compensation Committee may not adjust upwards the amount payable with
respect to a qualified performance-based award or waive or alter the performance
goals associated therewith; to determine to what extent and under what
circumstances New Common Stock and other amounts payable with respect to an
award shall be deferred; and to determine under what circumstances an award may
be settled in Cash or New Common Stock.
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c. Number of Shares Authorized Under the Stock Incentive
Plan
The Stock Incentive Plan authorizes the grant of awards to
participants with respect to a maximum of 523,000 shares of the New Common Stock
("Shares"), which number represents 10% of the New Common Stock on a fully
diluted basis; provided that the maximum number of Shares with respect to which
stock options and stock appreciation rights may be granted to any participant in
the Stock Incentive Plan in any fiscal year may not exceed 265,000 Shares. If
any shares of restricted stock are forfeited, or if any stock option (and
related stock appreciation right, if any) terminates without being exercised, or
if any stock appreciation right is exercised for Cash, then the Shares covered
by such award shall again be available for distribution in connection with
awards under the Stock Incentive Plan.
In the event of a change in corporate capitalization, a corporate
transaction, another distribution of stock or property of Reorganized Discovery
Zone, a reorganization or a partial or complete liquidation of Reorganized
Discovery Zone, the Compensation Committee or New Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Stock Incentive Plan, in the number, kind and option
price of shares subject to outstanding stock options and stock appreciation
rights, in the number and kind of shares subject to other outstanding awards
granted under the Stock Incentive Plan and/or such other equitable substitution
or adjustments as it may determine to be appropriate in its sole discretion.
d. Stock Options
Non-qualified and incentive stock options granted under the Stock
Incentive Plan shall be subject to such terms, including option price, option
term, exercisability and method of exercise, as may be determined by the
Compensation Committee and specified in the applicable award agreement or
thereafter.
Payment in respect of the exercise of an option granted under the
Stock Incentive Plan may be made in certified or bank check, or, if approved by
the Compensation Committee, payment, in full or in part, may also be made in the
form of unrestricted New Common Stock already owned by the optionee (based on
the fair market value of the New Common Stock on the date the stock option is
exercised); provided, however, that, in the case of an incentive stock option
the right to make a payment in the form of already owned Shares may be
authorized only at the time the stock option is granted and provided, further
that such already owned shares have been held by the optionee for at least six
months at the time of exercise. In the discretion of the Compensation Committee,
payment for any shares subject to a stock option may also be made by (i)
delivering a properly executed exercise notice to Reorganized Discovery Zone,
together with a copy of irrevocable instructions to a broker to deliver promptly
to Reorganized Discovery Zone the amount of sale or loan proceeds necessary to
pay the purchase price, and, if requested, by the amount of any
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federal, state, local or foreign withholding taxes; or (ii) instructing the
Compensation Committee to withhold a number of such shares of a fair market
value on the date of exercise equal to the aggregate exercise price of such
stock option.
No stock option shall be transferable by the optionee other than (i)
by will or by the laws of descent and distribution; or (ii) in the case of a
nonqualified stock option, as otherwise expressly permitted under the applicable
option agreement including, if so permitted, pursuant to a gift to a member of
such optionee's family, whether directly or indirectly or by means of a trust or
partnership or otherwise.
Unless otherwise determined by the Compensation Committee, if an
optionee's employment terminates by reason of death, any stock option held by
such optionee may thereafter be exercised, to the extent then exercisable, or on
such accelerated basis as the Compensation Committee may determine, for a period
of one year (or such other period as the Compensation Committee may specify in
the option agreement) from the date of such death or until the expiration of the
stated term of such stock option, whichever period is the shorter.
Unless otherwise determined by the Compensation Committee, if an
optionee's employment terminates by reason of disability, any stock option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination, or on such accelerated basis as the
Compensation Committee may determine, for a period of three years (or such
shorter period as the Compensation Committee may specify in the option
agreement) from the date of such termination of employment or until the
expiration of the stated term of such stock option, whichever period is the
shorter; provided, however, that if the optionee dies within such period, any
unexercised stock option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of 12 months from the date of
such death or until the expiration of the stated term of such stock option,
whichever period is the shorter. In the event of termination of employment by
reason of disability, if an incentive stock option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Internal Revenue Code, such stock option will thereafter be treated as a
nonqualified stock option.
Unless otherwise determined by the Compensation Committee, if an
optionee's employment terminates by reason of retirement, any stock option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of such retirement, or on such accelerated basis as
the Compensation Committee may determine, for a period of five years (or such
shorter period as the Compensation Committee may specify in the option
agreement) from the date of such termination of employment or until the
expiration of the stated term of such stock option, whichever period is the
shorter; provided, however, that if the optionee dies within such period any
unexercised stock option held by
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such optionee shall, notwithstanding the expiration of such period, continue to
be exercisable to the extent to which it was exercisable at the time of death
for a period of 12 months from the date of such death or until the expiration of
the stated term of such stock option, whichever period is the shorter. In the
event of termination of employment by reason of retirement, if an incentive
stock option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Internal Revenue Code, such stock
option will thereafter be treated as a nonqualified stock option.
Unless otherwise determined by the Compensation Committee: (A) if an
optionee incurs a Termination of Employment (as defined in the Stock Incentive
Plan) for Cause (as defined in the Stock Incentive Plan), all stock options held
by such optionee shall thereupon terminate; and (B) if an optionee incurs a
Termination of Employment for any reason other than death, disability or
retirement or for Cause, any stock option held by such optionee, to the extent
then exercisable, or on such accelerated basis as the Compensation Committee may
determine, may be exercised for the lesser of three months from the date of such
Termination of Employment or the balance of such stock option's term; provided,
however, that if the optionee dies within such three-month period, any
unexercised stock option held by such optionee shall, notwithstanding the
expiration of such three-month period, continue to be exercisable to the extent
to which it was exercisable at the time of death for a period of 12 months from
the date of such death or until the expiration of the stated term of such stock
option, whichever period is the shorter. In the event of Termination of
Employment, if an incentive stock option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Internal
Revenue Code, such stock option will thereafter be treated as a nonqualified
stock option.
On receipt of written notice of exercise, the Compensation Committee
may elect to Cash out all or part of the portion of the Shares for which a stock
option is being exercised by paying the optionee an amount, in Cash or New
Common Stock, equal to the excess of the fair market value of the New Common
Stock over the option price times the number of Shares for which the option is
being exercised on the effective date of such Cashout.
Notwithstanding any other provision of the Stock Incentive Plan,
during the 60-day period from and after a Change in Control (as defined in the
Stock Incentive Plan) (the "Exercise Period"), unless the Compensation Committee
shall determine otherwise at the time of grant, an optionee shall have the
right, whether or not the stock option is fully exercisable and in lieu of the
payment of the exercise price for the Shares being purchased under the stock
option and by giving notice to Reorganized Discovery Zone, to elect (within the
Exercise Period) to surrender all or part of the stock option to Reorganized
Discovery Zone and to receive Cash, within 30 days of such notice, in an amount
equal to the amount by which the Change in Control Price (as defined in the
Stock Incentive Plan) per share of New Common Stock on the date of such election
shall exceed the exercise price per share of
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New Common Stock under the stock option multiplied by the number of Shares
granted under the stock option as to which the right granted under this
paragraph shall have been exercised. Notwithstanding the foregoing, if any right
granted pursuant to this paragraph would make a Change in Control transaction
ineligible for pooling-of-interests accounting under Accounting Principles
Bulletin No. 16 that but for the nature of such grant would otherwise be
eligible for such accounting treatment, the Compensation Committee shall have
the ability to substitute for the Cash payable pursuant to such right New Common
Stock with a fair market value equal to the Cash that would otherwise be payable
hereunder.
The Compensation Committee may from time to time establish
procedures pursuant to which an optionee may elect to defer, until a time or
times later than the exercise of an option, receipt of all or a portion of the
Shares subject to such option and/or to receive Cash at such later time or times
in lieu of such deferred shares, all on such terms and conditions as the
Compensation Committee shall determine.
e. Stock Appreciation Rights
Stock Appreciation Rights (as defined in the Stock Incentive Plan)
may be granted in conjunction with all or part of any stock option granted under
the Stock Incentive Plan. A Stock Appreciation Right shall terminate and no
longer be exercisable upon the termination or exercise of the related stock
option. A Stock Appreciation Right may be exercised by an optionee by
surrendering the applicable portion of the related stock option in accordance
with procedures established by the Compensation Committee. Stock options which
have been so surrendered shall no longer be exercisable to the extent the
related Stock Appreciation Rights have been exercised.
Stock Appreciation Rights granted under the Stock Incentive Plan
shall be subject to such terms and the conditions as shall be determined by the
Compensation Committee and specified in the applicable award agreement or
thereafter; provided that Stock Appreciation Rights may be exercisable only at
such time or times and to the extent that the stock option to which they relate
are exercisable. Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in Cash, Shares or both, in value equal
to the excess of the fair market value of one Share over the option price per
Share specified in the related stock option multiplied by the number of Shares
in respect of which the Stock Appreciation Right shall have been exercised, with
the Compensation Committee having the right to determine the form of payment.
Stock Appreciation Rights shall be transferable only to permitted transferees of
the underlying stock option.
Upon the exercise of a Stock Appreciation Right, the stock option or
part thereof to which such Stock Appreciation Right is related shall be deemed
to have been exercised for the purpose of the limitation set forth above on the
number of Shares to be issued under the Stock Incentive Plan, but only to the
extent of the number of Shares covered
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by the Stock Appreciation Right at the time of exercise based on the value of
the Stock Appreciation Right at such time.
f. Restricted Stock
Shares of restricted stock may be awarded either alone or in
addition to other awards granted under the Stock Incentive Plan. The
Compensation Committee shall determine the officers and employees to whom and
the time or times at which grants of restricted stock will be awarded, the
number of Shares to be awarded to any participant (subject to the aggregate
limit on grants to individual participants set forth above), the conditions for
vesting, the time or times within which such awards may be subject to forfeiture
and any other terms and conditions of the awards, in addition to those described
below.
The Compensation Committee may, prior to or at the time of grant,
designate an award of restricted stock as a qualified performance-based award,
in which event it shall condition the grant or vesting, as applicable, of such
restricted stock upon the attainment of performance goals, or it may condition
the grant or vesting thereof upon the attainment of performance goals. The
Compensation Committee may also condition the grant or vesting thereof upon the
continued service of the participant. The Compensation Committee may at any
time, in its sole discretion, accelerate or waive, in whole or in part, any of
the foregoing restrictions; provided, however, that in the case of restricted
stock that is a qualified performance-based award, the applicable performance
goals have been satisfied.
During the restriction period, if any, the participant shall not be
permitted to sell, assign, transfer, pledge or otherwise encumber shares of
restricted stock; provided that the foregoing shall not prevent a participant
from pledging restricted stock as security for a loan, the sole purpose of which
is to provide funds to pay the option price for stock options.
Except as otherwise provided, the participant shall have, with
respect to the shares of restricted stock, all of the rights of a stockholder of
Reorganized Discovery Zone holding New Common Stock that is the subject of the
restricted stock award, including, if applicable, the right to vote the Shares
and the right to receive any Cash dividends. If so determined by the
Compensation Committee in the applicable restricted stock agreement, (A) Cash
dividends on the New Common Stock that is the subject of the restricted stock
award shall be automatically deferred and reinvested in additional restricted
stock, held subject to the vesting of the underlying restricted stock, or held
subject to meeting performance goals applicable only to dividends, and (B)
dividends payable in New Common Stock shall be paid in the form of restricted
stock held subject to the vesting of the underlying restricted stock, or held
subject to meeting performance goals applicable only to dividends.
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Except to the extent otherwise provided, upon a participant's
Termination of Employment for any reason during the restriction period or before
the applicable performance goals are satisfied, all shares still subject to
restriction shall be forfeited by the participant.
Except to the extent otherwise provided in the event of a Change in
Control, in the event that a participant retires or such participant's
employment is involuntarily terminated (other than for Cause), the Compensation
Committee shall have the discretion to waive, in whole or in part, any or all
remaining restrictions (other than, in the case of restricted stock with respect
to which a participant is a Covered Employee (as defined in the employee
incentive plan), satisfaction of the applicable performance goals unless the
participant's employment is terminated by reason of death or disability) with
respect to any or all of such participant's shares of restricted stock.
g. Performance Units
Performance units may be awarded either alone or in addition to
other awards granted under the Plan. The Compensation Committee shall determine
the officers and employees to whom and the time or times at which performance
units shall be awarded, the number of performance units to be awarded to any
participant (subject to the aggregate limit on grants to individual participants
set forth above), the duration of the award cycle and any other terms and
conditions of the award.
The Compensation Committee may, prior to or at the time of the
grant, designate performance units as qualified performance-based awards, in
which event it shall condition the settlement thereof upon the attainment of
performance goals, or it may condition the settlement thereof upon the
attainment of performance goals. The Compensation Committee may also condition
the settlement thereof upon the continued service of the participant. Except as
otherwise provided, performance units may not be sold, assigned, transferred,
pledged or otherwise encumbered during the award cycle.
Except to the extent otherwise provided, upon a participant's
Termination of Employment for any reason during the award cycle or before any
applicable performance goals are satisfied, all rights to receive Cash or stock
in settlement of the performance units shall be forfeited by the participant.
Except to the extent otherwise provided in the event of a Change in Control, in
the event that a participant's employment is terminated (other than for Cause),
or in the event a participant retires, the Compensation Committee shall have the
discretion to waive, in whole or in part, any or all remaining payment
limitations (other than, in the case of performance units that are qualified
performance-based awards, satisfaction of the applicable performance goals
unless the participant's employment is terminated by reason of death or
disability) with respect to any or all of such participant's performance units.
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A participant may elect to further defer receipt of Cash or shares
in settlement of performance units for a specified period or until a specified
event, subject in each case to the Compensation Committee's approval and to such
terms as are determined by the Compensation Committee.
At the expiration of the award cycle, the Compensation Committee
shall evaluate Reorganized Discovery Zone's performance in light of any
performance goals for such award, and shall determine the number of performance
units granted to the participant which have been earned, and the Compensation
Committee shall then cause to be delivered (A) a number of Shares equal to the
number of performance units determined by the Compensation Committee to have
been earned, or (B) Cash equal to the fair market value of such number of Shares
to the participant, as the Compensation Committee shall elect (subject to any
deferral).
h. Tax Offset Bonuses
At the time an award is made hereunder or at any time thereafter,
the Compensation Committee may grant to the participant receiving such award the
right to receive a Cash payment in an amount specified by the Compensation
Committee, to be paid at such time or times (if ever) as the award results in
compensation income to the participant, for the purpose of assisting the
participant to pay the resulting taxes.
i. Term and Amendment to Stock Incentive Plan
The Stock Incentive Plan will terminate 10 years after the effective
date of the Stock Incentive Plan. Under the Stock Incentive Plan, awards
outstanding as of such date shall not be affected or impaired by such
termination.
The New Board may amend, alter, or discontinue the Stock Incentive
Plan, but no amendment, alteration or discontinuation shall be made which would
impair the rights of an optionee under a stock option or a recipient of a stock
appreciation right, restricted stock award or performance unit award theretofore
granted without the optionee's or recipient's consent, except such an amendment
made to cause the Stock Incentive Plan to qualify for any exemption provided by
Rule 16b-3 of the Exchange Act. In addition, no such amendment shall be made
without the approval of the stockholders to the extent such approval is required
by law or agreement.
The Compensation Committee may amend the terms of any stock option
or other award theretofore granted, prospectively or retroactively, but no such
amendment shall cause a qualified performance-based award to cease to qualify
for the exemption under Section 162(m) of the Internal Revenue Code or impair
the rights of any holder without the
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holder's consent except such an amendment made to cause the Stock Incentive Plan
or award to qualify for any exemption provided by Rule 16b-3 of the Exchange
Act.
j. Federal Income Tax Consequences Relating to Stock
Options
The following summary of the federal income tax consequences of the
grant and exercise of nonqualified and incentive stock options awarded under the
Stock Incentive Plan, and the disposition of Shares purchased pursuant to the
exercise of such stock options, is intended to reflect the current provisions of
the Internal Revenue Code and the regulations promulgated thereunder. This
summary is not intended to be a complete statement of applicable law, nor does
it address state and local tax considerations. Each recipient of an award is
urged to consult his or her own tax advisor as to the specific tax consequences
regarding the grant of an award.
No income will be realized by an optionee upon grant of a
nonqualified stock option. Upon exercise of a nonqualified stock option, the
optionee will recognize ordinary compensation income in an amount equal to the
excess, if any, of the fair market value of the underlying stock over the option
exercise price (the "Spread") at the time of exercise. The Spread will be
deductible by Reorganized Discovery Zone for federal income tax purposes subject
to the possible limitations on deductibility under sections 280G and 162(m) of
the Internal Revenue Code of compensation paid to executives covered by those
sections. The optionee's tax basis in the underlying shares acquired by exercise
of a nonqualified stock option will equal the exercise price plus the amount
taxable as compensation to the optionee. Upon sale of the shares received by the
optionee upon exercise of the nonqualified stock option, any gain or loss is
generally long-term or short-term capital gain or loss, depending on the holding
period. The optionee's holding period for shares acquired pursuant to the
exercise of a nonqualified stock option will begin on the date of exercise of
such option.
Notwithstanding the foregoing, pursuant to applicable rules under
section 16(b) of the Exchange Act, the grant of an option (and not its exercise)
to a person who is subject to the reporting and short-swing profit provisions
under section 16 of the Exchange Act (a "Section 16 Person") may begin a
six-month holding period that (absent a written election (pursuant to Internal
Revenue Code Section 83(b)) filed with the Internal Revenue Service within 30
days after the date of transfer of Shares to include the Spread in income)
defers the timing of income recognition until the end of the filing period (the
"Deferral Period"). There will be no Deferral Period if the option grant is (a)
approved in advance by the New Board (or a committee composed solely of two or
more "non-employee directors" as defined under applicable law) or (b) approved
in advance, or subsequently ratified by Reorganized Discovery Zone's
shareholders no later than the next annual meeting of shareholders.
Consequently, the taxable event for the exercise of an option granted in
conformance with the requirements described in clause (a) or (b) above will be
the date of exercise.
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The payment by an optionee of the exercise price, in full or in
part, with previously acquired Shares will not affect the tax treatment of the
exercise described above. No gain or loss generally will be recognized by the
optionee upon the surrender of the previously acquired Shares to Reorganized
Discovery Zone, and Shares received by the optionee, equal in number to the
previously surrendered Shares, will have the same tax basis as the Shares
surrendered to Reorganized Discovery Zone and will have a holding period that
includes the holding period of the Shares surrendered. The value of Shares
received by the optionee in excess of the number of Shares surrendered to
Reorganized Discovery Zone will be taxable to the optionee. Such additional
Shares will have a tax basis equal to the fair market value of such additional
Shares as of the date ordinary income is recognized, and will have a holding
period that begins on the date ordinary income is recognized.
The Internal Revenue Code generally requires that, for incentive
stock option treatment: (i) shares acquired through exercise of an incentive
stock option cannot be disposed of before two years from the date of grant and
one year from the date of exercise, and (ii) at all times during the period
beginning on the date of grant of the option and ending on the day three months
before the date of exercise, the optionee was an employee of either the issuer
or its subsidiaries. Incentive stock option holders will generally incur no
federal income tax liability at the time of grant or upon exercise of such
options. However, the Spread will be an item of adjustment which may give rise
to "alternative minimum tax" liability at the time of exercise. If the optionee
does not dispose of the Shares before two years from the date of grant and one
year from the date of exercise, the difference between the exercise price and
the amount realized upon disposition of the Shares will constitute long-term
capital gain or loss, as the case may be. Assuming both the holding periods are
satisfied, no deduction will be allowable to Reorganized Discovery Zone for
federal income tax purposes in connection with the grant or exercise of the
option or disposition of the Shares. If, within two years of the date of grant
or within one year from the date of exercise, the holder of Shares acquired
through the exercise of an incentive stock option disposes of such Shares, the
optionee will generally realize ordinary taxable compensation at the time of
such disposition equal to the difference between the exercise price and the
lesser of the fair market value of the stock on the date of initial exercise or
the amount realized on the subsequent disposition, and such amount will
generally be deductible by Reorganized Discovery Zone for federal income tax
purposes, subject to the possible limitations on deductibility under sections
280G and 162(m) of the Internal Revenue Code for compensation paid to executives
covered by those sections.
6. Public Listing of New Common Stock
In the event the Debtors make the Complete Cash Distribution and
Deposit, Reorganized Discovery Zone will have no obligation under the Plan to
obtain a Listing (as defined below) for the New Common Stock or the Ten Year
Reorganized DZ Warrants. However, if the Debtors do not make the Complete Cash
Distribution and Deposit and a
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Listing has not been obtained, Reorganized Discovery Zone must use commercially
reasonable efforts, beginning on the first anniversary of the Effective Date, to
obtain by no later than fifteen (15) months after the Effective Date (i) a
continuing listing of the New Common Stock and Ten Year Reorganized DZ Warrants
on a national stock exchange or (ii) a continuous quotation of the
aforementioned securities quoted through any tier of the Nasdaq Stock Market (in
either case, a "Listing"). If the application for a Listing is denied,
Reorganized Discovery Zone shall use commercially reasonable efforts to cure the
conditions which resulted in such denial, and Reorganized Discovery Zone shall
reapply for Listing promptly after such conditions are cured.
7. Employee Retention Plan
On the Effective Date and thereafter, Reorganized Discovery Zone
will implement and make those payments required under the Employee Retention
Plan which, in the aggregate, will not exceed $500,000 (not including any
possible severance payments). The following Employee Retention Program, which is
attached as Exhibit C to the Plan, will be implemented by Reorganized Discovery
Zone pursuant to section 5.11 of the Plan. Under the Employee Retention Plan,
employees are divided into four levels, and employees at each level are entitled
to different benefits. Neither Ms. Donna Moore, Mr. Scott Bernstein, Ms. Sharon
Rothstein nor Mr. Robert Rooney are included in the Employee Retention Plan. All
employment contracts will be rejected pursuant to section 365(a) of the
Bankruptcy Code.
a. Level I Employees
Level I employees are the Vice Presidents and the Controller. Each
Level I employee will receive a 1996 Annual Bonus Payment equalling twenty
percent (20%) of such Level I employee's salary. As approved by the Bankruptcy
Court on November 14, 1996, one-third of the 1996 Annual Bonus Payment, not to
exceed $5,000, will be paid on or before November 30, 1996 as an Interim Stay
Bonus. The remaining portion of the 1996 Annual Bonus Payment will be paid on
the earlier of March 30, 1997 and the Effective Date. The terms and conditions
of the 1997 Annual Bonus Payment for Level I employees will be established by
Reorganized Discovery Zone's Chief Executive Officer after the Effective Date.
Level I employees are also eligible to receive a Bonus Payment For
Emergence From Chapter 11 in recognition of the additional time and effort
required in assisting Discovery Zone to confirm the Plan. A Level I employee's
Bonus Payment For Emergence From Chapter 11 will be equal to the amount of that
employee's Annual Bonus Payment (including the Interim Bonus Payment) as of the
date the Plan is confirmed, provided that such employee is either (i) in good
standing at that time or (ii) entitled to receive such payment under "Severance"
below. Bonus Payments For Emergence From Chapter 11 will be made on the
Effective Date. In order to provide assurance to employees, Discovery Zone's
current Severance Plan is incorporated in the Employee Retention Program
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and will be approved under the Plan. In the event a Level I employee or an
employee who serves as an officer is terminated without cause, such employee
shall receive as severance (i) six (6) months of severance pay, or, if greater,
severance pay equal to 1.7 weeks per year of continuous service, (ii) a pro rata
portion of his or her annual bonus for the year such termination occurs, based
on the number of days such employee was employed during such year, and (iii) if
the employee is terminated without cause during the period beginning 90 days
prior to the date a plan of reorganization is confirmed, the Bonus Payment For
Emergence From Chapter 11.
b. Level II Employees
Level II employees are the Corporate Directors and Regional
Directors of Operations. Each Level II employee will receive a 1996 Annual Bonus
Payment equal to ten percent (10%) of a Level II employee's annual salary. As
approved by the Bankruptcy Court on November 14, 1996, one-third of the 1996
Annual Bonus Payment will be paid on or before November 30, 1996 as an Interim
Stay Bonus. The remaining portion of the 1996 Annual Bonus Payment will be paid
on the earlier of March 30, 1997 and the Effective Date. The terms and
conditions of the 1997 Annual Bonus Payment for Level II employees will be
established by Reorganized Discovery Zone's Chief Executive Officer after the
Effective Date.
If a Level II employee is terminated without cause, such employee
shall receive as severance a pro rata portion of the annual bonus for the year
such termination occurs, based on the number of days such employee was employed
during such year. As provided in the Severance Plan, Level II employees are
entitled to a minimum of 3 months of severance pay, or, if greater, 1.7 weeks
per year of continuous service.
c. Level III Employees
Level III employees are the Corporate Managers and Field Managers.
Each Level III employee will receive a 1996 Annual Bonus Payment equal to seven
and one-half percent (7.5%) of such Level III employee's annual salary. As
approved by the Bankruptcy Court on November 14, 1996, one-third of the 1996
Annual Bonus Payment will be paid on or before November 30, 1996 as an Interim
Stay Bonus. The remaining portion of the 1996 Annual Bonus Payment will be paid
on the earlier of March 30, 1997 and the Effective Date. The terms and
conditions of the 1997 Annual Bonus Payment for Level III employees will be
established by Reorganized Discovery Zone's Chief Executive Officer after the
Effective Date.
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As provided in the Severance Plan, Level III employees are entitled
to a minimum of four weeks of severance pay, or, if longer, 1.7 weeks per year
of continuous service.
d. Level IV Employees
Level IV employees are non-management personnel. As provided in the
Severance Plan, Level IV employees are entitled to a minimum of two weeks of
severance pay, or, if longer, 1.7 weeks per year of continuous service.
e. Discretionary Pool
To receive a distribution from the discretionary pool, an employee
who is not a Level I employee must have clearly demonstrated a specific
contribution to Discovery Zone or the reorganization process as determined by an
officer of Discovery Zone. All payments from the discretionary pool must be
approved by the Chief Executive Officer and the Board of Directors of Discovery
Zone on or before the Effective Date. All payments from the Discretionary Pool
will be made on the Effective Date. The maximum amount which may be distributed
from the discretionary pool is $150,000.
8. Subordination
In consideration of the distributions to be made to the holders of
Class 6 Allowed Claims under the Plan, such holders shall each be deemed as of
the Effective Date to have agreed to limit the enforcement of any contractual or
statutory subordination of which they may be the beneficiaries to their right to
receive the consideration to be provided to them under the Plan and to have
agreed to allow the holders of Class 9 Allowed Claims to receive the
consideration to be provided to them under the Plan, free of any subordination
Claims that may otherwise be applicable. The subordination provisions under the
LYONS shall be enforced without exception and the holders of Allowed Class 9
Claims shall not receive any distribution under the Plan if, however, Class 9
rejects the Plan and one or more of the following occur: (i) any holder of an
Allowed Class 9 Claim files, or causes to be filed, an objection to confirmation
of the Plan in respect of its treatment of Class 9 Claims which objection is not
withdrawn at least three (3) business days prior to the Confirmation Hearing
Date, (ii) the Indenture Trustee files, or causes to be filed, any objection to
confirmation of the Plan (other than an objection relating solely to the payment
of the Indenture Trustees' fees and expenses), or (iii) the holder of Class 9
Claims and Class 1 Claims files any objection to confirmation of the Plan (other
than an objection described in the following paragraph).
Notwithstanding the preceding paragraph, if the holder of both Class
9 Claims and Class 1 Claims files an objection to those aspects of the Plan
reasonably calculated to
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protect that holder's Class 1 Claims, the filing of such objection shall in no
way affect the distribution of Reorganized DZ Units to the holders of Allowed
Class 9 Claims under the Plan.
9. Disputed Claims
No property shall be distributed under the Plan on account of any
Disputed Claim. Reorganized Discovery Zone shall establish, and hold in trust,
reserves (each being a "Disputed Claims Reserve") with respect to each Class of
Claims in which there exists a Disputed Claim and place in each Disputed Claims
Reserve property to be distributed on the later of the Effective Date and the
date such Claim becomes Allowed on account of such Claims to the extent such
Claims become Allowed.
Cash held in any Disputed Claims Reserve shall be held in a
segregated interest-bearing trust account. To the extent practicable,
Reorganized Discovery Zone may invest the Cash in any Disputed Claims Reserve in
a manner that will yield a reasonable net return, taking into account the safety
of the investment.
On or prior to the Confirmation Date, either (i) the Plan Proponents
and the Committee shall have jointly determined, and such determination shall
have been approved by the Bankruptcy Court, or (ii) the Bankruptcy Court shall
have determined, for each Class of Claims, other than Class 1A, the amount of
Cash and the number of Reorganized DZ Units sufficient to fund the Disputed
Claims Reserve with respect to each such Class. In accordance with the preceding
sentence, the Bankruptcy Court may estimate the maximum amount of Disputed
Claims in each Class for the purpose of funding each Disputed Claims Reserve in
accordance with Section 5.16 of the Plan.
In the event that the Cash or Reorganized DZ Units which are held in
a Disputed Claims Reserve with respect to a Class are insufficient to satisfy
the Allowed Claims of such Class, Reorganized Discovery Zone shall deposit into
the applicable Disputed Claims Reserve Reorganized DZ Units necessary to satisfy
such Allowed Claims as such Claims become Allowed by Final Order, the number of
such Reorganized DZ Units determined as if the Disputed Claim became an Allowed
Claim on the Effective Date. Notwithstanding any other provision of this Plan,
any Electing Holder whose Claim becomes Allowed after all Cash in the applicable
Disputed Claims Reserve has been distributed shall receive its Pro Rata portion
of Reorganized DZ Units.
The property in each Disputed Claims Reserve, including the
allocable portion of the net return yielded from the investment of any Cash in
such Disputed Claims Reserve, if any, and all regular and special dividends, if
any, that would have been received by the holder of shares of New Common Stock
that were held in each Disputed Claims Reserve,
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will be distributed by Reorganized Discovery Zone to the holders of the Disputed
Claims as such Claims become Allowed by Final Order.
To the extent that Claims ultimately Allowed in any Class exceed
prior estimates of the Claims in that Class, Reorganized Discovery Zone shall
distribute additional Reorganized DZ Units and Cash, if any, held in the
applicable Disputed Claims Reserve to the holders of such Claims so that the
final allocation of Reorganized DZ Units to such holders and to all holders in
Classes 6, 7, 8, and 10 represent the same Per Claim Distribution.
In the event there shall be, with respect to the Disputed Claims
Reserve for any Class, (i) an amount of Cash in excess of that required to pay
all Disputed Claims in such Class a twenty percent (20%) Cash distribution
pursuant to the Plan (assuming that all such Disputed Claims became Allowed), or
(ii) any Cash remaining in such Disputed Claims Reserve after all disputes
relating to Disputed Claims in such reserve have been resolved and all
distributions in respect of such Claims have been made, Reorganized Discovery
Zone shall distribute such Cash pro rata to all other Disputed Claims Reserves.
Any property remaining in any Disputed Claims Reserve (x) in excess of the
amount of Cash required to satisfy all Disputed Claims in Cash pursuant to the
Plan (assuming that all such Disputed Claims became Allowed Claims), or (y)
after the resolution of all disputes relating to Disputed Claims in such
reserve, shall become the property of Reorganized Discovery Zone.
10. Method of Resolution for Personal Injury Disputed Claims
Within thirty (30) days after the Effective Date, Reorganized
Discovery Zone shall mail to each holder of a Disputed Claim relating to a
personal injury (a "Personal Injury Disputed Claim") a form prepared by
Reorganized Discovery Zone, requesting such information as it believes is
necessary to evaluate such Personal Injury Disputed Claim.
No later than sixty (60) days after Reorganized Discovery Zone mails
such form to a holder of such a Personal Injury Disputed Claim, the holder must
return the completed form to Reorganized Discovery Zone and any Insurer on such
Personal Injury Disputed Claim which is entitled to participate in the
settlement process pursuant to agreement or applicable law. The completed form
must be signed, under penalty of perjury, by the holder and the holder's
counsel, if any, and the signature of the holder must be notarized.
Each form must include documentation which sets forth (i) the cause
of the injury, (ii) the nature and extent of the injury and (iii) a detailed
description of the compensation sought by the holder of the Personal Injury
Disputed Claim. This documentation may include: (i) copies of all medical bills;
(ii) copies of all medical reports; (iii) copies of all expert reports; (iv)
copies of all tax returns for the time periods for which
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the holder of the Personal Injury Disputed Claim is seeking compensation for
lost wages; (v) copies of all x-rays; (vi) copies of all MRIs; (vii) copies of
all wage statements, W-2 forms, W-4 forms, and 1099 forms for the time periods
for which the holder of the Personal Injury Disputed Claim is seeking
compensation for lost wages; (viii) copies of all pictures of any accident
scene; and (ix) in the case of wrongful death Claims, copies of all autopsy
reports. If the form is not returned in accordance with the provisions of the
Plan within the required sixty-day period, the Personal Injury Disputed Claim
shall be deemed disallowed.
Within ninety (90) days from the date on which Reorganized Discovery
Zone and the Insurer, if any, receive the form described above, Reorganized
Discovery Zone or, if there is an Insurer, Reorganized Discovery Zone and/or the
Insurer shall do one of the following:
(i) offer to settle the Personal Injury Disputed Claim;
(ii) deny the Personal Injury Disputed Claim; or
(iii) request additional information from the holder of the Personal
Injury Disputed Claim, including, without limitation, submission to an
independent medical examination.
If an offer of settlement is made, the holder must notify
Reorganized Discovery Zone of its decision to accept or reject the offer of
settlement in a writing received by Reorganized Discovery Zone within thirty
(30) days after the offer of settlement is made. If the holder accepts the offer
of settlement, the Personal Injury Disputed Claim shall be deemed to be Allowed
on the date on which Reorganized Discovery Zone and/or the Insurer, as the case
may be, receives notice of such acceptance. If the offer of settlement is not
accepted or rejected within such thirty-day period, the offer of settlement
shall be deemed accepted.
