IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
UNITED PETROLEUM CORPORATION, ) Case No. 99-88 (PJW)
)
Debtor. )
SECOND AMENDED DISCLOSURE STATEMENT
WITH RESPECT TO SECOND AMENDED PLAN OF
REORGANIZATION OF UNITED PETROLEUM CORPORATION
Young Conaway Stargatt & Taylor, LLP
Laura Davis Jones (No. 2436)
Joel A. Waite (No. 2925)
Brendan L. Shannon (No. 3136)
Rodney Square North
11th Floor
P.O. Box 391
Wilmington, Delaware 19899-0391
Attorneys for United Petroleum
Corporation, et. al., Debtors
in Possession
Dated: Wilmington, Delaware
July 23, 1999
DISCLAIMERS
ALL CREDITORS AND INTEREST HOLDERS ARE ADVISED AND ENCOURAGED TO READ
THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY. PLAN SUMMARIES AND
STATEMENTS MADE IN THIS DISCLOSURE STATEMENT, INCLUDING THE FOLLOWING EXECUTIVE
SUMMARY, ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN, THE EXHIBITS
ANNEXED TO THE PLAN, AND THIS DISCLOSURE STATEMENT AS A WHOLE. THE STATEMENTS
CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE ONLY AS OF THE DATE HEREOF, AND
THERE CAN BE NO ASSURANCE THAT THE STATEMENTS CONTAINED HEREIN WILL BE CORRECT
AT ANY TIME AFTER THE DATE HEREOF.
ALL CREDITORS AND INTEREST HOLDERS ARE ADVISED THAT THIS DISCLOSURE
STATEMENT AND RELATED PLAN ARE PREMISED ON A PROPOSED MERGER TRANSACTION WITH
FSCI, WITH RESPECT TO WHICH THE DEBTOR AND FSCI HAVE NOT COMPLETED THEIR DUE
DILIGENCE. CONSUMMATION OF THE PLAN AND THE MERGER AGREEMENT HAS THUS BEEN MADE
EXPRESSLY CONTINGENT UPON THE SATISFACTION OF THE PARTIES THERETO CONTINUING DUE
DILIGENCE INVESTIGATIONS. THE DEBTOR HAS BEEN ASKED TO SUPPORT THE PROPOSED
MERGER TRANSACTION BY ITS SECURED LENDER, INFINITY. INFINITY BROUGHT THE
PROPOSED TRANSACTION TO THE DEBTOR FOR CONSIDERATION. INFINITY HAS BEEN ACTIVELY
INVOLVED IN THE NEGOTIATIONS WITH FSCI. A SUBSTANTIAL AMOUNT OF THE INFORMATION
CONTAINED HEREIN HAS BEEN PROVIDED EITHER BY INFINITY OR FSCI AND THEIR ADVISORS
AND HAS NOT YET BEEN FULLY REVIEWED OR EVALUATED BY THE DEBTOR OR ITS ADVISORS.
THE DEBTOR INTENDS TO CONDUCT FURTHER DUE DILIGENCE WITH RESPECT TO THE PROPOSED
MERGER AGREEMENT PRIOR TO THE COURT'S APPROVAL OF THE PLAN. IF SUFFICIENT DUE
DILIGENCE CANNOT BE COMPLETED BY THE DEBTOR PRIOR TO THE HEARING TO CONSIDER
APPROVAL OF THE PLAN, THE DEBTOR MAY NOT BE ABLE TO PROCEED TO OBTAIN COURT
APPROVAL OF THE PLAN. THE DEBTOR MAKES NO REPRESENTATIONS WHATSOEVER REGARDING
THE ACCURACY AND COMPLETENESS OF THE INFORMATION HEREIN REGARDING FSCI, ITS
ASSETS, OR ITS HISTORICAL OR PROJECTED FINANCIAL INFORMATION AND DISCLAIMS ANY
LIABILITY WITH RESPECT THERETO. THE DEBTOR HAS DETERMINED THAT PROCEEDING AT
THIS TIME WITH SOLICITING VOTES ON THE PLAN UNDER THESE CIRCUMSTANCES IS
APPROPRIATE IN LIGHT OF THE FACT THAT THE PROPOSED MERGER REPRESENTS THE ONLY
KNOWN POSSIBILITY OF PROVIDING A SUBSTANTIAL RECOVERY TO THE DEBTOR'S CREDITORS
AND INTEREST HOLDERS AND IN LIGHT OF THE CRITICAL TIMING ISSUES ASSOCIATED WITH
THE PROPOSED MERGER DISCUSSED THROUGHOUT THIS DISCLOSURE STATEMENT. THE DEBTOR
DOES NOT PRESENTLY HAVE THE MEANS TO CONFIRM A PLAN WITHOUT THE SUPPORT OF
INFINITY. ABSENT THE PROPOSED MERGER, THE DEBTOR WOULD LIKELY BE FORCED TO
LIQUIDATE ITS ASSETS, WHICH WOULD PRODUCE LITTLE OR NO RECOVERY FOR ANY CREDITOR
