UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF FLORIDA
ORLANDO DIVISION
In re:
Case No. 94-02608-6J1
LASER PHOTONICS, INC.,
Debtor.
/
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DEBTOR'S THIRD AMENDED DISCLOSURE STATEMENT
Dated February 16, 1995
Peter N. Hill
Florida Bar No. 368814
Wolff, Hill, McFarlin &
Herron, P.A.
P.O. Box 2327
Orlando, FL 32802
(407) 648-0058
Attorneys for Debtor
TABLE OF CONTENTS
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ARTICLE I: INTRODUCTION. . . . . . . . . . . . . . . . . . .. 1
ARTICLE II: BACKGROUND OF THE DEBTOR AND ITS BUSINESS . . . .. 1
ARTICLE III: EVENTS LEADING TO CHAPTER 11 FILING . . . . . . .. 1
ARTICLE IV: SUMMARY OF THE CHAPTER 11 CASE TO DATE. . . . . .. 3
ARTICLE V: SUMMARY OF CHAPTER 11 PLAN. . . . . . . . . . . .. 5
ARTICLE VI: CLASS ACTION . . . . . . . . . . . . . . . . . .. 9
Summary Of The Claims . . . . . . . . . . . . . .. 9
The Proposed Settlement . . . . . . . . . . . . .. 11
ARTICLE VII: ACCEPTANCE AND CONFIRMATION OF PLAN . . . . . . .. 13
ARTICLE VIII: SECURITIES LAWS . . . . . . . . . . . . . . . . .. 16
A. Generally. . . . . . . . . . . . . . . . .. 16
B. Resale Considerations. . . . . . . . . . .. 17
C. Trust Indenture Act. . . . . . . . . . . .. 19
D. Delivery of Disclosure Statement . . . . .. 19
ARTICLE IX: TAX CONSIDERATIONS. . . . . . . . . . . . . . . .. 19
ARTICLE X: CERTAIN RISK FACTORS. . . . . . . . . . . . . . .. 19
ARTICLE XI: ALTERNATIVES TO THE PLAN. . . . . . . . . . . . .. 20
ARTICLE XII: CONCLUSION. . . . . . . . . . . . . . . . . . . .. 21
EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23
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Laser Photonics, Inc., the debtor, files this third amended
disclosure statement (the "disclosure statement") pursuant to
section 1125 of the Bankruptcy Code.
ARTICLE I: INTRODUCTION
This disclosure statement is being provided by the debtor in
connection with solicitation of acceptances of the debtor's first
amended plan of reorganization (the "plan"). The purpose of this
disclosure statement is to provide information of a kind and in
sufficient detail, as far as is reasonably practical in light of
the nature and history of the debtor and the condition of the
debtor's books and records that would enable holders of impaired
claims and interests to make an informed judgment in exercising the
right to vote for acceptance or rejection of the plan.
No representation concerning the debtor is authorized other
than as set forth herein. Any representations or inducements made
which are other than as contained herein should not be relied upon
in arriving at a decision about the plan. This disclosure
statement does not constitute legal or financial advice. You
should consult your own advisors if you have questions about the
plan or this disclosure statement.
The information contained herein has not been subject to
audit. For that reason, as well as the complexity of the debtor's
business and the impossibility of making assumptions, estimates and
projections with complete accuracy, the debtor is unable to warrant
or represent that the information contained herein is without
inaccuracy, although every reasonable effort has been made to
insure that such information is accurate.
The plan should be closely reviewed in conjunction herewith.
The disclosure statement is qualified in its entirety by reference
to the plan. All terms used in this disclosure statement shall
have the definitions specified in the plan unless otherwise defined
herein.
ARTICLE II: BACKGROUND OF THE DEBTOR AND ITS BUSINESS
The debtor's operations, products, organization, personnel and
financial data are described in detail in the Business Report dated
October 25, 1994 which is attached as an exhibit to this disclosure
statement.
ARTICLE III: EVENTS LEADING TO CHAPTER 11 FILING
The debtor began experiencing financial difficulties in 1993.
In the first quarter of 1992, the debtor sold patented technology.
Consequently, OEM medical sales decreased due
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to the discontinued manufacturing and selling of ophthalmic lasers. The
debtor also discontinued the sale of ruby lasers due to a customer's
failure to make timely payments. This change in the company's customer
mix had a dramatic effect on adjusted gross profit in 1993. The debtor
replaced its direct medical sales with OEM customers. The average
selling price was lower, resulting in a lower gross profit margin. Gross
profit was also adversely affected by the increase in manufacturing
overhead, selling, general and administrative expenses and research and
development costs. The debtor's financial dilemma was compounded by a
lack of sufficient capital to purchase raw materials.
To help fund operations, in February, 1993, the debtor
borrowed an additional $185,000 from certain directors and others
and executed a promissory note, collateralized by substantially
all of the assets of the company. The note bears interest at 8%
per year. Class A warrants to purchase 18,500 shares of common
stock were also issued to the holders of the note.
In May, 1993, the debtor and JMAR Industries, Inc. ("JMAR")
entered into agreements wherein Surgilase, Inc. ("Surgilase")
became the exclusive distributor for a number of the company's
high-performance, solid-state surgical laser systems and
accessories as well as a non-exclusive distributor for the
company's other solid-state laser systems and accessories. JMAR
gave the debtor $1,000,000 up front and purchased $500,000 worth of
the company's common stock. In October, 1993, Surgilase purchased
an exclusive right to license and use the debtor's technology on
the Nd:YAG/532 Combination System and the Holmium Laser System. A
non-exclusive right and license was granted to Surgilase for the
Nd:YAG laser. As consideration for these rights, the debtor
received $1,750,000 and 179,487 shares of JMAR common stock with
detachable stock warrants. The $2,750,000 received from JMAR was
used to pay outstanding debts, to purchase raw materials and for
general working capital.