If additional information is requested, the holder must provide such
additional information to Reorganized Discovery Zone within sixty (60) days of
the request. If Reorganized Discovery Zone does not receive such additional
information within such sixty-day period, the Personal Injury Disputed Claim
shall be deemed disallowed. If the requested additional information is provided
within such sixty-day time period, Reorganized Discovery Zone or, if there is an
Insurer, Reorganized Discovery Zone and/or the Insurer must make an offer of
settlement or deny the Personal Injury Disputed Claim within ninety (90) days
after it receives such additional information. If Reorganized Discovery Zone
and/or the Insurer does not make an offer of settlement or deny the Personal
Injury Disputed Claim within such ninety-day period, the Personal Injury
Disputed Claim will be submitted to mediation pursuant to Section 6.3 of the
Plan, described below.
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If a holder of a Personal Injury Disputed Claim rejects an offer of
settlement within thirty (30) days after the offer of settlement is made or the
Personal Injury Disputed Claim is denied, the Personal Injury Disputed Claim
shall be submitted to mediation pursuant to Section 6.3 of the Plan, described
below.
Each Personal Injury Disputed Claim which is referred to mediation
shall be submitted to mediation by a mediator approved by Reorganized Discovery
Zone and/or the Insurer, on the one hand, and the holder of the Personal Injury
Disputed Claim, on the other, or, if these Persons cannot agree, by a mediator
assigned by the Bankruptcy Court. Such mediator shall work with all Persons
involved, including, without limitation, any Insurer, to negotiate a mutually
satisfactory resolution with respect to the Personal Injury Disputed Claim.
Within thirty (30) days of the date on which a mediator is
appointed, the mediator shall schedule a mediation conference in a place agreed
to by each of the Persons involved, or, if such Persons cannot agree, at a place
selected by the mediator at which all Persons involved shall either (i) appear
personally or (ii) be represented by a Person authorized to enter into a binding
settlement agreement on behalf of such involved Person. The mediator shall give
each such involved Person at least twenty (20) days' prior written notice of the
date, the time and the place of the conference.
If any Person which has received notice of such mediation (or his,
her or its designated representative) fails to appear at such mediation
conference, any other Person may petition the Bankruptcy Court for an award of
costs, including, without limitation, reasonable attorneys' fees, against the
non-attending Person. In addition, if the holder or the holder's designated
representative, if any, fails to attend, the Personal Injury Disputed Claim
shall be deemed disallowed.
At the conclusion of the mediation conference, each Person (or its
designated representative) shall sign before the mediator a statement to the
effect that (i) the Personal Injury Disputed Claim has been resolved by mutual
agreement (subject to approval of the Bankruptcy Court) and the basis of such
resolution, (ii) the Personal Injury Disputed Claim shall be submitted to
binding arbitration or (iii) the Personal Injury Disputed Claim shall proceed
before the district court for the district in which the Personal Injury Disputed
Claim arose.
If a Personal Injury Disputed Claim is submitted to binding
arbitration, the Personal Injury Disputed Claim shall be resolved by binding
arbitration conducted in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. This binding arbitration shall be conducted in
a place agreed to by each of the Persons involved, including, without
limitation, any Insurer, or, if such Persons cannot agree, Reorganized Discovery
Zone's corporate headquarters. No Person involved in such
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arbitration shall be permitted to appeal any award except as expressly permitted
by Section 10 of the Federal Arbitration Act, as amended, and there shall be no
right to a de novo trial subsequent to the arbitration.
Upon compliance with the procedures set forth in Article VI of the
Plan, the holder of a Personal Injury Disputed Claim subject to Article VI of
the Plan shall have the right to pursue such Personal Injury Disputed Claim in a
federal district court in accordance with 28 U.S.C. ss. 157(b)(5) and the
Federal Rules of Civil Procedure. Any case filed prior to the Petition Date
shall be transferred from the forum in which it is pending to the federal
district court for the district in which the Disputed Claim arose. The Personal
Injury Disputed Claim shall be prosecuted in that federal district court.
11. Unclaimed Distributions
Notwithstanding section 1143 of the Bankruptcy Code, any Person who
fails to claim any Cash, New Common Stock, Ten Year Reorganized DZ Warrants or
Rent Deferral Secured Notes within one (1) year from the Effective Date or from
such later date as a Claim becomes an Allowed Claim shall forfeit all rights to
any distribution under the Plan. Persons who fail to claim Cash, New Common
Stock, Ten Year Reorganized DZ Warrants or Rent Deferral Secured Notes forfeit
their rights thereto and shall have no Claim whatsoever against the Debtors or
Reorganized Debtors or any holder of an Allowed Claim to whom distributions are
made.
12. Corporate Governance of Reorganized Discovery Zone
a. Amended Certificate of Incorporation and By-Laws
Reorganized Discovery Zone will amend and restate its existing
Certificate of Incorporation and By-Laws, in substantially the forms attached as
Exhibits A and B to the Plan, respectively. The amended and restated Certificate
of Incorporation and By-Laws will include, among other things (i) authorization
to issue 10,000,000 shares of common stock of Reorganized Discovery Zone, of
which 4,000,000 shares of New Common Stock will be issued pursuant to the Plan,
approximately 523,000 shares will be reserved for issuance pursuant to the Stock
Incentive Plan and approximately 445,000 shares will be reserved for issuance
upon exercise of the Ten Year Reorganized DZ Warrants, and 4,000,000 shares of
preferred stock of Reorganized Discovery Zone, (ii) provision for restrictions
on the issuance of nonvoting equity securities to the extent required by section
1123(a)(6) of the Bankruptcy Code, and (iii) such other provisions as may be
consistent with the terms of the Plan.
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b. New Board of Directors
The Reorganized Discovery Zone Board of Directors shall consist of
at least five members (the "New Board"). The Class 6 Creditors have nominated
four of the New Directors and the Creditors' Committee has nominated one of the
New Directors. The names, affiliations and backgrounds of the New Directors are
set forth in Exhibit 2 to this Disclosure Statement. The term in office of the
New Directors will commence on the Effective Date. Such directors may remain in
office unless and until their successors are duly elected or qualified or they
are removed by the stockholders of Reorganized Discovery Zone, in either case in
accordance with the Certificate of Incorporation and By-Laws of Reorganized
Discovery Zone; provided, however, that the New Director nominated by the
Creditors' Committee shall serve for a term of at least three (3) years,
beginning on the Effective Date. Such Creditors' Committee New Director shall
serve such three (3) year term notwithstanding any assignment by Birch or its
affiliates of any ownership interest in Reorganized Discovery Zone.
13. Modification of the Plan; Revocation or Withdrawal of the Plan
Subject to the restrictions and modifications set forth in section
1127 of the Bankruptcy Code, the Plan Proponents reserve the right to alter,
amend or modify the Plan before its substantial consummation; provided, however,
that any such alteration, amendment or modification shall not alter, amend or
modify any provision hereof that directly or indirectly affects the treatment of
a holder of an Unsecured Claim without the prior written consent of the
Creditors' Committee.
The Plan Proponents reserve the right to revoke or withdraw the Plan
prior to the Confirmation Date and any Plan Proponent may separately exercise
this right. If a Plan Proponent revokes or withdraws the Plan, or if
Confirmation does not occur, the Plan shall be null and void in all respects,
and nothing contained in the Plan shall (i) constitute a waiver or release of
any Claims by or against, or any Interests in, the Debtors or (ii) prejudice in
any manner the rights of the Debtors.
14. Retention of Jurisdiction
Notwithstanding the entry of the Confirmation Order or the Effective
Date having occurred, the Bankruptcy Court shall retain exclusive jurisdiction
over all matters arising out of or relating to the Chapter 11 Case, including,
but not limited to, the following matters:
(a) to determine the allowance or classification of Claims or
Interests and to determine any objections thereto;
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(b) to construe and take any action to enforce the Plan and to issue
such orders as may be necessary for the implementation, execution and
consummation of the Plan;
(c) to determine any and all applications for allowance of
compensation or reimbursement of expenses;
(d) to determine any other requests for payment of Priority Claims;
(e) to determine any other request for payment of Administrative
Expense Claims;
(f) to resolve any dispute regarding the implementation of the Plan;
(g) to determine any and all applications pending on the
Confirmation Date for the rejection, assumption or assignment of executory
contracts or unexpired leases and the allowance of any Claim resulting
therefrom;
(h) to determine all applications, motions, adversary proceedings,
contested matters and other litigated matters that may be pending in the
Court on or initiated after the Effective Date in connection with the
Chapter 11 Case;
(i) to determine such other matters and for such other purposes as
may be provided in the Confirmation Order;
(j) to modify the Plan pursuant to section 1127 of the Bankruptcy
Code, or to remedy any apparent non-material defect or omission in the
Plan, or to reconcile any non-material inconsistency in the Plan so as to
carry out its intent and purposes;
(k) to enter an order or final decree closing the Chapter 11 Case;
(l) to determine matters under section 505 of the Bankruptcy Code
relating to any tax, fine, penalty or addition to tax for which any Debtor
or the Estates may be liable, directly or indirectly, or any refund to
which any Debtor may be entitled;
(m) to consider and act on the compromise and settlement or payment
of any Claim against any Debtor or Estate;
(n) to determine all questions and disputes regarding title to the
assets of any Debtor or Estate;
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(o) to construe, enforce and resolve all questions and disputes
relating to employment agreements existing or approved by the Bankruptcy
Court at or prior to the Confirmation Date;
(p) to approve the surrender and abandonment of property of any
Debtor or Estate pursuant to the Bankruptcy Code;
(q) to issue injunctions, enter and implement other orders or to
take such other actions as may be necessary or appropriate to restrain
interference by any entity with consummation, implementation or
enforcement of the Plan or the Confirmation Order;
(r) to remedy any breach or default occurring under the Plan; and
(s) to resolve and finally determine all disputes that may relate
to, impact on, or arise in connection with, the Plan.
15. Plan Settlement Agreement
The Plan Proponents and the Creditors' Committee have entered into a
settlement agreement with respect to the provisions of the Plan (the "Plan
Settlement Agreement"), a true and correct copy of which is attached as Exhibit
H to the Plan. To the extent that the terms of the Plan and the Plan Settlement
Agreement conflict, the terms of the Plan Settlement Agreement shall control.
16. Rules of Construction
The rules of construction used in section 102 of the Bankruptcy Code
shall apply to the construction of the Plan. Any provision of the Plan other
than Section 5.5(b)(iv) of the Plan with respect to the estimation or
determination by any party, other than the Bankruptcy Court, of either (i) the
number or amount of any Claims, whether Allowed, Disputed, or Disputed which
will become Allowed (each, a "Claims Estimation"), or (ii) the value of any
property, including, but not limited to Cash, Reorganized DZ Units, New Common
Stock, Ten Year Reorganized DZ Warrants (each, a "Valuation Estimation"), shall
be deemed to require that the Plan Proponents and the Creditors' Committee
jointly make the Claims Estimation or the Valuation Estimation, and that such
estimation be approved by the Bankruptcy Court. In the event the Plan Proponents
and Creditors' Committee do not consensually make any Claim Estimation or
Valuation Estimation, the Bankruptcy Court shall make such estimation.
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VI. LIQUIDATION ANALYSIS
A plan of reorganization cannot be confirmed unless the Bankruptcy
Court finds that the plan is in the "best interests" of holders of claims
against, and interests in, the debtors subject to such plan. The "best
interests" test is satisfied if a plan provides to each dissenting or non-voting
member of each impaired class a recovery not less than the recovery such member
would receive if all the debtors' assets were sold and the debtors were
liquidated in a hypothetical case under chapter 7 of the Bankruptcy Code by a
chapter 7 trustee. The Debtors believe that the holders of impaired Claims and
Interests will receive not less than they would receive under a chapter 7
liquidation.
In applying the "best interests" test of section 1129(a)(7) of the
Bankruptcy Code, the Bankruptcy Court would ascertain the hypothetical
recoveries in a chapter 7 proceeding to secured creditors, priority claimants
(including administrative expense claims and tax claims), general unsecured
creditors and equity interest holders. These hypothetical chapter 7 recoveries
would then be compared with the distribution offered to each Class of Claims or
Interests under the Plan to determine if the Plan satisfied the "best interests"
test set forth in section 1129(a)(7) of the Bankruptcy Code. A Liquidation
Analysis is attached as Exhibit 6 to the Disclosure Statement.
COMPARISON OF RECOVERIES
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Total Claims Maximum Chapter 7 Plan's
Recovery as Recovery as
a Percentage a Percentage(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 1 Administrative Expense Claims $40,000,000 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Class 1A Small Claims $1,100,000 3% 70%
- -----------------------------------------------------------------------------------------------------------------------------------
Class 2 Tax Claims $5,000,000 100% 100% over six years from date
of assessment with interest
accruing after the Effective
Date at 10%
- -----------------------------------------------------------------------------------------------------------------------------------
Class 3 Priority Claims $0 Not Applicable Not Applicable
- -----------------------------------------------------------------------------------------------------------------------------------
Class 4A McDonald's Secured Claim $4,666,000 100% 100% over six years
- -----------------------------------------------------------------------------------------------------------------------------------
Class 4B McDonald's Secured Rent Deferral $133,000 100% 100% at the expiration of the
Claim applicable lease term
- -----------------------------------------------------------------------------------------------------------------------------------
Class 5 Miscellaneous Secured Claims $150,000 100% 100% over time or on the
Effective Date, depending on
the treatment elected by the
Plan Proponents
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Class Estimated Total Claims Maximum Chapter 7 Plan's
Recovery as Recovery as
a Percentage a Percentage(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 6 Credit Agreement Claims $101,900,000 5% 43%
- -----------------------------------------------------------------------------------------------------------------------------------
Class 7 General Unsecured Claims $34,750,000 3% If the holder receives a Class 7
Cash Distribution, 20% on the
Effective Date, to the extent
the Claim is so satisfied
If the holder receives
Reorganized DZ Units, 15.2%
on the Effective Date
- -----------------------------------------------------------------------------------------------------------------------------------
Class 8 Certain Unsecured Personal Injury $8,850,000 3% If the holder receives a Class 8
Claims Cash Distribution, 20% on the
Effective Date, to the extent
the Claim is so satisfied
If the holder receives
Reorganized DZ Units, 19.2%
on the Effective Date
- -----------------------------------------------------------------------------------------------------------------------------------
Class 9 LYONS Claims $129,700,000 0% 1.5% on the Effective Date
If the subordination provisions
under the LYONS are
enforced, holders will not
receive any distribution
- -----------------------------------------------------------------------------------------------------------------------------------
Class 10 Other Unsecured Claims $18,400,000 3% If the holder receives a Class
10 Cash Distribution, 20% on
the Effective Date, to the
extent the Claim is so satisfied
If the holder receives
Reorganized DZ Units, 19.2%
on the Effective Date
- -----------------------------------------------------------------------------------------------------------------------------------
Class 11 Insured Claims $155,334,000 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Class 12 Other Subordinated Unsecured $37,800,000 0% 0%
Claims
- -----------------------------------------------------------------------------------------------------------------------------------
Class 13 Intercompany Claims $289,000,000 0% 0%
- -----------------------------------------------------------------------------------------------------------------------------------
Class 14 Common Stock and Partnership Not Applicable 0% 0%
Interests
===================================================================================================================================
</TABLE>
(1) It is assumed, with respect to recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
VII. CERTAIN 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 matters, other than risks pertaining to the ability of the Debtors
to fund the Plan and to pay creditors, that could prevent confirmation or
consummation. Prior to voting on the Plan, each Creditor of the Debtors should
carefully consider the risk factors enumerated or referred to below as
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well as all of the information contained in this Disclosure Statement, the Plan
and the exhibits hereto and thereto.
The financial projections included as Exhibit 4 to this Disclosure
Statement are dependent upon the successful reorganization of the Debtors and
continued implementation of their business plan and the reliability of the
assumptions contained in the projections. These projections reflect numerous
assumptions, including confirmation and consummation of the Plan in accordance
with its terms, the anticipated future performance of Reorganized Discovery
Zone, industry performance, general business and economic conditions and other
matters, most of which are beyond the control of Reorganized Discovery Zone 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 Reorganized Discovery Zone. Therefore,
the actual results achieved throughout the periods covered by the projections
will vary from the projected results.
Following consummation of the Plan and issuance of the New Common
Stock, none of the New Common Stock or the Ten Year Reorganized DZ Warrants will
be listed on a securities exchange or quoted through the Nasdaq Stock Market.
There can be no assurance that such securities will be so listed or quoted in
the future or that any trading market will develop therefor, or, if developed,
that it will continue. In addition, there can be no assurance as to the degree
of price volatility in any market for such securities that does develop.
Accordingly, no assurance can be given that a holder of New Common Stock or Ten
Year Reorganized DZ Warrants will be able to sell such securities in the future
or as to the price at which any sale may occur. If such markets were to exist,
such securities could trade at prices higher or lower than the value ascribed to
such securities hereunder, depending upon many factors, including prevailing
interest rates, markets for similar securities, industry conditions, and the
performance of, and investor expectations for, Reorganized Discovery Zone.
VIII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax
consequences of the Plan to holders of Claims and Interests (the "Holders") and
to the Debtors/Reorganized Discovery Zone, based upon the Internal Revenue Code
of 1986, as amended (the "Tax Code"), the Treasury Regulations promulgated
thereunder (the "Treasury Regulations"), judicial authority and current
administrative rulings and practice now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action, and any
such change which could be retroactively applied in a manner that could
adversely affect the Holders, the Debtors and/or Reorganized Discovery Zone. The
federal income tax consequences to any particular Holder may be affected by
matters not discussed below. For example, certain types of Holders (including
foreign persons, financial institutions, life insurance companies, tax exempt
organizations and taxpayers who may be subject to the
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<PAGE>
alternative minimum tax) may be subject to special rules not addressed herein.
There also may be state, local or foreign tax considerations applicable to each
Holder. The Debtors have not sought, nor do they intend to seek, any tax rulings
from the Internal Revenue Service (the "IRS"). Consequently, there can be no
assurance that the treatment set forth in the following discussion will be
accepted by the IRS. THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL
INFORMATION ONLY. EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR
AS TO THE CONSEQUENCES OF THE PLAN TO SUCH HOLDER UNDER FEDERAL AND APPLICABLE
STATE, LOCAL AND FOREIGN TAX LAWS.
A. Income Tax Consequences to Creditors
The tax consequences that implementation of the Plan will have to a
Holder will depend in part on (i) whether the obligation from which the Holder's
Claim arose (the "Original Obligation") is satisfied solely with Cash on the
Effective Date, or if not, (ii) whether the Original Obligation constitutes a
"security", as the term is used for federal income tax purposes, and if so,
whether the consideration received in exchange for such Original Obligation will
include, at least in part, a "security" as the term is used for federal income
tax purposes. Generally, stock in a corporation constitutes a security, and thus
the stock portion of the Reorganized DZ Units would be treated as securities for
these purposes. Whether the Original Obligation or a debt obligation received in
exchange therefor (a "New Obligation") constitutes a security will depend on the
facts and circumstances surrounding the origin and nature of the obligations.
Generally, corporate debt obligations evidenced by written instruments with
maturities, when issued, of five years or less, or arising out of the extension
of trade credit, do not constitute "securities," whereas corporate debt
obligations evidenced by written instruments with original maturities of ten
years or more constitute "securities." It is unclear whether corporate debt
obligations with original maturities between five and ten years constitute
"securities." The Debtors/Reorganized Discovery Zone express no views with
respect to whether the Original Obligations arising from the Holder's Claims or
any New Obligations exchanged therefor constitute "securities" for tax purposes.
Each Holder is urged to consult such Holder's own tax advisor in this regard.
Under current law, if the terms of an obligation are significantly
modified, the modified obligation may be treated for federal income tax purposes
as a new obligation issued in exchange for the original obligation. Thus,
modifications to certain Holders' Claims under the Plan, if treated as
significant, could cause such Holders to be treated for federal income tax
purposes as receiving New Obligations in exchange for such Debtors' Original
Obligations. However, the Debtors/Reorganized Discovery Zone express no view
with respect to whether any particular Holder or Holders will be so treated.
Each Holder is urged to consult such Holder's own tax advisor in this regard.
The discussions below with respect to "New Obligations" apply to Holders who are
treated as receiving new obligations for tax purposes as a result of
modifications to the Original Obligations as well as to Holders who actually
receive new obligations (if any) in exchange for the Original Obligations.
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1. Creditors Whose Original Obligations Do Not Constitute
"Securities" and Creditors Who on the Effective Date Receive
Solely Cash or Cash and Other Consideration That Does Not
Include "Securities"
If the Original Obligation does not constitute a security (as
defined for federal income tax purposes) or if it does constitute a security but
the Holder does not receive, at least as part of the consideration exchanged
therefor, a security, then such exchange will be treated as a fully taxable
transaction. Such Holder will recognize gain or loss, as the case may be, equal
to the difference between (i) the amount realized by the Holder on the discharge
of its Claim (other than any Claim for accrued interest) and (ii) the Holder's
tax basis in its Claim (other than any Claim for accrued interest).
For tax purposes, the amount realized by a Holder will be equal to
the amount of any Cash received, the fair market value of any property received
(including for instance the fair market value of the Reorganized DZ Units
received pursuant to the Plan) and generally, the "issue price" of any New
Obligations received. If a Holder receives a New Obligation, and if neither the
Old Obligation nor the New Obligation is publicly traded and the yield to
maturity of the New Obligation is at least equal to the "applicable federal
rate" (see the discussion in section 4 below), then the issue price of any such
New Obligation that has at least one payment due more than six months after the
Effective Date will generally equal its stated principal amount. The issue price
of any such New Obligation with a maturity of six months or less, although it
should be viewed to be equal to the stated principal amount for this purpose,
could, under the tax law, be interpreted to be equal to all payments (including
interest) due under such obligation. Under the foregoing rules, a Holder could
have an amount realized with respect to a New Obligation which exceeds the fair
market value of such New Obligation. As a general rule, if the New Obligations
are publicly traded, then the issue price of the New Obligations will be the
trading price of the New Obligations on the issue date of such New Obligations
or if the New Obligations are not publicly traded but the Original Obligations
are publicly traded then the issue price of the New Obligations will be the
trading price of the Original Obligations on the issue date of such New
Obligations. The tax basis of any New Obligation received in the exchange will
equal the amount realized with respect to such New Obligation. The installment
method may apply to a Holder who realizes a gain on the receipt of a New
Obligation, unless such Holder elects out of such method.
Where gain or loss is recognized by a Holder, the character of such
gain or loss as capital gain or loss or as ordinary income or loss will be
determined by a number of factors, including the tax status of the Holder,
whether the obligation from which a claim arose constitutes a capital asset in
the hands of the Holder, whether such obligation was acquired with original
issue discount or market discount, and whether and to what extent the Holder has
previously claimed a bad debt deduction. Any capital gain or loss recognized by
a Holder will be long-term capital gain or loss with respect to those claims for
which the Holder's holding period is more than one year.
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2. Creditors Whose Original Obligations Constitute "Securities"
and Who Receive Securities or Consideration that In Part
Includes "Securities"
Exchanges by Holders of Original Obligations that constitute
"securities" for either (A) New Obligations that constitute "securities" or (B)
Reorganized DZ Units will qualify as a "recapitalization" under the Tax Code.
Accordingly, gain, if any, will be recognized only to the extent of the sum of
(i) the amount of any Cash received in the exchange; (ii) the fair market value
of any property received (for example, the warrants received that are part of
the Reorganized DZ Units) other than either the New Obligations constituting
"securities" or the stock portion of the Reorganized DZ Units; and (iii) the
fair market value of the excess, if any, of the principal amount of the New
Obligations constituting "securities" received over the principal amount of
"securities" surrendered. It is possible that the IRS could take the position
that the excess principal amount for these purposes is determined by reference
to the New Obligations' issue price and by reference to the Original
Obligations' "adjusted issue price" (defined in 4. below). In no case will a
loss be recognized upon such an exchange. A Holder's tax basis in the stock
portion of the Reorganized DZ Units and any New Obligation constituting a
"security" received in such an exchange will be the same as that of the Claim
exchanged therefor, decreased by the amounts, if any, described above in clauses
(i), (ii) or (iii) and increased by the amount of gain, if any, recognized in
the exchange.
The IRS recently issued proposed regulations that provide that a
right to acquire stock of the issuing corporation is treated as a security with
no principal amount. Therefore, if these regulations are adopted in final form
and are effective prior to the consummation of the Plan, the receipt of the
warrants that are part of the Reorganized DZ Units will be treated as a
nontaxable receipt of securities and no gain would be recognized. (These
regulations are proposed to be effective 60 days after the decision to finalize
these rules is filed with the Federal Register).
3. Distributions in Discharge of Accrued Interest
Notwithstanding the discussion in the foregoing sections 1 and 2, to
the extent any amount received by a Holder is received in discharge of interest
accrued on its Claim during its holding period, such amount will be taxable to
the Holder as interest income (if not previously included in the Holder's gross
income). However, it is not clear whether interest received by a Holder that is
in excess of the interest to which such Holder is legally entitled under state
law would be taxable as interest income or, alternatively, either as part of
such Holder's amount realized or as ordinary income other than interest.
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4. New Obligations
In general, stated interest on a New Obligation (unless such stated
interest is not "qualified stated interest," as defined below) will be taxable
to a Holder as ordinary interest income at the time it is accrued or received,
in accordance with the Holder's method of tax accounting. Special timing rules
may apply if the New Obligation provides for interest that is contingent upon
future events.
Holders should be aware that certain New Obligations may be issued
with original issue discount, which generally would be included in a Holder's
income over the term of a New Obligation on the basis of a constant yield to
maturity. Original issue discount is defined as the excess of the stated
redemption price at maturity of a debt instrument (generally, its stated
principal amount plus interest payments that are not "qualified stated
interest") over its issue price, subject to a de minimis exception. A Holder
would include original issue discount in income before the receipt of Cash
attributable to such income. A Holder's basis in a New Obligation (its "adjusted
issue price") would equal such obligation's issue price (defined below)
increased by the amount of any original issue discount included in such Holder's
income and reduced by payments of stated interest (other than "qualified stated
interest") and principal.
Under current law, stated interest on a New Obligation would be
included in the stated redemption price at maturity, and thus would be
reportable as original issue discount, unless such interest were "qualified
stated interest." In general, qualified stated interest means stated interest
unconditionally payable in Cash at least annually at a single fixed rate or, as
noted below, at certain variable rates. Whether the stated interest on a
particular New Obligation constitutes qualified stated interest will depend upon
the specific terms of such obligation.
In general, if an instrument bears stated interest at certain
variable rates, including floating rates where variations can reasonably be
expected to measure contemporaneous variations in the costs of newly borrowed
funds, and certain other conditions are met, then (i) if stated interest is
unconditionally payable at least annually, the stated interest is qualified
stated interest; (ii) original issue discount accrues at a rate determined by
substituting an equivalent fixed rate for the variable rate; and (iii) the
qualified stated interest allocable to an accrual period is increased (or
decreased) if the interest actually paid during an accrual period exceeds (or is
less than) the interest assumed to be paid during the accrual period.
The issue price of a New Obligation that is not publicly traded,
that has at least one payment due more than six months after the Effective Date
and that is received in exchange for an Original Obligation that was not
publicly traded, generally will equal its stated principal amount if such amount
does not exceed the present value of the payments that will be made pursuant to
the terms of such New Obligation, discounted at the
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appropriate IRS-published "applicable federal rate" in effect on the date on
which there is a binding contract in writing for the acquisition of the New
Obligation (which is the lowest of the appropriate monthly applicable federal
rates for the month in which such date occurs and the two preceding months). If
the stated principal amount of such New Obligation exceeds the present value of
the payments thereunder, discounted as described above, then the issue price of
such New Obligation will equal such present value (the "imputed principal
amount") rather than the stated principal amount. A New Obligation whose issue
price is equal to the imputed principal amount will have original issue discount
equal to the excess of the stated redemption price at maturity over such imputed
principal amount.
Certain New Obligations may be prepaid for fixed amounts at the
option of the Reorganized Discovery Zone. This ability to prepay would be
treated as an "option" under Treasury Regulations. The Reorganized Discovery
Zone would be presumed to exercise this option with respect to a New Obligation
if, by using the date of exercise (the "Presumed Prepayment Date") as the
maturity date of such New Obligation, the imputed principal amount of such
obligation were less than the imputed principal amount computed using the stated
maturity date. If such an option were presumed exercised, the Holder generally
would compute and report original issue discount as if the New Obligation
matured on the Presumed Prepayment Date, for an amount equal to the presumed
prepayment. If the New Obligation were not in fact prepaid on the Presumed
Prepayment Date, the Holder would be treated, solely for purposes of the
original issue discount rules, as if the New Obligation were reissued on such
date at an issue price equal to its adjusted issue price on such date.
Holders should be aware that positions other than those described
above with respect to original issue discount on the New Obligations may be
supportable under current law. EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR AS TO THE TREATMENT OF THE NEW OBLIGATIONS UNDER THE ORIGINAL ISSUE
DISCOUNT RULES.
Each Holder receiving a New Obligation should be aware that the tax
treatment of the New Obligations also may be affected by the provisions of the
Tax Code concerning market discount, acquisition premium and amortizable bond
premium and should consult such Holder's own tax advisor about these provisions.
Upon the sale, exchange or redemption of a New Obligation, a Holder
generally will recognize gain or loss equal to the difference between the amount
realized on the sale, exchange or redemption and the Holder's adjusted tax basis
in the New Obligation. Any gain not treated as ordinary income in accordance
with the market discount rules will be classified as capital gain or loss if the
New Obligation constitutes a capital asset in the hands of the Holder.
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B. Federal Income Tax Consequences to Stockholders
Holders of common stock of the Debtors generally will recognize a
loss equal to their tax basis in such stock. Such loss would be a long-term
capital loss if such Holder held such stock as a capital asset for more than one
year and a short-term capital loss if such Holder held such stock as a capital
asset for one year or less.
C. Federal Income Tax Consequences to The Debtors/Reorganized Discovery
Zone
1. Discharge of Indebtedness
In general, the Tax Code, with certain exceptions, provides that
taxpayers such as the Debtors that realize a "discharge of indebtedness" must
include the amount of discharged indebtedness in gross income to the extent that
the indebtedness discharged exceeds any consideration given for such discharge.
The Debtors expect to realize a material amount of discharge of indebtedness
income as a result of the Plan.
The Tax Code further provides, however, that where, as here, the
taxpayer is in a Chapter 11 case and the discharge of indebtedness is pursuant
to a plan approved by the bankruptcy court, such discharge of indebtedness will
not be included in gross income, but the taxpayer must generally reduce tax
attributes, in a specified order. Tax attributes must be reduced in the order
specified as follows: (i) net operating losses ("NOLs"), (ii) business credits,
(iii) minimum tax credits, (iv) capital loss carryovers, (v) tax basis in
assets, (vi) passive activity losses and credits, and (vii) foreign tax credit
carryovers. In lieu of this order, however, the Debtors may elect to apply any
portion of the reduction to reduce the basis of its assets first. This election
would be beneficial for instance, if the Debtors could use NOLs faster than it
could claim its depreciation deductions. Thus, the Debtors will determine
whether or not this election should be made.
2. Net Operating Loss Carryforwards and Other Tax Attributes
The total consolidated NOL carryforward available to the Debtors as
of December 31, 1996, is presently estimated to be approximately $344 million,
of which approximately $25.4 million will expire in 2008, approximately $55.2
million will expire in 2009, approximately $120.9 million will expire in 2010,
and the remainder will expire in 2011. The Debtors anticipate that they will
recognize additional losses for the period January 1, 1997 through the effective
date of the Plan. The foregoing NOL amounts are only estimates and may be
subject to adjustment as a result of future IRS audits of the Debtors' tax
returns, which may not take place for several years. Such losses are also
subject to reduction as discussed in 1. above. In addition, a corporation may be
subject to the "alternative minimum tax" even if its regular taxable income is
entirely offset by NOL carryforwards.
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Section 382 (in conjunction with Section 383) of the Tax Code
imposes limitations upon the utilization of a corporation's NOL and credit
carryforwards and certain other tax attributes following significant changes in
the corporation's stock ownership (an "ownership change"). Since the
Debtors'/Reorganized Discovery Zone will experience an ownership change, its
unused NOL carryforwards will be subject to limitation under Section 382.
Section 382 also imposes limitations upon the utilization of a
corporation's net unrealized built-in loss following an ownership change. A
corporation's net unrealized built-in loss is the amount by which the aggregate
adjusted basis of its assets exceeds the fair market value of such assets
immediately before the ownership change. Generally, if a corporation has a net
unrealized built-in loss, then, subject to a de minimis exception, any such loss
recognized within the five-year period beginning on the change date and ending
at the close of the fifth post-change year (the so-called "recognition period")
is treated as a prechange loss and is subject to the Section 382 limitation. If
a deduction for any portion of a recognized built-in loss is disallowed, such
portion is carried forward and is subject to rules similar to the rules for the
carryforward of NOLs. For these purposes, any depreciation, amortization or
depletion that is deductible during the recognition period and attributable to
the built-in loss existing on the change date is treated as a recognized
built-in loss subject to these rules. The Debtors/Reorganized Discovery Zone
anticipates that it will have a net unrealized built-in loss that will be
subject to these rules. Accordingly, the utilization of any portion of the
Debtors'/Reorganized Discovery Zone's built-in loss (including depreciation
deductions attributable thereto) that is recognized during the recognition
period will be subject to limitation under Section 382.