OTHER THAN INFINITY.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION
1125 OF THE BANKRUPTCY CODE AND RULE 3016(c) OF THE FEDERAL RULES OF BANKRUPTCY
PROCEDURE AND NOT IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAWS. THIS
DISCLOSURE STATEMENT HAS NEITHER BEEN APPROVED NOR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "SEC"), NOR HAS THE SEC PASSED UPON THE ACCURACY OR
ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. THIS DISCLOSURE STATEMENT WAS
PREPARED TO PROVIDE HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE DEBTOR WITH
"ADEQUATE INFORMATION" (AS DEFINED IN SECTION 1125 OF THE BANKRUPTCY CODE) SO
THAT THEY CAN MAKE AN INFORMED JUDGMENT ABOUT THE PLAN. PERSONS OR ENTITIES
TRADING IN, OR OTHERWISE PURCHASING, SELLING, OR TRANSFERRING, SECURITIES OF THE
DEBTOR SHOULD NOT RELY UPON THIS DISCLOSURE STATEMENT FOR SUCH PURPOSES AND
SHOULD EVALUATE THIS DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSE
FOR WHICH THEY WERE PREPARED.
THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE CONSTRUED AS AN
ADMISSION OF ANY FACT OR LIABILITY, STIPULATION, OR WAIVER, BUT RATHER AS A
STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. NOR SHALL THE STATEMENTS SET FORTH
HEREIN BE USED AS EVIDENCE OR BIND ANY PARTY IN CONNECTION WITH THE
PISACRETA/TUCCI ACTION.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS INCLUDED
HEREIN FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN AND MAY NOT BE RELIED
UPON FOR ANY PURPOSE OTHER THAN TO MAKE A JUDGMENT WITH RESPECT TO, AND
DETERMINE HOW TO VOTE ON, THE PLAN.
THE DISCLOSURE STATEMENT SHALL NOT BE ADMISSIBLE IN ANY NON-BANKRUPTCY
PROCEEDING INVOLVING THE DEBTOR OR ANY OTHER PARTY, NOR SHALL IT BE CONSTRUED TO
BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES, OR OTHER LEGAL EFFECTS OF THE
LIQUIDATION OR PLAN AS TO HOLDERS OF CLAIMS AGAINST, OR INTERESTS IN, THE
DEBTOR.
DISCLAIMER CONCERNING BUSINESS PLANS, PROJECTIONS
AND OTHER FORWARD-LOOKING STATEMENTS
This Disclosure Statement includes "forward-looking statements" as that
term is used under the Securities Exchange Act of 1934, as amended ("Exchange
Act"). All statements other than statements of historical facts included in this
Disclosure Statement, including without limitation, statements under "Certain
Risk Factors to be Considered" and statements regarding the Debtor's, Farm
Stores'(R) or any other company's financial position, business strategy and
plans and objectives for future operations, including those found in the section
entitled "Business Plan and Projections," are forward-looking statements. The
forward-looking statements herein regarding Farm Stores(R) and the projected
financial performance of the combined reorganized Debtor have been prepared by
F.S. Management and its advisors. Although F.S. Management believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Certain of
the factors that could affect such forward looking statements are described in
Section XII, "Certain Risk Factors to be Considered".
EXECUTIVE SUMMARY
On January 14, 1999 (the "Petition Date")<F9> United Petroleum
Corporation, a Delaware corporation ("UPC" or the "Debtor") filed a petition for
relief under chapter 11 of title 11 of the United States Code (11 U.S.C. ss.ss.