Also in May, 1993, the debtor entered into a settlement
agreement with the landlord of the Orlando, Florida facility. In
settlement of the delinquent rent and taxes owed, the debtor issued
100,000 shares of its common stock to the landlord and agreed to
pay the landlord an additional amount of $252,000 in accordance
with an agreed payment schedule. The lease now has been extended on
a short term basis pursuant to an adequate protection agreement
approved by the court. The debtor's primary lender terminated the
debtor's drawing ability and required the company to make principal
reductions in the amount of $1,250,000 in the twelve months
preceding September 30, 1993 and thereafter at the rate of $40,000
per month. This further eroded the amount of capital available to
the company.
The debtor failed to make its June, July and August, 1993,
interest payments aggregating $88,437 on its 13% Senior
Subordinated Debentures due May, 1999 ("13% Debentures"), and did
not make its July, 1993 quarterly interest payment of $36,998 on
its
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10.5% Convertible Senior Subordinated Debentures due May, 1999
("10.5% Debentures). The principal outstanding balances on the 13%
Debentures and 10.5% Debentures are $2,489,300 and $1,382,900,
respectively. The debtor received a notice from the indenture
trustee that an event of default had occurred; however, the company
has not received any notice of acceleration of the principal
balance of the debentures.
The debtor failed to make payroll tax deposits during the
second quarter of 1993, resulting in assessment of penalties and
accrual of interest.
On September 13, 1993, the debtor announced that it had
discovered discrepancies in its financial statements included in
its form 10-K for calendar year 1992 and Form 10-Q's for the
quarters ended March 31, 1993 and June 30, 1993 and, accordingly,
they could not be relied upon. At that time, the debtor was unable
to determine the full effect of the discrepancies; however, both
sales and income were negatively affected. The debtor cooperated
with its outside auditors, Coopers & Lybrand, promptly to quantify
the effects of the discrepancies as well as whether any other
adjustments were necessary.
The debtor requested and accepted the resignations of Mark T.
Fukuhara, president and chief executive officer, and Andrew J.
O'Connell, its chief financial officer. Robert Anselmo, senior
vice-president-administration was appointed as acting president and
Elroy McConnell, controller, assumed the additional financial
responsibilities. Paul Cattermole was later appointed president.
Messrs. Anselmo and O'Connell have left the employ of the debtor
since the filing of the chapter 11 case.
At the debtor's request, NASDAQ suspended trading in the
debtor's shares pending release of further information.
Facing increasing pressure on a number of fronts, the debtor
was forced to seek relief under Chapter 11 of the Bankruptcy Code
and filed its petition on May 13, 1994.
ARTICLE IV: SUMMARY OF THE CHAPTER 11 CASE TO DATE
On May 13, 1994, Laser Photonics filed its Chapter 11
bankruptcy petition. Since the petition date, the debtor has
operated its business and managed its affairs as a debtor in
possession under the authority of sections 1107(a) and 1108 of the
Bankruptcy Code. The debtor has retained, or has applied to
retain, the following professionals to assist the debtor in the
case:
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Name Function
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Peter N. Hill, Wolff, Hill, McFarlin & General counsel for debtor in
Herron, P.A. possession
Spitzer & Feldman, P.C. Special corporate and securities
counsel for debtor in possession
Morrison, Brown, Argiz & Company Accountants
Coopers & Lybrand Auditors
Early in the case, the debtor obtained interim and final
orders authorizing it to use cash collateral, namely proceeds of
accounts receivable in which various creditors held security
interests. As adequate protection of the interests of such
creditors, the court ordered replacement liens on accounts
receivable generated following the petition date, and further
ordered periodic payments and other protections to Sun Bank, N.A.
Sun Bank's position has been acquired by Helionetics, Inc.
The debtor obtained a court order authorizing it to enter into
a factoring relationship with Commercial Factors of Atlanta. Sun
Bank subordinated its first priority position in accounts
receivable in exchange for certain percentages of advances from the
factor.
The debtor also obtained a court order authorizing it to
borrow up to $350,000 from Helionetics, Inc. secured by a lien on
property of the estate senior to all other liens but for those of
the Orange County, Florida, Tax Collector, Commercial Factors of
Atlanta, and Sun Bank.
The debtor obtained court authority to pay prepetition wages
of non-insiders accrued prior to the petition date in the aggregate
sum of $46,969.43. The debtor further sought and obtained
authority to pay compensation to its officer, Paul S. Cattermole,
president and chief executive officer, at the rate of $8,000 per
month, plus a $500 per month car allowance.
The debtor sought, but was denied, court authority to sell
ruby lasers free and clear of any interest of Spectrum Medical
Technologies, Inc. Spectrum and the debtor were parties to an OEM
manufacturing and distribution agreement which was terminated in
October of 1993. The agreement precludes, under certain
circumstances, the debtor from selling lasers in the dermatology
market for a period of 3 years from the date of termination of the
agreement. The debtor contends the prohibition is unenforceable
since the circumstances that give rise to it never occurred.
Spectrum contends that the circumstances in fact occurred, and
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that the debtor is precluded from selling in the dermatology market.
The court denied the debtor's motion on procedural grounds, without
reaching the merits of the dispute. The debtor has filed an
adversary proceeding challenging Spectrum's claim in the case,
seeking a determination that the restrictive covenant is not
enforceable, and seeking damages in the amount of $890,000 for
goods sold to Spectrum for which Spectrum never made payment.
The debtor settled a dispute with Patlex Corporation and Dr.
R. Gordon Gould regarding performance of the debtor's obligations
under a patent licensing agreement. Under the terms of the
settlement, the debtor has preserved the right to manufacture laser
equipment covered by the patents.
No interested party has sought the appointment of a Chapter 11
trustee or examiner, nor has any party sought dismissal or
conversion of the case.
The United States Trustee appointed a creditors' committee.
The court has approved of the committee's retention of the
accounting firm of Arthur Andersen and the Orlando, Florida law
firm of Lowndes, Drosdick, Doster, Kantor & Reed, P.A., subject to
payment to the Lowndes, Drosdick firm by the debtor of a retainer
in the amount of $20,000. To date, $15,000 of the $20,000 retainer
has been paid.