Subject to certain exceptions applicable to chapter 11 proceedings,
as discussed below, Section 382 provides, in general, that following an
ownership change, the amount of a corporation's income that can be offset each
taxable year by its NOLs and by its recognized built-in losses (including
depreciation) cannot exceed an amount equal to the value of such corporation's
stock immediately before the ownership change (excluding certain capital
contributions) multiplied by the Section 382 federal rate, published monthly by
the IRS. (For the month of March 1997 this rate is 5.50%.) If the exchange of
stock occurs pursuant to a title 11 or similar case and Section 382(l)(5),
discussed below, does not apply, then for purposes of calculating the limitation
the value of the corporation is calculated taking into account the debt forgiven
pursuant to the Plan. Moveover, if immediately after an ownership change, one
third or more of the assets of a corporation and its subsidiaries consist of
"assets held for investment," then, in computing the Section 382 limitation, the
value of such corporation's stock is reduced by an amount that, generally,
approximates the value of the corporation's equity in such investment assets.
Section 382(l)(5) of the Tax Code and the regulations thereunder
provide that the foregoing limitations on the utilization of NOLs after an
ownership change do not apply if (i) immediately before the ownership change,
the loss corporation is under the jurisdiction
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of a court in a title 11 or similar case, (ii) the transaction resulting in such
ownership change is ordered by the court or is pursuant to a plan approved by
the court, and (iii) the prechange shareholders and "qualified creditors" of the
loss corporation determined immediately before the ownership change own in the
aggregate 50% or more of the value and voting power of the reorganized
corporation after the ownership change. Qualified creditors are creditors who
held their indebtedness for at least 18 months before the date of the filing of
the title 11 case or who hold debt that arose in the ordinary course of the
trade or business if such latter creditors have, at all times, been the
beneficial holders thereof. A taxpayer may elect not to have Section 382(1)(5)
apply.
If Section 382(l)(5) applies, then the NOLs must be computed as if
no deduction had been allowed for interest paid by the corporation on any
obligations that were exchanged for stock pursuant to the Plan during any
taxable year ending during the three-year period preceding the taxable year in
which the ownership change occurs. However, if an ownership change to which
Section 382(l)(5) applied were to occur pursuant to the Plan, the NOLs and other
tax attributes of the Debtors/Reorganized Discovery Zone would be eliminated in
their entirety if there were a second ownership change during the two-year
period following the date of the ownership change pursuant to the Plan.
The Debtors are aware that there have been recent significant
changes in the ownership of the Claims and thus the Debtors will determine
whether the requirements of Section 382(1)(5) have been satisfied and, if so,
whether to elect to have Section 382(1)(5) not apply.
CAVEAT. AS IS APPARENT FROM THE FOREGOING DISCUSSION, THE TAX CONSEQUENCES OF
THE PLAN FOR THE DEBTORS/REORGANIZED DISCOVERY ZONE AND THEIR CREDITORS INVOLVE
A NUMBER OF ISSUES AS TO WHICH THE LAW IS HIGHLY UNCERTAIN. THE FOREGOING
DISCUSSION, MOREOVER, IS MERELY A BRIEF OVERVIEW OF SOME OF THE MORE IMPORTANT
TAX CONSEQUENCES. WITH THESE CONSIDERATIONS IN MIND, EACH HOLDER IS AGAIN URGED
TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE CONSEQUENCES OF THE PLAN TO
SUCH HOLDER UNDER FEDERAL AND APPLICABLE STATE, LOCAL AND FOREIGN TAX LAWS.
IX. ACCEPTANCE AND CONFIRMATION OF THE PLAN
A. Confirmation Hearing
The Bankruptcy Court has scheduled a hearing on Confirmation of the
Plan to commence on April 28, 1997 at 9:30 a.m. That hearing will be held at the
Bankruptcy Court for the District of Delaware, 824 Market Street, 6th floor,
Wilmington, Delaware 19801, before the Honorable Helen S. Balick, Chief United
States Bankruptcy Judge. At that hearing, the Bankruptcy Court will consider
whether the Plan satisfies the various
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requirements of the Bankruptcy Code, including whether it is feasible, and
whether it is in the best interests of the Creditors and Interest holders of the
Debtors. At that time, the Debtors will submit a report to the Bankruptcy Court
concerning 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
served so as to be received by the following persons no later than April 21,
1997 at 4:00 p.m., Prevailing Eastern Time:
SHEARMAN & STERLING
599 Lexington Avenue
New York, New York 10022
Attn: Douglas P. Bartner, Esq.
YOUNG, CONAWAY, STARGATT & TAYLOR
Rodney Square North
Wilmington, Delaware 19899-0391
Attn: Laura Davis Jones, Esq.
DISCOVERY ZONE, INC.
110 East Broward Boulevard
Ft. Lauderdale, Florida 33301
Attn: Robert Rooney
WEIL, GOTSHAL & MANGES, LLP
767 Fifth Avenue
New York, New York 10153
Attn: Martin J. Bienenstock, Esq.
BAYARD, HANDLEMAN & MURDOCH
1300 Delaware Trust Building
902 North Market Street
Wilmington, Delaware 19801
Attn: Neil Glassman, Esq.
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WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
Attn: Chaim J. Fortgang, Esq.
DUANE, MORRIS & HECKSHER
1201 Market Street, Suite 1500
P.O. Box 195
Wilmington, Delaware 19899
Attn: Teresa K.D. Currier
OFFICE OF THE UNITED STATES TRUSTEE
601 Walnut Street
Curtis Center, Suite 950 West
Philadelphia, Pennsylvania 19106
Attn: John D. McLaughlin, Esq.
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. Requirements for Confirmation
At the hearing on confirmation, the Bankruptcy Court will determine
whether the provisions of section 1129 of the Bankruptcy Code have been
satisfied. If all of the provisions of section 1129 are met, the Bankruptcy
Court may enter an order confirming the Plan. The Debtors believe that all the
requirements of section 1129 will be satisfied.
Section 1129, as applicable here, provides as follows:
1. The plan must comply with the applicable provisions of the
Bankruptcy Code (section 1129(a)(1)).
2. The proponent of the plan must comply with the applicable
provisions of the Bankruptcy Code (section 1129(a)(2)).
3. The plan must have been proposed in good faith and not by
any means forbidden by law (section 1129 (a)(3)).
4. Any payment made or to be made by the debtor or its
successor for services or for costs and expenses in or in connection with
the case, or in
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connection with the plan and incident to the case, must be disclosed to
the court and approved or subject to the approval of the court as
reasonable (section 1129(a)(4)).
5. The proponent of the plan must disclose the identity and
affiliations of any individual proposed to serve, after confirmation of
the plan, as a director, officer or voting trustee of the debtor, of an
affiliate of the debtor participating in the plan with the debtor, or of a
successor to the debtor under the plan. The appointment to, or continuance
in, such office of such individual must be consistent with the interests
of the debtor's creditors, equity holders, and with public policy. The
debtor must also disclose the identity of any insider that will be
employed or retained by the debtor or its successor under the plan and the
nature of any compensation for such insider (section 1129(a)(5)).
6. The plan must meet the "best interests of creditors" test.
See "ACCEPTANCE AND CONFIRMATION OF THE PLAN--Plan Meets Requirements for
Confirmation--Best Interest of Creditors--Liquidation Alternative."
7. Each class of claims or interests must either accept the
plan or not be impaired under the plan (section 1129(a)(8)).
Alternatively, as discussed hereafter, the requirements of section
1129(a)(8) need not be met, and the plan may be confirmed over the dissent
of a class of claims or interests, if the "cramdown" requirements of
section 1129(b) of the Bankruptcy Code are fulfilled.
8. Except to the extent that the holder of a particular claim
has agreed to a different treatment of such claim, the plan must provide
that holders of administrative expense claims will be paid in full in Cash
on the effective date of the plan, that the holders of other priority
claims (other than tax claims) be paid in Cash in full on the effective
date of the plan or, if the class to which such claim belongs consents,
receive deferred Cash payments of a present value equal to the allowed
amount of such claim, and that holders of priority tax claims will receive
on account of such claims deferred Cash payments, over a period not
exceeding six years after the date of assessment of such tax, of a value,
as of the effective date of the plan, equal to the allowed amount of such
claim (section 1129(a)(9)).
9. If a class of claims is impaired under the plan, at least
one impaired class of claims must accept the plan, determined without
including the acceptance of the plan by any insider holding a claim in
such class (section 1129(a)(10)).
10. The plan must be "feasible." In other words, it cannot be
likely that confirmation of a plan will be followed by the liquidation, or
the need for further financial reorganization, of the debtor or of any
successor to the debtor under the
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plan, unless such liquidation or reorganization is proposed in the plan
(section 1129(a)(11)).
11. All fees required to be paid under the Bankruptcy Code
have been paid or the plan provides for such payment on its effective date
(section 1129(a)(12)).
12. The plan provides for the continuation after the effective
date of all retiree benefits for the period the debtor has obligated
itself to provide such benefits (section 1129(a)(13)).
The Debtors believe that the Plan satisfies all the statutory
requirements of chapter 11 of the Bankruptcy Code, that they have complied or
will have complied with all of the requirements of chapter 11, and that the Plan
has been proposed and is made in good faith.
C. Cramdown
A court may confirm a plan, even if it is not accepted by all
impaired classes, if the plan has been accepted by at least one impaired class
of claims and the plan meets the "cramdown" requirements set forth in section
1129(b) of the Bankruptcy Code. Section 1129(b) requires that the court find
that a plan is "fair and equitable" and "does not discriminate unfairly" with
respect to each nonaccepting impaired class of claims or interests.
A court may find that the plan is "fair and equitable" with respect
to a class of secured claims only if the plan provides (a) that the secured
creditors within such class retain under the plan the liens securing their
claims and that each holder of a claim of such class receive deferred cash
payments totaling at least the allowed amount of its secured claim of a value,
as of the effective date of the plan, of at least the value of secured
creditor's interest in the estate's interest in the secured property, (b) for
the sale of the property securing the claim pursuant to section 363(k) of the
Bankruptcy Code, with the secured creditor's lien attached to the proceeds of
such sale and with such lien treated as in clause (a) above, or (c) for the
realization by the secured creditor of the indubitable equivalent of its claim.
A court may find that a plan is "fair and equitable" with respect to
a class of nonaccepting impaired unsecured claims only if (a) each impaired
unsecured creditor in such class receives or retains under the plan property of
a value as of the effective date of such plan equal to the allowed amount of its
claim, or (b) the holder of any claim or interest that is junior to the claims
of such dissenting class does not receive or retain any property under the plan
on account of their claims.
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In the event that any impaired Class of Claims shall fail to accept
the Plan in accordance with section 1129(a)(8) of the Bankruptcy Code, the Plan
Proponents reserve the right to request that the Bankruptcy Court confirm the
Plan in accordance with section 1129(b) of the Bankruptcy Code or modify the
Plan in accordance with Section 11.4 of the Plan. The Plan Proponents will
request that the Bankruptcy Court confirm the Plan in accordance with section
1129(b) of the Bankruptcy Code because the holders of Allowed Class 12 and 13
Claims and Allowed Class 14 Interests will receive no distribution under the
Plan in respect of such Allowed Claims and Interests and the holders of such
Allowed Claims and Interests are deemed to reject the Plan.
The "fair and equitable" test will be satisfied based on the fact
that, under the Plan, holders of Allowed Claims in Classes 1A, 2, 3, 4A, 4B, 5,
6, 7, 8, 9 and 10, should they vote to reject the Plan and the Plan is confirmed
over such vote, shall receive the distributions discussed under "DESCRIPTION OF
PLAN OF REORGANIZATION--Classification and Treatment of Claims and Interests"
while holders of Allowed Claims in Classes 12 and 13 and holders of Allowed
Interests in Class 14 do not receive any property under the Plan on account of
their Claims and Interests.
D. Plan Meets Requirements for Confirmation
1. Best Interests of Creditors--Liquidation Alternative
Notwithstanding acceptance of the Plan by each impaired Class, to
confirm the Plan the Bankruptcy Court must determine that the Plan meets the
requirements of Section 1129(a)(7); that is, that the Plan is in the best
interests of each holder of a Claim or Interest in an impaired class that has
not voted to accept the Plan. Accordingly, if an impaired Class does not
unanimously accept the Plan, the "best interests" test requires that the
Bankruptcy Court find that the Plan provides to each holder of a Claim or
Interest in such impaired class a recovery on account of the holder's Claim or
Interest that has a value at least equal to the value of the distribution that
each such holder would receive if the Debtors were liquidated under chapter 7 of
the Bankruptcy Code.
In the opinion of the Debtors, confirmation of the Plan is in the
best interests of the holders of Claims and Interests because it provides to
holders of impaired Claims distributions having a present value as of the
Effective Date of not less than the value such holders would likely receive if
the Debtors were liquidated under chapter 7 of the Bankruptcy Code. See
"LIQUIDATION ANALYSIS" above.
To estimate what members of each impaired Class of Claims or
Interests would receive if the Debtors were liquidated pursuant to chapter 7 of
the Bankruptcy Code, the Debtors must first determine the aggregate dollar
amount that would be available if the Chapter 11 Case were converted to a
chapter 7 case and the Debtors' assets were liquidated by a chapter 7 trustee
(the "Liquidation Value"). The Liquidation Value of the Debtors
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would consist of the net proceeds from the disposition of assets of the Debtors,
augmented by any Cash held by the Debtors.
The Liquidation Value available to creditors in Classes 1A, 2, 6, 7,
8, 9, 10, 11, 12, 13 and 14 would be reduced by, among other things, (i) the
Secured Claims of Classes 4A, 4B and 5 to the extent of the value of the
collateral securing such Claims, (ii) the costs, fees, and expenses of the
liquidation, as well as other administrative expenses of the Debtors' chapter 7
cases, (iii) the Class 1 Administrative Expense Claims, and (iv) the Class 3
Priority Claims. The Debtors' cost of liquidation in a chapter 7 case would also
include the compensation of a chapter 7 trustee, as well as counsel and of other
professionals retained by such trustee, asset disposition expenses, applicable
taxes, potential litigation costs, and Claims arising from the operation of the
Debtors during the pendency of the chapter 7 case. The liquidation would likely
accelerate the payment of other priority Claims, such as certain deferred income
tax obligations that would otherwise be payable in the ordinary course of the
Debtors' business. These priority Claims would be paid in full out of the net
liquidation proceeds, before any balance would be made available to pay Claims
and Interests in respect of Classes 1A, 2, 6, 7, 8, 9, 10, 11, 12, 13 and 14.
In summary, the Debtors believe that chapter 7 liquidation would
result in a diminution in the value to be realized by holders of Claims and
Interests due to, among other factors, (i) the failure to realize the maximum
going concern value of the Debtors' assets, (ii) the incurrence of additional
tax liabilities in the event of a liquidation, (iii) additional costs and
expenses involved in the appointment of a chapter 7 trustee, attorneys,
accountants, and other professionals to assist such trustee in the chapter 7
case, (iv) additional expenses and Claims, some of which would be entitled to
priority in payment, which would arise by reason of the liquidation, including
Claims resulting from the rejection of unexpired real estate leases and other
leases and executory contracts in connection with a cessation of the Debtors'
real estate operations and (v) the substantial time that would elapse before
creditors would receive any distribution in respect of their Claims.
Consequently, the Debtors believe that the Plan, which provides for the
continuation of the Debtors' business, will provide a greater ultimate return to
holders of Claims and Interests than would a chapter 7 liquidation.
At the Confirmation hearing, the Bankruptcy Court will determine
whether the holders of impaired Claims and Interests receive a distribution
under the Plan that is at least as great as the distribution that such holders
would receive upon a liquidation of the Debtors pursuant to chapter 7 of the
Bankruptcy Code.
2. Feasibility of the Plan
The Plan Proponents believe that confirmation of the Plan is not
likely to be followed by a liquidation of the Reorganized Debtors or a need for
a further financial reorganization of the Reorganized Debtors. The projections
of the Debtors' post-confirmation business, attached hereto in Exhibit 4, show a
sufficient financing facility,
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<PAGE>
earnings and Cash flow from operations to support and meet the ongoing financial
needs of Reorganized Discovery Zone. The projections and pro forma financial
statements indicate that the Plan as proposed by the Debtors and Birch is
feasible and that Reorganized Discovery Zone will be financially viable after
Confirmation of the Plan.
E. Alternatives to Confirmation of the Plan
If the Plan is not confirmed, the Debtors or, subject to further
determination by the Bankruptcy Court as to extensions of the Exclusive Period
and the Solicitation Period, any other party in interest in the Chapter 11 Case,
could attempt to formulate and propose a different plan or plans of
reorganization. Such plans might involve a reorganization and continuation of
the Debtors' business, a sale of the Debtors' business as a going concern, an
orderly liquidation of the Debtors' assets, or any combination thereof. If no
plan of reorganization is determined by the Bankruptcy Court to be confirmable,
the Chapter 11 Case may be converted to liquidation proceedings under chapter 7
of the Bankruptcy Code.
In a liquidation, a trustee would be appointed or elected with the
single purpose of liquidating the assets of the Debtors. Typically, in a
liquidation, assets are sold for less than their going concern value and,
accordingly, the return to creditors and interest holders is less than the
return in a reorganization, which derives value to be distributed in a plan from
the business as a going concern. Proceeds from liquidation would be distributed
to the creditors and interest holders of the Debtors in accordance with the
priorities set forth in the Bankruptcy Code.
In a liquidation, the proceeds received from the sale of the
Debtors' assets would be used to first satisfy Claims in Classes 4A, 4B and 5 to
the extent of the collateral securing such Claims, and then the Administrative
Claims, Priority Claims, Tax Claims. Thereafter, such proceeds would be used to
satisfy Claims in Classes 4A, 4B and 5 (to the extent of any deficiency in the
value of the collateral securing such Claims) and Classes 1A, 6, 7, 8, 9, 10,
11, 12 and 13. Any remaining value would go to holders of Class 14 Interests.
See "ACCEPTANCE AND CONFIRMATION OF THE PLAN--Best Interests of
Creditors--Liquidation Alternative."
The Debtors believe that there is no currently available alternative
that would offer holders of Claims against and Interests in the Debtors greater
value than the Plan and urge all parties entitled to vote on the Plan to vote to
accept the Plan.
If you are an impaired creditor you are entitled to vote on the
Plan; your vote is most important. See "VOTING PROCEDURES AND REQUIREMENTS" for
descriptions of ballots and related procedures and deadlines, the parties
entitled to vote on the Plan and the vote required for acceptance of the Plan.
124
<PAGE>
DEBTORS' RECOMMENDATION
THE DEBTORS BELIEVE THAT CONFIRMATION OF THE PLAN IS IN THE BEST
INTERESTS OF CREDITORS AND THAT THE PLAN SHOULD BE CONFIRMED. THE DEBTORS
STRONGLY RECOMMEND THAT ALL CREDITORS WHO ARE ENTITLED TO VOTE ON THE PLAN VOTE
TO ACCEPT THE PLAN.
THE PLAN INCORPORATES A PROPOSED SETTLEMENT DEVELOPED BY THE
STATUTORY COMMITTEE OF UNSECURED CREDITORS, WHICH PROVIDES A PROTOCOL FOR
DISTRIBUTION OF (i) COMMON STOCK OF REORGANIZED DISCOVERY ZONE AND (ii) WARRANTS
TO PURCHASE COMMON STOCK OF REORGANIZED DISCOVERY ZONE TO UNSECURED CREDITORS IN
CLASSES 7 AND 9 (THE "DISTRIBUTION PROTOCOL").
THE PLAN PROPONENTS WERE NOT INVOLVED IN THE CREATION AND
NEGOTIATION OF THE DISTRIBUTION PROTOCOL AND THEREFORE EXPRESS NO OPINION AS TO
ITS MERITS. THE PLAN PROVIDES THAT THE DISTRIBUTION PROTOCOL WILL NOT BE
IMPLEMENTED IF CERTAIN EVENTS, DESCRIBED HEREIN, OCCUR. THE PLAN PROPONENTS
BELIEVE THAT THE PLAN MAY BE CONFIRMED REGARDLESS OF WHETHER THE DISTRIBUTION
PROTOCOL IS IMPLEMENTED.
CREDITORS' COMMITTEE'S RECOMMENDATION
BEFORE AND DURING ITS CHAPTER 11 CASE, DISCOVERY ZONE HAS INCURRED
MILLIONS OF DOLLARS OF LOSSES. SEVERAL BUSINESS PLANS HAVE BEEN IMPLEMENTED BY
PREVIOUS MANAGEMENT. BUT NONE HAS BEEN SUCCESSFUL.
DURING THE CHAPTER 11 CASE, THE COMMITTEE RETAINED FINANCIAL EXPERTS
IN THE ENTERTAINMENT INDUSTRY TO TRY TO FIND THE RIGHT INVESTORS WITH THE RIGHT
BUSINESS PLAN TO MAKE DISCOVERY ZONE SUCCESSFUL. THUS FAR NO FIRM OFFER HAS BEEN
MADE. IN THIS CONTEXT, THE CURRENT PLAN OFFERS CREDITORS A SUPERIOR RESULT THAN
THE ONLY CURRENT ALTERNATIVE, WHICH IS LIQUIDATION. IF THE CURRENT PLAN BECOMES
EFFECTIVE, UNSUBORDINATED CREDITORS MAY RECEIVE UP TO 20 CENTS CASH ON THE
DOLLAR OR STOCK AND WARRANTS WHOSE VALUES ARE VERY DIFFICULT TO DETERMINE, BUT
WHICH MAY ULTIMATELY TRADE FOR MATERIAL VALUE IF DISCOVERY ZONE'S NEW BUSINESS
PLAN PROVES SUCCESSFUL. FOR THESE REASONS, THE COMMITTEE SUPPORTS THE PLAN.
125
<PAGE>
BASED ON THE FOREGOING AND TO AVOID COSTLY LITIGATION, THE COMMITTEE
ENTERED INTO THE CHAPTER 11 PLAN AGREEMENT AMONG DEBTORS, BIRCH HOLDINGS LLC,
AND STATUTORY CREDITORS' COMMITTEE (THE "PLAN SETTLEMENT AGREEMENT"), A TRUE AND
COMPLETE COPY OF WHICH IS ANNEXED TO THE PLAN AS EXHIBIT H.
PURSUANT TO THE PLAN SETTLEMENT AGREEMENT, AND SUBJECT TO THE
COMMITTEE'S FIDUCIARY DUTIES, THE COMMITTEE WILL NOT OBJECT TO CONFIRMATION OF
THE PLAN. THE COMMITTEE HAS, HOWEVER, RESERVED THE RIGHT TO RECOMMEND TO
CREDITORS THAT THEY SUPPORT AN ALTERNATIVE CHAPTER 11 PLAN IF ONE MATERIALIZES
AND AFFORDS CREDITORS SUPERIOR TREATMENT.
THIS DISCLOSURE STATEMENT CONTAINS ENTERPRISE AND LIQUIDATION
VALUATIONS WHICH WERE PREPARED BY THE DEBTORS. ALTHOUGH THE COMMITTEE'S JOINT
FINANCIAL ADVISORS, ROTHSCHILD, INC. AND SBC WARBURG, INC., AND THE COMMITTEE'S
BANKRUPTCY ACCOUNTANTS, ERNST & YOUNG LLP, WERE PROVIDED WITH A COPY OF A
BUSINESS PLAN PREPARED BY THE PLAN PROPONENTS, NEITHER THE COMMITTEE'S FINANCIAL
ADVISORS NOR THE COMMITTEE'S BANKRUPTCY ACCOUNTANTS TOOK PART IN THE PREPARATION
OF EITHER THE BUSINESS PLAN OR THE VALUATIONS CONTAINED IN THIS DISCLOSURE
STATEMENT BASED ON THAT BUSINESS PLAN. MOREOVER, THE COMMITTEE AND ITS
PROFESSIONALS DISCLAIM ANY RESPONSIBILITY FOR THE ACCURACY OF THE FINANCIAL
PROJECTIONS AND BUSINESS FORECASTS CONTAINED IN THIS DISCLOSURE STATEMENT, OR
THE ACCURACY OF ANY OF THE HISTORICAL DISCUSSION/NARRATIVE CONTAINED HEREIN.
FINALLY, THE COMMITTEE FIRMLY SUPPORTS IMPLEMENTATION OF THE
DISTRIBUTION PROTOCOL PROVIDED FOR IN ARTICLE 5 OF THE PLAN AMONG CLASSES 6, 7
AND 9. THE COMMITTEE BELIEVES THAT ABSENT CREDITOR APPROVAL OF THE DISTRIBUTION
PROTOCOL, THERE IS A SIGNIFICANT LIKELIHOOD THAT PROTRACTED LITIGATION AMONG THE
HOLDERS OF THE ALLOWED CLASSES 6, 7 AND 9 CLAIMS COULD ENSUE WHICH COULD
SIGNIFICANTLY DELAY -- AND POTENTIALLY DIMINISH MATERIALLY -- THE DISTRIBUTIONS
CONTEMPLATED UNDER THE PLAN.
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<PAGE>
Respectfully submitted,
DISCOVERY ZONE, INC.
Debtor and
Debtor in possession
By /s/ Scott Bernstein
-----------------------
Scott Bernstein
Chief Executive Officer and President
BEAVERTON FUN FITNESS, INC.
DJM MANAGEMENT, INC.
DZ OF CONNECTICUT, INC.
DZ OF GEORGIA, INC.
DZ OF MASSACHUSETTS, INC.
DZ OF MISSOURI, INC.
DZ OF NEW YORK, INC.
DZ PARTY, INC.
DZ OF PENNSYLVANIA, INC.
DZ OF WISCONSIN, INC.
PORTLAND FUN FITNESS, INC.
VANCOUVER FUN FITNESS, INC.
DISCOVERY ZONE (PUERTO RICO), INC.
LEAPS & BOUNDS, INC.
SEMBORG CORP.
DZGP, INC.
DISCOVERY ZONE CHILDREN'S
AMUSEMENT CORPORATION
Debtors and
Debtors in possession
By /s/ Scott Bernstein
-----------------------
Scott Bernstein
President
<PAGE>
DISCOVERY ZONE L.P.
Debtor and
Debtor in possession
By: DZGP, Inc., its general partner
By /s/ Scott Bernstein
-----------------------
Scott Bernstein
President
TUMBLE FOR FUN LIMITED
PARTNERSHIP
Debtor and
Debtor in possession
By Discovery Zone Children's
Amusement Corporation, its
general partner
By /s/ Scott Bernstein
-----------------------
Scott Bernstein
President
<PAGE>
Exhibit 1
First Amended Joint Plan of Reorganization
<PAGE>
Exhibit 2
Reorganized Discovery Zone Board of Directors
<PAGE>
EXHIBIT 3
REORGANIZED DISCOVERY ZONE MANAGEMENT TEAM
(To be provided)
<PAGE>
EXHIBIT 4
FINANCIAL PROJECTIONS
<PAGE>
EXHIBIT 5
DESCRIPTION OF OPERATION OF DISTRIBUTION PROTOCOL
<PAGE>
EXHIBIT 6
LIQUIDATION ANALYSIS
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- ---------------------------------------x
In re :
:
DISCOVERY ZONE, INC., et al.,* : Chapter 11
-- ---
: Case No. 96-411 (HSB)
:
Debtors. : (Jointly Administered)
- ---------------------------------------x
THIRD AMENDED JOINT PLAN OF REORGANIZATION
PURSUANT TO 11 U.S.C. ss. 1129
- ----------
* Discovery Zone, Inc., Beaverton Fun Fitness, Inc., DJM Management, Inc., DZ
of Connecticut, Inc., DZ of Georgia, Inc., DZ of Massachusetts, Inc., DZ of
Missouri, Inc., DZ of New York, Inc., DZ of Pennsylvania, Inc., DZ of
Wisconsin, Inc., Portland Fun Fitness, Inc., Vancouver Fun Fitness, Inc.,
Discovery Zone (Puerto Rico), Inc., Leaps & Bounds, Inc., Semborg Corp., DZ
Party, Inc., DZGP, Inc., Discovery Zone Children's Amusement Corporation,
Discovery Zone L.P. and Tumble for Fun Limited Partnership.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I INTRODUCTION................................................... 1
ARTICLE II DEFINITIONS; RULES OF INTERPRETATION
AND COMPUTATION OF TIME........................................ 1
Section 2.1. Scope of Definitions...................................... 1
Section 2.2. Definitions............................................... 1
Section 2.3. Rules of Interpretation................................... 11
Section 2.4. Computation of Time....................................... 12
ARTICLE III CLASSIFICATION OF CLAIMS AND INTERESTS........................ 12
Section 3.1. Class 1 - Administrative Expense Claims................... 12
Section 3.2. Class 1A - Small Claims................................... 12
Section 3.3. Class 2 - Tax Claims...................................... 12
Section 3.4. Class 3 - Priority Claims................................. 12
Section 3.5. Class 4A - McDonald's Secured Claim....................... 12
Section 3.6. Class 4B - McDonald's Secured Rent Deferral Claims........ 12
Section 3.7. Class 5 - Miscellaneous Secured Claims.................... 12
Section 3.8. Class 6 - Credit Agreement Claims......................... 13
Section 3.9. Class 7 - General Unsecured Claims........................ 13
Section 3.10. Class 8 - Certain Unsecured Personal Injury Claims....... 13
Section 3.11. Class 9 - LYONS Claims................................... 13
Section 3.12. Class 10 - Other Unsecured Claims........................ 13
Section 3.13. Class 11 - Insured Claims................................ 13
Section 3.14. Class 12 - Subordinated Unsecured Claims................. 13
Section 3.15. Class 13 - Intercompany Claims........................... 13
Section 3.16. Class 14 - Common Stock and Partnership Interests........ 13
ARTICLE IV TREATMENT OF CLASSES OF CLAIMS AND INTERESTS.................. 13
Section 4.1. Class 1 - Administrative Expense Claims................... 13
Section 4.2. Class 1A - Small Claims................................... 14
Section 4.3. Class 2 - Tax Claims...................................... 14
Section 4.4. Class 3 - Priority Claims................................. 14
Section 4.5. Class 4A - McDonald's Secured Claim....................... 14
Section 4.6. Class 4B -- McDonald's Secured Rent Deferral Claims....... 15
Section 4.7. Class 5 - Miscellaneous Secured Claims.................... 16
Section 4.8. Class 6 - Credit Agreement Claims......................... 17
Section 4.9. Class 7 - General Unsecured Claims........................ 18
Section 4.10. Class 8 - Certain Unsecured Personal Injury Claims....... 18
Section 4.11. Class 9 - LYONS Claims................................... 19
Section 4.12. Class 10 - Other Unsecured Claims........................ 19
- i -
<PAGE>
Page
----
Section 4.13. Class 11 - Insured Claims................................ 20
Section 4.14. Class 12 - Subordinated Unsecured Claims................. 20
Section 4.15. Class 13 - Intercompany Claims........................... 20
Section 4.16. Class 14 - Common Stock and Partnership Interests........ 20
Section 4.17. Nonconsensual Confirmation and Cramdown.................. 20
Section 4.18. Satisfaction of Claims and Interests..................... 21
ARTICLE V MEANS FOR IMPLEMENTATION OF THIS PLAN......................... 21
Section 5.1. Initial Calculation For Distribution of Reorganized
DZ Units................................................. 21
Section 5.2. Distribution of Reorganized DZ Units to Class 6........... 21
Section 5.3. Distribution of Reorganized DZ Units to Class 7........... 22
Section 5.4. Distribution of Reorganized DZ Units to Class 9........... 22
Section 5.5. Calculations for Certain Distributions to Classes 7 and 9. 24
Section 5.6. Distribution of the Class 8 Insurance Fund to Class 8..... 26
Section 5.7. Distribution of Reorganized DZ Units to Class 10.......... 27
Section 5.8. Distribution of Fractional Reorganized DZ Units........... 27
Section 5.9. Cash Distribution to Classes 7, 8 and 10.................. 28
Section 5.10. Public Listing of New Common Stock....................... 28
Section 5.11. Merger of Reorganized Debtors............................ 28
Section 5.12. Request for Substantive Consolidation.................... 29
Section 5.13. Employee Retention Plan.................................. 29
Section 5.14. Stock Incentive Plan..................................... 29
Section 5.15. Subordination............................................ 29
Section 5.16. Disputed Claims.......................................... 29
Section 5.17. Withholding of Taxes..................................... 31
Section 5.18. Professional Fees and Expenses; Administrative
Expense Claims Bar Date................................. 31
Section 5.19. Transactions on Business Days............................ 31
Section 5.20. Unclaimed Property....................................... 31
Section 5.21. Fractional Cents......................................... 31
Section 5.22. Revesting of Assets...................................... 32
ARTICLE VI METHOD OF RESOLUTION FOR PERSONAL INJURY
DISPUTED CLAIMS............................................... 32
Section 6.1. Information Assembly...................................... 32
Section 6.2. Settlement Offers......................................... 32
Section 6.3. Mediation................................................. 33
Section 6.4. Arbitration and Trial..................................... 34
- ii -
<PAGE>
Page
----
ARTICLE VII TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED
LEASES; INDEMNIFICATION OBLIGATIONS.......................... 34
Section 7.1. Assumption and Rejection of Executory Contracts
and Unexpired Leases.................................... 34
Section 7.2. Cure of Defaults......................................... 35
Section 7.3. Claims for Damages....................................... 35
Section 7.4. Classification of Claim.................................. 35
Section 7.5. Indemnification Obligations.............................. 35
ARTICLE VIII CERTIFICATE OF INCORPORATION; CORPORATE
GOVERNANCE................................................... 36
Section 8.1. Certificate of Incorporation............................. 36
Section 8.2. New Board of Directors................................... 36
ARTICLE IX CONDITIONS TO CONFIRMATION AND EFFECTIVE DATE................ 37
Section 9.1. Confirmation............................................. 37
Section 9.2. Effective Date........................................... 37
Section 9.3. Waiver of Conditions..................................... 37
ARTICLE X RETENTION OF JURISDICTION.................................... 37
Section 10.1. Retention of Jurisdiction............................... 37
ARTICLE XI EFFECTS OF CONFIRMATION...................................... 39
Section 11.1. Discharge............................................... 39
Section 11.2. Limitation of Liability................................. 39
Section 11.3. Injunction.............................................. 40
Section 11.4. Modification and Revocation of this Plan................ 41
ARTICLE XII MISCELLANEOUS PROVISIONS..................................... 41
Section 12.1. Headings................................................ 41
Section 12.2. Construction............................................ 41
Section 12.3. Amendments.............................................. 41
Section 12.4. Notices................................................. 41
Section 12.5. Creditors' Committee.................................... 42
Section 12.6. Severability of Plan Provisions......................... 42
Section 12.7. Plan Settlement Agreement............................... 42
- iii -
<PAGE>
SCHEDULES
Schedule 1 List of Debtors
Schedule 2 Executory Contracts and Unexpired Leases to be Assumed
EXHIBITS
Exhibit A Form of Certificate of Incorporation of Reorganized Discovery Zone
Exhibit B Form of By-Laws of Reorganized Discovery Zone
Exhibit C Employee Retention Program
Exhibit D Form of Agreement and Plan of Merger
Exhibit E Form of Warrant Agreement
Exhibit F Form of Stock Incentive Plan
Exhibit G McDonald's Stipulation
Exhibit H Form of Plan Settlement Agreement
- iv -
<PAGE>
ARTICLE I
INTRODUCTION
Discovery Zone, Inc. and its affiliates listed in Schedule 1 hereto,
debtors and debtors in possession in the above-captioned chapter 11 cases
(collectively, the "Debtors"), and Birch Holdings LLC, a New York limited
liability company (collectively with the Debtors, the "Plan Proponents"),
propose this Third Amended Joint Plan of Reorganization under chapter 11 of the
United States Bankruptcy Code pursuant to section 1121(a), title 11 of the
United States Code (this "Plan"). A Disclosure Statement, including the Exhibits
thereto, sets forth a discussion of the Debtors' history, business and a summary
and analysis of this Plan.