101 et. seq.) (the "Bankruptcy Code"). On July 23, 1999 the Debtor filed its
second amended plan of reorganization (the "Plan"), which sets forth how claims
against and interests in the Debtor will be treated. This Disclosure Statement
describes certain aspects of the Plan, the Debtor's operations, significant
events occurring in the Debtor's Chapter 11 Case and other related matters. This
Executive Summary is intended solely as a summary of the distribution provisions
of the Plan and certain matters related to the Debtor's businesses. FOR A
COMPLETE UNDERSTANDING OF THE PLAN, YOU SHOULD READ THE DISCLOSURE STATEMENT,
THE PLAN AND THE EXHIBITS AND SCHEDULES THERETO IN THEIR ENTIRETY.
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<F9> All capitalized terms used herein but not defined herein shall have the
meanings attributed to such terms in the Plan.
Capitalized terms used in this Executive Summary and not otherwise
defined herein have the meanings ascribed to them in the Disclosure Statement
and the Plan.
The Plan is intended, among other things, to materially reduce the
Debtor's overall indebtedness and the related drain on the Debtor's cash flow
from servicing its debt obligations. As described in greater detail in the
Disclosure Statement, the Debtor is proposing the Plan to achieve changes in its
financial structure that it believes are necessary to alleviate the problems
caused by the Debtor's excessive debt levels and fixed charges (including its
obligations to make payments in respect of interest and dividends), to enable
the Debtor to continue to implement its revised business strategy and to assure
the Debtor's long-term viability. An important feature of the Plan is the
Debtor's contemplated merger with a chain of 92 walk in convenience stores, and
Debtor's acquisition of 10% of the equity in a chain of drive-thru stores, all
located in Florida and presently owned and operated by a group of related
entities doing business as "Farm Stores"(R).
Time is of the essence in order to effect the merger. The walk-in and
drive-thru Farm Stores(R) are currently beneficially owned by two different
entities, which are controlled by a Mr. Joe Bared and the Isaias family (see
"General information -- Farm Stores"). The Isaias family and Mr. Bared, however,
have entered into an agreement whereby Mr. Bared has the option, but only until
August 25, 1999, to purchase all of the interest held by the Isaias family.
Thus, if the Debtor is unsuccessful in consummating the Plan and acquiring the
Merger Financing by August 25, 1999, this option will expire and neither Bared,
nor the Debtor would have the right to acquire the Isaias's interest in the
business. To insure that it could satisfy the requirements under the Bankruptcy
Code regarding the length of notice that must be provided prior to a hearing on
the Disclosure Statement and confirmation of the Plan, the Debtor is proceeding
with soliciting votes on the Plan, prior to entering into the Merger Agreement
(which shall be in substantially the form attached to the Plan as Annex I) or
completion of its due diligence. Nevertheless, among other things, the Merger
Agreement contemplates the parties' need to complete due diligence and
conditions closing of the Merger on the parties' satisfaction with their due
diligence investigations.
The Plan has been carefully designed and structured to preserve the
going-concern value of the Debtor's business enterprise and the businesses of
Farm Stores(R) to be acquired by Debtor, materially enhance the Debtor's
operational viability on a prospective basis, channel and resolve all disputes
relating to certain existing and potential litigation, and create a mechanism
for the settlement of Securities Claims. Given the inability of the Debtor,
standing alone, to fund the achievement of such an outcome, the Plan includes
the acquisition of new businesses (as described above) and incorporates a
settlement with Infinity, pursuant to which Infinity's Claims against and
Interests in the Debtor will be restructured and all Securities Claims will be
channeled to a trust funded by Infinity and the Debtor.
Under the Plan, Claims against and Interests in the Debtor are divided
into Classes. Certain unclassified Claims, including Administrative Claims and
Priority Tax Claims, will receive payment in full in cash on or before the
Effective Date. All other Allowed Claims and Interests are divided into 8
classes and will receive the distributions and recoveries described in the table
below. This summary is qualified in its entirety by reference to the balance of
this Disclosure Statement and the provisions of the Plan, a copy of which is
attached hereto as Exhibit "A".