ARTICLE V: SUMMARY OF CHAPTER 11 PLAN
The debtor's plan organizes claims and interests in 16
separate classes. One class is empty. Eleven of the classes are
impaired. A class of claims or interests is impaired unless the
plan proposes to cash out the claim or interest, the plan leaves
the claim or interest unaltered or, in the case of a prebankruptcy
default, the plan provides for cure of the default, reinstatement
of the original maturity date, payment of any damages caused by the
default, and that the claim or interest will otherwise remain
unaltered. Impairment is dealt with in section 1124 of the
Bankruptcy Code. Impaired classes of claims and interests are
entitled to vote on the plan, while unimpaired classes are deemed
to have accepted the plan.
Of the 4 unimpaired classes, one, Commercial Factors of
Atlanta, is owed nothing. In fact, due to the nature of the
factoring arrangement, the debtor has a credit balance with the
factor. Employee wage claims were paid, with court approval,
during the case and, to the extent any priority wage claims remain,
those will be paid in cash on the effective date of the plan.
Priority vacation claims will be paid in kind, except that
claimants who have left the employ of the debtor will receive cash
on account of their claims. The secured claim of Business
Telephone Systems, Inc. will be paid in cash, and the secured claim
of Coral Packaging, Inc. will be unaffected by the plan.
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Of the 11 classes of impaired claims, the Orange County,
Florida, Tax Collector's secured claim for unpaid tangible personal
property taxes will be satisfied in two cash payments, the first on
the effective date, the second on the first anniversary of the
effective date, with interest at 9% per year. Helionetics, Inc.
will receive interest at the prime rate published in the Wall
Street Journal and the right to demand payment of its claims by
assignment from Sun Bank and for postpetition loans at any time
after the first anniversary of the effective date. The Internal
Revenue Service will receive $5,000 per month until its secured
claim is fully paid. Secured claims held by certain directors, a
former director, and attorneys who have represented the debtor will
be satisfied 4 years from the first day of the third month
following the effective date. Interest will be paid quarterly in
the interim at the prime rate. Security interests held by these
creditors to secure payment of their claims will be subordinated to
security interests granted by the debtor to secure any and all
working capital loans to the debtor following confirmation of the
plan. A former president of the debtor will receive nothing on
account of his secured claim as a result of offsetting claims held
by the debtor against him, and the confirmation order will be
deemed to satisfy all security interests held by him in property of
the estate. The secured claim of Ciba-Geigy Corporation will be
paid in one lump sum cash payment of $55,000.
General unsecured claims, including claims of holders of
debentures issued by the debtor, will be satisfied by the issuance
by the debtor of a sufficient number of shares of the debtor's
capital stock such that, following issuance of all stock to be
issued by the debtor under the plan, the holders of Class 10 claims
will hold, in the aggregate, 20% of all issued and outstanding
shares of stock of the debtor. In the event, however, it becomes
necessary for the debtor to issue 1% of its stock to the holder of
the Class 16 claim, then the 20% figure in the immediately
preceding sentence will change to 19%. Each holder of a Class 10
claim will receive a pro rata share of stock to be issued to
holders of Class 10 claims. Distribution of stock to the LPI
Debenture holders will be made through the Indenture Trustee
pursuant to the terms of the Indentures governing the existing LPI
Debentures. The LPI Debentures will be extinguished and all
obligations of the Indenture Trustee under all indentures relating
thereto shall be discharged upon the completion of distributions to
Class 10 creditors under this plan who are holders of LPI
Debentures.
Shareholders who are members of a class or putative class who
have sued the debtor will receive their pro rata share of $350,000
in cash to be paid on the effective date by the non-debtor class
action defendants. The latter have agreed to waive any and all
claims against the debtor or the estate for contribution and
indemnity.
The debtor will object to the secured claim of Laser Center of
America, Inc. in the amount of $60,638.99. The debtor believes
that, under Florida law, the claimant failed to take steps
necessary to elevate its claim based on a judgment to the status of
a secured claim
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in bankruptcy. If unsuccessful, the debtor will issue to Laser Center of
America, Inc. a note calling for payment of the claim over 60 months at 9%
interest per year.
S & K Enterprises filed a secured claim in the amount of $100.
The debtor intends to object to the claim as a secured claim. If
unsuccessful, the debtor will pay the claim in cash on the
effective date.
Intevac, Inc. filed a secured claim in the amount of $654.21.
The debtor intends to object to the claim as a secured claim. If
unsuccessful, the debtor will pay the claim in cash on the
effective date.
Spectrum Medical Technologies, Inc. filed claim 131 in the
amount of $35,096,587.61 as a general unsecured claim. The debtor
has disputed the claim and has sought judgment against the holder
of the Class 16 claim in the amount of $890,000. To the extent, if
any, the Class 16 claim is allowed, the debtor will issue to the
holder of the Class 16 claim a sufficient number of its shares of
capital stock such that, following issuance of all stock to be
issued by the debtor under the plan, the holder of the Class 16
claim will own 1% of the then issued and outstanding shares. The
debtor will in that event be relieved of any restriction on the
conduct of its business as a result of its OEM manufacturing
agreement with the holder of the Class 16 claim.
The one class of interests is also impaired. Holders of
common stock of the debtor will retain their interests. However,
the debtor will authorize and issue new stock to Helionetics and to
the holders of Class 10 claims such that, following such
authorization and issuance, Helionetics and holders of Class 10
claims will own exactly 75%, 20%/1 and 5%, respectively, of the
outstanding shares of common stock of the debtor. In other words,
holders of 100% of the corporate stock of the debtor, in the
aggregate, will own, after confirmation, 5% in the aggregate, of
the debtor's stock.
Class action plaintiffs and other interest holders will
receive solicitation packages directly, where the identity of such
person is known and, where securities are held in street name,
solicitation packages will be distributed through various brokerage
houses holding such securities.