ARTICLE II
DEFINITIONS; RULES OF INTERPRETATION
AND COMPUTATION OF TIME
Section 2.1. Scope of Definitions. For purposes of this Plan, the
following words or phrases shall have the meanings set forth below (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined). Unless otherwise provided in this Plan, all terms used herein
shall have the meanings assigned to such terms in the Bankruptcy Code (as
hereinafter defined).
Section 2.2. Definitions.
"Administrative Expense Claim" means a Claim against the Debtors or
portion of a Claim against the Debtors for payment of an administrative expense
of a kind specified in section 503(b) of the Bankruptcy Code, including, without
limitation: (a) the actual and necessary costs and expenses incurred after the
commencement of the Cases of preserving the Estates and operating the businesses
of any Debtor, including wages, salaries or commissions for services; (b)
compensation for legal, financial, advisory, accounting and other services and
reimbursement of expenses allowed under section 330(a) or 331 of the Bankruptcy
Code; and (c) all charges assessed against the Estates under chapter 123, title
28 of the United States Code.
"Administrative Expense Claim Bar Date" means the date set by the
Bankruptcy Court as the last day for the holders of Administrative Expense
Claims (other than professional fees and expenses) arising prior to the
Confirmation Date to file a request for payment of an Administrative Expense
Claim under section 503(a) of the Bankruptcy Code and after which date all such
Administrative Expense Claims as to which a request for payment has not been
made shall be forever barred.
1
<PAGE>
"Allowed Claim" or "Allowed Interest" or "Allowed" means a Claim
against or Interest in any of the Debtors, or any portion thereof, to the extent
that:
(a) proof of the Claim or Interest was:
(i) timely filed; or
(ii) deemed filed under applicable law or by reason of an
order of the Bankruptcy Court; and
(b) (i) no Debtor, or any other party in interest entitled to do
so, has filed an objection within a time fixed by the
Bankruptcy Court; or
(ii) the Claim or Interest is allowed by a Final Order; and
(c) with respect to an application for compensation or
reimbursement of an Administrative Expense Claim, the amount
of such Administrative Expense Claim which has been approved
by the Bankruptcy Court.
"Ballot Date" means the date on which ballots accepting or rejecting
this Plan must be submitted, as set forth in the order of the Bankruptcy Court
dated March 11, 1997.
"Ballot Solicitation Date" means the date by which the Debtors must
send a ballot, Disclosure Statement and any accompanying materials to creditors
entitled to vote on the Plan, as set forth in the order of the Bankruptcy Court
dated March 11, 1997.
"Bankruptcy Code" means title 11 of the United States Code, as now
in effect or hereafter amended.
"Bankruptcy Court" means the United States Bankruptcy Court for the
District of Delaware, in which these Cases are pending.
"Bankruptcy Rules" means, collectively, the Federal Rules of
Bankruptcy Procedure and the local rules of the Bankruptcy Court, as now in
effect or hereafter amended.
"B1 Investments, LLC" means B1 Investments, LLC, a New York limited
liability company and a member of Birch.
"Bar Date" means the applicable bar date by which a proof of Claim
must be filed, as established by order of the Bankruptcy Court, including the
Bar Date Order and the Confirmation Order.
2
<PAGE>
"Bar Date Order" means the Order Pursuant to Bankruptcy Rule
3003(c)(3), Fixing November 29, 1996 As The Last Day For Filing Of Proofs Of
Claim Against The Debtors And Approving Form And Manner Of Notice Thereof,
entered by the Bankruptcy Court on August 16, 1996, as subsequently amended or
supplemented.
"Birch" means Birch Holdings LLC, a New York limited liability
company and its affiliates.
"Birch Administrative Claim" means the Class 1 Administrative Claim
held by Birch for reimbursement of fees and expenses which Birch has incurred in
respect of the substantial contribution which Birch has made to these Cases.
"Business Day" means a day on which banks in New York City are not
required or authorized to be closed.
"Cases" means the jointly administered chapter 11 cases of the
Debtors.
"Cash" means lawful currency of the United States of America.
"Cash Distributions" has the meaning set forth in Section 5.2.
"Cash Deposits" has the meaning set forth in Section 5.2.
"Certificate" has the meaning set forth in Section 5.4.
"Claim" means (a) a right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (b)
a right to an equitable remedy for breach of performance if such breach gives
rise to a right to payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured or unsecured.
"Claims Estimation" has the meaning set forth in Section 12.2.
"Class" means a group of Claims or Interests consisting of Claims or
Interests, as the case may be, which are substantially similar to each other
within the meaning of the Bankruptcy Code, as classified pursuant to Article III
of this Plan.
"Class 7 Calculation Claims Amount" has the meaning set forth in
Section 5.5.
"Class 7 Distribution Percentage" has the meaning set forth in
Section 5.5.
"Class 7 Cash Distribution" has the meaning set forth in Section
4.9.
3
<PAGE>
"Class 8 Cash Distribution" has the meaning set forth in Section
4.10.
"Class 8 Initial Pro Rata Calculation Value" has the meaning set
forth in Section 5.6.
"Class 8 Insurance Fund" has the meaning set forth in Section 5.6.
"Class 8 Insurance Fund Payment Date" has the meaning set forth in
Section 5.6.
"Class 9 Distribution Percentage" has the meaning set forth in
Section 5.5.
"Class 10 Cash Distribution" has the meaning set forth in Section
4.12.
"Complete Cash Distribution and Deposit" has the meaning set forth
in Section 5.2.
"Confirmation Date" means the date on which the Bankruptcy Court
enters the Confirmation Order.
"Confirmation Fund" means a segregated bank account into which shall
be deposited Cash which is required to be distributed to holders of
Administrative Expense Claims and all holders of Allowed Claims which are
entitled to receive Cash distributions on the Effective Date.
"Confirmation Hearing Date" means the first scheduled date on which
the Bankruptcy Court hears evidence on confirmation of this Plan.
"Confirmation Order" means the order of the Bankruptcy Court
confirming this Plan pursuant to section 1129 of the Bankruptcy Code.
"Contingent or Unliquidated Claims" means the Claims that have been
filed as contingent or unliquidated with the Court prior to the Bar Date or that
are listed as contingent or unliquidated in the Debtors' Statements of Financial
Affairs filed with the Bankruptcy Court, as such statements may have been or may
be amended, supplemented or otherwise modified from time to time in a filing
with the Bankruptcy Court in accordance with the applicable Bankruptcy Rules.
"Credit Agreement" means the certain Credit Agreement dated as of
December 22, 1994, as amended, by and among Discovery Zone, Inc., the lenders
named therein and NationsBank, N.A., as co-agent and Bank of Montreal as
co-agent.
"Creditor" means the holder of an Allowed Claim.
4
<PAGE>
"Creditors' Committee" means the committee of unsecured creditors of
the Debtors officially appointed by the United States Trustee for Region 3 in
the Cases.
"Debtor" or "Debtors" means Discovery Zone, Inc., the Subsidiary
Debtors and the Partnership Debtors, each a Debtor and, collectively, the
Debtors.
"Deficiency Claim" means a Claim equal to the amount, if any, by
which the total Allowed Claim of any Creditor exceeds the sum of (i) any setoff
rights of the Creditor against any Debtor provided for by applicable law and
preserved by section 553 of the Bankruptcy Code plus (ii) the portion of such
Claim that is a Secured Claim; provided, however, that, if the holder of such
Claim makes the election provided for by section 1111(b)(2) of the Bankruptcy
Code, there shall be no Deficiency Claim in respect of such Claim.
"Disclosure Statement" means the Second Amended Disclosure Statement
for the Debtors' Third Amended Joint Plan of Reorganization dated as of March
11, 1997, as such Disclosure Statement may be modified or amended from time to
time, prepared pursuant to section 1125 of the Bankruptcy Code.
"Disputed Claim" or "Disputed Interest" means a Claim or Interest
with respect to which a proof of claim or interest, as the case may be, has been
timely filed or deemed timely filed under applicable law, and as to which an
objection, timely filed, has not been withdrawn on or before the Effective Date
or any date fixed for filing such objections by order of the Bankruptcy Court,
and has not been denied by a Final Order and which claim or interest has not
been estimated or temporarily allowed by the Bankruptcy Court on timely motion
by the holder of such claim or interest. If an objection related to the
allowance of only a part of a Claim or Interest has been timely filed or deemed
timely filed, such Claim or Interest shall be a Disputed Claim or Disputed
Interest, as the case may be, only to the extent of the objection. For purposes
of voting on this Plan, prior to allowance or denial by Final Order, the holder
of each Disputed Claim which is Disputed as of the Ballot Solicitation Date
shall be permitted to vote the amount of such Claim scheduled by any of the
Debtors. In the event such Disputed Claim is scheduled as "contingent, disputed
or unliquidated," or is not scheduled by any of the Debtors, the holder of such
Disputed Claim shall not be permitted to vote on this Plan unless, upon timely
motion of such holder, the Bankruptcy Court has estimated such Disputed Claim
for voting purposes in sufficient time to enable such holder to submit its
ballot prior to the Ballot Date.
"Disputed Claims Reserve" has that meaning set forth in Section
5.16.
"Effective Date" means a Business Day, as determined by the Plan
Proponents, that is as soon as reasonably practicable but that is at least 11
days after the Confirmation Date and not more than 14 days after the first day
on which (i) each of the conditions in Section 9.2 has either been satisfied or
duly waived, (ii) no stay of the Confirmation Order is in effect, (iii) the
Merger Transactions shall have been consummated,
5
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and (iv) Reorganized Discovery Zone's amended and restated certificate of
incorporation shall have been filed with the Secretary of State of Delaware.
Distributions to be made under this Plan on the Effective Date shall be made on,
or the first Business Day after, the Effective Date.
"Electing Class 7 Creditor" has the meaning set forth in Section
4.9.
"Electing Class 8 Creditor" has the meaning set forth in Section
4.10.
"Electing Class 10 Creditor" has the meaning set forth in Section
4.12.
"Electing Holders" has the meaning set forth in Section 5.9.
"Employee Retention Plan" means the employee retention plan which is
described in Exhibit C to this Plan.
"Estates" means the estates created in the Cases by section 541 of
the Bankruptcy Code.
"Existing Common Stock" means common stock issued by Discovery Zone,
Inc. and each Subsidiary Debtor and outstanding on the Petition Date.
"Existing Common Stock Options" means any and all rights, warrants
or options to purchase shares of Existing Common Stock outstanding on the
Petition Date.
"Existing Partnership Interests" means all general and limited
partnership interests in the Partnership Debtors outstanding on the Petition
Date.
"Exit Financing" means the financing required to be raised by the
Debtors to satisfy the condition to the Effective Date described in Section
9.2(a).
"Fee Auditor" means the fee auditor appointed in these Cases,
Stuart, Maue, Mitchell & James, Ltd., and its counsel, Stone, Leyton & Gershman.
"Final Order" means an order or judgment of the Bankruptcy Court the
operation or effect of which has not been reversed, stayed, modified or amended
and as to which the time to appeal or to seek certiorari, review or rehearing
has expired and as to which no appeal or petition for certiorari, review or
rehearing is pending or as to which any right to appeal or seek certiorari,
review or rehearing has been waived in writing in a manner satisfactory to the
Plan Proponents or, if an appeal, reargument, petition for certiorari or
rehearing thereof has been sought, the order or judgment of the Bankruptcy Court
has not been stayed or has been affirmed by the highest court to which the order
was appealed or from which the reargument or rehearing was sought, or certiorari
has been denied, and the time to take any further appeal or to seek certiorari
or further reargument or
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rehearing has expired.
"Indenture Trustee" means Marine Midland Bank, successor trustee.
"Indenture Trustee Reserve" has the meaning set forth in Section 5.4
of this Plan.
"Insurer" means any insurance company who has issued a policy to the
Debtors under which the Insurer may be responsible for any part of a Personal
Injury Disputed Claim.
"Intercompany Claims" means all Claims asserted by any Debtor
against any other Debtor.
"Interest" means any equity or partnership interest in any Debtor.
"L&B Owned Properties" means (i) the fourteen (14) parcels of real
property which are owned by Leaps & Bounds and as to which McDonald's holds
valid and enforceable first priority mortgages and (ii) any proceeds obtained
from the sale of a parcel of undeveloped real property in Columbia, Maryland and
the sale of any of the parcels described in (i) which have not been applied, as
of the Effective Date, against Claims held by McDonald's pursuant to the
McDonald's Stipulation.
"L&B Subleases" means the twenty-one (21) assumed subleases of
nonresidential real property pursuant to which McDonald's is the sublandlord and
Leaps & Bounds is the sublessee.
"Leaps & Bounds" means Leaps & Bounds, Inc., a Delaware corporation
and a Debtor.
"Lexington 1994-1995 Insurance Policy" means a certain insurance
policy number SLGL2828086 issued by Lexington Insurance Company for the policy
period beginning June 16, 1994 and ending May 31, 1995.
"Listing" has the meaning set forth in Section 5.10.
"LYONS" means, collectively, the Liquid Yield Option Notes, due
2013, issued by Discovery Zone, Inc. on October 14, 1993 and outstanding as of
the Petition Date.
"LYONS Calculation Claims Amount" has the meaning set forth in
Section 5.5.
"McDonald's" means McDonald's Corporation, a Delaware corporation.
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"McDonald's Secured Rent Deferral Claims" means the Secured Claims
held by McDonald's as of the Effective Date in respect of rent deferrals granted
to the Debtors pursuant to the McDonald's Stipulation in respect of obligations
under certain of the L&B Subleases.
"McDonald's Stipulation" means the Stipulation and Order Between
Debtors and McDonald's Corporation Providing for the Resolution, Settlement and
Compromise of Disputes and For Rent Deferrals and Allowance of Certain Claims,
entered by the Bankruptcy Court on November 18, 1996, a true and correct copy of
which is amended hereto as Exhibit I and is incorporated in this Plan as if set
forth in its entirety.
"Merger Agreement" means the Agreement and Plan of Merger attached
as Exhibit D to this Plan.
"Merger Subsidiaries" means (i) the Subsidiary Debtors (other than
Discovery Zone (Puerto Rico), Inc. and Semborg Corp.), (ii) the Partnership
Debtors and (iii) Metrozone, Inc. and Enchanted Castle II, Inc., each a Delaware
corporation and wholly owned subsidiary of Discovery Zone, Inc.
"Merger Transactions" means the merger of the Merger Subsidiaries
with and into the U.S. Holding Company pursuant to the Merger Agreement.
"Moore Administrative Claim" means the Class 1 Administrative Claim
which may be held by Ms. Donna Moore against the Debtors in the event agreement
as to a settlement of Ms. Moore's Claims against the Debtors is reached between
and among Ms. Moore, the Plan Proponents and the Creditors' Committee, and which
Claim, if agreement is reached, will be in the amount of $300,000 and will be
subordinate to all superpriority Class 1 Administrative Claims.
"New Common Stock" means common stock of Reorganized Discovery Zone
issued pursuant to this Plan.
"New Directors" means the members of the Board of Directors of
Reorganized Discovery Zone whose names, affiliations and backgrounds are set
forth in Exhibit 2 to the Disclosure Statement.
"Partnership Debtors" means Discovery Zone L.P., a Delaware limited
partnership, and Tumble for Fun Limited Partnership, a Delaware limited
partnership.
"Per Claim Distribution" has the meaning set forth in Section 5.1.
"Person" has the meaning provided in section 101(41) of the
Bankruptcy Code and also means, without limitation, a joint venture, trust,
estate, an unincorporated association or organization, governmental entity or
political subdivision, agency or
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representative thereof, or any other entity.
"Personal Injury Disputed Claim" has the meaning set forth in
Section 6.1.
"Petition Date" means March 25, 1996.
"Plan" or "this Plan" has the meaning set forth in Article I.
"Plan Proponents" has the meaning set forth in Article I.
"Plan Settlement Agreement" has the meaning set forth in Section
12.7.
"Prime Rate" means the rate of interest published by The Wall Street
Journal (Northeast Edition), from time to time, as the prime rate.
"Priority Claim" means all Claims which are entitled to priority
under sections 507(a)(2)-(a)(7) and (a)(9) of the Bankruptcy Code.
"Professionals" means those persons retained pursuant to an order of
the Bankruptcy Court in accordance with section 327 or 1103 of the Bankruptcy
Code.
"Pro Rata" means the ratio of an Allowed Claim in a particular Class
to the aggregate principal amount of all Allowed Claims in that Class.
"Qualified 1994-1995 Personal Injury Claim" means an Unsecured Claim
which either Lexington Insurance Company or the Debtors are obligated to satisfy
in accordance with the terms of the Lexington 1994-1995 Insurance Policy, but
only to the extent that such Claim is in excess of $25,000 and is less than
$100,000.
"Record Date" means the date on which the Bankruptcy Count enters an
order pursuant to section 1125 of the Bankruptcy Code approving the Disclosure
Statement.
"Rent Deferral Secured Note" has that meaning set forth in Section
4.6 of this Plan.
"Reorganized Debtors" means Reorganized Discovery Zone, the
Subsidiary Debtors and the Partnership Debtors on and after the Effective Date,
each a corporation or limited partnership under the laws of the state in which
such Debtor, as the case may be, is incorporated or organized on the Petition
Date.
"Reorganized Discovery Zone" means Discovery Zone, Inc., a Delaware
corporation, on and after the Effective Date.
"Reorganized DZ Unit" shall consist of (a) nine (9) shares of New
Common
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Stock and (b) one (1) Ten Year Reorganized DZ Warrant.
"Section 5.5 Claims Amount" has the meaning set forth in Section
5.5.
"Section 5.5 Distribution Value" has the meaning set forth in
Section 5.5.
"Section 5.5 Ratio" has the meaning set forth in Section 5.5.
"Section 5.6 Calculation Sum" has the meaning set forth in Section
5.6.
"Secured Claim" means (a) that portion of a Claim equal to the value
of the interest of the holder of such Claim in the property of any of the
Debtors securing such Claim, as such value is determined by the Bankruptcy Court
pursuant to section 506(a) of the Bankruptcy Code and Bankruptcy Rule 3012 and
(b) any other Claim allowed under this Plan as a Secured Claim or, in the case
of McDonald's, allowed as a secured claim under the McDonald's Stipulation.
"SIR" means the self-insured retention limit up to which the Debtors
are required to satisfy all amounts owing under any insurance policy.
"Stock Incentive Plan" means the 1997 Discovery Zone, Inc. Stock
Incentive Plan, the form of which is attached as Exhibit F.
"Subsidiary Debtors" means Beaverton Fun Fitness, Inc., an Oregon
corporation; DJM Management, Inc., a Massachusetts corporation; DZ of
Connecticut, Inc., a Connecticut corporation; DZ of Georgia, Inc., a Georgia
corporation; DZ of Massachusetts, Inc., a Massachusetts corporation; DZ of
Missouri, Inc., a Missouri corporation; DZ of New York, Inc., a New York
corporation; DZ of Pennsylvania, Inc., a Pennsylvania corporation; DZ of
Wisconsin, Inc., a Wisconsin corporation; Portland Fun Fitness, Inc., an Oregon
corporation; Vancouver Fun Fitness, Inc., a Washington corporation; Discovery
Zone (Puerto Rico), Inc., a Puerto Rico corporation; Leaps & Bounds, Inc., a
Delaware corporation; Semborg Corp., a Delaware corporation; DZ Party, Inc., a
Delaware corporation; DZGP, Inc., a Delaware corporation; and Discovery Zone
Children's Amusement Corporation, a Delaware corporation.
"Tax Claim" means that portion of any Claim for an amount entitled
to priority under section 507(a)(8) of the Bankruptcy Code, other than a Claim
for a penalty.
"Ten Year Reorganized DZ Warrants" means the warrants to be issued
to certain holders of Allowed Unsecured Claims, which will be governed by and
subject to the terms and conditions of the Warrant Agreement.
"Unsecured Claim" means an unsecured claim that is not an
Administrative Claim, a Secured Claim or a Priority Claim, an Intercompany
Claim, nor a Contingent or
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Unliquidated Claim, but includes all Deficiency Claims and Claims arising as a
result of the rejection of executory contracts and unexpired leases pursuant to
section 365 of the Bankruptcy Code.
"Unsecured Creditor" means a holder of an Allowed Unsecured Claim.
"U.S. Holding Company" means Discovery Zone USA, Inc., a Delaware
corporation and wholly owned subsidiary of Discovery Zone, Inc.
"Valuation Estimation" has the meaning set forth in Section 12.2.
"Viacom" means Viacom Inc., a Delaware corporation, and its
affiliates and their respective successors and assigns.
"Viacom Settlement Agreement" means the Settlement Agreement to be
entered into among the Debtors and Viacom providing for the terms of the
settlement of Viacom's prepetition Claims against the Debtors.
"Warrant Agreement" means the agreement, a form of which is attached
as Exhibit E to this Plan, which sets forth the terms and conditions of the Ten
Year Reorganized DZ Warrants.
Section 2.3. Rules of Interpretation. For purposes of this Plan (a)
any reference in this 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 to the McDonald's
Stipulation means that document agreed to by and among the Debtors and
McDonald's (annexed hereto as Exhibit I) approved by a Final Order of the
Bankruptcy Court entered on November 18, 1996, which is incorporated herein as
if set forth in its entirety, such that in the event of any inconsistency
between this Plan and the McDonald's Stipulation, the terms and conditions of
the McDonald's Stipulation shall control; (c) any reference in this 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; (d)
unless otherwise specified, all references in this Plan to Sections, Articles,
Schedules and Exhibits are references to Sections, Articles, Schedules and
Exhibits of or to this Plan; (e) the words "herein" and "hereto" refer to this
Plan in its entirety rather than to a particular portion of this Plan; (f)
captions and headings to Articles and Sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the
interpretation of this Plan; and (g) the rules of construction set forth in
section 102 of the Bankruptcy Code and in the Bankruptcy Rules shall apply.
Section 2.4. 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.
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ARTICLE III
CLASSIFICATION OF CLAIMS AND INTERESTS
The classification of Claims and Interests herein is made for the
purpose of voting on this Plan, making distributions hereunder and ease of
administration hereof. A Claim or Interest is in a particular Class only to the
extent that the Claim or Interest is an Allowed Claim or an Allowed Interest
that qualifies within the description of that Class and has not been paid prior
to the Effective Date.
Section 3.1. Class 1 - Administrative Expense Claims. Class 1 will
consist of all Allowed Administrative Expense Claims, the Birch Administrative
Claim and the Moore Administrative Claim.
Section 3.2. Class 1A - Small Claims. At the Plan Proponents'
election, which shall be made prior to the Ballot Solicitation Date, Class 1A
may be created. If created, Class 1A will consist of all Allowed Unsecured
Claims in an amount of $1,000 or less, or Claims in an amount greater than
$1,000 and less than or equal to $5,000 which the holder elects to reduce to
$1,000 and which would otherwise be classified in Class 6, 7 or 10.
Section 3.3. Class 2 - Tax Claims. Class 2 will consist of all
Allowed Tax Claims.
Section 3.4. Class 3 - Priority Claims. Class 3 will consist of all
Allowed Priority Claims.
Section 3.5. Class 4A - McDonald's Secured Claim. Class 4A will
consist of the Allowed Secured Claim of McDonald's other than the McDonald's
Secured Rent Deferral Claims.
Section 3.6. Class 4B - McDonald's Secured Rent Deferral Claims.
Class 4B will consist of the Allowed McDonald's Secured Rent Deferral Claims.
Section 3.7. Class 5 - Miscellaneous Secured Claims. Class 5 will
consist of all Allowed Secured Claims that are not otherwise classified in
Classes 4A or 4B. As set forth in Section 4.7 of this Plan, each Allowed Class 5
Claim shall be in its own subclass and each such Claim shall be treated as being
in a separate class for voting purposes.
Section 3.8. Class 6 - Credit Agreement Claims. Class 6 will consist
of all Allowed Claims arising under or related to the Credit Agreement.
Section 3.9. Class 7 - General Unsecured Claims. Class 7 will
consist of all
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Allowed Unsecured Claims which arose prior to the Petition Date and that are in
respect of goods or services provided to any of the Debtors or under leases of
nonresidential real property to which any Debtor is a party.
Section 3.10. Class 8 - Certain Unsecured Personal Injury Claims.
Class 8 will consist of all Allowed Qualified 1994-1995 Personal Injury Claims.
Section 3.11. Class 9 - LYONS Claims. Class 9 will consist of all
Allowed Claims in respect of the LYONS.
Section 3.12. Class 10 - Other Unsecured Claims. Class 10 will
consist of all Allowed Unsecured Claims which arose prior to the Petition Date
and that are not otherwise classified in Class 1A, 6, 7, 8, 9 or 12.
Section 3.13. Class 11 - Insured Claims. Class 11 will consist of
all Allowed Unsecured Claims for damages against which the Debtors are insured,
other than Class 8 Claims.
Section 3.14. Class 12 - Subordinated Unsecured Claims. Class 12
will consist of all Allowed Unsecured Claims, other than Class 9 Claims, which
are subordinated, whether by agreement or applicable law, to Allowed Class 1A,
6, 7, 8, 9 or 10 Claims.
Section 3.15. Class 13 - Intercompany Claims. Class 13 will consist
of all Allowed Intercompany Claims.
Section 3.16. Class 14 - Common Stock and Partnership Interests.
Class 14 will consist of all Allowed Interests in respect of Existing Common
Stock, Existing Common Stock Options and Existing Partnership Interests.
ARTICLE IV
TREATMENT OF CLASSES
OF CLAIMS AND INTERESTS
Section 4.1. Class 1 - Administrative Expense Claims. Class 1 Claims
are not impaired under this Plan. The holders of Allowed Class 1 Claims will be
paid in full in Cash on the Effective Date or, if any Class 1 Claim becomes
Allowed after the Effective Date, as soon as practicable after such Claim
becomes Allowed, or, if by its terms or by agreement with the holder of such
Allowed Class 1 Claim any such Allowed Class 1 Claim is payable on a later date
or dates, such Allowed Class 1 Claim will be paid in full in Cash on such later
date or dates.
Section 4.2. Class 1A - Small Claims. If the Plan Proponents elect
to create
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Class 1A as provided in Section 3.2, Class 1A Claims are impaired under this
Plan. Each holder of an Allowed Class 1A Claim shall receive a single Cash
payment equal to seventy percent (70%) of its Class 1A Claim on the Effective
Date or, if such Claim becomes Allowed after the Effective Date, as soon as
practicable after such Claim becomes Allowed. Any holder of a Class 6, 7 or 10
Claim that would not otherwise have been classified in Class 1A but for the
election by such holder to reduce its Claim to $1,000 will not receive any other
distribution under this Plan on account of such Claim.
Section 4.3. Class 2 - Tax Claims. Class 2 Claims are impaired under
this Plan. Unless any holder of a Class 2 Claim shall agree to less favorable
treatment, each holder of an Allowed Class 2 Claim shall be paid in full in Cash
over a period not exceeding six years from the date of assessment of such Claim.
Payments will be made in equal annual installments of principal, plus simple
interest accruing from the Effective Date at ten percent (10%) on the unpaid
portion of each Class 2 Claim (or upon such other terms determined by the
Bankruptcy Court to provide the holders of Class 2 Claims with deferred cash
payments having a value, as of the Effective Date, equal to such Claims). Unless
otherwise agreed by the holder of such Claim and the Plan Proponents or
Reorganized Discovery Zone, the first payment will be payable one year after the
Effective Date or, if the Class 2 Claim is not allowed within one year after the
Effective Date, as soon as practicable after such Claim becomes Allowed.
Interest will be due and payable on the date on which each annual installment is
due. Reorganized Discovery Zone may elect to prepay without penalty all or any
portion of any Class 2 Claim.
Section 4.4. Class 3 - Priority Claims. Class 3 Claims are impaired
under this Plan. The holders of Allowed Class 3 Claims will be paid in Cash in
full on the Effective Date or, if any such Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes Allowed or, if
by its terms or by agreement with the holder of such Allowed Class 3 Claim any
such Allowed Class 3 Claim is payable on a later date or dates, such Allowed
Class 3 Claim will be paid in Cash in full on such later date or dates.
Section 4.5. Class 4A - McDonald's Secured Claim. (a) The Class 4A
Claim is impaired under this Plan. McDonald's shall retain its liens against the
L&B Owned Properties to the extent of the amount of its Allowed Class 4A Claim
and its Allowed Class 4B Claim. McDonald's shall receive deferred Cash payments
equal to the value of the Class 4A Claim in equal payments over six (6) years
beginning on the first anniversary of the Effective Date and thereafter on the
five (5) subsequent anniversaries of the Effective Date, with simple interest
from the Effective Date on the unpaid balance at the Prime Rate (or upon such
other terms determined by the Bankruptcy Court to provide the holder of the
Class 4A Claim with deferred cash payments having a value, as of the Effective
Date, equal to such Claim). The amount owing and to be paid by the Reorganized
Debtors in respect of such Claim may be prepaid by Reorganized Discovery Zone in
full or in part at any time without penalty. Notwithstanding any provision of
this Section 4.5, in the event that the Reorganized Debtors sell any of the L&B
Owned Properties after the Effective Date, those
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proceeds will be immediately applied, to the extent available, to satisfy
McDonald's Class 4A Claim.
(b) Any debt issued in respect of McDonald's Allowed Class 4A Claims
will contain cross-defaults to any other debt issued, or credit obtained, by any
of the Debtors or successor entities, the aggregate principal amount of which is
equal to or greater than $2.5 million. Reorganized Discovery Zone will be in
default of any debt issued in respect of McDonald's Allowed Class 4A Claims in
the event McDonald's terminates any two assumed L&B Subleases as a result of
Reorganized Discovery Zone's breach of those subleases.
Section 4.6. Class 4B -- McDonald's Secured Rent Deferral Claims.
(a) Class 4B Claims are impaired under this Plan. McDonald's shall retain its
liens against the L&B Owned Properties to the extent of the amount of its
Allowed Class 4B Claim and its Allowed Class 4A Claim. On the Effective Date,
McDonald's will receive a secured note (each, a "Rent Deferral Secured Note")
for each L&B Sublease in respect of which McDonald's has granted the Debtors a
rent deferral under the McDonald's Stipulation. On the Effective Date, the
principal amount of each Rent Deferral Secured Note will equal the aggregate
amount of rent deferrals which have accrued up to the Effective Date pursuant to
the McDonald's Stipulation under the applicable L&B Sublease. After the
Effective Date, the principal amount of each Rent Deferral Secured Note will
increase by an amount equal to the rent deferral for each month between the
Effective Date and the termination of the applicable L&B Sublease. Each Rent
Deferral Secured Note will be due and payable on the date on which the current
term of the applicable L&B Sublease expires, without giving effect to any
unexercised right to extend or option to renew such sublease.
(b) Each Rent Deferral Secured Note will bear interest at a rate
which is the greater of (i) the highest effective interest cost on a
yield-to-maturity basis in respect of any secured non-subordinated debt of
Reorganized Discovery Zone issued under this Plan which has a maturity
comparable to that of the Rent Deferral Secured Notes and (ii) a rate which
McDonald's and the Plan Proponents agree would ensure that the Rent Deferral
Secured Notes trade at par. In the event that the parties are unable to agree as
to the interest rate described under (ii) above, an independent investment
banker selected by the parties will provide an opinion as to such rate. Interest
will be payable upon maturity or acceleration of each Rent Deferral Secured
Note. On each anniversary of the Effective Date all accrued interest not
previously paid or capitalized will be capitalized and added to the principal
amount of the Rent Deferral Secured Note.
(c) The Rent Deferral Secured Notes will contain cross-defaults to
any other debt issued, or credit obtained, by any of the Debtors or any
successor entities, the aggregate principal amount of which is equal to or
greater than $2.5 million. Reorganized Discovery Zone will be in default of the
Rent Deferral Secured Notes in the event that McDonald's terminates any two
assumed L&B Subleases as result of Reorganized Discovery Zone's breach of those
subleases. In addition, the Rent Deferral Secured Notes will contain terms,
conditions and covenants of the type commonly contained in notes issued pursuant
to a
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plan of reorganization.
Section 4.7. Class 5 - Miscellaneous Secured Claims. (a) Class 5
Claims, other than those treated under (b)(ii) of this Section 4.7, are impaired
under this Plan. Each Allowed Class 5 Claim shall be in its own subclass and
each such Claim shall be treated as being in a separate Class for voting
purposes.