SUMMARY OF ANTICIPATED DISTRIBUTIONS UNDER THE PLAN<F1>
This summary of distributions under the Plan includes estimated
recoveries for certain classes of creditors of the Debtor. These estimates are
based, in whole or in part, on various assumptions and projections, including
among others: that the Merger with Farm Stores will be consummated; that the
businesses combined in the Merger will perform as well as is anticipated; that
the actual value of the stock issued in the reorganization will not be
significantly different from the value determined for it on the basis of
available financial and business information and assumptions used in estimating
its value; and that post-Merger UPC will have sufficient income to repay the
obligations of the Farm Stores' business acquired in the Merger, bank debt
incurred in connection with the Merger, and the obligations of UPC that arise
later. The assumptions and projections on which the estimates below are based
are subject to numerous risks and uncertainties, and actual values and recovery
may differ from these estimates. For a description of certain of these risks,
see " Section XII Certain Risk Factors to be Considered."
Class Description Treatment Under the Plan
Class 1 - Priority Non-Tax Claims Unimpaired
Estimated Allowed Amount: Pursuant to section 1124 of the Bankruptcy
Approximately $10,000 Code, all of the legal, equitable and
contractual rights of a holder of an
Allowed Priority Non-Tax Claim shall be
fully reinstated and retained as though
the Chapter 11 Case had never been filed.
Estimated Recovery: 100%
Class 2 - Infinity Secured Impaired
Estimated Allowed On the Effective Date the holder of the
Amount: $7,300,000 Infinity Secured Claim shall receive
70,000 shares of New UPC Preferred Stock,
in full satisfaction and release of the
Infinity Secured Claim.
Class 3 - Secured Claims Unimpaired
Estimated Allowed Amount: Pursuant to section 1124 of the Bankruptcy
Approximately $908,045 Code, all of the legal, equitable and
contractual rights of a holder of a
Secured Claim (other than an Infinity
Secured Claim) shall be fully reinstated
and retained as though the Chapter 11 Case
had never been filed.
Estimated Recovery: 100%
Class 4 General Unsecured Claims Unimpaired
Estimated Allowed Amount: Pursuant to section 1124 of the Bankruptcy
Approximately $250,000 Code, all of the legal, equitable and
contractual rights of a holder of an
Allowed General Unsecured Claim shall be
fully reinstated and retained as though
the Chapter 11 Case had never been filed.
Estimated Recovery: 100%
Class 5 - Debenture Claims Impaired
Estimated Allowed Amount: On account of and in full satisfaction of
Approximately $7,500,000 its Allowed Debenture Claim, the holder of
such a claim shall receive its Pro Rata
Share of 1,750,000 shares (35%) of New UPC
Common Stock.
Estimated Recovery: 87.9%
(based upon the valuation of the New UPC
Common Stock provided by F.S. Management,
see "Valuation of New UPC Common Stock")
Class 6 Preferred Equity Interests Impaired
Estimated Allowed Amount: On account of and in full satisfaction of
Approximately $13,800,000 its Allowed Preferred Equity Interest, the
holder of such an interest shall receive
its Pro Rata Share of 650,000 shares (13%)
of New UPC Common Stock.
Estimated Recovery: 17.3%
(based upon the valuation of the New UPC
Common Stock provided by F.S. Management,
see "Valuation of New UPC Common Stock")
Class 7 Common Equity Interests Impaired
Estimated Allowed Amount: On account of and in full satisfaction of
Approximately 30,565,352 Shares its Allowed Common Equity Interest, the
holder of such an interest shall receive
its Pro Rata Share of (i) 200,000 shares
(4%) of New UPC Common Stock, and (ii) 1/2
of any assets remaining in the UPC Trust
after all distributions have been made
under the Plan in respect of all
Securities Claims.
Estimated Value of Recovery: $754,000
(based upon the valuation of the New UPC
Common Stock provided by F.S. Management,
see "Valuation of New UPC Common Stock"),
plus 1/2 of remaining assets initially
contributed to UPC Trust
Class 8 UPC Securities Claims All UPC Securities Claims will be liqui-
Estimated Allowed Amount: dated pursuant to the ADR (annexed as
Zero Appendix I to the Plan) together with the
Infinity Securities. Each holder of an
allowed UPC Securities Claim shall
receive, on account of and in full
satisfaction and release of such
Securities Claim, a Distribution from the
UPC Trust, as provided for by the UPC
Trust Agreement and the ADR.