Priority tax claims are not classified in the plan. Holders
of such claims against the debtor will receive full satisfaction of
their claims, together with interest at 9% per year from the
effective date of the plan, in cash in equal monthly payments
beginning on the first day
- --------------
/1 As noted above, in the event it becomes necessary for the debtor to
issue 1% of its stock to the holder of the Class 10 claims will receive
19%, and not 20%, of the debtor's stock.
7
of the third month following the effective date and continuing on the first
day of each and every month thereafter for a period not longer than 6 years
from the dates of assessments of such tax claims.
The plan provides for assumption by the debtor of all
unexpired leases and executory contracts listed on Schedule G filed
by the debtor, with the exception of the executory contract with A
T & T Credit Corporation and the executory contract with Spectrum
Medical Technologies, Inc. which was terminated prior to the
petition date. The debtor assumes its patent licensing
agreements with Dr. R. Gordon Gould and Patlex Corporation, as
modified by the settlement agreement between the parties approved
by the Court.
Administrative claims are not classified in the plan.
Professional fees approved by the court will be paid on the
effective date. Professional fees are estimated as follows:
Professional Function Estimated Fees
- ------------ --------- --------------
Wolff, Hill, McFarlin & Herron, General counsel to the $100,000, less
P.A. debtor retainer of
$22,000 and
additional payments
to date of $15,003
Spitzer & Feldman, P.C. Special counsel to the $25,000
debtor for corporate and
securities matters
Morrison, Brown, Argiz &
Company Accountants for the debtor $35,000
Coopers & Lybrand Auditors for the debtor $-0-
Arthur Andersen Accountants for creditors'
committee $7,000
Lowndes, Drosdick, Doster, Counsel to the creditors' $20,000 less $15,000
Kantor & Reed, P.A. committee retainer
National City Bank of Indenture Trustee $45,000
Minneapolis
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Postbankruptcy liabilities incurred in the ordinary course of
business will be paid in the ordinary course. Administrative
claims in connection with assumption of executory contracts or
unexpired leases will be paid on the effective date.
Travel expenses incurred by the committee members will be paid
directly by Helionetics.
Fees payable to the United States Trustee under 28 U.S.C. Section
1930 will be paid on or before the effective date.
Helionetics will pay to the debtor $1 million on the effective
date, and will transfer to the debtor its 76% interest in AccuLase,
Inc. Susan E. Barnes, wife of Bernard Katz, Helionetics' chairman,
will personally guarantee payment of the $1 million. A copy of her
financial statement is attached as an exhibit. AccuLase, Inc. has
a positive net worth. Helionetics has committed to fund research
and development costs of AccuLase's excimer laser technology for at
least two years after the effective date. Financial and other
information regarding AccuLase is also attached as an exhibit.
In exchange, Helionetics will acquire 75% of the stock of the
debtor.
ARTICLE VI: CLASS ACTION CLAIMS
The debtor is a party to two purported class actions, Louis S.
Terranova vs. Laser Photonics, et al., Case No. 94-13-CIV-ORL-22,
and Frederic Marin vs. Laser Photonics, et al., Case No. 94-505-
CIV-ORL-22, each pending in the United States District Court,
Middle District of Florida, Orlando Division (the "class actions").
The class actions were brought on behalf of all persons who
purchased or acquired common stock or warrants of the debtor from
November 6, 1992 through September 14, 1993, excluding the
defendants named in the class actions and officers, directors,
affiliates and subsidiaries of the debtor and defendant, Radix
Organization, Inc.
Summary Of The Claims
The defendants in the class actions consist of the following
in addition to the debtor: Leonard Lichter, Don S. Friedkin, Roger
M. Kirk, Robert C. Lapin, John Radziwill, Thurman Sasser, Andrew L.
O'Connell, III, Mark J. Fukuhara and Radix Organization, Inc.
Messrs. Lichter, Friedkin, Kirk, Lapin, Radziwill and Sasser are
directors or former directors of the debtor, Fukuhara is the
debtor's former President and a former director and O'Connell is
the debtor's former Chief Financial Officer. Radix Organization,
Inc. is an investment company
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affiliated with a number of the director defendants. All of the defendants
other than Fukuhara and O'Connell are referred to below as the "director
defendants".
The class actions rest on essentially two claims. The first
claim alleges an accounting fraud based on the deliberate
overstatement of debtor's revenues which resulted in material
discrepancies in the company's 1992 10-K dated May 26, 1993, its
first quarter 1993 10-Q, dated June 1, 1993, and the second quarter
1993 10-Q, dated August 12, 1993.
The overstatement was discovered by Roy McConnell who was
hired by the debtor in May 1993 as its controller. McConnell had
previously been employed by Coopers & Lybrand as a manager and was
the manager who supervised the debtor's 1992 year end audit.
McConnell uncovered a significant number of credit memos reflecting
returns of laser systems in 1992 and 1993, but the sales for these
systems were not reversed and remained on the books as accounts
receivable. These credit memos were deliberately withheld from
Coopers & Lybrand and from the debtor's outside directors. In
fact, in many cases, customers overstated the amount of the
receivable that they confirmed to the auditors. The outside
directors were first advised of the fraud on September 8, 1993.
After conducting an investigation, a special meeting of the
debtor's board of directors was called for the following Monday,
September 13, 1993. On September 13, 1993, following the special
board meeting, the debtor announced the discrepancies, stated that
the filings could not be relied upon, and at debtor's request,
NASDAQ halted trading in the debtor's stock.
The plaintiffs assert that each of the defendants participated
in the accounting fraud, were aware of it or at the least
negligently permitted the fraud. In support of this assertion
plaintiffs claim that they have conducted extensive factual
investigations which have unearthed, among other things, tape
recordings made by debtor's former President, Mr. Fukuhara, in
which he accused the other defendants of participating in the
fraud. It is the position of the director defendants that the
accounting fraud was perpetrated by Fukuhara without the knowledge
or involvement of any of the director defendants and that the
director defendants took immediate steps to rectify the fraud once
discovered, including demanding and receiving Fukuhara's and
O'Connell's resignations. Several of the director defendants made
loans to the debtor during this time period.