(b) Each holder of an Allowed Class 5 Claim shall receive one of
four forms of treatment under this Plan in respect of its Allowed Claim. The
Plan Proponents, contemporaneously with the solicitation of acceptances of this
Plan, shall select which treatment each holder is to receive. The Plan
Proponents' selection shall be made by the Debtors' filing of notice and serving
it on the holder of the Allowed Class 5 Claim so indicating their selection
contemporaneously with the solicitation of acceptances of this Plan. If the
Claim is a Disputed Claim at such time, the Debtors shall file and serve the
notice of selection contemporaneously with the solicitation of acceptances of
this Plan, notwithstanding the fact that the holder of a Disputed Class 5 Claim,
unless otherwise ordered by the Bankruptcy Court, does not have the ability to
vote to accept or reject this Plan; provided, however, that in the event that a
holder of an Allowed Class 5 Claim secured by property of the Debtors holds a
Disputed Class 5 Claim which is also secured by such property, the election
which the Debtors make pursuant to this Section 4.7 with respect to the Allowed
Class 5 Claim shall also apply to the Disputed Class 5 Claim in the event such
Disputed Claim subsequently becomes an Allowed Class 5 Claim. If no form of
treatment is so selected, the first alternative described below shall be
applicable. The alternative treatments for any Allowed Class 5 Claims are:
(i) Deferred Payments. Unless a holder of an Allowed Class 5 Claim
and the Debtors, prior to the Effective Date, or the Reorganized Debtors,
after the Effective Date, agree to less favorable treatment, a holder of
an Allowed Class 5 Claim shall retain its lien securing its Allowed Class
5 Claim to the extent of the Allowed amount of its Secured Claim. The
holder of such Claim shall receive deferred Cash payments equal to the
value, as of the Effective Date, of such holder's interest in the Debtor's
interest in the property securing such holder's Allowed Class 5 Claim, in
equal payments over six (6) years beginning on the first anniversary of
the Effective Date or, if any such Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes Allowed,
but not before the first anniversary of the Effective Date, and thereafter
on the six subsequent anniversaries of the Effective Date, with simple
interest from the Effective Date on the unpaid balance at the Prime Rate
(or upon such other terms determined by the Bankruptcy Court to provide
the holders of Class 5A Claims with deferred cash payments having a value,
as of the Effective Date, equal to such Claims). The amounts owing and to
be paid by Reorganized Discovery Zone in respect of such Claims may be
prepaid by Reorganized Discovery Zone in full or in part at any time
without penalty.
(ii) Maintain Existing Rights. Unless a holder of an Allowed Class 5
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Claim and the Debtors, prior to the Effective Date, or the Reorganized
Debtors, after the Effective Date, agree to less favorable treatment, a
holder of an Allowed Class 5 Claim shall retain its lien securing its
Allowed Class 5 Claim to the extent of the Allowed amount of its Secured
Claim. Additionally: (A) any default other than a default of the kind
specified in section 365(b)(2) of the Bankruptcy Code shall be cured; (B)
the maturity of the claim shall be reinstated as the maturity that existed
before any default; (C) the holder of the Claim shall be compensated for
any damages which occurred as the result of any reasonable reliance by the
holder on any provision that entitled the holder to accelerate the
maturing of the Claim; and (D) the other legal, equitable and contractual
rights to which the Claim entitles the holder shall not otherwise be
altered.
(iii) Present Full Payment. Unless an Allowed Class 5 Claim holder
and the Debtors, prior to the Effective Date, or the Reorganized Debtors,
after the Effective Date, agree to less favorable treatment, a holder of
the Allowed Class 5 Claim shall receive Cash in the amount of its Allowed
Class 5 Claim on the Effective Date or, if such Claim becomes Allowed
after the Effective Date, as soon as practicable after such Claim becomes
Allowed.
(iv) Abandonment of Collateral. Unless an Allowed Class 5 Claim
holder and the Debtors, prior to the Effective Date, or the Reorganized
Debtors, after the Effective Date, agree to less favorable treatment, a
holder of a Class 5 Claim shall receive back its collateral in full
satisfaction of its Class 5 Claim no later than ten (10) Business Days
after the Effective Date or, if such Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes Allowed.
Pending the return of the collateral for the Claim of such holder, such
holder shall retain its liens securing its Allowed Class 5 Claim to the
extent of the Allowed amount of its Secured Claim.
Section 4.8. Class 6 - Credit Agreement Claims. Class 6 Claims are
impaired under this Plan. Each holder of an Allowed Class 6 Claim will receive
on the Effective Date or, if such Claim becomes Allowed after the Effective
Date, as soon as such Claim becomes Allowed, its Pro Rata portion of Reorganized
DZ Units distributed to holders of Class 6 Claims under this Plan.
Notwithstanding any other provision of this Plan, the Ten Year Reorganized DZ
Warrants issued in connection with Reorganized DZ Units to holders of Allowed
Class 6 Claims shall be distributed to B1 Investments, LLC, unless otherwise
elected by the holder of an Allowed Class 6 Claim on its ballot accepting or
rejecting this Plan.
Section 4.9. Class 7 - General Unsecured Claims. Class 7 Claims are
impaired under this Plan. Each holder of an Allowed Class 7 Claim may elect to
receive either (i) its Pro Rata portion of Reorganized DZ Units distributed to
holders of Class 7 Claims under this Plan on, subject to Section 5.5(f), the
Effective Date or, if such Claim becomes Allowed after the Effective Date, as
soon as such Claim becomes Allowed or (ii) a
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cash distribution (the "Class 7 Cash Distribution").
(b) The Plan Proponents will determine, as described in Section 5.9,
whether to make a Class 7 Cash Distribution available. The Plan Proponents will
make such determination on or before the Confirmation Date. If the Plan
Proponents do not make the Class 7 Cash Distribution available, each holder of
an Allowed Class 7 Claim that elected to receive a Class 7 Cash Distribution
(each, an "Electing Class 7 Creditor") will receive its Pro Rata portion of
Reorganized DZ Units distributed to holders of Class 7 Claims under this Plan
on, subject to Section 5.5(f), the Effective Date or, if such Claim becomes
Allowed after the Effective Date, as soon as such Claim becomes Allowed.
(c) If the Plan Proponents make the Class 7 Cash Distribution, each
Electing Class 7 Creditor will receive a single Cash payment equal to twenty
percent (20%) of the portion of its Class 7 Claim which is satisfied through a
Class 7 Cash Distribution. To the extent that the Class 7 Cash Distribution is
not sufficient to make distributions in respect of all Class 7 Claims held by
Electing Class 7 Creditors, each Electing Class 7 Creditor will receive (i) its
Pro Rata portion of the aggregate Class 7 Cash Distribution and (ii) with
respect to the portion of its Allowed Class 7 Claim not satisfied by the Class 7
Cash Distribution, its Pro Rata portion of Reorganized DZ Units distributed to
holders of Class 7 Claims on, subject to Section 5.5(f), the Effective Date or,
if such Claim becomes Allowed after the Effective Date, as soon as practicable
after such Claim becomes Allowed.
Section 4.10. Class 8 - Certain Unsecured Personal Injury Claims.
(a) Class 8 Claims are impaired under this Plan. Each holder of an Allowed Class
8 Claim (i) may elect to receive either (x) its Pro Rata portion of Reorganized
DZ Units distributed to holders of Class 8 Claims under this Plan on the
Effective Date or, if such Claim becomes Allowed after the Effective Date, as
soon as such Claim becomes Allowed, or (y) a cash distribution (the "Class 8
Cash Distribution") and (ii) shall receive Pro Rata distributions, if any, from
the Class 8 Insurance Fund pursuant to Section 5.6.
(b) The Plan Proponents will determine, as described in Section 5.9,
whether to make the Class 8 Cash Distribution available. The Plan Proponents
will make such determination on or before the Confirmation Date. If the Plan
Proponents do not make the Class 8 Cash Distribution available, each holder of
an Allowed Class 8 Claim that elected to receive a Class 8 Cash Distribution
(each, an "Electing Class 8 Creditor") will receive its Pro Rata portion of
Reorganized DZ Units distributed to holders of Class 8 Claims under this Plan on
the Effective Date or, if such Claim becomes Allowed after the Effective Date
or, if such Claim becomes Allowed after the Effective Date, as soon as such
Claim becomes Allowed.
(c) If the Plan Proponents make the Class 8 Cash Distribution, each
Electing Class 8 Creditor will receive a single Cash payment on the Effective
Date equal to twenty percent (20%) of the portion of its Class 8 Claim which is
satisfied through the Class 8 Cash Distribution. To the extent that the Class 8
Cash Distribution is not sufficient to
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make distributions in respect of all Class 8 Claims held by Electing Class 8
Creditors, each Electing Class 8 Creditor will receive (i) its Pro Rata portion
of the aggregate Class 8 Cash Distribution and (ii) with respect to the portion
of its Allowed Class 8 Claim not satisfied by the Class 8 Cash Distribution, its
Pro Rata portion of Reorganized DZ Units distributed to holders of Class 8
Claims on the Effective Date or, if such Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes Allowed.
Section 4.11. Class 9 - LYONS Claims. (a) Class 9 Claims are
impaired under this Plan. Each holder of an Allowed Class 9 Claim will receive
on, subject to Section 5.5(f), the Effective Date or, if such Claim becomes
Allowed after the Effective Date, as soon as practicable after such Claim
becomes Allowed, its Pro Rata portion of Reorganized DZ Units distributed to
holders of Class 9 Claims under this Plan. Notwithstanding the previous
sentence, the subordination provisions under the LYONS shall be enforced without
exception and the holders of Allowed Class 9 Claims shall not receive any
distribution under this Plan in the event that Class 9 rejects the Plan and one
or more of the following occur: (i) any holder of an Allowed Class 9 Claim
files, or causes to be filed, an objection to confirmation of the Plan in
respect of its treatment of Class 9 Claims which objection is not withdrawn at
least three (3) business days prior to the Confirmation Hearing Date, (ii) the
Indenture Trustee files, or causes to be filed, any objection to confirmation of
the Plan (other than an objection relating solely to the payment of the
Indenture Trustee's fees and expenses), or (iii) the holder of Class 9 Claims
and Class 1 Claims files any objection to confirmation of the Plan (other than
an objection described in Section 4.11(b)).
(b) Notwithstanding Section 4.11(a) above, if the holder of both
Class 9 Claims and Class 1 Claims files an objection to those aspects of this
Plan reasonably calculated to protect that holder's Class 1 Claims, the filing
of such objection shall in no way affect the distribution of Reorganized DZ
Units to the holders of Allowed Class 9 Claims under the Plan.
Section 4.12. Class 10 - Other Unsecured Claims. (a) Class 10 claims
are impaired under this Plan. Each holder of an Allowed Class 10 Claim may elect
to receive either (i) its Pro Rata portion of Reorganized DZ Units distributed
to holders of Class 10 Claims under this Plan on the Effective Date or, if such
Claim becomes Allowed after the Effective Date, as soon as such Claim becomes
Allowed or (ii) a cash distribution (the "Class 10 Cash Distribution").
(b) The Plan Proponents will determine, as described in Section 5.9,
whether to make a Class 10 Cash Distribution available. The Plan Proponents will
make such determination on or before the Confirmation Date. If the Plan
Proponents do not make the Class 10 Cash Distribution available, each holder of
an Allowed Class 10 Claim that elected to receive a Class 10 Cash Distribution
(an "Electing Class 10 Creditor") will receive its Pro Rata portion of
Reorganized DZ Units distributed to holders of Class 10 Claims under this Plan
on the Effective Date or, if such Claim becomes Allowed after the Effective
Date, as soon as such Claim becomes Allowed.
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(c) If the Plan Proponents make the Class 10 Cash Distribution, each
Electing Class 10 Creditor will receive a single Cash payment equal to twenty
percent (20%) of the portion of its Class 10 Claim which is satisfied through a
Class 10 Cash Distribution. To the extent that the Class 10 Cash Distribution is
not sufficient to make distributions in respect of all Class 10 Claims held by
Electing Class 10 Creditors, each Electing Class 10 Creditor will receive (i)
its Pro Rata portion of the aggregate Class 10 Cash Distribution and (ii) with
respect to the portion of its Allowed Class 10 Claim not satisfied by the Class
10 Cash Distribution, its Pro Rata portion of Reorganized DZ Units distributed
to holders of Class 10 Claims on the Effective Date or, if such Claim becomes
Allowed after the Effective Date, as soon as practicable after such Claim
becomes Allowed.
Section 4.13. Class 11 - Insured Claims. Class 11 Claims are not
impaired under this Plan. The holders of Allowed Class 11 Claims will have
recourse only to the proceeds of insurance coverage carried by the Debtors.
Section 4.14. Class 12 - Subordinated Unsecured Claims. Class 12
Claims are impaired under this Plan. The subordination provisions under any
applicable agreements or bankruptcy or nonbankruptcy law shall be enforced
without exception. The holders of Allowed Class 12 Claims shall not receive any
distribution under this Plan. The Class 12 Claims shall not be used for any
purpose in connection with this Plan, including, but not limited to, voting on
this Plan by any impaired Class and determining any distribution of Cash or
Reorganized DZ Units to any Person under this Plan.
Section 4.15. Class 13 - Intercompany Claims. Class 13 Claims are
impaired under this Plan. On the Effective Date, all Intercompany Claims shall
be expunged, released and discharged, and the holders of such Claims shall
receive no distribution of any kind under this Plan.
Section 4.16. Class 14 - Common Stock and Partnership Interests.
Class 14 Interests are impaired under this Plan. All Existing Common Stock,
Existing Common Stock Options and Existing Partnership Interests shall be
cancelled, annulled and extinguished as of the Effective Date and each holder of
an Allowed Common Stock Interest, Existing Common Stock Option and Existing
Partnership Interest shall not be entitled to receive or retain any property or
interest in property on account of such Existing Common Stock, Existing Common
Stock Option or Existing Partnership Interest under this Plan.
Section 4.17. Nonconsensual Confirmation and Cramdown. In the event
that any impaired Class of Claims shall fail to accept this Plan in accordance
with section 1129(a)(8) of the Bankruptcy Code, the Plan Proponents reserve the
right to request that the Bankruptcy Court confirm this Plan in accordance with
section 1129(b) of the Bankruptcy Code or modify this Plan in accordance with
Section 11.4 of this Plan. The Plan Proponents will request that the Bankruptcy
Court confirm this Plan in accordance with section 1129(b) of the Bankruptcy
Code because the holders of Allowed Class 12 and 13 Claims and Allowed Class 14
Interests will receive no distribution under this Plan in respect
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of such Allowed Claims and Interests and the holders of such Allowed Claims and
Interests are deemed to reject this Plan.
Section 4.18. Satisfaction of Claims and Interests. All payments and
distributions hereunder shall be in full and final satisfaction, settlement,
release and discharge of all Claims and Interests.
ARTICLE V
MEANS FOR IMPLEMENTATION OF THIS PLAN
Section 5.1. Initial Calculation For Distribution of Reorganized DZ
Units. The number of Reorganized DZ Units which shall be separately distributed
in respect of Allowed Class 6, 7, 8, 9 and 10 Claims (in the case of Classes 7,
8 and 10 whose holders will or are estimated to receive Reorganized DZ Units)
will be calculated in accordance with the following formula and any other
applicable provisions of this Plan. The number of Reorganized DZ Units that will
be distributed in respect of each dollar of applicable Allowed Unsecured Claims
shall equal the fraction obtained by dividing (x) the aggregate number of
Reorganized DZ Units to be distributed under this Plan by (y) the sum of all
Claims which are classified in Classes 6, 7, 8, 9 and 10 (but only to the extent
that holders of Class 7, 8 and 10 Claims will or are estimated to receive
Reorganized DZ Units) which are either Allowed as of the Effective Date, or
which either (i) the Plan Proponents and the Creditors' Committee jointly
estimate, as such estimate is approved by the Bankruptcy Court, or (ii) if the
Plan Proponents and the Creditors' Committee do not so consensually estimate,
the Bankruptcy Court estimates, will be Allowed after the Effective Date (such
fraction being the "Per Claim Distribution"). This calculation will not be
affected by the acceptance or rejection of this Plan by any Class which is
entitled to vote to accept or reject this Plan.
Section 5.2. Distribution of Reorganized DZ Units to Class 6. (a) In
the event that, on the Effective Date, the Debtors (i) make the Class 7 Cash
Distribution, the Class 8 Cash Distribution and the Class 10 Cash Distribution
(collectively, the "Cash Distributions") in respect of the total amount of all
Allowed Claims held by Creditors that have elected to receive Cash Distributions
on the Effective Date in such Classes and (ii) deposit Cash into the respective
Disputed Claims Reserves for each Class in accordance with Section 5.16
(collectively, the "Cash Deposits") in an amount which the Bankruptcy Court
determines is sufficient to satisfy all Disputed Claims which, once Allowed,
will receive a Cash Distribution in respect of the total amount of the Allowed
amount of such Claims the holders of which are anticipated to elect a Cash
Distribution (such Cash Distributions and Cash Deposits being a "Complete Cash
Distribution and Deposit"), the aggregate number of Reorganized DZ Units which
will be distributed to holders of Allowed Class 6 Claims pursuant to Section 4.8
will be equal to the difference of (i) the product of (x) the Per Claim
Distribution multiplied by (y) the sum of the Allowed amounts of Class 6 and 9
Claims minus (ii) one percent (1%) of the aggregate number of Reorganized DZ
Units
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to be distributed under this Plan; provided, however, in the event that Class 9
is not entitled to a distribution of Reorganized DZ Units pursuant to Section
4.11 of this Plan, the aggregate number of Reorganized DZ Units distributed to
holders of Allowed Class 6 Claims will be equal to the product obtained in
clause (i) above without reduction.
(b) In the event that the Debtors do not make a Complete Cash
Distribution and Deposit on the Effective Date, a number of shares of New Common
Stock which (i) have a value on the Effective Date equal to fifteen percent
(15%) of the amount of the Birch Administrative Claim and (ii) that otherwise
would be distributed to holders of Class 6 Claims pursuant to Section 5.2(a) if
a Complete Cash Distribution and Deposit had been made on the Effective Date,
shall be distributed Pro Rata to the holders of Class 7, 8 and 10 Claims.
Section 5.3. Distribution of Reorganized DZ Units to Class 7. The
aggregate number of Reorganized DZ Units which will be distributed to holders of
Class 7 Claims will be determined in accordance with the formulas set forth in
Section 5.5 hereof. However, if either (i) Class 9 is not entitled to a
distribution of Reorganized DZ Units pursuant to Section 4.11 or (ii) Class 7
rejects the Plan and the holder of any Class 7 Claim files an objection to
confirmation of the Plan, which objection is not withdrawn at least three (3)
business days prior to the Confirmation Hearing Date and which contests the
validity of the distribution formula set forth in Section 5.5 hereof, then, in
either case, the distribution formula in Section 5.5 shall not apply and the
aggregate number of Reorganized DZ Units which will be distributed to holders of
Class 7 Claims pursuant to Section 4.9 will be equal to the product of (i) the
Per Claim Distribution multiplied by (ii) the sum of the Allowed amounts of
Class 7 Claims the holders of which have elected a distribution of Reorganized
DZ Units.
Section 5.4. Distribution of Reorganized DZ Units to Class 9. (a)
Subject to Section 4.11 of this Plan, the aggregate number of Reorganized DZ
Units which will be distributed to holders of Class 9 Claims will be determined
in accordance with the formulas set forth in Section 5.5 hereof. If, however,
Class 9 is entitled to a distribution but Class 7 rejects this Plan and the
holder of any Class 7 Claim files an objection to confirmation of this Plan,
which objection is not withdrawn at least three (3) business days prior to the
Confirmation Hearing Date and which contests the validity of the distribution
formula set forth in Section 5.5 hereof, then the distribution formula in
Section 5.5 shall not apply and the holders of Class 9 Claims will receive only
one percent (1%) of the Reorganized DZ Units in satisfaction of their Allowed
Claims.
(b) At the close of business on the Record Date, the transfer
ledgers of the Indenture Trustee of the LYONS shall be closed, and there shall
be no further transfers of registration on the books of the Indenture Trustee of
the record holders of the LYONS. Reorganized Discovery Zone and the Indenture
Trustee for the LYONS shall have no obligation to recognize any transfer of the
LYONS occurring after the Record Date. Reorganized Discovery Zone and the
Indenture Trustee for the LYONS shall be entitled
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instead to recognize and deal for all purposes hereunder with only those record
holders stated on the transfer ledgers as of the close of business on the Record
Date.
(c) Distributions to holders of Allowed Class 9 Claims shall be made
by the Indenture Trustee at the addresses contained in the official records of
the Indenture Trustee. If any holder's distribution is returned as
undeliverable, no further distributions to such holder shall be made unless and
until Reorganized Discovery Zone or the Indenture Trustee is notified of such
holder's then current address, at which time all missed distributions shall be
made to such holder. Amounts in respect of undeliverable distributions made
through the Indenture Trustee shall be returned to Reorganized Discovery Zone
until such distributions are claimed.
(d) On the Effective Date, except as otherwise provided for herein,
(i) LYONS shall be cancelled, and (ii) the obligations of Discovery Zone under
the indenture governing the LYONS shall be discharged; provided however, that
the indenture that governs the rights of the holder of a Class 9 Claim and that
is administered by the Indenture Trustee shall continue in effect solely for the
purposes of allowing the Indenture Trustee to make the distributions to be made
on account of such Claims under this Plan as provided in Section 9 hereof,
provided, further however, that nothing herein shall discharge Reorganized
Discovery Zone from its liabilities under the Bankruptcy Code and the
Confirmation Order. Upon the completion of distributions to be made to the
holders of the LYONS, including payment of the fees and expenses of the
Indenture Trustee, the Indenture Trustee shall be discharged from any further
obligation or powers under the indenture.
(e) On the Effective Date, or as soon thereafter as is practicable,
each holder of an instrument evidencing a Class 9 Claim (a "Certificate") shall
surrender such certificate to the Indenture Trustee and such Certificate shall
be cancelled. No distribution of property hereunder shall be made to or on
behalf of any such holder unless the Certificate is received by the Indenture
Trustee or the unavailability of such Certificate is reasonably established to
the satisfaction of the Indenture Trustee. Any such holder that fails to
surrender such Certificate or to execute and deliver an affidavit of loss and
indemnity reasonably satisfactory to the Indenture Trustee within two years
after the Effective Date shall be deemed to have forfeited all rights, claims
and interests related thereto and shall not participate in any distribution
hereunder and all property in respect of such forfeited distribution shall be
redistributed to the holders of Class 9 Claims in accordance with the Plan
unless the distribution is de minimis.
(f) To the extent that, as of the Effective Date, (i) any pending
Unsecured Claims or Administrative Expense Claims of the Indenture Trustee
(including a good faith estimate submitted to the Debtors by the Indenture
Trustee of its fees and expenses accruing through the Effective Date, or (ii)
any pending Unsecured Claims or Administrative Expense Claims of the Indenture
Trustee for its fees and expenses are not yet Allowed, the Debtors shall
establish on the Effective Date a separate cash reserve (the "Indenture Trustee
Reserve") for the Indenture Trustee in the amount of any such outstanding Claims
or
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Administrative Expenses including the estimated fees and expenses, not to exceed
$25,000.
The obligation of the Reorganized Discovery Zone to pay the
Indenture Trustee its fees and expenses shall be secured by the amounts in the
Indenture Trustee Reserve established for the Indenture Trustee and the lien
rights of the Indenture Trustee under the indenture governing the LYONS shall be
deemed to attach to the cash in the Indenture Trustee Reserve to the same extent
as if the cash in the Indenture Trustee Reserve were property received by the
Indenture Trustee pursuant to the indenture; provided, however, that the
Indenture Trustee shall be conclusively deemed to have taken any and all action
required to perfect its lien rights as to the cash in the Indenture Trustee
Reserve, including, without limitation, any requirement of possession for such
perfection.
In consideration of the foregoing, and subject to the establishment
of the Indenture Trustee Reserve, the Indenture Trustee is deemed to have waived
its lien rights in the property to be distributed under the Plan to the holders
of the LYONS. The Indenture Trustee shall be entitled to Allowed Claims for the
reasonable fees and expenses incurred under the indenture. Upon the payment by
the Debtors or the Reorganized Discovery Zone of such Claims and administrative
expenses the lien rights of the Indenture Trustee shall be extinguished.
Section 5.5. Calculations for Certain Distributions to Classes 7 and
9. (a) Subject to the provisions of Sections 4.11, 5.3 and 5.4(a), the number of
Reorganized DZ Units which shall be distributed to holders of Allowed Class 7
and 9 Claims will be determined in accordance with the formulas and calculations
set forth in this Section 5.5.
(b) For the purpose of all calculations required by this Section
5.5, the following defined terms shall apply:
(i) "Class 7 Calculation Claims Amount" means the aggregate amount
of all Allowed Class 7 Claims satisfied through the distribution of
Reorganized DZ Units and Disputed Class 7 Claims which the Plan Proponents
or the Bankruptcy Court estimate will become Allowed Class 7 Claims and
which will be satisfied through the distribution of Reorganized DZ Units.
(ii) "LYONS Calculation Claims Amount" means the aggregate amount of
all (A) Allowed Class 9 Claims and (B) Disputed Class 9 Claims which the
Plan Proponents or the Bankruptcy Court estimate will become Allowed Class
9 Claims.
(iii) "Section 5.5 Claims Amount" means the sum of (A) the Class 7
Claims Calculation Amount and (B) the LYONS Calculation Claims Amount.
(iv) "Section 5.5 Distribution Value" means the sum of the aggregate
value, as determined by either the Debtors and the Creditors' Committee or
the Bankruptcy Court, of (A) an amount of Reorganized DZ Units which is
equal to the product of
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(I) the Per Claim Distribution multiplied by (II) the Class 7 Calculation
Claims Amount, and (B) one percent (1%) of the aggregate number of
Reorganized DZ Units to be distributed under this Plan, and (C) the shares
of New Common Stock, if any, distributed to holders of Class 7 Claims
pursuant to Section 5.2(b).
(v) "Section 5.5 Ratio" shall be (A) ten (10) in the event that the
Section 5.5 Distribution Value is less than $9 million, (B) eight (8) in
the event that the Section 5.5 Distribution Value is equal to or greater
than $9 million or equal to or less than $12 million, and (C) three (3)
for any incremental Section 5.5 Distribution Value that is greater than
$12 million.
(c) The first step in determining the number of the Reorganized DZ
Units to be distributed to Classes 7 and 9 under this Section 5.5 shall be
determined by solving for X in the following equation: the sum of (i) and (ii)
equals one (1). For the purposes of this equation, (i) shall equal the product
of (A) the product of the Section 5.5 Ratio and X and (B) the Class 7
Calculation Claims Amount divided by the Section 5.5 Claims Amount. Furthermore,
for the purposes of this equation, (ii) shall mean the product of (A) the LYONS
Calculation Claims Amount and (B) X divided by the Section 5.5 Claims Amount. In
the event that the Section 5.5 Distribution Value is greater than $12 million,
the foregoing calculation must be undertaken twice, first to determine the value
of X where the Section 5.5 Distribution Value is $12 million and second to
determine the value of X to the extent that the Section 5.5 Distribution Value
exceeds $12 million.
(d) The second step in determining the number of Reorganized DZ
Units to be distributed to Classes 7 and 9 under this Section 5.5 is to conduct
the following calculations. First, determine the product of (i) the product of
the Section 5.5 Ratio and X and (ii) the fraction obtained by dividing the Class
7 Calculation Claims Amount by the Section 5.5 Claims Amount. Second, multiply
this product by one hundred (100), and express the resulting number as a
percentage which will be referred to as the "Class 7 Distribution Percentage."
Third, determine the sum of one hundred (100) percent minus the Class 7
Distribution Percentage and express this sum as a percentage which will be
referred to as the "Class 9 Distribution Percentage."
(e) The number of Reorganized DZ Units which will be distributed Pro
Rata to holders of Class 7 Claims in satisfaction of such Claims will be
determined by multiplying the Class 7 Distribution Percentage and the Section
5.5 Distribution Value and dividing by the value of one Reorganized DZ Unit. The
number of Reorganized DZ Units which will be distributed Pro Rata to holders of
Class 9 Claims in satisfaction of such Claims will be determined by multiplying
the Class 9 Distribution Percentage and the Section 5.5 Distribution Value and
dividing by the value of one Reorganized DZ Unit.
(f) In the event either (i) the Debtors and the Creditors' Committee
do not consensually determine the Section 5.5 Distribution Value, or (ii) any
holders of Allowed Class 7 or 9 Claims dispute the Section 5.5 Distribution
Value as determined by the Debtors
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and the Creditors' Committee, the Bankruptcy Court shall determine the Section
5.5 Distribution Value. In the event the Bankruptcy Court does not make this
determination on or before the Effective Date, all Reorganized DZ Units which
comprise the Section 5.5 Distribution Value will be held in reserve pending the
Bankruptcy Court's determination and, upon the Bankruptcy Court making such
determination pursuant to a Final Order, will thereafter be distributed in
accordance with this Section 5.5. In the event the Bankruptcy Court does not
determine the Section 5.5 Distribution Value as of the three (3) month
anniversary of the Effective Date, Reorganized Discovery Zone shall accept and
adopt the Section 5.5 Distribution Value proposed by the Creditors' Committee.
Section 5.6. Distribution of the Class 8 Insurance Fund to Class 8.
(a) On the Effective Date, the Reorganized Debtors shall establish a segregated
interest-bearing account (the "Class 8 Insurance Fund"). All Cash paid by
Lexington Insurance Company in respect of Allowed Class 8 Claims shall be
deposited into the Class 8 Insurance Fund and distributed in accordance with
this Section 5.6.
(b) Distributions of Cash from the Class 8 Insurance Fund shall be
made, to the extent practicable, on each anniversary of the Effective Date
(each, a "Class 8 Insurance Fund Payment Date") until all property in the Class
8 Insurance Fund has been distributed. Reorganized Discovery Zone shall not be
required to make any distribution of Cash from the Class 8 Insurance Fund of
less than $50,000 on any Class 8 Insurance Fund Payment Date other than on the
final Class 8 Insurance Fund Payment Date. In the event Reorganized Discovery
Zone does not make a distribution on a Class 8 Insurance Fund Payment Date in
accordance with the preceding sentence, the Class 8 Insurance Fund Payment Date
shall occur as soon thereafter as a Cash distribution of $50,000 may be made to
holders of Class 8 Claims and Reorganized Discovery Zone. Notwithstanding any
other provision of this Section 5.6(b), Reorganized Discovery Zone shall make a
final distribution from the Class 8 Insurance Fund in the event the Cash to be
distributed on the final Class 8 Insurance Fund Payment Date is of an amount not
less than $2,000.
(c) Reorganized Discovery Zone shall determine, as of each Class 8
Insurance Fund Payment Date, the amount of Cash which shall be distributed to
each holder of a Class 8 Claim and which shall be distributed to Reorganized
Discovery Zone. Reorganized Discovery Zone shall first calculate the holder's
Pro Rata portion of Cash then held in the Class 8 Insurance Fund, such portion
determined, solely for the purpose of this calculation, as if all Disputed Class
8 Claims were Allowed Claims (such amount being the "Class 8 Initial Pro Rata
Calculation Value"). Reorganized Discovery Zone shall also determine the sum of
(i) the amount of Cash, if any, previously distributed to such holder in respect
of its Class 8 Claim from the Class 8 Insurance Fund, plus (ii) any sums
previously distributed to Reorganized Discovery Zone from the Class 8 Insurance
Fund in respect of such holder's Claim pursuant to Section 5.6(d), less (iii)
the Cash or the value of Reorganized DZ Units (determined as of the Effective
Date) previously distributed to such holder in respect of its Class 8 Claim
other than from the Class 8 Insurance Fund (such sum being "Section 5.6
Calculation Sum").
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(d) In the event the Section 5.6 Calculation Sum is a negative
number, on the Class 8 Insurance Fund Payment Date: (i) Reorganized Discovery
Zone shall receive Cash from the Class 8 Insurance Fund in an amount equal to
the Section 5.6 Calculation Sum expressed as a positive number but, in any
event, not exceeding the holder's Class 8 Initial Pro Rata Calculation Value,
and (ii) the holder of the Class 8 Claim shall receive Cash from the Class 8
Insurance Fund in an amount equal to the positive sum, if any, of its Class 8
Initial Pro Rata Calculation Value and the Section 5.6 Calculation Sum. In the
event the Section 5.6 Calculation Sum is a positive number, the holder of the
Class 8 Claim shall receive Cash equal to the amount of its Class 8 Holder's
Initial Pro Rata Calculation Value on the Class 8 Insurance Fund Payment Date.
Section 5.7. Distribution of Reorganized DZ Units to Class 10. The
aggregate number of Reorganized DZ Units which will be distributed to holders of
Allowed Class 10 Claims pursuant to Section 4.13 will be equal to the product of
the Per Claim Distribution multiplied by the sum of the Allowed amounts of Class
10 Claims satisfied by distributions of Reorganized DZ Units.
Section 5.8. Distribution of Fractional Reorganized DZ Units. (a)
Fractional Reorganized DZ Units shall not be distributed. Instead, each Creditor
which would, except for the operation of this Section 5.8, be a holder of a
fractional Reorganized DZ Unit shall receive a whole number of shares of New
Common Stock determined in accordance with the calculations described in Section
5.8(b).
(b) The first step in determining the number of shares of New Common
Stock which a Creditor will receive pursuant to this Section 5.8 is to determine
the product of 0.9 (nine-tenths) and the holder's fractional interest in a
Reorganized DZ Unit, such fractional interest rounded to the first decimal place
(rounding down in the case of 0.05 or less and rounding up in the case of more
than 0.05). The holder shall receive a whole number of shares of New Common
Stock equal to this product rounded to a single integer (rounding down in the
case of 0.5 or less and rounding up in the case of more than 0.5). Fractional
shares of New Common Stock shall not be distributed.
(c) All Ten Year Reorganized DZ Warrants not distributed due to the
operation of Section 5.8(a) shall be cancelled and no Person shall have any
rights with respect to such Ten Year Reorganized DZ Warrants.