COMPROMISE AND SETTLEMENT WITH INFINITY PARTIES
The Plan is the result of protracted negotiations between the Debtor
and the Infinity Parties, which commenced approximately one year ago when the
Debtor encountered a working capital short fall and sought additional financing
from various sources, including Infinity. After reviewing the Debtor's financial
conditions and operations, Infinity concluded that it would only be willing to
provide the requested financing in conjunction with an overall restructuring of
the Debtor's capital and a final resolution of various contingent matters.
Without the loans made by Infinity in the approximate amount of $7.0 million in
contemplation of the Debtor's reorganization and the substantial concessions
being made by the Infinity Parties under the Plan, the Debtor would have been
unlikely to maintain its operations or to reorganize and would most likely be
forced to liquidate its assets - presumably for the sole benefit of the Infinity
Parties. See "Confirmation of the Plan - Requirements for Confirmation of the
Plan; Application of Section 1129(a)(7) of the Bankruptcy Code."
In addition to being the Debtor's largest unsecured creditor and holder
of preferred stock, the Infinity Parties hold mature claims secured by
substantially all of the Debtor's assets in the approximate amount of $7.3
million. Instead of exercising its right to foreclose on the Debtor's assets,
which would most likely result in there being no recovery to unsecured creditors
and Interest holders, the Infinity Parties have agreed, among other things, to
convert their entire secured claim of $7.3 million into equity, to allow for the
payment in full of allowed General Unsecured Claims, to allow for the
distribution of 4.0% of the equity of the reorganized Debtor to existing common
stockholders, to share pro rata approximately 35% of the equity of the
reorganized Debtor with existing holders of Debentures, to share pro rata
approximately 13% of the equity of the reorganized Debtor with existing holders
of Preferred Stock, to release any and all claims or causes of action that the
Infinity Parties may hold against the Debtor, and to contribute 200,000 shares
(4.0% of the equity in the reorganized Debtor) to the UPC Trust for liquidation
and payment of Securities Claims. See "The Plan - Compromise and Settlement
Between and Among the Debtor, the Infinity Parties and the UPC Trust" and
"Comparison of Rights in Securities to be Issued Under the Plan to Rights Held
in Prepetition Securities."
Among other things and as more fully disclosed in the Disclosure
Statement and the Plan, in consideration of the concessions made by the Infinity
Parties and to ensure the feasibility of the Debtor's reorganization, the Plan
provides for (i) the mutual release and compromise of any and all claims or
causes of action against one another by the Debtor, the Infinity Parties, and
their respective officers, directors, employees and agents and (ii) the
establishment of the UPC Trust and channeling injunction for the liquidation and
payment of all Securities Claims.
Infinity has been actively involved in the Debtor's efforts to
reorganize for several months. The Debtor initially intended to accomplish its
reorganization through a prepackaged bankruptcy. In that regard, the Infinity
Parties' involvement included, among other things initially drafting the
Debtor's Plan, Disclosure Statement, the ADR procedures and certain other
documents, in consultation with the Debtor's management and its professional
advisors at that time. In August, 1998, in connection with the refinancing of
the Debtor's secured debt, Infinity's counsel, White & Case LLP, was paid
$300,000 by the Debtor for legal fees incurred in connection with restructuring
the loans and for drafting the Plan, Disclosure Statement and other documents.
As the major stakeholder in this case, Infinity, through its counsel
has continued to be actively involved since the Petition Date in the Debtor's
efforts to successfully complete this chapter 11 case including, without
limitation, conducting due diligence with respect to the proposed merger
transaction, being actively involved in the negotiations and drafting of the
Merger Agreement and is actively involved in efforts to obtain the financing
necessary to close under the Merger Agreement.
SECURITIES CLAIMS AND THE UPC TRUST
All UPC Securities Claims and Infinity Securities Claims (as defined in
the Plan, Securities Claims include all non-derivative claims arising in
connection with the purchase, sale, exchange or issuance of a UPC security,
including without limitation, claims asserted in the Pisacreta/Tucci Action (but
only to the extent such Claims are not derivative claims) described under
"General Information-Legal Proceedings") will be settled and liquidated pursuant
to an alternative dispute resolution procedure (the "ADR," a true and correct
copy of which is attached to the Plan as Appendix II) and satisfied from the UPC
Trust, which is being funded by Infinity and the Debtor for the purpose of
paying Securities Claims.