The second claim involves alleged misrepresentations and
omissions, unrelated to the accounting fraud described above,
concerning the true state of debtor's financial affairs.
Plaintiffs allege that debtor failed to disclose a variety of
adverse financial information until September, 1993. The
disclosures that plaintiff alleges were not timely made include (a)
that the debtor was in default under its 13 percent senior
subordinated debentures due May 1999, and its 10.5 percent
convertible series subordinated debentures due May 1999; (b) the
debtor was in default to the Internal Revenue Service with respect
to an agreement to pay
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approximately $550,000 in payroll taxes; (c) the debtor was in default
under the lease of its facilities in Orlando, Florida; and (d) the debtor
was in default to various vendors and others.
According to the director defendants, the investing public
was always aware of the company's financial position.
Specifically, these disclosures included the following. In a
Registration Statement filed with the SEC on November 6, 1992, the
debtor disclosed that "[h]istorically, the Company has been past
due in substantial obligations to noteholders, vendors and other
creditors." In its second quarter 1993 10Q, dated August 12, 1993,
the debtor stated (at pg. 11) that "the Company is currently in
arrears in its interest payments under its debentures, which
default would permit the bondholders to demand immediate payment of
those debentures." The debtor disclosed its arrearages to the IRS
in its 1991 and 1992 10K, its 2nd quarter 1992 10Q and in its June
30, 1993 Registration Statement. The debtor disclosed its default
under its lease in its 1991 and 1992 10K's and its November 6, 1992
Registration Statement and June 30, 1993 Prospectus. The debtor
also warned investors on a number of occasions that its ability to
finance its activities and growth in the long term depended upon,
among other things, an additional capital infusion which was not
guaranteed. The 1991 report of the debtor's then auditors, Ernst
& Young states that: "the Company's recurring losses from
operations and deficiency in shareholder's equity raise substantial
doubt about its ability to continue as a going concern". Likewise,
the report of Coopers & Lybrand, dated May 26, 1993, contained in
the debtor's 1992 10-K, stated that the company's operating results
"raise substantial doubt about the company's ability to continue as
a going concern."
The Terranova complaint was filed on or about January 5, 1994
and the Marin complaint was filed on or about May 4, 1994. Both
cases are in the pre-trial discovery stage. The defendants have
produced documents in response to plaintiff's requests and two of
the director defendants have given depositions to the plaintiffs.
On October 7, 1994 the District Court entered an order staying the
class actions pending the conclusion of debtor's Chapter 11 case.
The Proposed Settlement
The plan incorporates a proposed settlement of the class
actions. The proposed settlement is not supported by the named
plaintiffs in the class actions. Specifically each class 12
creditor, which includes all members of the plaintiff class in the
class actions, is being offered his pro rata share of $350,000 in
cash. This offer is made possible by an agreement between the
debtor and the director defendants whereby the director defendants
have offered to fund what would be the $350,000 cash settlement and
to withdraw all claims they may have against the debtor for
indemnity or contribution. In consideration, the director
defendants are seeking releases from the debtor and each member of
the class.
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The debtor believes that the settlement is fair to class
members. First, under Section 510(b) of the Bankruptcy Code, the
claims of class action plaintiffs have the same priority as common
stock claims. Under the plan, the equity interests of common
shareholders are being diluted to 5% of the common stock
outstanding. Accordingly, the settlement offers the members of
class 12 significantly more than they would receive under the plan
absent a settlement. Second, unless claims of director defendants
for indemnity and contribution can be settled, such claims could
significantly dilute the recoveries of general unsecured creditors.
The debtor has not yet determined whether such claims can be
properly asserted.
The debtor's certificate of incorporation contains provisions
entitling the directors and officers to be indemnified by the
debtor against all claims asserted against them arising out of
their performance of their duties to the corporation. Under
Delaware law, the debtor's indemnity obligation may be avoided only
if the defendants did not act in good faith. Thus, defendants may
be entitled to be indemnified for their legal expenses if they
successfully defend the class actions. They may also be entitled
to be indemnified if there is a settlement or they are held liable
on a negligence theory. Defendants may also be entitled to
contribution from the debtor even if they are found liable on any
of the fraud counts.
The creditors' committee has advised the debtor that if the
director defendants asserted claims for indemnification or
contribution, the committee would oppose debtor's plan which could
make the debtor's reorganization difficult, if not impossible.
Third, in the opinion of the director defendants, the
settlement amount represents a substantial portion of the damages
which would be recoverable even if the plaintiffs are successful,
after attorneys fees are paid.
Plaintiffs have asserted the losses of the class 12 creditors
are approximately $5-6 million. Defendants believe that such
estimates are significantly overstated and that even if plaintiffs
were to prevail on all their liability claims, the recoveries would
be in the range of $1.5 million to $3.5 million before deducting
the attorneys' fees payable to plaintiff's attorneys. Defendants
estimate, based on recent precedents, that plaintiffs' attorneys
fees will total approximately one-third of any recovery.
The debtor believes that the outcome of the class action
litigation is uncertain and the actual recoveries may be
substantially less than $1.5 to $3.5 million. Also, the class
actions are not yet ready for trial and it is difficult to predict
when such actions could be completed. Finally, there is some
question whether a judgment against certain of the defendants would
be collectible.
12
ARTICLE VII: ACCEPTANCE AND CONFIRMATION OF PLAN
Section 1126 of the Bankruptcy Code deals with acceptance of
the plan. Unimpaired classes of claims are deemed to have accepted
the plan. The debtor's former president is deemed not to have
accepted the plan, since the plan provides that he will neither
receive nor retain any property under the plan.
As for classes of impaired claims, absent consideration of
votes cast, procured or solicited in bad faith, a class accepts the
plan if a majority of creditors voting on the plan votes in favor
of the plan and if the majority voting in favor of the plan holds
at least two-thirds in dollar amount of allowed claims held by
creditors who vote on the plan.
Section 1129 of the Code deals with confirmation of the plan.
In order for the plan to be confirmed, without resorting to
cramdown which is discussed below, the court must find that all of
the following requirements have been met:
1. Each class of claims and interests has accepted the
plan or is not impaired by the plan.