Section 5.9. Cash Distribution to Classes 7, 8 and 10. To the extent
the Debtors obtain Exit Financing in excess of the sum of $30,000,000 (or such
other amount as the Plan Proponents determine, in their sole discretion, is
sufficient to fund working capital, capital expenditures and other operating
needs) plus the amount of Cash required to make distributions to Classes 1, 1A
and 3, the Debtors will make Cash Distributions of all such excess funds up to
twenty percent (20%) of the aggregate Allowed Claims in Classes 7, 8 and 10 held
by Creditors that have elected to receive Cash Distributions (such Creditors
being "Electing Holders") and make Cash Deposits in respect of Disputed Claims
the holders
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of which are estimated to become Electing Holders of Allowed Claims. If the
Debtors cannot make the Complete Cash Distribution and Deposit, the Debtors will
make Cash Distributions to all Electing Holders Pro Rata (both among Classes and
within each relevant Class) based upon the amount of Allowed Claims held by such
Electing Holders and make Cash Deposits Pro Rata (among Disputed Claims
Reserves) based upon the amount of Disputed Claims the holders of which are
estimated to become Electing Holders of Allowed Claims. As described more fully
in Article IV, Electing Holders will receive Reorganized DZ Units to the extent
the Cash Distributions do not satisfy their Claims.
Section 5.10. Public Listing of New Common Stock. In the event the
Debtors make the Complete Cash Distribution and Deposit, Reorganized Discovery
Zone will have no obligation under this Plan to obtain a Listing (as defined
below) for the New Common Stock or the Ten Year Reorganized DZ Warrants.
However, if the Debtors do not make the Complete Cash Distribution and Deposit
and a Listing has not been obtained, Reorganized Discovery Zone must use
commercially reasonable efforts, beginning on the first anniversary of the
Effective Date, to obtain by no later than fifteen (15) months after the
Effective Date (i) a continuing listing of the New Common Stock and Ten Year
Reorganized DZ Warrants on a national stock exchange or (ii) a continuous
quotation of the aforementioned securities quoted through any tier of the Nasdaq
Stock Market (in either case, a "Listing"). If the application for a Listing is
denied, Reorganized Discovery Zone shall use commercially reasonable efforts to
cure the conditions which resulted in such denial, and Reorganized Discovery
Zone shall reapply for Listing promptly after such conditions are cured.
Section 5.11. Merger of Reorganized Debtors. Simultaneously with the
commencement of the Effective Date, Reorganized Discovery Zone, the U.S. Holding
Company and the Merger Subsidiaries will take all such actions as may be
necessary or appropriate to effect the Merger Transactions on the terms and
subject to the conditions set forth in the Merger Agreement. Without limiting
the generality of the foregoing sentence, promptly upon the satisfaction or
waiver of each of the conditions set forth in the Merger Agreement, each of the
U.S. Holding Company and the Merger Subsidiaries will cause the Merger
Agreement, a certificate of merger or other appropriate documentation conforming
to the applicable provisions of the laws of its jurisdiction of organization to
be appropriately filed in such jurisdiction pursuant to applicable provisions of
such laws and will take or cause to be taken all other actions, including making
appropriate filings or recordings, that may be required by such laws or other
applicable laws in connection with the Merger Transactions.
Section 5.12. Request for Substantive Consolidation. This Plan is
predicated on the substantive consolidation of the Debtors. The Debtors request
substantive consolidation on the grounds that (i) the Debtors' Creditors did not
deal with each Debtor as a single economic unit, but rather, the Debtors were
dealt with together as a single "Discovery Zone" entity and (ii) the Claims
against and the other affairs of the Debtors are so intermingled that the denial
of substantive consolidation would result in a costly, time-consuming
administrative burden.
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Section 5.13. Employee Retention Plan. On the Effective Date and
thereafter, Reorganized Discovery Zone will implement and make those payments
required under the Employee Retention Plan.
Section 5.14. Stock Incentive Plan. On or prior to the Effective
Date, the Stock Incentive Plan, substantially in the form attached as Exhibit F
hereto, will be adopted by Discovery Zone and, by voting to accept this Plan,
all holders of Class 6, 7, 8, 9 and 10 Claims shall be deemed to have ratified
and approved the Stock Incentive Plan. Following the Effective Date, the Board
of Directors of Reorganized Discovery Zone may amend or modify the Stock
Incentive Plan in accordance with the terms thereof and any such amendment or
modification shall not require amendment of this Plan.
Section 5.15. Subordination. In consideration of the distributions
to be made to the holders of Class 6 Allowed Claims under this Plan, such
holders shall each be deemed as of the Effective Date to have agreed to limit
the enforcement of any contractual or statutory subordination of which they may
be the beneficiaries to their right to receive the consideration to be provided
to them under this Plan and to have agreed to allow the holders of Class 9
Allowed Claims to receive the consideration to be provided to them under this
Plan, free of any subordination claims that may otherwise be applicable.
Notwithstanding the previous sentence, the subordination provisions under the
LYONS shall be enforced without exception and the holders of Allowed Class 9
Claims shall not receive any distribution under this Plan in the event that the
holders of Class 9 Claims are not entitled to receive any distribution under
Section 4.11.
Section 5.16. Disputed Claims. (a) Notwithstanding any other
provision of this Plan, no property shall be distributed under this Plan on
account of any Disputed Claim. On the Effective Date, Reorganized Discovery Zone
shall establish, and hold in trust, reserves (each being a "Disputed Claims
Reserve") with respect to each Class of Claims in which there exists a Disputed
Claim and place in each Disputed Claims Reserve property to be distributed on
the later of the Effective Date and the date such Claim becomes Allowed on
account of such Claims to the extent such Claims become Allowed.
(b) Cash held in any Disputed Claims Reserve shall be held in a
segregated interest-bearing trust account. To the extent practicable,
Reorganized Discovery Zone may invest the Cash in any Disputed Claims Reserve in
a manner that will yield a reasonable net return, taking into account the safety
of the investment.
(c) On or prior to the Confirmation Date, either (i) the Plan
Proponents and the Committee shall have jointly determined, and such
determination shall have been approved by the Bankruptcy Court, or (ii) the
Bankruptcy Court shall have determined, for each Class of Claims, other than
Class 1A, the amount of Cash and the number of Reorganized DZ Units sufficient
to fund the Disputed Claims Reserve with respect to each such Class. In
accordance with the preceding sentence, the Bankruptcy Court may estimate the
maximum amount of Disputed Claims in each Class for the purpose of funding each
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Disputed Claims Reserve in accordance with this Section 5.16.
(d) In the event that the Cash or Reorganized DZ Units which are
held in a Disputed Claims Reserve with respect to a Class are insufficient to
satisfy the Allowed Claims of such Class, Reorganized Discovery Zone shall
deposit into the applicable Disputed Claims Reserve Reorganized DZ Units
necessary to satisfy such Allowed Claims as such Claims become Allowed by Final
Order, the number of such Reorganized DZ Units determined as if the Disputed
Claim became an Allowed Claim on the Effective Date. Notwithstanding any other
provision of this Plan, any Electing Holder whose Claim becomes Allowed after
all Cash in the applicable Disputed Claims Reserve has been distributed shall
receive its Pro Rata portion of Reorganized DZ Units.
(e) The property in each Disputed Claims Reserve, including the
allocable portion of the net return yielded from the investment of any Cash in
such Disputed Claims Reserve, if any, and all regular and special dividends, if
any, that would have been received by the holder of shares of New Common Stock
that were held in each Disputed Claims Reserve, will be distributed by
Reorganized Discovery Zone to the holders of the Disputed Claims as such Claims
become Allowed by Final Order.
(f) To the extent that Claims ultimately Allowed in any Class exceed
prior estimates of the Claims in that Class, Reorganized Discovery Zone shall
distribute additional Reorganized DZ Units and Cash, if any, held in the
applicable Disputed Claims Reserve to the holders of such Claims so that the
final distribution of Reorganized DZ Units to such holders and to all holders in
Classes 6, 7, 8 and 10 represent the same Per Claim Distribution.
(g) In the event there shall be, with respect to the Disputed Claims
Reserve for any Class, (i) an amount of Cash in excess of that required to pay
all Disputed Claims in such Class a twenty percent (20%) distribution in Cash
pursuant to this Plan (assuming that all such Disputed Claims became Allowed
Claims), or (ii) any Cash remaining in such Disputed Claims Reserve after all
disputes relating to Disputed Claims in such Class have been resolved and all
distributions in respect of such Claims have been made, Reorganized Discovery
Zone shall distribute such Cash pro rata to all other Disputed Claims Reserves.
Any property remaining in any Disputed Claims Reserve (x) in excess of the
amount of Cash required to satisfy all Disputed Claims in Cash pursuant to this
Plan (assuming that all such Disputed Claims became Allowed Claims) or (y) after
the resolution of all disputes relating to Disputed Claims in such reserve,
shall become the property of Reorganized Discovery Zone.
Section 5.17. Withholding of Taxes. To the extent required by
applicable law, there shall be withheld from any property distributed under this
Plan any property which must be withheld for taxes payable by the Person
entitled to such property to the extent required by applicable law.
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Section 5.18. Professional Fees and Expenses; Administrative Expense
Claims Bar Date. (a) Each Person retained or requesting compensation and
reimbursement in the Cases pursuant to section 327, 328, 330, 331, 503(b) or
1103 of the Bankruptcy Code shall be entitled to file an application for
allowance of compensation and reimbursement of expenses incurred prior to the
Confirmation Date in the Cases on or before the Administrative Expense Claim Bar
Date. Objections to each such application other than objections submitted by the
Fee Auditor must be filed on or before the sixtieth (60th) day after the
Administrative Expense Claim Bar Date.
(b) The Confirmation Order shall contain the Administrative Expense
Claim Bar Date which shall be a date at least thirty (30) days after the
Effective Date.
(c) Liabilities incurred in Debtors' purchase, lease or use of goods
and services in the ordinary course of their business, including Administrative
Expense Claims for amounts due on account of services rendered to the Debtors,
including, without limitation, expenses incurred in accordance with Section 11.5
of this Plan and other fees and expenses of professionals, after the
Confirmation Date shall be paid by the Reorganized Debtors pursuant to the terms
and conditions of the particular transaction giving rise to such Claims, without
any further action by the holders of such Claims.
Section 5.19. Transactions on Business Days. If the Effective Date
or any other date on which a transaction may occur under this Plan is not a
Business Day, the transactions contemplated by this Plan to occur on such day
shall occur instead on the next succeeding Business Day.
Section 5.20. Unclaimed Property. Notwithstanding section 1143 of
the Bankruptcy Code, any Person who fails to claim any Cash, New Common Stock or
Ten Year Reorganized DZ Warrants within one (1) year from the Effective Date or
from such later date as a Claim becomes an Allowed Claim shall forfeit all
rights to any distribution under this Plan. Persons who fail to claim Cash, New
Common Stock or Ten Year Reorganized DZ Warrants forfeit their rights thereto
and shall have no claim whatsoever against the Debtors or Reorganized Debtors or
any holder of an Allowed Claim to whom distributions are made.
Section 5.21. Fractional Cents. When any payment of a fraction of a
cent would otherwise be called for, the actual payment shall reflect a rounding
of such fraction to the nearest whole cent (rounding down in the case of .50 or
less and rounding up in the case of more than .50).
Section 5.22. Revesting of Assets. All property of each Estate shall
revest in the applicable Reorganized Debtor on the Effective Date free and clear
of all Claims, liens, charges, encumbrances and Interests, except as otherwise
provided in this Plan, provided, however, that any liens on or security
interests in property of each Estate which secure postpetition Claims shall
attach to such property on and after the Effective Date until such
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postpetition Claims have been satisfied in full.
ARTICLE VI
METHOD OF RESOLUTION FOR PERSONAL INJURY DISPUTED CLAIMS
Section 6.1. Information Assembly. (a) Within thirty (30) days after
the Effective Date, Reorganized Discovery Zone shall mail to each holder of a
Disputed Claim relating to a personal injury (a "Personal Injury Disputed
Claim") a form prepared by Reorganized Discovery Zone, requesting such
information as it believes is necessary to evaluate such Personal Injury
Disputed Claim.
(b) No later than sixty (60) days after Reorganized Discovery Zone
mails such form to a holder of such a Personal Injury Disputed Claim, the holder
must return the completed form by properly addressed first class mail, postage
prepaid, to Reorganized Discovery Zone and any Insurer on such Personal Injury
Disputed Claim which is entitled to participate in the settlement process
pursuant to agreement or applicable law. The completed form must be signed,
under penalty of perjury, by the holder and the holder's counsel, if any, and
the signature of the holder must be notarized. Each form must include
documentation which sets forth (i) the cause of the injury, (ii) the nature and
extent of the injury and (iii) a detailed description of the compensation sought
by the holder of the Personal Injury Disputed Claim. This documentation may
include: (i) copies of all medical bills, (ii) copies of all medical reports,
(iii) copies of all expert reports, (iv) copies of all tax returns for the time
periods for which the holder of the Personal Injury Disputed Claim is seeking
compensation for lost wages, (v) copies of all x-rays, (vi) copies of all MRIs,
(vii) copies of all wage statements, W-2 forms, W-4 forms, and 1099 forms for
the time periods for which the holder of the Personal Injury Disputed Claim is
seeking compensation for lost wages, (viii) copies of all pictures of any
accident scene, and (ix), in the case of wrongful death claims, copies of all
autopsy reports. If the form is not returned in accordance herewith within the
required sixty-day period, the Personal Injury Disputed Claim shall be deemed
disallowed.
Section 6.2. Settlement Offers. (a) Within ninety (90) days from the
date on which Reorganized Discovery Zone and the Insurer, if any, receive the
forms returned in accordance with Section 6.1, Reorganized Discovery Zone or, if
there is an Insurer, Reorganized Discovery Zone and/or the Insurer shall do one
of the following:
(i) offer to settle the Personal Injury Disputed Claim;
(ii) deny the Personal Injury Disputed Claim; or
(iii) request additional information from the holder of the Personal
Injury Disputed Claim, including, without limitation, submission to an
independent medical
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examination.
(b) If an offer of settlement is made, the holder must notify
Reorganized Discovery Zone of its decision to accept or reject the offer of
settlement in a writing received by Reorganized Discovery Zone within thirty
(30) days after the offer of settlement is made. If the holder accepts the offer
of settlement, the Personal Injury Disputed Claim shall be deemed to be Allowed
on the date on which Reorganized Discovery Zone and/or the Insurer, as the case
may be, receives notice of such acceptance. If the offer of settlement is not
accepted or rejected within such thirty-day period, the offer of settlement
shall be deemed accepted.
(c) If additional information is requested, the holder must provide
such additional information to Reorganized Discovery Zone within sixty (60) days
of the request. If Reorganized Discovery Zone does not receive such additional
information within such sixty-day period, the Personal Injury Disputed Claim
shall be deemed disallowed. If the requested additional information is provided
within such sixty-day period, Reorganized Discovery Zone or, if there is an
Insurer, Reorganized Discovery Zone and/or the Insurer must make an offer of
settlement or deny the Personal Injury Disputed Claim within ninety (90) days
after it receives such additional information. If Reorganized Discovery Zone
and/or the Insurer does not make an offer of settlement or deny the Personal
Injury Disputed Claim within such ninety-day period, the Personal Injury
Disputed Claim will be submitted to mediation pursuant to Section 6.3.
(d) If a holder of a Personal Injury Disputed Claim rejects an offer
of settlement within thirty (30) days after the offer of settlement is made or
the Personal Injury Disputed Claim is denied, the Personal Injury Disputed Claim
shall be submitted to mediation pursuant to Section 6.3 of this Plan.
Section 6.3. Mediation. (a) Each Personal Injury Disputed Claim
which is referred to mediation shall be submitted to mediation by a mediator
approved by Reorganized Discovery Zone and/or the Insurer, on the one hand, and
the holder of the Personal Injury Disputed Claim, on the other, or, if these
Persons cannot agree, by a mediator assigned by the Bankruptcy Court. Such
mediator shall work with all Persons involved, including, without limitation,
any Insurer, to negotiate a mutually satisfactory resolution with respect to the
Personal Injury Disputed Claim. Within thirty (30) days of the date on which a
mediator is appointed, the mediator shall schedule a mediation conference in a
place agreed to by each of the Persons involved, or if such Persons cannot
agree, at a place selected by the mediator at which all Persons involved shall
either (i) appear personally or (ii) be represented by a Person authorized to
enter into a binding settlement agreement on behalf of such involved Person. The
mediator shall give each such involved Person at least twenty (20) days' prior
written notice of the date, the time and the place of the conference. If any
Person which has received notice of such mediation (or his, her or its
designated representative) fails to appear at such mediation conference, any
other Person may petition the Bankruptcy Court for an award of costs, including,
without limitation, reasonable attorneys' fees against the non-
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attending Person. In addition, if the holder or the holder's designated
representative, if any, fails to attend, the Personal Injury Disputed Claim
shall be deemed disallowed.
(b) At the conclusion of the mediation conference, each Person (or
its designated representative) shall sign before the mediator a statement to the
effect that (i) the Personal Injury Disputed Claim has been resolved by mutual
agreement (subject to approval of the Bankruptcy Court) and the basis of such
resolution, (ii) the Personal Injury Disputed Claim shall be submitted to
binding arbitration or (iii) the Personal Injury Disputed Claim shall proceed
before the district court for the district in which the Personal Injury Disputed
Claim arose.
Section 6.4. Arbitration and Trial. (a) If a Personal Injury
Disputed Claim is submitted to binding arbitration, the Personal Injury Disputed
Claim shall be resolved by binding arbitration conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. This
binding arbitration shall be conducted in either a place agreed to by each of
the Persons involved, including, without limitation, any Insurer or, if such
Persons cannot agree, Reorganized Discovery Zone's corporate headquarters. No
Person involved in such arbitration shall be permitted to appeal any award
except as expressly permitted by Section 10 of the Federal Arbitration Act, as
amended, and there shall be no right to a de novo trial subsequent to the
arbitration.
(b) Upon compliance with the procedures set forth in this Article
VI, the holder of a Personal Injury Disputed Claim subject to this Article VI
shall have the right to pursue such Personal Injury Disputed Claim in a federal
district court in accordance with 28 U.S.C. ss. 157(b)(5) and the Federal Rules
of Civil Procedure. Any case filed prior to the Petition Date shall be
transferred from the forum in which it is pending to the federal district court
for the district in which the Disputed Claim arose. The Personal Injury Disputed
Claim shall be prosecuted in that federal district court.
ARTICLE VII
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES;
INDEMNIFICATION OBLIGATIONS
Section 7.1. Assumption and Rejection of Executory Contracts and
Unexpired Leases. Each executory contract or unexpired lease not previously
assumed shall be deemed rejected as of the Effective Date, except those
executory contracts or unexpired leases listed in Schedule 2 to this Plan, which
the Debtors will assume on the Confirmation Date; provided, however, that the
Reorganized Debtors shall have the right, at any time prior to sixty (60) days
after the Effective Date, to amend Schedule 2; any executory contract or
unexpired lease not previously assumed which is added to or deleted from
Schedule 2 will be assumed or rejected, respectively, as of the date of such
amendment.
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Section 7.2. Cure of Defaults. All cure and other payments required
by section 365(b)(1) of the Bankruptcy Code under any executory contract or
unexpired lease which is assumed or assumed and assigned under this Plan shall
be made by the Reorganized Debtors. In the event of a dispute regarding the
amount of any cure or other payment, the ability of any Reorganized Debtor or an
assignee to provide adequate assurance of future performance, or any other
matter pertaining to assumption or assignment, the Reorganized Debtors shall
make such cure or other payments required by section 365(b)(1) of the Bankruptcy
Code following the entry of a Final Order resolving such dispute. The
Reorganized Debtors shall cure all other defaults existing under any executory
contract or unexpired lease which is assumed under this Plan.
Section 7.3. Claims for Damages. Each Person who is a party to an
executory contract or unexpired lease rejected pursuant to Section 7.1 shall be
entitled to file, not later than thirty (30) days after such rejection, a proof
of claim for damages alleged to arise from the rejection of such executory
contract or unexpired lease to which such Person is a party. Objections to any
such proof of claim shall be filed not later than sixty (60) days after such
proof of claim is filed, and the Bankruptcy Court shall determine any such
objections. Payment of such Claim shall be made on the later of (i) ten Business
Days after the expiration of the sixty-day period for filing an objection in
respect of any proof of Claim filed pursuant to this Section 7.3 and (ii) ten
Business Days after the Claim has been Allowed by a Final Order, provided that
no such payments shall be made before the Effective Date.
Section 7.4. Classification of Claim. Allowed Claims arising out of
the rejection of executory contracts or unexpired leases shall be Class 7
Claims.
Section 7.5. Indemnification Obligations. (a) Except as limited
below, the obligations of the Debtors to indemnify each Indemnified Person
pursuant to the Debtors' respective articles of incorporation, by-laws,
applicable state law or specific agreement shall survive confirmation of this
Plan and shall not be discharged pursuant to section 1141 of the Bankruptcy
Code, provided that, with respect to indemnification obligations incurred before
the Petition Date, the Claim of any Indemnified Person for any loss, cost or
expense with respect to occurrences before the Petition Date shall be limited to
the cost of defense and, to the extent that any amounts are paid as a cost of
defense of a claim with respect to occurrences before the Petition Date which is
adversely determined as to any Indemnified Person, such amounts shall be
returned by such Indemnified Person to the Reorganized Debtors immediately after
such adverse determination. Any Claim of any Person other than an Indemnified
Person based upon an indemnity obligation of the Debtors shall be disallowed and
any obligation of the Debtors to indemnify any such Person shall terminate as of
the day immediately preceding the Petition Date and cease to be of any further
force or effect.
(b) The term "Indemnified Person" means (i) each Person serving as
an officer or director of any of the Debtors on the Petition Date or on the
Effective Date, and each employee indemnified by a Debtor as of the Confirmation
Date pursuant to the applicable Debtor's articles of incorporation, by-laws,
applicable state law or specific
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agreement, and (ii) professionals retained in these Cases and having an
indemnity from the Debtors. The term "Indemnified Person" does not include the
following former officers and directors of Discovery Zone: Donald Flynn, Robert
Mitchum, Victor Casini, Gerard Seegers and John McCarthy.
ARTICLE VIII
CERTIFICATE OF INCORPORATION;
CORPORATE GOVERNANCE
Section 8.1. Certificate of Incorporation. Reorganized Discovery
Zone will amend and restate its existing Certificate of Incorporation and
By-Laws in substantially the forms attached hereto as Exhibits A and B,
respectively. The amended and restated Certificate of Incorporation and By-Laws
will include (i) authorization to issue 10,000,000 shares of common stock of
Reorganized Discovery Zone, of which 4,000,000 shares of New Common Stock will
be issued pursuant to the Plan and approximately 968,000 shares will be reserved
for issuance (x) pursuant to the Stock Incentive Plan and (y) upon exercise of
the Ten Year Reorganized DZ Warrants, and 4,000,000 shares of preferred stock of
Reorganized Discovery Zone, (ii) provision for restrictions on the issuance of
nonvoting equity securities to the extent required by section 1123(a)(6) of the
Bankruptcy Code, and (iii) such other provisions as may be consistent with the
terms of this Plan.
Section 8.2. New Board of Directors. The Reorganized Discovery Zone
Board of Directors shall consist of at least five members. The Class 6 Creditors
have nominated four of the New Directors and the Creditors' Committee has
nominated one of the New Directors. The names, affiliations and backgrounds of
the New Directors are set forth in Exhibit 2 to the Disclosure Statement. The
term in office of the New Directors will commence on the Effective Date. Such
directors may remain in office unless and until their successors are duly
elected or qualified or they are removed by the stockholders of Reorganized
Discovery Zone, in either case in accordance with the Certificate of
Incorporation and By-Laws of Reorganized Discovery Zone; provided, however, that
the New Director nominated by the Creditors' Committee shall serve for a term of
a least three (3) years, beginning on the Effective Date. Such Creditors'
Committee New Director shall serve such three (3) year term notwithstanding any
assignment by Birch or its affiliates of any ownership interest in Reorganized
Discovery Zone.
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ARTICLE IX
CONDITIONS TO CONFIRMATION AND EFFECTIVE DATE
Section 9.1. Confirmation. The Bankruptcy Court shall not begin a
hearing on confirmation of this Plan and thereafter enter the Confirmation Order
unless the Debtors' investment bankers have provided the Debtors and the
Creditors' Committee with reasonable assurance that they have obtained
commitments from investors, conditioned upon confirmation of this Plan,
sufficient to consummate the Exit Financing within 14 days of the Confirmation
Date.
Section 9.2. Effective Date. The occurrence of the Effective Date is
subject to the following conditions precedent:
(a) The Debtors shall have consummated the Exit Financing on terms
acceptable to the Plan Proponents in an amount necessary to make the Cash
payments required to be made under this Plan on the Effective Date and for
working capital purposes.
(b) The Confirmation Order, in form and substance satisfactory to
the Plan Proponents, shall become a Final Order.
(c) The Bankruptcy Court shall have entered a substantive
consolidation order, in form and substance satisfactory to the Plan
Proponents, which shall have become a Final Order.
(d) All documents contemplated to be executed or implemented in
connection with the Plan, including, without limitation, Exhibit 1 annexed
to the Disclosure Statement and Exhibits A through H to this Plan, shall
be executed or implemented in a form satisfactory to the Plan Proponents.
Section 9.3. Waiver of Conditions. The Plan Proponents expressly
reserve the right to waive any of the conditions set forth in this Article IX.
ARTICLE X
RETENTION OF JURISDICTION
Section 10.1. Retention of Jurisdiction. Notwithstanding the entry
of the Confirmation Order or the Effective Date having occurred, the Bankruptcy
Court shall retain exclusive jurisdiction over all matters arising out of or
relating to the Cases, including, but not limited to, the following matters:
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(a) to determine the allowance or classification of Claims or
Interests and to determine any objections thereto;
(b) to construe and take any action to enforce this Plan and to
issue such orders as may be necessary for the implementation, execution
and consummation of this Plan;
(c) to determine any and all applications for allowance of
compensation or reimbursement of expenses;
(d) to determine any other requests for payment of Priority Claims;
(e) to determine any other request for payment of Administrative
Expense Claims;
(f) to resolve any dispute regarding the implementation of this
Plan;
(g) to determine any and all applications pending on the
Confirmation Date for the rejection, assumption or assignment of executory
contracts or unexpired leases and the allowance of any Claim resulting
therefrom;
(h) to determine all applications, motions, adversary proceedings,
contested matters and other litigated matters that may be pending in the
Court on or initiated after the Effective Date in connection with the
Cases;
(i) to determine such other matters and for such other purposes as
may be provided in the Confirmation Order;
(j) to modify the Plan pursuant to section 1127 of the Bankruptcy
Code, or to remedy any apparent non-material defect or omission in this
Plan, or to reconcile any non-material inconsistency in the Plan so as to
carry out its intent and purposes;
(k) to enter an order or final decree closing the Cases;
(l) to determine matters under section 505 of the Bankruptcy Code
relating to any tax, fine, penalty or addition to tax for which any Debtor
or the Estates may be liable, directly or indirectly, or any refund to
which any Debtor may be entitled;
(m) to consider and act on the compromise and settlement or payment
of any Claim against any Debtor or Estate;
(n) to determine all questions and disputes regarding title to the
assets of any Debtor or Estate;
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(o) to construe, enforce and resolve all questions and disputes
relating to employment agreements existing or approved by the Bankruptcy
Court at or prior to the Confirmation Date;
(p) to approve the surrender and abandonment of property of any
Debtor or Estate pursuant to the Bankruptcy Code;
(q) to issue injunctions, enter and implement other orders or to
take such other actions as may be necessary or appropriate to restrain
interference by any entity with consummation, implementation or
enforcement of the Plan or the Confirmation Order;
(r) to remedy any breach or default occurring under this Plan; and
(s) to resolve and finally determine all disputes that may relate
to, impact on, or arise in connection with, this Plan.
ARTICLE XI
EFFECTS OF CONFIRMATION
Section 11.1. Discharge. The Confirmation Order shall discharge each
Debtor from any debt and liability that arose before Confirmation, as provided
in sections 524 and 1141 of the Bankruptcy Code, and any debt and liability of a
kind specified in section 502(g), 502(h) or 502(i) of the Bankruptcy Code,
whether or not:
(i) a proof of claim based on such debt or liability is filed or
deemed filed under section 501 of the Bankruptcy Code;
(ii) a Claim based on such debt or liability is Allowed; or
(iii) the holder of a Claim based on such debt or liability has
accepted this Plan.
Section 11.2. Limitation of Liability. Notwithstanding any other
provision of this Article XI, none of the directors, officers, agents,
representatives, accountants, financial advisors, attorneys or employees of (i)
any Debtor during these Cases, (ii) any Reorganized Debtor, (iii) the Creditors'
Committee, (iv) any member of the Creditors' Committee during these Cases, (v)
Birch, (vi) any member of Birch or (vii) Viacom and neither the Debtors, the
Reorganized Debtors, the Creditors' Committee, any member of the Creditors'
Committee, Birch, any member of Birch nor Viacom shall have any liability for
actions taken or omitted to be taken in good faith under or in connection with
this Plan or in connection with the Cases or the operation of the Debtors during
the pendency of the Cases.
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Section 11.3. Injunction. Except as otherwise expressly provided in
this Plan, the Confirmation Order will provide, among other things, that all
Persons who have held, hold or may hold Claims or who have held, hold or may
hold any Interest are permanently enjoined from and after the Effective Date
from (i) commencing or continuing in any manner any action or other proceedings
of any kind against any Debtor, any Reorganized Debtor, any Indemnified Person,
any member of the Creditors' Committee, Viacom, Birch or any member of Birch or
any of their respective agents, employees, representatives, accountants,
financial advisors or attorneys, based upon, relating to, arising out of, or in
any way connected with any such Claim or Interest, (ii) enforcing, attaching,
collecting or recovering by any manner or means any judgment, award, decree or
order against any Debtor, any Reorganized Debtor, any Indemnified Person, any
member of the Creditors' Committee, Viacom, Birch or any member of Birch or any
of their respective agents, employees, representatives, accountants, financial
advisors or attorneys, the property of any Debtor or any Reorganized Debtor with
respect to any such Claim, (iii) creating, perfecting or enforcing any
encumbrance of any kind against any Debtor, any Reorganized Debtor, any
Indemnified Person, any member of the Creditors' Committee, Birch or any member
of Birch or any of their respective agents, employees, representatives,
accountants, financial advisors or attorneys, or against the property of any
Debtor, any Reorganized Debtor, any Indemnified Person, any member of the
Creditors' Committee, Viacom, Birch or any member of Birch with respect to any
such Claim, except that holders of security interests in or liens, charges or
other encumbrances on property may perfect such security interests, liens,
charges or other encumbrances, (iv) asserting any setoff, right of subrogation,
or recoupment of any kind against any obligation due any Debtor, any Reorganized
Debtor, any Indemnified Person, any member of the Creditors' Committee, Viacom,
Birch or any member of Birch or against the property of any Debtor, any
Reorganized Debtor, any Indemnified Person, any member of the Creditors'
Committee, Viacom, Birch or any member of Birch or any of their respective
agents, employees, representatives, accountants, financial advisors or
attorneys, with respect to any such Claim, (v) commencing or continuing in any
manner any action or other proceeding of any kind with respect to any Claim as
to which such Person shall be deemed to have covenanted not to sue as provided
in this Section 11.3, and (vi) commencing any action, collecting or recovering
by any manner or means any judgment, award, decree or order against the
immediate or any mediate transferee of any property distributed pursuant to this
Plan or the securities issued hereunder based upon a claim that the transferor's
receipt of such property constituted a fraudulent conveyance, preference,
violation of a bulk sales law or based upon any other claim that receipt and, or
distribution of property by transfer pursuant to this Plan is wrongful.
Notwithstanding anything contained herein, the injunction to be provided by the
Confirmation Order, as described above, shall not prevent any person from taking
any action to enforce any rights under the Plan or from taking the actions
described in (i) through (vi) above against the following former officers and
directors of Discovery Zone: Donald Flynn, Robert Mitchum, Victor Casini, Gerard
Seegers and John McCarthy. Furthermore, notwithstanding anything contained
herein, the injunction to be provided by the Confirmation Order, as described
above, shall not prevent any lessor of nonresidential real property from
exercising its rights under any lease or guaranty against Viacom.
40
<PAGE>
Section 11.4. Modification and Revocation of this Plan. (a) Subject
to the restrictions and modifications set forth in section 1127 of the
Bankruptcy Code, the Plan Proponents reserve the right to alter, amend or modify
this Plan before its substantial consummation; provided, however, that any such
alteration, amendment or modification shall not alter, amend or modify any
provision hereof that directly or indirectly affects the treatment of a holder
of an Unsecured Claim without the prior written consent of the Creditors'
Committee.
(b) The Plan Proponents reserve the right to revoke or withdraw this
Plan prior to the Confirmation Date and any Plan Proponent may separately
exercise this right. If a Plan Proponent revokes or withdraws this Plan, or if
Confirmation does not occur, this Plan shall be null and void in all respects,
and nothing contained in this Plan shall (i) constitute a waiver or release of
any Claims by or against, or any Interests in, the Debtors or (ii) prejudice in
any manner the rights of the Debtors.
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.1. Headings. The headings of the articles, sections and
subsections of this Plan are inserted for convenience only and shall not affect
the interpretation hereof.
Section 12.2. Construction. The rules of construction used in
section 102 of the Bankruptcy Code shall apply to the construction of this Plan.
Any provision of this Plan other than Section 5.5(b)(iv) with respect to the
estimation or determination by any party, other than the Bankruptcy Court, of
either (i) the number or amount of any Claims, whether Allowed, Disputed, or
Disputed which will become Allowed (each, a "Claims Estimation"), or (ii) the
value of any property, including, but not limited to Cash, Reorganized DZ Units,
New Common Stock, Ten Year Reorganized DZ Warrants (each, a "Valuation
Estimation"), shall be deemed to require that the Plan Proponents and the
Creditors' Committee jointly make the Claims Estimation or the Valuation
Estimation, and that such estimation be approved by the Bankruptcy Court. In the
event the Plan Proponents and Creditors' Committee do not consensually make any
Claim Estimation or Valuation Estimation, the Bankruptcy Court shall make such
estimation.