Under the Plan, the UPC Trust shall assume full responsibility for the
liquidation and satisfaction of all Securities Claims. In particular, the
trustee of the UPC Trust (the "UPC Trustee"), whose appointment and terms of
compensation are subject to Bankruptcy Court approval, shall establish a
Securities Claims Resolution Facility that incorporates and adopts the ADR, for
the efficient and expeditious settlement and liquidation of all Securities
Claims.
The UPC Trust will be funded initially with, among other things,
200,000 shares of New UPC Common Stock, to be transferred by Infinity, and all
of the Debtor's causes of action for contribution or indemnity against any party
in connection with the Securities Claims other than the Infinity Parties, such
causes of action to be prosecuted by the UPC Trustee. See "The Plan -- Means for
Implementation of the Plan; Establishment and Funding of the UPC Trust."
Based on the Debtor's current assessment of the aggregate amount of all
Securities Claims and the value of the assets to be initially contributed to the
UPC Trust, the Debtor believes that the UPC Trust will be sufficiently funded to
pay all Allowed Securities Claims in full. In that regard, the Debtor believes
that the claims asserted in the Pisacreta/Tucci Action seek relief that is
derivative in nature, that belong to the Debtor's chapter 11 estate and that are
among the claims being resolved pursuant to the Settlement between the Debtor
and the Infinity Parties contained in Article XIV of the Plan. Such contention
is disputed by the plaintiff in the Pisacreta/Tucci Action. Any excess assets
from those initially contributed, pursuant to Sections 7.2 and 7.3 of the Plan,
held by the UPC Trust after satisfaction of all Securities Claims and related
expenses shall be allocated and distributed 50% to Infinity or its affiliates
and 50% to holders of currently issued and outstanding shares of Common Stock.
In order to give effect to the UPC Trust and make possible the
contribution of 200,000 shares of New UPC Stock by Infinity, upon confirmation
of the Plan and for so long as assets remain in the UPC Trust, any person who
has been, is, or may be a holder of a Securities Claim shall be enjoined from
taking any action against or affecting the Debtor or the Infinity Parties or
their respective assets and property with respect to such Securities Claim. In
the event that the assets of the UPC Trust are exhausted and there exists
additional unpaid Allowed Securities Claims or additional Securities Claims that
have not been resolved, then the channeling injunction will terminate as to the
Infinity Parties unless the Infinity Parties contribute additional funds to the
UPC Trust to enable the UPC Trustee to continue to perform their duties and pay
all Allowed Securities Claims in full.
Merger with Farm Stores
The centerpiece of the Plan is the Debtor's proposed merger ("Merger")
with a Florida based chain of walk-in convenience stores and Drive-thru
specialty retail stores operating under the tradename Farm Stores(R). The Debtor
has entered into a letter of intent and intends to execute that certain
agreement and plan of merger substantially in the form attached to the Plan as
Annex I (the "Merger Agreement") with F.S. Convenience Stores, Inc. ("FSCI").
Prior to consummation of the Merger Agreement, the assets of FSCI shall include
(a) a chain of 65 Farm Stores(R) walk-in convenience stores that sell gasoline
and 23 walk-in convenience stores that do not sell gasoline, (b) 10% of the
stock of Farm Stores Grocery, Inc., a Delaware corporation ("FSG") that will own
or lease a chain of 108 specialty grocery drive-through stores, and (c) a
royalty free license to use the Farm Stores(R) name and related trademarks.