2. a. Each holder of a claim or interest in an
impaired class has accepted the plan or will receive or retain
under the plan property of a value as of the effective date that is
not less than the amount the holder would receive if the debtor
were liquidated under Chapter 7 on that same date; or
b. Each holder of a claim in an impaired class
which has elected that claims in that class be treated as fully
secured claims under section 1111(b)(2) of the Code will receive or
retain under the plan property of a value as of the effective date
that is not less than the value of the holder's interest in the
estate's interest in the property securing the claim.
3. The plan complies with Title 11 of the United States
Code.
4. The proponent of the plan, in this case the debtor,
complies with Title 11;
5. The plan has been proposed in good faith and not by
any means forbidden by law.
6. Any payment made or to be made by the proponent of
the plan, by the debtors, or by any person issuing securities or
acquiring property under the plan, for services
13
or for costs and expenses in or in connection with the case, or in
connection with the plan and incident to the case, has been approved
by, or is subject to approval of, the court as reasonable.
7. a. The proponent has disclosed the identity and
affiliations of any individual proposed to serve, after
confirmation, as director, officer or voting trustee of the debtor,
an affiliate of the debtor participating in a joint plan with the
debtors, or a successor to the debtor under the plan.
b. The appointment to, or continuance in, such
office of such individual, is consistent with the interests of
creditors and equity security holders and with public policy.
c. The proponent has disclosed the identity of any
insider that will be employed or retained by the reorganized debtor
and the nature of any compensation for the insider.
8. Any governmental regulatory commission with
jurisdiction, after confirmation, over rates of the debtor has
approved any rate change provided for in the plan, or the rate
change is expressly conditioned upon such approval (not applicable
here).
9. a. Unless otherwise agreed by a holder of a
particular claim, administrative expense claims, fees payable to
the United States Trustee and any other fees payable under 28
U.S.C. Section 1930, and involuntary "gap" claims (not applicable here)
will be paid in full in cash on the effective date.
b. Unless otherwise agreed by a holder of a
particular claim, holders of priority wage claims, priority claims
for contributions to employee benefit plans (not applicable here),
priority claims of grain producers or fishermen (not applicable
here), and priority consumer deposit claims (not applicable here)
will receive, if any class of such claims has accepted the plan,
deferred cash payments of a value as of the effective date equal to
the allowed amount of the claims or, if any class of such claims
has not accepted the plan, cash on the effective date equal to the
allowed amount of the claims.
c. Unless otherwise agreed by a holder of a
particular claim, holders of priority tax claims will receive
deferred cash payments over a period not exceeding six years from
the dates of assessment of such claims of a value as of the
effective date equal to the allowed amount of the claims.
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10. Confirmation is not likely to be followed by
liquidation or the need for further financial reorganization of the
debtor or any successor to the debtor under the plan, unless
proposed in the plan.
11. The plan provides for continuation of payment of all
retiree benefits (not applicable here).
It is possible for a plan to be confirmed despite a failure to
meet the requirement described in paragraph 1 above (all classes of
claims and interests must either accept the plan or be unimpaired
under the plan). This is called cramdown. Where there is at least
one class of impaired claims, however, at least one such class must
accept the plan. For this purpose, acceptance of the plan by
insiders is insufficient.
Cramdown is possible so long as the plan does not discriminate
unfairly and is fair and equitable with respect to each class of
claims or interests that is impaired under and has not accepted the
plan. In order to be considered fair and equitable, the plan must
treat impaired secured claims in one of the following ways:
1. The holders of secured claims retain their liens
securing the claims to the extent of the allowed amount of the
claims, and each holder receives deferred cash payments totaling at
least the allowed amount of the claim of a value, as of the
effective date, of at least the value of the holder's interest in
the estate's interest in the property.
2. The property securing the claims is to be sold,
subject to section 363(k) of the Code (allowing credit bidding by
the holder of the secured claim), free and clear of liens, with the
liens to attach to the proceeds, and with the treatment of the
liens on proceeds according to paragraph 1 above or paragraph 3
below.
3. The holders of the claims realize the indubitable
equivalent of the claims. Some courts have held that surrender of
the collateral to the holder of the claim constitutes a realization
of the indubitable equivalent of the claim.
In order to be considered fair and equitable, the plan must
treat impaired unsecured claims in one of the following ways:
1. The holders receive or retain property of a value,
as of the effective date, equal to the allowed amount of their
claims.
2. Holders of claims or interests junior to the class
of unsecured claims will receive or retain no property on account
of their junior claim or interest.
15
In order to be considered fair and equitable, the plan must
treat impaired interests in one of the following ways:
1. The holders receive or retain property of a value as
of the effective date equal to the greatest of the allowed amount
of any fixed liquidation preference to which they are entitled, any
fixed redemption price to which they are entitled, or the value of
their interests.
2. Holders of junior interests will receive or retain
no property on account of their junior interest.
ARTICLE VIII: SECURITIES LAWS
A. Generally.
The confirmation order will authorize the issuance by the
debtor of notes and stock under the plan. Notes and stock will be
issued without registration under the Securities Act of 1933 or
under any state or local law, in reliance on the exemptions set
forth in Section 1145 of the Bankruptcy Code.
If the issuance of the notes and stock is to be exempt from
registration under Section 1145 of the Bankruptcy Code, then three
principal requirements must be satisfied:
1. the securities must be issued by a debtor, its
successor under a plan of reorganization, or an affiliate
participating in a joint plan of reorganization with the debtor;
2. each recipient of the securities must hold a claim
against the debtor or an affiliate, an interest in the debtor or an
affiliate, or a claim for an administrative expense against the
debtor or an affiliate; and
3. the securities must be issued in exchange for the
recipient's claim against or interest in the debtor or an
affiliate, or "principally" in such exchange and "partly" for cash
or other property.
The debtor believes that its issuance of the notes and stock
will satisfy all three requirements because (a) those securities
will be securities of the debtor, and the issuance of the
securities is specifically mandated under the plan; (b) the
recipients of the notes and stock are holders of claims against the
debtor; and (c) the recipients of the securities will obtain the
securities in exchange for their claims.