Section 12.3. Amendments. This Plan may not be altered, amended,
modified or withdrawn without the prior written consent of each of the Plan
Proponents.
Section 12.4. Notices. All notices and other communications provided
for hereunder shall be in writing (including telecopier, telegraphic, telex or
cable communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered to the applicable party at its address.
41
<PAGE>
Section 12.5. Creditors' Committee. The Creditors' Committee shall
continue to have all the rights, powers and duties conferred upon it pursuant to
section 1103 of the Bankruptcy Code until the Effective Date, subject to the
following sentence. On the Effective Date, the Creditors' Committee shall be
disbanded and terminate; provided, however, that if the Bankruptcy Court is
required to determine the Section 5.5 Distribution Value, and has not done so on
or before the Effective Date, the Creditors' Committee shall continue solely for
the purpose of, and in connection with, the Bankruptcy Court's determination of
such value, until the earlier of (i) such date that the Bankruptcy Court has
made such determination pursuant to a Final Order or (ii) the three month
anniversary of the Effective Date. The Creditors' Committee's fees and expenses,
including all professional fees, which may be reimbursed pursuant to Section
5.18 during such post-Effective Date period shall not exceed $10,000 per month.
Professionals employed by the Creditors' Committee shall be compensated for
services rendered and reimbursed for expenses incurred in accordance with
Section 5.18 and this Section 12.5.
Section 12.6. Severability of Plan Provisions. If, on or before the
Confirmation Date, any term or provision of this Plan is held by the Bankruptcy
Court to be invalid, void or unenforceable, the Bankruptcy Court, with the
consent of the Plan Proponents, shall have the power to alter and interpret such
term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of this
Plan will remain in full force and effect and will in no way be affected,
impaired or invalidated by such holding, alteration or interpretation. The
Confirmation Order shall constitute a judicial determination and shall provide
that each term and provision of this Plan, as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
Section 12.7. Plan Settlement Agreement. The Plan Proponents and the
Creditors' Committee have entered into a settlement agreement with respect to
the provisions of this Plan (the "Plan Settlement Agreement"), a true and
correct copy of which is attached as Exhibit H to this Plan. To the extent that
the terms of this Plan and the Plan Settlement Agreement conflict, the terms of
the Plan Settlement Agreement shall control.
42
<PAGE>
Respectfully submitted,
DISCOVERY ZONE, INC.
Debtor and
Debtor in possession
By /s/ Scott Bernstein
---------------------------------------
Scott Bernstein
Chief Executive Officer and President
BEAVERTON FUN FITNESS, INC.
DJM MANAGEMENT, INC.
DZ OF CONNECTICUT, INC.
DZ OF GEORGIA, INC.
DZ OF MASSACHUSETTS, INC.
DZ OF MISSOURI, INC.
DZ OF NEW YORK, INC.
DZ PARTY, INC.
DZ OF PENNSYLVANIA, INC.
DZ OF WISCONSIN, INC.
PORTLAND FUN FITNESS, INC.
VANCOUVER FUN FITNESS, INC.
DISCOVERY ZONE (PUERTO RICO),
INC.
LEAPS & BOUNDS, INC.
SEMBORG CORP.
DZGP, INC.
DISCOVERY ZONE CHILDREN'S
AMUSEMENT CORPORATION
Debtors and
Debtors in possession
By /s/ Scott Bernstein
---------------------------------------
Scott Bernstein
President
<PAGE>
DISCOVERY ZONE L.P.
Debtor and
Debtor in possession
By DZGP, Inc., its general partner
By /s/ Scott Bernstein
---------------------------------------
Scott Bernstein
President
TUMBLE FOR FUN LIMITED
PARTNERSHIP
Debtor and
Debtor in possession
By Discovery Zone Children's Amusement
Corporation, its general partner
By /s/ Scott Bernstein
---------------------------------------
Scott Bernstein
President
<PAGE>
Schedule 1
List of Debtors
<PAGE>
Discovery Zone, Inc.
Subsidiary Debtors
Beaverton Fun Fitness, Inc.
DJM Management, Inc.
DZ of Connecticut, Inc.
DZ of Georgia, Inc.
DZ of Massachusetts, Inc.
DZ of Missouri, Inc.
DZ of New York, Inc.
DZ of Pennsylvania, Inc.
DZ of Wisconsin, Inc.
Portland Fun Fitness, Inc.
Vancouver Fun Fitness, Inc.
Discovery Zone (Puerto Rico), Inc.
Leaps & Bounds, Inc.
Semborg Corp.
DZ Party, Inc.
DZGP, Inc.
Discovery Zone Children's Amusement Corporation
Partnership Debtors
Discovery Zone L.P.
Tumble for Fun Limited Partnership
<PAGE>
Schedule 2
Executory Contracts and Unexpired Leases to be Assumed
<PAGE>
Exhibit A
Form of Certificate of Incorporation of Reorganized Discovery Zone
<PAGE>
Exhibit B
Form of By-Laws of Reorganized Discovery Zone
<PAGE>
Exhibit C
Employee Retention Program
<PAGE>
Exhibit D
Form of Agreement and Plan of Merger
<PAGE>
Exhibit E
Form of Warrant Agreement
<PAGE>
Exhibit F
Form of Stock Incentive Plan
<PAGE>
Exhibit G
McDonald's Stipulation
<PAGE>
Exhibit H
Form of Plan Settlement Agreement
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- -----------------------------------------x
In re :
:
DISCOVERY ZONE, INC., et al.,* : Chapter 11
:
: Case No. 96-411 (HSB)
:
Debtors. : (Jointly Administered)
- -----------------------------------------x
SUPPLEMENT TO THE SECOND AMENDED JOINT DISCLOSURE
STATEMENT PURSUANT TO 11 U.S.C. ss. 1125
- ----------
* Discovery Zone, Inc., Beaverton Fun Fitness, Inc., DJM Management, Inc., DZ
of Connecticut, Inc., DZ of Georgia, Inc., DZ of Massachusetts, Inc., DZ of
Missouri, Inc., DZ of New York, Inc., DZ of Pennsylvania, Inc., DZ of
Wisconsin, Inc., Portland Fun Fitness, Inc., Vancouver Fun Fitness, Inc.,
Discovery Zone (Puerto Rico), Inc., Leaps & Bounds, Inc., Semborg Corp., DZ
Party, Inc., DZGP, Inc., Discovery Zone Children's Amusement Corporation,
Discovery Zone L.P. and Tumble for Fun Limited Partnership.
<PAGE>
TABLE OF CONTENTS
Page
I. INTRODUCTION AND OVERVIEW.............................................. 1
A. Purpose of this Supplement...................................... 1
B. Summary of Distributions Under the Plan......................... 3
II. RECENT DEVELOPMENTS.................................................... 11
III. EXIT FINANCING, REORGANIZATION VALUES AND PROJECTIONS.................. 12
A. Exit Financing.................................................. 12
B. Reorganization Values........................................... 14
C. Projections..................................................... 17
IV. LIQUIDATION ANALYSIS................................................... 17
V. SUPPLEMENTAL VOTING PROCEDURES AND REQUIREMENTS........................ 19
A. Supplemental Ballots and Supplemental Voting Deadline........... 19
B. Special Note for Holders of LYONS............................... 22
VI. CONFIRMATION HEARING................................................... 24
Exhibits
Exhibit 1 - Financial Projections
Exhibit 2 - Description of Operation of Distribution Protocol
Exhibit 3 - Liquidation Analysis
i
<PAGE>
On March 11, 1997, Discovery Zone, Inc. ("Discovery Zone") and
nineteen of its affiliates (collectively, the "Debtors"), along with Birch
Holdings LLC ("Birch"), filed the Third Amended Joint Plan of Reorganization
(the "Plan") and the Second Amended Joint Disclosure Statement describing the
Plan (the "Disclosure Statement"). On March 11, 1997, the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") approved
the Disclosure Statement and authorized the Debtors to mail the Plan and
Disclosure Statement to all creditors entitled to vote on the Plan. Accordingly,
such Creditors previously received a copy of the Plan and the Disclosure
Statement, and the Bankruptcy Court set April 23, 1997 as the last day to vote
to accept or reject the Plan. Capitalized terms used but not defined in this
cover letter or this Supplement to the Disclosure Statement (this "Supplement")
shall have the meanings assigned to such terms in the Plan.
The purpose of this Supplement is to provide Creditors who had
previously submitted a timely ballot accepting or rejecting the Plan with
adequate information with respect to the revised Exit Financing terms and the
anticipated value of distributions to Creditors through Reorganized DZ Units
under the Plan. Such Creditors have the opportunity to change their votes with
respect to accepting or rejecting the Plan.
This Supplement describes the revised Exit Financing terms and the
estimated recovery to be received by certain Classes of Creditors upon giving
effect to the Exit Financing as described herein. As described below, the terms
of the Exit Financing are different from the terms set forth in the Disclosure
Statement. The anticipated Exit Financing will result in a reduction of the
projected values of distributions to Creditors through Reorganized DZ Units as
compared to those projected values set forth in the Disclosure Statement.
This Supplement also describes certain recent developments in the
Debtors' business and the projected enterprise value of Reorganized Discovery
Zone in light of such developments and revised Exit Financing terms. Attached as
exhibits to this Supplement are financial projections, a description of the
operation of the Distribution Protocol and a liquidation analysis, each of which
has been updated to reflect an anticipated August 1, 1997 Effective Date. This
Supplement modifies the Disclosure Statement only to the extent of the
information set forth herein.
Given the changes in the Exit Financing terms described below, each
Creditor that timely submitted a Ballot to accept or reject the Plan has an
opportunity to change its previous vote on the Plan (each such Creditor being a
"Voting Creditor"). Accordingly, Voting Creditors are receiving this Supplement
and a supplement ballot ("Supplemental Ballot"). Voting Creditors that wish to
change their vote to accept or reject the Plan may do so by returning the
enclosed Supplemental Ballot. Voting Creditors that do not wish to change their
vote to accept or reject the Plan need not return the enclosed Supplemental
Ballot. Instructions for Voting Creditors to submit their Supplemental Ballots
are set forth in Section V, "SUPPLEMENTAL VOTING PROCEDURES AND REQUIREMENTS."
ii
<PAGE>
Creditors that previously did not timely submit a Ballot are not
entitled to cast a vote to accept or reject the Plan.
This Supplement has been prepared by the Debtors based upon
information contained in their books and records. Birch, as the non-Debtor
proponent of the Plan, makes no representation that this Supplement contains
complete and accurate information. Birch, the Debtors' largest unsecured
creditor, has no relationship with the Debtors other than through the claims it
holds against the Debtors and as described in the Disclosure Statement.
The information contained herein has been prepared by the Debtors in
good faith, based upon information available to them. The information herein
concerning the Plan has not been the subject of a verified audit. All financial
information was compiled from the records of the Debtors. The Debtors believe
that the Disclosure Statement, as modified by this Supplement, complies with the
requirements of the Bankruptcy Code.
The statements contained in this Supplement are made as of the date
hereof, unless another time is specified herein, and delivery of this Supplement
shall not imply that there has been no change in the facts set forth herein
since the date of this Supplement and the date the materials relied on in
preparation of this Supplement were compiled. This Supplement may not be relied
on for any purpose other than to determine whether and how to change a
previously cast vote on the Plan. Nothing contained herein shall constitute an
admission of any fact or liability by any party, or be admissible in any
proceeding involving the Debtors or any other party, or be deemed conclusive
advice on the tax or other legal effects of the reorganization on holders of
Claims or Interests.
THIS SUPPLEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
The Disclosure Statement, as modified by this Supplement, has been
approved by order of the Bankruptcy Court, dated June 19, 1997, as containing
information of a kind and in sufficient detail to enable a hypothetical
reasonable investor typical of holders of Claims or Interests of relevant
classes to make an informed judgment concerning the Plan. The Bankruptcy Court's
approval of the Disclosure Statement, as modified by this Supplement, however,
does not constitute a recommendation by the Bankruptcy Court either for or
against the Plan.
The Bankruptcy Court has scheduled a hearing on confirmation of the
Plan to commence on July 18, 1997 at 2:30 p.m. That hearing will be held at the
United States Bankruptcy Court for the District of Delaware, 824 Market Street,
6th Floor, Wilmington, Delaware before The Honorable Helen Balick. 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.
iii
<PAGE>
I. INTRODUCTION AND OVERVIEW
A. Purpose of this Supplement
The Disclosure Statement, which you previously received, describes
various transactions contemplated under the Plan, including how Claims and
Interests will be satisfied. This Supplement describes the terms of the Exit
Financing and the estimated recoveries to be received by certain Classes of
Creditors upon giving effect to the Exit Financing as described herein.
As noted above, the Bankruptcy Court had set April 23, 1997 as the
last day to vote to accept or reject the Plan. Pursuant to the prior
solicitation of votes on the Plan, the Plan has been accepted by all Classes
entitled to vote on the Plan other than certain subclasses of Class 5
Miscellaneous Secured Claims(1) and Class 10 Other Unsecured Claims. The Debtors
believe that, once the condition precedent to commencing the confirmation
hearing set forth in Section 9.1 of the Plan is satisfied, the Plan will be
confirmed pursuant to Section 1129 of the Bankruptcy Code. Section 9.1 of the
Plan provides that the confirmation hearing shall not begin unless the Debtors'
placement agent has provided the Debtors and the Creditors' Committee with
reasonable assurance that it believes, based upon the facts and circumstances
known to it at the time and assuming (x) the absence of material adverse changes
to the Debtors and securities market conditions and (y) the satisfaction of
normal and customary conditions, including Plan confirmation, that it is highly
likely that the Exit Financing will be consummated within 14 days of entry of
the order confirming the Plan. Section 9.1 was developed during the course of
discussions with the Creditors' Committee as to the terms and conditions of the
Plan. The Debtors and their professionals are working diligently to satisfy this
condition precedent to commencement of the confirmation hearing.
The purpose of this Supplement is to provide each Voting Creditor
(i) adequate information with respect to the Exit Financing and the anticipated
value of distributions to Creditors in the form of Reorganized DZ Units under
the Plan, and (ii) an opportunity to change its vote on the Plan. Instructions
to Voting Creditors for submitting their Supplemental Ballots are set forth in
Section V, "SUPPLEMENTAL VOTING PROCEDURES AND REQUIREMENTS."
- ----------
(1) Each Class 5 Secured Creditor is placed in its own Class for voting
purposes. Plan ss. 4.7(a) ("Each Allowed Class 5 Claim shall be in its own
subclass and each such Claim shall be treated as being in a separate Class
for voting purposes.").
1
<PAGE>
DEBTORS' RECOMMENDATION
THE DEBTORS BELIEVE THAT CONFIRMATION OF THE PLAN IS IN THE BEST
INTERESTS OF CREDITORS AND THAT THE PLAN SHOULD BE CONFIRMED. THE MODIFICATION
TO THE EXIT FINANCING TERMS, DESCRIBED BELOW, WAS REQUIRED BY MARKET CONDITIONS.
THE DEBTORS STRONGLY RECOMMEND THAT ALL CREDITORS THAT ARE ENTITLED
TO VOTE ON THE PLAN VOTE TO ACCEPT THE PLAN.
CREDITORS' COMMITTEE'S RECOMMENDATION
BEFORE AND DURING ITS CHAPTER 11 CASE, DISCOVERY ZONE HAS INCURRED
MILLIONS OF DOLLARS OF LOSSES. SEVERAL BUSINESS PLANS HAVE BEEN IMPLEMENTED BY
PREVIOUS MANAGEMENT. BUT NONE HAS BEEN SUCCESSFUL.
DURING THE CHAPTER 11 CASE, THE COMMITTEE RETAINED FINANCIAL EXPERTS
IN THE ENTERTAINMENT INDUSTRY TO TRY TO FIND THE RIGHT INVESTORS WITH THE RIGHT
BUSINESS PLAN TO MAKE DISCOVERY ZONE SUCCESSFUL. THUS FAR NO FIRM OFFER HAS BEEN
MADE. IN THIS CONTEXT, THE CURRENT PLAN OFFERS CREDITORS A SUPERIOR RESULT THAN
THE ONLY CURRENT ALTERNATIVE, WHICH IS LIQUIDATION. IF THE CURRENT PLAN BECOMES
EFFECTIVE, UNSUBORDINATED CREDITORS MAY RECEIVE UP TO 20 CENTS CASH ON THE
DOLLAR OR STOCK AND WARRANTS WHOSE VALUES ARE VERY DIFFICULT TO DETERMINE, BUT
WHICH MAY ULTIMATELY TRADE FOR MATERIAL VALUE IF DISCOVERY ZONE'S NEW BUSINESS
PLAN PROVES SUCCESSFUL. FOR THESE REASONS, THE COMMITTEE SUPPORTS THE PLAN.
BASED ON THE FOREGOING AND TO AVOID COSTLY LITIGATION, THE COMMITTEE
ENTERED INTO THE CHAPTER 11 PLAN AGREEMENT AMONG DEBTORS, BIRCH HOLDINGS LLC,
AND STATUTORY CREDITORS' COMMITTEE (THE "PLAN SETTLEMENT AGREEMENT"), A TRUE AND
COMPLETE COPY OF WHICH IS ANNEXED TO THE PLAN AS EXHIBIT H.
PURSUANT TO THE PLAN SETTLEMENT AGREEMENT, AND SUBJECT TO THE
COMMITTEE'S FIDUCIARY DUTIES, THE COMMITTEE WILL NOT OBJECT TO CONFIRMATION OF
THE PLAN. THE COMMITTEE HAS, HOWEVER, RESERVED THE RIGHT TO RECOMMEND TO
CREDITORS THAT THEY SUPPORT AN ALTERNATIVE CHAPTER 11 PLAN IF ONE MATERIALIZES
AND AFFORDS CREDITORS SUPERIOR TREATMENT.
2
<PAGE>
THIS SUPPLEMENT CONTAINS ENTERPRISE AND LIQUIDATION VALUATIONS WHICH
WERE PREPARED BY THE DEBTORS. ALTHOUGH THE COMMITTEE'S JOINT FINANCIAL ADVISORS,
ROTHSCHILD, INC. AND SBC WARBURG, INC., AND THE COMMITTEE'S BANKRUPTCY
ACCOUNTANTS, ERNST & YOUNG LLP, WERE PROVIDED WITH A COPY OF A BUSINESS PLAN
PREPARED BY THE PLAN PROPONENTS, NEITHER THE COMMITTEE'S FINANCIAL ADVISORS NOR
THE COMMITTEE'S BANKRUPTCY ACCOUNTANTS TOOK PART IN THE PREPARATION OF EITHER
THE BUSINESS PLAN OR THE VALUATIONS CONTAINED IN THIS SUPPLEMENT BASED ON THAT
BUSINESS PLAN. MOREOVER, THE COMMITTEE AND ITS PROFESSIONALS DISCLAIM ANY
RESPONSIBILITY FOR THE ACCURACY OF THE FINANCIAL PROJECTIONS AND BUSINESS
FORECASTS CONTAINED IN THIS SUPPLEMENT, OR THE ACCURACY OF ANY OF THE HISTORICAL
DISCUSSION/NARRATIVE CONTAINED HEREIN.
FINALLY, THE COMMITTEE FIRMLY SUPPORTS IMPLEMENTATION OF THE
DISTRIBUTION PROTOCOL PROVIDED FOR IN ARTICLE 5 OF THE PLAN AMONG CLASSES 6, 7
AND 9. THE COMMITTEE BELIEVES THAT ABSENT CREDITOR APPROVAL OF THE DISTRIBUTION
PROTOCOL, THERE IS A SIGNIFICANT LIKELIHOOD THAT PROTRACTED LITIGATION AMONG THE
HOLDERS OF THE ALLOWED CLASSES 6, 7 AND 9 CLAIMS COULD ENSUE WHICH COULD
SIGNIFICANTLY DELAY -- AND POTENTIALLY DIMINISH MATERIALLY -- THE DISTRIBUTIONS
CONTEMPLATED UNDER THE PLAN.
B. Summary of Distributions Under the Plan
Set forth below is a summary of the distributions to be made under
the Plan upon giving effect to the Exit Financing as described herein. The
following will incorporate projected recoveries, based on assumptions contained
in Exhibit 1, entitled "Financial Projections." The projected recoveries have
been calculated, for Classes of Creditors to receive Reorganized DZ Units, with
reference only to the Financial Projections and not with reference to any
assumed trading level. There can be no assurance that the New Common Stock would
actually be traded at prices corresponding to the values set forth in this
Disclosure Statement. See Section VII of the Disclosure Statement, entitled
"Certain Risk Factors to be Considered." The calculations supporting the
projected recoveries for Classes 7, 8, 9 and 10 with respect to distributions of
Reorganized DZ Units are set forth in Exhibit 2 to this Supplement, "Description
of Operation of Distribution Protocol."
THE FOLLOWING SUMMARY OF DISTRIBUTIONS UNDER THE PLAN IS INTENDED AS
A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN, WHICH
WAS ATTACHED AS EXHIBIT 1 TO THE DISCLOSURE STATEMENT. THE DEBTORS URGE EACH
VOTING CREDITOR TO CAREFULLY REVIEW THE ENTIRE PLAN, TOGETHER WITH THE
DISCLOSURE
3
<PAGE>
STATEMENT AND THIS SUPPLEMENT, BEFORE DECIDING WHETHER TO CAST A SUPPLEMENTAL
BALLOT, WHICH WOULD CHANGE A PREVIOUSLY CAST VOTE TO ACCEPT OR REJECT THE PLAN.
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 1 $45,000,000 Not impaired. The holders of Allowed 100%
Administrative Class 1 Claims will be paid in full in
Expense Claims Cash on the Effective Date or, if any
Class 1 Claim becomes Allowed after
the Effective Date, as soon as
practicable after such Claim becomes
Allowed, or, if by its terms or by
agreement with the holder of such
Allowed Class 1 Claim any such Allowed
Class 1 Claim is payable on a later
date or dates, such Allowed Class 1
Claim will be paid in full in Cash on
such later date or dates.
- --------------------------------------------------------------------------------------------------------
Class 1A Small $1,200,000 Impaired. Class 1A has been created. 70%
Claims Each holder of an Allowed Class 1A
Claim shall receive a single Cash
payment equal to 70% of its Class 1A
Claim on the Effective Date or, if
such Claim becomes Allowed after the
Effective Date, as soon as practicable
after such Claim becomes Allowed. Any
holder of a Class 6, 7 or 10 Claim
which is less than or equal to $5,000
that would not otherwise have been
classified in Class 1A but for the
election by such holder to reduce its
Claim to $1,000 will not receive any
other distribution under the Plan on
account of such Claim.
- --------------------------------------------------------------------------------------------------------
Class 2 Tax Claims $5,000,000 Impaired. Unless any holder of a Class 100% over six years
2 Claim shall agree to less favorable from date of
treatment, each holder of an Allowed assessment with
Class 2 Claim shall be paid in full in interest accruing
Cash over a period not exceeding six from the Effective
years from the date of assessment of Date at the 10% per
such Claim. Payments will be made in annum
equal annual installments of
principal, plus simple interest
accruing from the Effective Date at
10% per annum on the unpaid portion of
each Class 2 Claim or as determined by
the Bankruptcy Court. Unless otherwise
agreed by the holder of such Claim and
the Plan Proponents or Reorganized
Discovery Zone, the first payment will
be payable one year after the
Effective Date, or if the Class 2
Claim is not allowed within one year
after the Effective Date, as soon as
practicable after such Claim becomes
Allowed. Interest will be due and
payable on the date on which each
annual installment is due. The
Reorganized Debtors may elect to
prepay without penalty all or any
portion of any Class 2 Claim.
- --------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 3 Priority $0 Impaired. The holders of allowed Class 100%
Claims 3 Claims will be paid in Cash in full
on the Effective Date or, if any such
Claim becomes Allowed after the
Effective Date, as soon as practicable
after such Claim becomes Allowed or,
if by its terms or by agreement with
the holder of such Allowed Class 3
Claim any such Allowed Class 3 Claim
is payable on a later date or dates,
such Allowed Class 3 Claim will be
paid in Cash in full on such later
date or dates.
- --------------------------------------------------------------------------------------------------------
Class 4A McDonald's $4,666,000(2) Impaired. McDonald's shall retain its 100%
Secured Claim liens against the L&B Owned Properties over six
to the extent of the amount of its years
Allowed Class 4A Claim and its Allowed
Class 4B Claim. McDonald's shall
receive deferred Cash payments equal
to the value of the Class 4A Claim in
equal payments over six years
beginning on the first anniversary of
the Effective Date and thereafter on
the five subsequent anniversaries of
the Effective Date, with simple
interest from the Effective Date on
the unpaid balance at the Prime Rate
or as determined by the Bankruptcy
Court.
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(2) The Debtors and McDonald's Corporation have not reached final agreement
with respect to the Allowed amount of the Class 4A Claim.
5
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 4B McDonald's $265,000(3) Impaired. McDonald's shall retain its 100% at the
Secured Rent Deferral liens against the L&B Owned Properties expiration of the
Claims to the extent of the amount of its applicable lease
Allowed Class 4B Claim and its Allowed term
Class 4A Claim. On the Effective Date,
McDonald's will receive a Rent
Deferral Secured Note which
corresponds to each L&B Sublease in
respect of which McDonald's has
granted the Debtors a rent deferral
under the McDonald's Stipulation. On
the Effective Date, the principal
amount of each Rent Deferral Secured
Note will equal the aggregate amount
of rent deferrals which have accrued
up to the Effective Date pursuant to
the McDonald's Stipulation under the
applicable L&B Sublease. After the
Effective Date, the principal amount
of each Rent Deferral Secured Note
will increase by an amount equal to
the rent deferral for each month
between the Effective Date and the
termination of the applicable L&B
Sublease.
- --------------------------------------------------------------------------------------------------------
Class 5 Miscellaneous $150,000 Impaired. Each holder of an Allowed 100% over time or on
Secured Claims Class 5 Claim shall receive one of the Effective Date,
four forms of treatment under the Plan depending on the
in respect of its Allowed Claim. The treatment elected by
Plan Proponents, contemporaneously the Plan Proponents
with the solicitation of acceptances
of the Plan, shall select which
treatment each holder is to receive.
The Plan Proponents' selection shall
be made by the Debtors' filing of
notice and serving it on the holder of
the Allowed Class 5 Claim so
indicating their selection
contemporaneously with the
solicitation of acceptances of the
Plan, or if the Claim is a Disputed
Claim at such time, the Debtors or the
Reorganized Debtors, as the case may
be, shall file and serve the notice of
selection within thirty (30) days
after the Claim becomes an Allowed
Claim. If no form of treatment is so
selected, the first alternative
described shall be applicable. The
alternative treatments for any Allowed
Class 5 Claims are described under
"DESCRIPTION OF PLAN OF
REORGANIZATION--Classification and
Treatment of Claims and Interests."
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(3) This estimated Claim amount is based on four months of rent deferrals
prior to the Effective Date. Any delay in the Effective Date will increase
the amount of McDonald's allowed Class 4B Claim by approximately $33,000
per month.
6
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 6 Credit $101,900,000 Impaired. Each holder of an Allowed 34.3%(4)
Agreement Claims Class 6 Claim will receive on the
Effective Date or, if such Claim
becomes Allowed after the Effective
Date, as soon as such Claim becomes
Allowed, its Pro Rata portion of
Reorganized DZ Units distributed to
holders of Class 6 Claims under the
Plan. All Ten Year DZ Warrants issued
in connection with Reorganized DZ
Units to Class 6 will be distributed
to B1 Investments, LLC, unless
otherwise elected by the holder of an
Allowed Class 6 Claim on its ballot
accepting or rejecting the Plan.
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(4) It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
7
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 7 General $36,000,000 Impaired. Each holder of an Allowed If the holder
Unsecured Claims Class 7 Claim may elect to receive receives a Class 7
either (i) its Pro Rata portion of Cash Distribution,
Reorganized DZ Units distributed to 20% on the Effective
holders of Class 7 Claims under the Date, to the extent
Plan, subject to Section 5.5(f) of the the Claim is so
Plan, on the Effective Date or, if satisfied
such Claim becomes Allowed after the
Effective Date, as soon as such Claim If the holder
becomes Allowed, or (ii) a Class 7 receives Reorganized
Cash Distribution (to the extent, if DZ Units and the
any, that the Plan Proponents Distribution
determine to make such a distribution Protocol is
available). The terms and conditions implemented, 12.2%
with respect to a Class 7 Cash on the Effective
Distribution are described under Date(5)
"DESCRIPTION OF PLAN OF
REORGANIZATION--Classification and If the holder
Treatment of Claims and Interests." receives Reorganized
DZ Units and the
A Voting Creditor which is a holder of Distribution
a Class 7 Claim less than or equal to Protocol is not
$5,000 may elect to reduce its Claim implemented, 15.4%
to $1,000 and have such Claim treated on the Effective
as a Class 1A Claim. Date(6)
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(5) It is assumed, with respect to these recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
(6) It is assumed that the Class 7 Claim will be satisfied solely through
distributions of Reorganized DZ Units and no Cash Distribution will be
made available.
8
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 8 Certain $2,500,000 Impaired. Each holder of an Allowed If the holder
Unsecured Personal Class 8 Claim may elect to receive receives a Class 8
Injury Claims either (i) its Pro Rata portion of Cash Distribution,
Reorganized DZ Units distributed to 20% on the Effective
holders of Class 8 Claims under this Date, to the extent
Plan on the Effective Date or, if such the Claim is so
Claim becomes Allowed after the satisfied
Effective Date, as soon as such Claim
becomes Allowed or (ii) a Class 8 Cash If the holder
Distribution (to the extent, if any, receives Reorganized
that the Plan Proponents determine to DZ Units, 15.4% on
make such a distribution available). the Effective
In addition, each holder of a Allowed Date(7)
Class 8 Claim shall receive Pro Rata
distributions, if any, from the Class
8 Insurance Fund.
- --------------------------------------------------------------------------------------------------------
Class 9 LYONS $128,700,000 Impaired. Each holder of an Allowed 1.2% on the
Claims Class 9 Claim will receive on the Effective Date
Effective Date or, if such Claim through a
becomes Allowed after the Effective distribution of
Date, as soon as practicable after Reorganized DZ
such Claim becomes Allowed, its Pro Units(7)
Rata portion of Reorganized DZ Units
distributed to holders of Allowed If the subordination
Class 9 Claims under the Plan. The provisions under the
subordination provisions under the LYONS are enforced,
LYONS shall be enforced without holders will not
exception and the holders of Allowed receive any
Class 9 Claims shall not receive any distribution
distribution under the Plan if Class 9
rejects the Plan and certain events,
described herein, occur. See
"Classification and Treatment Claims
and Interests--Class 9 - LYONS
Claims."
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(7) It is assumed, with respect to all recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
(7) It is assumed, with respect to all recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
9
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 10 Other $15,700,000 Impaired. Each holder of an Allowed If the holder
Unsecured Claims Class 10 Claim may elect to receive receives a Class 10
either (i) its Pro Rata portion of Cash Distribution,
Reorganized DZ Units distributed to 20% on the Effective
holders of Class 10 Claims under the Date, to the extent
Plan on the Effective Date or, if such the Claim is so
Claim becomes Allowed after the satisfied
Effective Date, as soon as such Claim
becomes Allowed, or (ii) a Class 10 If the holder
Cash Distribution (to the extent, if receives Reorganized
any, that the Plan Proponents DZ Units, 15.4% on
determine to make such a distribution the Effective
available). The terms and conditions Date(8)
with respect to a Class 10 Cash
Distribution are described under
"DESCRIPTION OF PLAN OF
REORGANIZATION--Classification and
Treatment of Claims and Interests."
A Voting Creditor which is a holder of
a Class 10 Claim which is less than or
equal to $5,000 may elect to reduce
its Claim to $1,000 and have such
Claim treated as a Class 1A Claim.
- --------------------------------------------------------------------------------------------------------
Class 11 Insured $155,334,000 Not impaired. The holders of Allowed 100%
Claims Class 11 Claims will have recourse
only to the proceeds of insurance
coverage carried by the Debtors.
- --------------------------------------------------------------------------------------------------------
Class 12 Subordinated $37,800,000 Impaired. The subordination provisions 0%
Unsecured Claims under any applicable agreements or
bankruptcy or nonbankruptcy law shall
be enforced without exception and the
holders of Allowed Class 12 Claims
shall not receive any distribution
under the Plan.
- --------------------------------------------------------------------------------------------------------
Class 13 $289,000,000 Impaired. On the Effective Date, all 0%
Intercompany Claims Intercompany Claims shall be expunged,
released and discharged, and the
holders of such Claims shall receive
no distribution of any kind under the
Plan.
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(8) It is assumed, with respect to all recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
10
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Class Estimated Treatment Recovery as
Maximum a % of
Amount of Claims Claim
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 14 Common Not Applicable Impaired. All Existing Common Stock, 0%
Stock and Partnership Existing Common Stock Options and
Interests Existing Partnership Interests shall
be cancelled, annulled and
extinguished as of the Effective Date
and each holder of an Allowed Common
Stock Interest, Existing Common Stock
Option and Existing Partnership
Interest shall not be entitled to
receive or retain any property or
interest in property on account of
such Existing Common Stock, Existing
Common Stock Option or Existing
Partnership Interest under the Plan.
========================================================================================================
</TABLE>
II. RECENT DEVELOPMENTS
In December 1996, Scott W. Bernstein was appointed President and
Chief Executive Officer of Discovery Zone and President of the other corporate
Debtors. Subsequent to the hiring of Mr. Bernstein, a new senior management team
was put in place and the Debtors began implementing a turnaround plan designed
to significantly reduce its operating costs, enhance its core product offerings
and reposition the Debtors from an operator of indoor playgrounds to the leading
national provider of high quality children's indoor entertainment. Since
December 1996, the Debtors implemented a broad cost reduction program that
included four key components: (i) the elimination of excessive selling, general
and administrative expenses; (ii) the implementation of a variety of financial
and quality controls designed to significantly improve operating margins at the
FunCenter level; (iii) the establishment of a broad-based incentive compensation
plan at the store and regional management levels tied to FunCenter EBITDA and
service quality measures; and (iv) the continued closing of unprofitable
FunCenters. The Debtors have completed the implementation of this cost reduction
program, which, they believe, will result in substantially improved operating
cash flow. Accordingly, during the first quarter of 1997, the Debtors generated
revenue of approximately $38.8 million and positive EBITDA (before non-recurring
restructuring and bankruptcy related fees and expenses) of approximately $0.8
million, as compared, for the comparable stores, to revenue of approximately
$49.2 million and negative EBITDA (before non-recurring restructuring and
bankruptcy related fees and expenses) of approximately $5.5 million in the first
quarter of 1996.