16
B. Resale Considerations.
The resale or disposition by the recipients of the securities
will also be exempt from registration under the Securities Act of
1933 if the recipients are not deemed to be "underwriters" under
Section 1145(b) of the Bankruptcy Code. Section 1145(b) of the Bankruptcy
Code defines four types of underwriters: (a) a person who purchases
a claim against, interest in, or claim for administrative expense
in the case concerning a debtor with a view to distributing any
security received in exchange for that claim or interest; (b) a
person who offers to sell securities offered or sold under a plan
for the holders of those securities; (c) a person who offers to buy
those securities from the holders of those securities, if the offer
is (i) made with a view to distribution of the securities, and (ii)
made under an agreement made in connection with the plan, its
consummation or the offer or sale of securities under the plan; and
(d) a person who is an "issuer" with respect to the securities as
the term "issuer" is defined in Section 2(11) of the Securities Act of
1933.
Under Section 2(11) of the Securities Act of 1933, an "issuer" will
include any person directly or indirectly controlling or controlled
by the debtor, or any person under direct or indirect common
control with the debtor (an "affiliate"). Whether a person is an
affiliate, and therefore an "underwriter," with respect to the
debtor for purposes of Section 1145(b) of the Bankruptcy Code, will depend
on a number of factors. These factors include: (a) the person's
equity interest in the debtor; (b) the distribution and
concentration of other equity interests in the debtor; (c) whether
the person is an officer or director of the debtor; (d) whether the
person, either alone or acting in concert with others, has a
contractual or other relationship giving that person power over
management policies and decisions of the debtor; and (e) whether
the person actually has that power notwithstanding the absence of
formal indicia of control.
An officer or director of the debtor may be deemed an
affiliate. In addition, the legislative history of Section 1145 suggests
that a former creditor or interest holder receiving one percent or
more of the securities of a debtor could be deemed an affiliate.
To the extent that a person is deemed to be an "underwriter"
receives securities, resales by that person would not be exempted
by Section 1145 of the Bankruptcy Code from registration under the
Securities Act of 1933 except in "ordinary trading transactions"
(within the meaning of Section 1145(b)(1) of the Bankruptcy Code).
The Bankruptcy Code does not define the term "ordinary trading
transactions," and the Securities and Exchange Commission ("SEC")
has not given definitive guidance with respect to the proper
construction of the term. In a no-action letter the staff of the
SEC has, however, concurred in the view that a transaction will be
an "ordinary trading transaction"
17
if it is carried out on an exchange or in the over-the-counter market
at a time when the issuer of the traded securities is a reporting
company under the Exchange Act and does not involve any of the
following factors:
a. (x) concerted action by two or more recipients of
securities issued under a plan of reorganization in
connection with the sale of those securities; or (y)
concerted action by distributors on behalf of one or more
such recipients in connection with sales;
b. the preparation or use of informational documents
concerning the offering of the securities to assist in
the resale of the securities, other than the disclosure
statement approved in connection with the plan (and any
supplement thereto) and documents filed with the SEC by
the debtors or the reorganized company pursuant to the
Exchange Act; or
c. special compensation to brokers or dealers in connection
with the sale of the securities designed as a special
incentive to resell the securities, other than
compensation that would be paid pursuant to arms-length
negotiation between a seller or a broker or dealer, each
acting unilaterally, that is not greater that the
compensation that would be paid for a routine similar-
sized sale of similar securities of a similar issuer.
In addition, a person deemed to be an "underwriter" solely
because he is an affiliate may be able to sell securities without
registration, in accordance with Rule 144 under the Securities Act
of 1933, which permits public sales of securities received pursuant
to a plan by statutory underwriters subject to volume limitations
and certain other conditions. Based on the views of the Commission
expressed in no-action letters, a person deemed to be an
underwriter solely because he is an affiliate may be able to sell
securities without registration in accordance with Rule 144,
without complying with the holding period requirement of Rule
144(d).
Because of the complex, subjective nature of the question
whether a particular holder may be an underwriter, the debtor makes
no representation concerning the ability of any person to dispose
of the notes or stock. The debtor recommends that recipients of
notes and stock under the plan consult with their own counsel
concerning the limitations on their ability to dispose of those
notes.
18
C. Trust Indenture Act.
The debtor believes that issuance of the notes and stock does
not require compliance with the Trust Indenture Act of 1939,
because: (i) there will be no public issue of stock or notes; and
(ii) the aggregate amount of unsecured notes will be less than $1
million. If compliance is required, then the debtor will qualify
the notes under the Trust Indenture Act of 1939.
D. Delivery of Disclosure Statement.
Under Section 1145(a)(4) of the Bankruptcy Code, "stockbrokers" (as
that term is defined in Section 101(48) of the Bankruptcy Code) are
required to deliver to their customers, for the first 40 days after
the effective date of the plan, a copy of this disclosure statement
(and any supplement to it ordered by the Bankruptcy Court) at or
before the time of delivery of any security issued under the plan.
This requirement specifically applies to trading and other after-
market transactions in the securities issued under the plan.
DISCLAIMER: THIS DISCLOSURE STATEMENT HAS NEITHER BEEN APPROVED
NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC")
NOR HAS THE SEC PASSED UPON THE ADEQUACY OR ACCURACY OF THE
INFORMATION CONTAINED HEREIN.
ARTICLE IX: TAX CONSIDERATIONS
The federal and state income tax consequences of the plan will
vary substantially from creditor to creditor since such
consequences are in large part the result of factors unique to each
creditor. Although the debtor could in this disclosure statement
state a number of general tax principles, the complexity of the
subject and the variations in the effect of the plan on each
creditor for tax purposes for the reasons stated in the preceding
sentence would be of little benefit. Creditors and interested
parties are urged to consult advisors of their choice for opinions
and advice on the tax consequences of the plan.