In addition to implementing their cost reduction program, the
Debtors have begun to implement a variety of initiatives focused on increasing
FunCenter attendance and in-store spending. As part of these efforts, the
Debtors have developed and begun implementing a marketing and promotional
strategy and have entered into a beverage and
11
<PAGE>
marketing sponsorship agreement with PepsiCo which will provide the Debtors with
substantial marketing and promotional support from PepsiCo and Frito-Lay in
exchange for the Debtors' agreement to sell Pepsi and Frito-Lay products in
their FunCenters. The Debtors, subject to Bankruptcy Court approval, have also
signed a Master License and Marketing Agreement with Pizza Hut, which will, once
approved by the Bankruptcy Court, permit the Debtors to sell Pizza Hut products
and will provide for cross-promotional marketing activities between the Debtors
and Pizza Hut. The Debtors have also entered into an agreement with the creators
of Gymboree and Playorena for the development of weekday programs at their
FunCenters.
Although the Debtors' operations and financial outlook have improved
dramatically, the Debtors continue to experience losses. Accordingly, as
contemplated in the First Amendment, which was approved by the Bankruptcy Court
by orders dated December 31, 1996, and March 4, 1997, the Debtors have entered
into a loan agreement with Birch which provides the Debtors with $5 million of
additional availability. The Debtors believe that this additional availability,
along with cash generated from operations, will be adequate to fund their
near-term cash requirements.
III. EXIT FINANCING, REORGANIZATION VALUES AND PROJECTIONS
A. Exit Financing
The effectiveness of the Plan is conditioned on, among other things,
the Debtors raising Exit Financing on terms acceptable to the Plan Proponents
and in an amount necessary to make the payments required to be made under the
Plan to satisfy Claims in Classes 1, 1A and 3 and for working capital purposes.
The Plan Proponents estimate that Cash payments required to satisfy Claims in
Classes 1, 1A and 3 will be approximately $45,900,000. The Plan Proponents
presently estimate that the amount of financing required for working capital and
capital expenditures and transaction costs will be approximately $29,100,000.
Accordingly, the Plan Proponents presently anticipate that approximately
$75,000,000 of Exit Financing proceeds will be sufficient to satisfy the
condition for the effectiveness of the Plan. As of the date of the Disclosure
Statement, the Plan Proponents anticipated that approximately $70,000,000 of
Exit Financing proceeds would have been sufficient to satisfy the condition for
the effectiveness of the Plan. The increase in this figure results from losses
the Debtors have incurred or anticipate incurring.
The Debtors are seeking to raise additional funds to make the Cash
distributions available to all Unsecured Creditors electing to receive Cash
under the Plan.
12
<PAGE>
However, the Debtors believe that it is unlikely that the net proceeds of the
Exit Financing will be sufficient to permit the Debtors to satisfy any portion
of a Class 7, 8 or 10 Claim in Cash. Furthermore, and as noted in the Disclosure
Statement, the Debtors' ability to make the Cash Distributions available with
respect to the full amount of all Allowed Claims is dependent on both obtaining
sufficient financing and successfully resolving Claims in Class 7, 8 and 10 for
$50 million or less.
The Plan Proponents contemplate that the Exit Financing will be
raised through the sale of debt securities of Reorganized Discovery Zone ("Debt
Securities"), a revolving credit or term loan facility for Reorganized Discovery
Zone (a "Credit Facility") or the sale of preferred stock ("Preferred Stock") of
Reorganized Discovery Zone or any combination of the foregoing. The sale of Debt
Securities or Preferred Stock would likely require the issuance of warrants
("Exit Financing Warrants") to purchase, and/or include a conversion feature
allowing conversion into, New Common Stock. The final maturity or redemption
period with respect to any Debt Securities or Preferred Stock is expected to be
between five and ten years from the Effective Date. The final maturity of any
Credit Facility which may be entered into as part of the Exit Financing is
expected to be between three and seven years from the Effective Date. Any Exit
Financing Warrants or convertible securities would be exercisable or convertible
within ten years of issuance. Subject to pre-existing liens, the Plan Proponents
anticipate that collateral composed of substantially all of Reorganized
Discovery Zone's assets (including the common stock of the Reorganized Debtors
other than Reorganized Discovery Zone) would be required for a Credit Facility
and/or certain Debt Securities.
The weighted average of the interest rates or dividend rates of any
Debt Securities and Preferred Stock which is issued as part of the Exit
Financing is likely to be between 12% and 14%. The interest rate of any Credit
Facility is likely to be between 8% and 12%. The conversion option in connection
with Preferred Stock and any Exit Financing Warrants which are issued as part of
the Exit Financing are likely to represent the right, upon exercise thereof, to
obtain between 25% and 35% of the New Common Stock on a fully diluted basis,
subject to adjustment upon the occurrence of certain events. The Exit Financing
Warrants will be exercisable at a nominal exercise price. The specific terms of
the Exit Financing are subject to market conditions, and will be determined at
the time of the closing of the Exit Financing.
These terms differ from those set forth in the Disclosure Statement
in that it was previously anticipated that any Exit Financing Warrants would
represent the right, upon exercise thereof, to purchase between 10% and 20% of
the New Common Stock on a fully diluted basis, subject to adjustment upon the
occurrence of certain events, at a nominal exercise price. As described above,
it is currently projected that the Exit Financing will
13
<PAGE>
require the grant of Preferred Stock conversion rights and Exit Financing
Warrants which, upon exercise, will entitle the holders of such rights and
warrants to between 25% and 35% of the New Common Stock on a fully diluted
basis.
The net proceeds to the Reorganized Debtors from the Exit Financing
will be used to (i) satisfy all Class 1 Administrative Expense Claims, including
any Claims held by Perry with respect to the Replacement Credit Agreement, as
amended by the First Replacement Amendment, as well as Class 1A and Class 3
Claims; (ii) finance a major capital improvement program; (iii) provide
additional availability for working capital purposes; and (iv) satisfy fees and
expenses associated with the Exit Financing. If sufficient financing is
obtained, the net proceeds of the Exit Financing will also be used to satisfy
Class 7, 8 and 10 Claims in Cash, to the extent that holders of such Claims
elect to receive Cash under the Plan. As noted above, the Debtors do not believe
that it is likely that the net proceeds of the Exit Financing will be sufficient
to permit the Debtors to satisfy Class 7, 8 and 10 Claims in Cash.
B. Reorganization Values
The Debtors have been advised by Peter J. Solomon Company Limited
("PJSC") with respect to the value of Reorganized Discovery Zone. The Plan
provides that the Debtors and the Creditors' Committee will attempt to agree as
to the value of Reorganized Discovery Zone. In the event the Debtors and the
Creditors' Committee are unable to consensually determine the value of
Reorganized Discovery Zone, the Bankruptcy Court shall determine such value.
The range of reorganization values (which includes the value of
Discovery Zone's business and the value of certain other assets) of Reorganized
Discovery Zone was assumed for purposes of the Plan by Discovery Zone, based on
advice from PJSC to be approximately $110,000,000 to $130,000,000 as of an
assumed Effective Date of August 1, 1997. Such assumed reorganization value
represents the range of values prepared by PJSC during June 1997 in respect of
the business and assets of Reorganized Discovery Zone. Based upon the assumed
reorganization value of Reorganized Discovery Zone and an assumed net debt
(including the Exit Financing and capital lease obligations less projected Cash
balances assuming the creation of Class 1A) of approximately $57,500,000,
Discovery Zone has employed an assumed range of distributable equity values for
Reorganized Discovery Zone of approximately $36,700,000 to $50,700,000 or
approximately $9.18 per share to $12.68 per share of New Common Stock based upon
a distribution of approximately 4,000,000 shares of New Common Stock and Ten
Year Reorganized DZ Warrants to purchase approximately 10% of the shares of New
Common Stock estimated by Reorganized Discovery Zone on the Effective Date to be
issued to the holders of Claims under the Plan,
14
<PAGE>
and assuming dilution from the exercise of the conversion option in connection
with any preferred stock associated with the Exit Financing and any warrants
issued in connection with the Exit Financing.
These valuations are based on a number of assumptions, including a
successful reorganization of the Debtors' business and finances in a timely
manner, the achievement of the forecasts reflected in the financial projections,
the availability of certain tax attributes, the continuation of current market
conditions through the Effective Date and the Plan becoming effective in
accordance with its terms. In addition, these valuations are highly dependent on
the Debtors obtaining Exit Financing in the amount and under substantially
similar terms as described herein. These valuations also assume that the
proceeds from the Exit Financing contemplated by the Plan will be utilized as
described in the Business Plan and that such Exit Financing will require the
issuance of warrants to purchase New Common Stock calculated at the mid-point of
the range of expected dilution in connection with such financing. These
valuations do not reflect the favorable tax effects, if any, associated with the
reorganization of Discovery Zone. Each of these assumptions is set forth in the
Financial Projections attached as Exhibit 1 to this Supplement.
Estimates of value do not purport to be appraisals or necessarily
reflect the values which may be realized if assets are sold. The estimates of
value represent hypothetical reorganization values of Reorganized Discovery Zone
as the continuing owner and operator of its business and assets. Such estimates
reflect computations of the reorganization value of Reorganized Discovery Zone
through the application of various valuation techniques and do not purport to
reflect or constitute appraisals, liquidation values or estimates of the actual
market value that may be realized through the sale of any securities to be
issued pursuant to the Plan, each of which may be significantly different than
the amounts set forth herein. The value of an operating business such as
Discovery Zone's is subject to uncertainties and contingencies which are
difficult to predict and will fluctuate with changes in factors affecting the
financial conditions and prospects of such a business. AS A RESULT, THE ESTIMATE
OF THE RANGE OF REORGANIZATION VALUES SET FORTH HEREIN IS NOT NECESSARILY
INDICATIVE OF ACTUAL OUTCOMES, WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE
THAN THOSE SET FORTH THEREIN. BECAUSE SUCH ESTIMATE IS INHERENTLY SUBJECT TO
UNCERTAINTIES, NEITHER DISCOVERY ZONE NOR PJSC, NOR ANY OTHER PERSON ASSUMES
RESPONSIBILITY FOR ITS ACCURACY. IN ADDITION, THE VALUATION OF NEWLY-ISSUED
SECURITIES SUCH AS THE NEW COMMON STOCK IS SUBJECT TO ADDITIONAL UNCERTAINTIES
AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO PREDICT. Actual market prices
of such securities at issuance will depend upon, among other things, prevailing
interest rates, conditions in the financial markets, the anticipated initial
securities holdings of prepetition creditors, some of
15
<PAGE>
which may prefer to liquidate their investment rather than hold it on a
long-term basis, and other factors which generally influence the prices of
securities. It should be noted that there is presently no trading market for the
New Common Stock and there can be no assurance that such a trading market will
develop.
PJSC has undertaken its valuation analysis for purposes of
determining the value available to distribute to creditors pursuant to the Plan
and analyzing relative recoveries to creditors thereunder. The analysis is based
on the projections as well as current market conditions and statistics. The
values are as of the assumed Effective Date, August 1, 1997, and were prepared
by PJSC during June 1997. PJSC used the discounted cash flow and comparable
company multiple methodologies to value Discovery Zone's business. These
valuation techniques reflect both the market's current view of Discovery Zone's
value as well as a longer-term focus on the intrinsic value of the Cash flow
projections in the Business Plan.
In preparing a range of the estimated reorganization value of
Reorganized Discovery Zone, PJSC: (i) reviewed certain historical financial
information of Discovery Zone for recent years and interim periods; (ii)
reviewed certain internal financial and operating data of Discovery Zone
including financial projections provided by the Plan Proponents relating to its
business and prospects; (iii) met with certain members of senior management of
Discovery Zone to discuss operations and future prospects; (iv) reviewed
publicly available financial data and considered the market values of public
companies deemed generally comparable to the operating business of Discovery
Zone; (v) considered certain economic and industry information relevant to the
operating business, and conducted such other analyses as PJSC deemed
appropriate; and (vi) solicited interest in a potential business combination
with Reorganized Discovery Zone with potential strategic partners, investors and
acquirors. Although PJSC conducted a review and analysis of Discovery Zone's
business, operating assets and liabilities and business plans, PJSC assumed and
relied on the accuracy and completeness of all (i) financial and other
information furnished to it by the Plan Proponents and by other firms retained
by the Plan Proponents, and (ii) publicly available information. In addition,
PJSC did not independently verify the Plan Proponents' projections in connection
with such valuation, and no independent evaluations or appraisals of the
Debtor's assets were sought or were obtained in connection therewith.
The Plan contemplates the distribution of Ten Year Reorganized DZ
Warrants to holders of Allowed Claims in certain Classes. The exercise price of
each Ten Year Reorganized DZ Warrant issued under the Plan is based on the
estimated reorganization equity value per share and exercise of the Ten Year
Reorganized DZ Warrants requires the payment to Reorganized Discovery Zone of
Cash in the amount of the exercise price. While warrants may be valued using
complex mathematical computations, these computations are
16
<PAGE>
based upon highly subjective assumptions, including, among others, the estimated
trading prices of the equity securities into which the warrants may be exercised
and the projected volatility of price movements of those shares. Moreover,
actual trading values for warrants frequently differ materially from those
values derived from mathematical computations. Accordingly, no value has been
ascribed to the warrants under the Plan due to the significant uncertainty
regarding (i) the projected trading value of the New Common Stock, (ii) the
projected volatility of the New Common Stock due to the lack of an established
market for the New Common Stock, and (iii) the potential dilutive value of the
Ten Year Reorganized DZ Warrants.
THE VALUATIONS REPRESENT ESTIMATED REORGANIZATION VALUES AND DO NOT
NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE
MARKETS. THE EQUITY VALUE ASCRIBED IN THE ANALYSIS DOES NOT PURPORT TO BE AN
ESTIMATE OF THE POST-REORGANIZATION MARKET TRADING VALUE. SUCH TRADING VALUE, IF
ANY, MAY BE MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY VALUE RANGES
ASSOCIATED WITH THE VALUATION ANALYSIS.
C. Projections
Financial Projections which are based on the Debtors' Business Plan
and which take into account the Exit Financing as described herein are attached
as Exhibit 1 to this Supplement.
IV. LIQUIDATION ANALYSIS
A plan of reorganization cannot be confirmed unless the Bankruptcy
Court finds that the plan is in the "best interests" of holders of claims
against, and interests in, the debtors subject to such plan. The "best
interests" test is satisfied if a plan provides to each dissenting or non-voting
member of each impaired class, a recovery not less than the recovery such member
would receive if all the debtors' assets were sold and the debtors were
liquidated in a hypothetical case under chapter 7 of the Bankruptcy Code by a
chapter 7 trustee. The Debtors believe that the holders of impaired Claims and
Interests will receive not less than they would receive under a chapter 7
liquidation. A Liquidation Analysis is attached as Exhibit 3 to this Supplement.
17
<PAGE>
COMPARISON OF RECOVERIES
<TABLE>
<CAPTION>
=========================================================================================================
Class Estimated Total Maximum Chapter 7 Plan's
Claims Recovery as Recovery as
a Percentage a Percentage(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 1 Administrative $45,000,000 100% 100%
Expense Claims
- ---------------------------------------------------------------------------------------------------------
Class 1A Small Claims $1,200,000 1% 70%
- ---------------------------------------------------------------------------------------------------------
Class 2 Tax Claims $5,000,000 100% 100% over six years from date
of assessment with interest
accruing after the Effective
Date at 10%
- ---------------------------------------------------------------------------------------------------------
Class 3 Priority Claims $0 Not Applicable Not Applicable
- ---------------------------------------------------------------------------------------------------------
Class 4A McDonald's $4,666,000 100% 100% over six years
Secured Claim
- ---------------------------------------------------------------------------------------------------------
Class 4B McDonald's Secured $265,000 100% 100% at the expiration of the
Rent Deferral Claim applicable lease term
- ---------------------------------------------------------------------------------------------------------
Class 5 Miscellaneous $150,000 100% 100% over time or on the
Secured Claims Effective Date, depending on
the treatment elected by the
Plan Proponents
- ---------------------------------------------------------------------------------------------------------
Class 6 Credit Agreement Claims $101,900,000 2% 34.3% on the Effective Date
through a distribution of
Reorganized DZ Units
- ---------------------------------------------------------------------------------------------------------
Class 7 General Unsecured Claims $36,000,000 1% If the holder receives a Class 7
Cash Distribution, 20% on the
Effective Date, to the extent
the Claim is so satisfied
If the holder receives
Reorganized DZ Units, 12.2%
on the Effective Date
- ---------------------------------------------------------------------------------------------------------
Class 8 Certain Unsecured $2,500,000 1% If the holder receives a Class 8
Personal Injury Claims Cash Distribution, 20% on the
Effective Date, to the extent
the Claim is so satisfied
If the holder receives
Reorganized DZ Units, 15.4%
on the Effective Date
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(1) It is assumed, with respect to recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
18
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================
Class Estimated Total Maximum Chapter 7 Plan's
Claims Recovery as Recovery as
a Percentage a Percentage(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 9 LYONS Claims $128,700,000 0% 1.2% on the Effective Date
through a distribution of
Reorganized DZ Units
If the subordination provisions
under the LYONS are
enforced, holders will not
receive any distribution
- ---------------------------------------------------------------------------------------------------------
Class 10 Other Unsecured $15,700,000 1% If the holder receives a Class
Claims 10 Cash Distribution, 20% on
the Effective Date, to the
extent the Claim is so satisfied
If the holder receives
Reorganized DZ Units, 15.4%
on the Effective Date
- ---------------------------------------------------------------------------------------------------------
Class 11 Insured Claims $155,334,000 100% 100%
- ---------------------------------------------------------------------------------------------------------
Class 12 Other Subordinated $37,800,000 0% 0%
Unsecured Claims
- ---------------------------------------------------------------------------------------------------------
Class 13 Intercompany Claims $289,000,000 0% 0%
- ---------------------------------------------------------------------------------------------------------
Class 14 Common Stock and Not Applicable 0% 0%
Partnership Interests
=========================================================================================================
</TABLE>
V. SUPPLEMENTAL VOTING PROCEDURES AND REQUIREMENTS
A. Supplemental Ballots and Supplemental Voting Deadline
This Supplement has been mailed to each Creditor who timely cast a
Ballot to accept or reject the Plan (as previously defined, "Voting Creditors").
A Supplemental Ballot to be used for changing a previously cast timely vote to
accept or reject the Plan, together with a postage-paid return envelope, is
enclosed with all copies of this Supplement. Only Voting Creditors have received
Supplemental Ballots.
IF YOU HAVE RECEIVED A SUPPLEMENTAL BALLOT,
YOU ARE A VOTING CREDITOR.
IF YOU HAVE NOT RECEIVED A SUPPLEMENTAL BALLOT, YOU ARE NOT
A VOTING CREDITOR.
- ----------
(1) It is assumed, with respect to recoveries through distributions of
Reorganized DZ Units, that the Claims will be satisfied solely by such
distributions, the Distribution Protocol will be implemented and no Cash
Distributions will be made available.
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<PAGE>
After carefully reviewing this Supplement, if a Voting Creditor
wishes to change its vote to accept or reject the Plan, that Voting Creditor
must indicate its acceptance or rejection of the Plan by voting in favor of or
against the Plan on the enclosed Supplemental Ballot and return the Supplemental
Ballot in the enclosed envelope to the Debtors, as directed below. If a Voting
Creditor does not wish to change its vote, the Voting Creditor is not required
to submit a Supplemental Ballot.
THE BANKRUPTCY COURT HAS DIRECTED THAT, TO BE COUNTED FOR VOTING
PURPOSES, SUPPLEMENTAL BALLOTS CHANGING A VOTE TO ACCEPT OR REJECT THE PLAN,
OTHER THAN SUPPLEMENTAL BALLOTS CAST BY CLASS 9 CREDITORS WHO ARE BENEFICIAL
OWNERS HOLDING LYONS IN STREET NAME ("STREET NAME LYONS HOLDERS") THROUGH A
BROKERAGE FIRM, BANK, TRUST COMPANY OR OTHER NOMINEE (A "NOMINEE"), MUST BE
RECEIVED NO LATER THAN 5:00 P.M., PREVAILING EASTERN TIME, ON JULY 15, 1997 BY
THE DEBTORS AT THE FOLLOWING ADDRESS:
Discovery Zone, Inc.
c/o Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
For purposes of changing a vote on the Plan, Voting Creditors will
be entitled to vote in the same amount that they were entitled to vote on the
Plan pursuant to their Ballot as originally cast.
If a person timely submitted Ballots in more than one Class entitled
to vote on the Plan, such person will receive a Supplemental Ballot for each
such Class. IF YOU RECEIVE MORE THAN ONE SUPPLEMENTAL BALLOT YOU SHOULD ASSUME
THAT EACH SUPPLEMENTAL BALLOT IS FOR A SEPARATE CLASS. THEREFORE, IF YOU WOULD
LIKE TO CHANGE YOUR VOTE ON THE PLAN, PLEASE COMPLETE AND RETURN EACH
SUPPLEMENTAL BALLOT THAT YOU RECEIVE UNLESS THESE SUPPLEMENTAL BALLOTS REPRESENT
CLAIMS WHICH ARE DUPLICATIVE (i.e., multiple claims filed for the same
merchandise or service). IF YOU RETURN DUPLICATE SUPPLEMENTAL BALLOTS, ONLY ONE
SUPPLEMENTAL BALLOT WILL BE INCLUDED IN ANY CALCULATION TO DETERMINE WHETHER THE
PARTIES ENTITLED TO VOTE ON THE PLAN HAVE VOTED TO ACCEPT OR REJECT THE PLAN. IF
YOU RETURN DUPLICATIVE SUPPLEMENTAL BALLOTS WHICH HAVE BEEN VOTED
INCONSISTENTLY, THEY WILL BE COUNTED AS ONE VOTE ACCEPTING THE PLAN.
20
<PAGE>
IF YOU DO NOT RETURN A SUPPLEMENTAL BALLOT, YOUR PREVIOUSLY CAST
VOTE WILL BE INCLUDED IN ANY CALCULATION TO DETERMINE WHETHER THE PARTIES
ENTITLED TO VOTE ON THE PLAN HAVE VOTED TO ACCEPT OR REJECT THE PLAN.
IF A SUPPLEMENTAL BALLOT IS DAMAGED OR LOST OR IF YOU HAVE ANY
QUESTIONS REGARDING THE PROCEDURES FOR CHANGING A VOTE ON THE PLAN, CONTACT:
Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
Telephone: (212) 376-8494
Telecopier: (212) 376-8989
All Voting Creditors other than Street Name LYONS Holders may change
their vote for or against the Plan by completing, dating and signing the
Supplemental Ballot accompanying this Supplement and returning it in the
enclosed postage-prepaid return envelope, by first class mail, to the Debtors at
the following address:
Discovery Zone, Inc.
c/o Bankruptcy Services, Inc.
70 East 55th Street, 6th Floor
New York, NY 10022
IN ORDER TO BE COUNTED, ALL SUPPLEMENTAL BALLOTS OTHER THAN
SUPPLEMENTAL BALLOTS COMPLETED BY STREET NAME LYONS HOLDERS MUST BE EXECUTED AND
RECEIVED BY THE DEBTORS NO LATER THAN 5:00 P.M., PREVAILING EASTERN TIME, ON
JULY 15, 1997. SINCE MAIL DELAYS MAY OCCUR, IT IS IMPORTANT THAT YOUR
SUPPLEMENTAL BALLOT BE MAILED OR DELIVERED WELL IN ADVANCE OF THE SPECIFIED
DATE. ANY SUPPLEMENTAL BALLOTS RECEIVED AFTER 5:00 P.M., PREVAILING EASTERN
TIME, ON JULY 15, 1997 WILL NOT BE INCLUDED IN ANY CALCULATION TO DETERMINE
WHETHER THE PARTIES ENTITLED TO VOTE ON THE PLAN HAVE VOTED TO ACCEPT OR REJECT
THE PLAN.
SUPPLEMENTAL BALLOTS MAY BE RECEIVED BY THE DEBTORS BY FACSIMILE
TRANSMISSION TO BANKRUPTCY SERVICES, INC. AT: (212) 376- 8989. SUPPLEMENTAL
BALLOTS SENT BY FACSIMILE TRANSMISSION WILL NOT BE COUNTED UNLESS THE ORIGINAL
SUPPLEMENTAL BALLOT IS RECEIVED BY BANKRUPTCY SERVICES, INC. BY 4:00 P.M.,
PREVAILING EASTERN TIME, ON JULY 16, 1997.
21
<PAGE>
WHEN A SUPPLEMENTAL BALLOT IS SIGNED AND RETURNED WITHOUT FURTHER
INSTRUCTION REGARDING ACCEPTANCE OR REJECTION OF THE PLAN, THE SIGNED
SUPPLEMENTAL BALLOT SHALL BE COUNTED AS A VOTE ACCEPTING THE PLAN.
WHEN A SUPPLEMENTAL BALLOT IS RETURNED INDICATING ACCEPTANCE OR
REJECTION OF THE PLAN BUT IS UNSIGNED, THE UNSIGNED SUPPLEMENTAL BALLOT WILL NOT
BE INCLUDED IN ANY CALCULATION TO DETERMINE WHETHER THE PARTIES ENTITLED TO VOTE
ON THE PLAN HAVE VOTED TO ACCEPT OR REJECT THE PLAN.
B. Special Note for Holders of LYONS
(a) Beneficial Owners
(i) Any beneficial owner holding LYONS as record holder in
its own name who wishes to change a previously cast vote
on the Plan should do so by completing and signing the
enclosed Supplemental Ballot and returning it directly
to the Debtors, care of Bankruptcy Services, Inc. at the
address set forth above, so that it is received on or
before July 15, 1997 at 5:00 p.m., Prevailing Eastern
Time, using the enclosed postage-prepaid return
envelope.
(ii) Any Street Name LYONS Holder who wishes to change a
previously cast vote on the Plan should do so by
following these instructions:
(A) Complete and sign the Supplemental Ballot.
(B) Return the Supplemental Ballot to your Nominee at
the address provided by your Nominee no later than
5:00 p.m., Prevailing Eastern Time, on July 15,
1997.
22
<PAGE>
Any Supplemental Ballot returned to a Nominee by a Street Name LYONS
Holder will not be counted for purposes of changing a vote to accept or reject
the Plan until such Nominee properly completes and delivers to the Debtors a
master supplemental ballot (the "Master Supplemental Ballot") that reflects the
change in vote of such Street Name LYONS Holder.
If any Street Name LYONS Holder owns LYONS through more than one
Nominee, such Street Name LYONS Holder may receive multiple mailings containing
the Supplemental Ballots. Each such Street Name LYONS Holder who wishes to
change a previously cast vote on the Plan should execute a separate Supplemental
Ballot for each block of LYONS that it holds through any particular Nominee and
return each Supplemental Ballot to the respective Nominee in the return envelope
provided therewith.
Street Name LYONS Holders who execute multiple Supplemental Ballots
with respect to LYONS held through more than one Nominee must indicate on each
Supplemental Ballot the names of all such other Nominees and the additional
amounts of the LYONS.
If a Street Name LYONS Holder holds a portion of the LYONS through a
Nominee and another portion as a record holder, such owner should follow the
procedures described in (a) above to change its vote relating to the portion
held of record and the procedures described in (b) above to change its vote
relating to the portion held through a Nominee or Nominees.
(b) Brokerage Firms, Banks And Other Nominees
An entity (other than a beneficial owner) which is the registered
holder of LYONS should vote on behalf of the beneficial owners of such LYONS by
(i) immediately distributing a copy of this Supplement, all appropriate
Supplemental Ballots, and self-addressed return envelopes to all beneficial
owners for whom it holds such LYONS who submitted a Ballot to vote to accept or
reject the Plan; (ii) collecting all such Supplemental Ballots; (iii) completing
a first Master Supplemental Ballot (a "First Master Supplemental Ballot")
compiling the votes from the Supplemental Ballots received prior to July 13,
1997 at 5:00 p.m., and transmitting such First Master Supplemental Ballot to the
Debtors, care of Bankruptcy Services, Inc. at the address set forth above, so
that it is received on or before July 15, 1997 at 5:00 p.m., Prevailing Eastern
Time; and (iv) completing a second Master Supplemental Ballot (a "Second Master
Supplemental Ballot") compiling the votes from the Supplemental Ballots received
after July 13, 1997 at 5:00 p.m. and prior to July 15, 1997 at 5:00 p.m., and
transmitting such Second Master Supplemental Ballot to the Debtors, care of
Bankruptcy Services, Inc. at the address set forth above, so that it is received
on or before July 17, 1997 at 10:00 a.m., Prevailing Eastern Time. Such entity
may also pre-validate a Supplemental Ballot by completing all information to be
entered on the Supplemental Ballot (the "Pre-Validated Supplemental Ballot") and
forwarding the Pre-Validated Supplemental Ballot to the beneficial owner for
voting. A proxy intermediary acting on behalf of a
23
<PAGE>
brokerage firm or bank may follow the procedures outlines in the preceding
sentence to change a vote on behalf of such party.
First Master Supplemental Ballots sent by facsimile transmission
prior to July 15, 1997 at 5:00 p.m., Prevailing Eastern Time, will not be
counted unless the original First Master Supplemental Ballot is received by
Bankruptcy Services, Inc. by 5:00 p.m., Prevailing Eastern Time, on June 16,
1997. Second Master Supplemental Ballots sent by facsimile transmission prior to
July 17, 1997 at 10:00 a.m., Prevailing Eastern Time, will not be counted unless
the original First Master Supplemental Ballot is received by Bankruptcy
Services, Inc. by 12:00 p.m., Prevailing Eastern Time, on June 17, 1997.
VI. CONFIRMATION HEARING
The Bankruptcy Court has scheduled a hearing on Confirmation of the
Plan to commence on July 18, 1997 at 2:30 p.m. That hearing will be held at the
Bankruptcy Court for the District of Delaware, 824 Market Street, 6th floor,
Wilmington, Delaware 19801, before the Honorable Helen S. Balick, Chief 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 Interest holders of the Debtors. At that time, the Debtors will
submit a report to the Bankruptcy Court concerning 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 THE PLAN
WHICH WERE TIMELY FILED PRIOR TO THE APRIL 23, 1997 DEADLINE WILL BE TREATED AS
OBJECTIONS TO THE PLAN. THERE IS NO NEED TO REFILE ANY SUCH OBJECTIONS. Any
additional objections to confirmation of the Plan must be made in writing and
filed with the Bankruptcy Court and served so as to be received by the following
persons no later than July 11, 1997 at 4:00 p.m., Prevailing Eastern Time:
SHEARMAN & STERLING
599 Lexington Avenue
New York, New York 10022
Attn: Douglas P. Bartner, Esq.
24
<PAGE>
YOUNG, CONAWAY, STARGATT & TAYLOR
Rodney Square North
Wilmington, Delaware 19899-0391
Attn: Laura Davis Jones, Esq.
DISCOVERY ZONE, INC.
110 East Broward Boulevard
Ft. Lauderdale, Florida 33301
Attn: Robert Rooney
WEIL, GOTSHAL & MANGES, LLP
767 Fifth Avenue
New York, New York 10153
Attn: Martin J. Bienenstock, Esq.
BAYARD, HANDLEMAN & MURDOCH
1300 Delaware Trust Building
902 North Market Street
Wilmington, Delaware 19801
Attn: Neil Glassman, Esq.
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
Attn: Chaim J. Fortgang, Esq.
DUANE, MORRIS & HECKSHER
1201 Market Street, Suite 1500
P.O. Box 195
Wilmington, Delaware 19899
Attn: Teresa K.D. Currier
OFFICE OF THE UNITED STATES TRUSTEE
601 Walnut Street
Curtis Center, Suite 950 West
Philadelphia, Pennsylvania 19106
Attn: John D. McLaughlin, Esq.
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.
25
<PAGE>
Respectfully submitted,
DISCOVERY ZONE, INC.
Debtor and
Debtor in possession
By /s/ Scott Bernstein
----------------------------------------
Scott Bernstein
Chief Executive Officer and President
BEAVERTON FUN FITNESS, INC.
DJM MANAGEMENT, INC.
DZ OF CONNECTICUT, INC.
DZ OF GEORGIA, INC.
DZ OF MASSACHUSETTS, INC.
DZ OF MISSOURI, INC.
DZ OF NEW YORK, INC.
DZ PARTY, INC.
DZ OF PENNSYLVANIA, INC.
DZ OF WISCONSIN, INC.
PORTLAND FUN FITNESS, INC.
VANCOUVER FUN FITNESS, INC.
DISCOVERY ZONE (PUERTO RICO), INC.
LEAPS & BOUNDS, INC.
SEMBORG CORP.
DZGP, INC.
DISCOVERY ZONE CHILDREN'S
AMUSEMENT CORPORATION
Debtors and
Debtors in possession
By /s/ Scott Bernstein
----------------------------------------
Scott Bernstein
President
<PAGE>
DISCOVERY ZONE L.P.
Debtor and
Debtor in possession
By: DZGP, Inc., its general partner
By /s/ Scott Bernstein
----------------------------------------
Scott Bernstein
President
TUMBLE FOR FUN LIMITED
PARTNERSHIP
Debtor and
Debtor in possession
By Discovery Zone Children's
Amusement Corporation, its
general partner
By /s/ Scott Bernstein
----------------------------------------
Scott Bernstein
President
<PAGE>
Exhibit 1
Financial Projections
<PAGE>
Exhibit 2
Description of Operation of Distribution Protocol
<PAGE>
Exhibit 3
Liquidation Analysis