ARTICLE X: CERTAIN RISK FACTORS
Holders of claims in various classes described above are to
receive, stock and notes issued by the debtor. If for some reason
Helionetics fails to fund the plan, absent a new investor or
purchaser the case may be converted or dismissed. Similarly, as
with any
19
investment, there is always a risk that equity interests
will decline in value and that an issuer of debt securities will
default in performance of its obligations under such securities.
The plan proposes issuance of a pro rata portion of fixed
percentages of stock to holders of certain claims and interests.
The amount of stock received by the holders of such claims will be
directly affected by the aggregate amount of all allowed claims in
a particular class. Although it does not appear to be the case
here, allowed unsecured claims frequently include the unsecured
deficiency portion of undersecured claims. Since the debtor may
object to certain claims, with such objections to be resolved by
the bankruptcy court, the debtor cannot predict with certainty the
total amount of allowed claims. Resolution of contested claims may
delay consummation of the plan, although the debtor intends in such
circumstances to make interim or periodic distributions while
holding sufficient reserves for payment if necessary based on
allowance of the full amount of the disputed claims.
As noted above in connection with the treatment of the Class
16 claim, Spectrum Medical Technologies, Inc. has filed claim 131
in the amount of $35,096,587.61. The debtor claims that Spectrum
owes it $890,000 and that it owes Spectrum nothing. The debtor and
Spectrum have attempted to negotiate a settlement of the dispute.
An agreed resolution appears promising.
General unsecured claims, exclusive of the Spectrum claim and
of the claim of R. Gordon Gould and Patlex Corporation which has
been settled at zero, total $7,281,258. That amount includes a
claim filed by the debtor's Orlando landlord for $1,366,098 which
is disputed based on section 502(b)(6) of the Bankruptcy Code.
Also included is the claim of the indenture trustee for the
bondholder in the amount of $4,361.928.
Holders of certain types of claims described above are to
receive payment of their claims over time. Just as there is a risk
that an issuer of debt securities will default in payment, so too
is there a risk, for a wide variety of possible reasons, that the
debtor will be unable to honor its obligations under the plan. The
debtor believes, however, that its plan is feasible and that it
will be able to fully consummate the plan.
ARTICLE XI: ALTERNATIVES TO THE PLAN
The plan as filed is built around an offer from Helionetics,
Inc. to acquire 80% of the common stock of the debtor. If the
debtor's plan is not confirmed, then the debtor, the committee or
any other party in interest in the Chapter 11 case could attempt to
formulate and propose a different plan or plans. Such plan or
plans might involve either a reorganization and continuation of the
debtor's business, a sale of the debtor's business as a going
concern,
20
an orderly liquidation of the debtor's business, or some
combination thereof. As explained above, the debtor requires an
infusion of cash and must substantially compromise claims against
the estate in order to successfully reorganize. Postpetition loans
from Helionetics have largely solved the former requirement.
Confirmation of the plan will accomplish the latter. Although the
debtor has met with a number of other possible investors and
purchasers, none other than Helionetics has tendered a formal
offer. Accordingly, the alternatives to the debtor's plan appear
to consist of dismissal of the case or conversion of the case to a
liquidation case under Chapter 7 of the Bankruptcy Code.
The proceeds of a liquidation would be distributed to
creditors in accordance with the priorities established by the
Bankruptcy Code, although presumably later than under the plan and
in a lesser amount due to the additional administrative expenses
entailed in a Chapter 7 liquidation. A schedule reflecting the
debtors' best estimates of dividends to be expected by holders of
claims in the various classes is attached as an exhibit to this
disclosure statement.
Dismissal of the case would accomplish little, since the
debtor and all its remaining creditors would be placed in the same
position they occupied before the petition date. Creditors would
presumably bring additional legal actions to enforce their claims,
likely resulting in a piecemeal dissection of the debtor in direct
contrast to the benefits of reorganization or orderly liquidation.
ARTICLE XII: CONCLUSION
The bankruptcy court will schedule a hearing for purposes of
determining whether this disclosure statement contains information
adequate to permit holders of claims and interests to make an
informed judgment about the plan. Court approval of the disclosure
statement, however, does not mean that the court recommends either
acceptance or rejection of the plan. All creditors and interested
parties will receive notice of the date and time of the hearing, of
their opportunity to object to approval of the disclosure
statement, and other matters.
21
After approval of the disclosure statement, the court will
schedule a hearing on confirmation of the plan. All creditors and
interested parties will receive a copy of the order approving the
disclosure statement, setting the confirmation hearing and dealing
with other matters, and will receive a copy of the plan, the
approved disclosure statement, and a ballot with which to cast
votes for or against the plan.
Dated: February 16, 1995
LASER PHOTONICS, INC.
-------------------------------
Peter N. Hill
Florida Bar No. 368814
By: ---------------------- Wolff, Hill, McFarlin &
Paul Cattermole Herron, P.A.
P.O. Box 2327
Orlando, FL 32802
Telephone (407) 648-0058
Facsimile (407) 648-0681
Attorneys for Debtor
22
EXHIBITS
A. Business Report
B. Debtor's income statement for 1994
C. Debtor's actual and projected income statement for 1995
D. Debtor's balance sheet and pro forma balance sheet at 12-31-94
and after reorganization
E. Debtor's monthly debtor in possession report for December,
1994 (selected pages)
F. Liquidation analysis
G. Personal financial statement of Susan E. Barnes
H. Audited financial statements of AccuLase, Inc. through 12-31-93
I. Unaudited balance sheet of AccuLase, Inc. at 9-30-94
J. Letter dated 1-20-95 from Bernard Katz to Dr. Alan Ryan
K. Memo dated 2-1-95 from Bernard Katz to Dr. Ryan and to Paul
Cattermole
L. Letter dated 2-10-95 from Adrian Cayetano, Controller of
Helionetics, Inc., to Pete Hill setting forth trading volumes
and last trades for 2-6 through 2-10-95
M. Helionetics' 1993 annual report
N. Helionetics' amended 1993 Form 10-K report
O. Helionetics' 9-30-94 Form 10-Q report