Pursuant to the Merger Agreement, FSCI will merge with and into a newly
formed subsidiary of the Debtor ("UPC Merger Sub"). Upon consummation of the
Merger, (a) the former shareholder of FSCI (the "Farm Stores' Shareholder") will
receive 48% of the New UPC Common Stock, 50% of the New UPC Preferred Stock and
$3 Million; (ii) UPC Merger Sub and FSCI will borrow (either directly or by
assumption of debt incurred by FSCI in connection with the transaction) up to
$23 million ("Merger Financing"), secured by the Farm Stores(R) walk-in
convenience stores; (iii) FSCI will use some of the proceeds of the Merger
Financing to perform under an agreement to purchase for $17 million (x) all of
the interests not already held by FSCI in the Farm Stores(R) walk-in convenience
stores that sell gasoline (such that FSCI will own or lease 100% of Farm
Stores(R) walk-in convenience stores that sell gasoline); (y) 100% of 23 Farm
Stores(R) walk-in convenience stores that do not presently sell gasoline; and
(z) a 10% of the equity of Farm Stores Grocery, Inc. ("FSG"), a corporation
recently formed to own and operate 108 Farm Stores Express(R) drive-through
specialty grocery stores; (iv) UPC Merger Sub will license the Farm Stores(R)
name for use in connection with its walk in convenience stores from FSG, and (v)
UPC Merger Sub and FSG will enter into a Management Agreement, providing for UPC
Merger Sub to provide general, administrative, and management services to FSG
and for FSG to pay management fees to UPC Merger Sub therefor<F1>. Additionally,
during the first year, after the Merger, UPC Merger Sub may acquire up to an
additional 15% of the equity of FSG at the fixed amount of $1 million per 2%.
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<F1> Alternatively, management services may be provided through a separate
entity or other means. None of these alternatives will materially effect
the economics of the management agreement.
I. INTRODUCTION
United Petroleum Corporation (referred to herein alternatively as the
"Debtor" or "UPC"), the debtor and debtor in possession in the above-referenced
chapter 11 case (the "Chapter 11 Case"), submits this Second Amended Disclosure
Statement Pursuant to Section 1125 of the United States Bankruptcy Code with
Respect to the Second Amended Plan of Reorganization Under Chapter 11 of the
United States Bankruptcy Code for United Petroleum Corporation (the "Disclosure
Statement"). This Disclosure Statement is to be used in connection with the
solicitation of acceptances of the Second Amended Plan of Reorganization Under
Chapter 11 of the United States Bankruptcy Code for United Petroleum
Corporation, dated July 23, 1999 (the "Plan"), filed by the Debtor with the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). A copy of the Plan is attached hereto as Exhibit "A." UNLESS OTHERWISE
DEFINED HEREIN, TERMS USED HEREIN HAVE THE MEANING ASCRIBED THERETO IN THE PLAN
(SEE ARTICLE 1 OF THE PLAN ENTITLED "DEFINITIONS AND INTERPRETATIONS").
II. NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS
The purpose of this Disclosure Statement is to enable you, as a
creditor whose Claim is impaired under the Plan or as a stockholder whose Equity
Interest is impaired under the Plan, to make an informed decision in exercising
your right to accept or reject the Plan. See "Confirmation of the Plan --
Solicitation of Votes; Parties Entitled to Vote" and "Definition of Impairment."
THIS DISCLOSURE STATEMENT CONTAINS IMPORTANT INFORMATION THAT MAY BEAR
UPON YOUR DECISION TO ACCEPT OR REJECT THE PLAN PROPOSED BY THE DEBTOR. PLEASE
READ THIS DOCUMENT WITH CARE.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED
HEREIN.
On July 23, 1999, after notice and a hearing, the Bankruptcy Court
entered an order pursuant to section 1125 of the United States Bankruptcy Code,
11 U.S.C. ss. 101, et seq. (the "Bankruptcy Code"), approving this Disclosure
Statement (the "Disclosure Statement Order") as containing information of a
kind, in sufficient detail, and adequate to enable a hypothetical, reasonable
investor typical of the solicited classes of Claims against and Equity Interests
of the Debtor to make an informed judgment with respect to the acceptance or
rejection of the Plan (a true and correct copy of the Disclosure Statement Order
is attached hereto as Exhibit "B," and should be referred to for details
regarding the procedures for the solicitation of votes on the Plan).
APPROVAL OF THIS DISCLOSURE STATEMENT BY THE BANKRUPTCY COURT DOES NOT
CONSTITUTE A DETERMINATION BY THE BANKRUPTCY COURT OF THE FAIRNESS OR MERITS OF
THE PLAN OR OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED IN THIS
DISCLOSURE STATEMENT.
Each holder of a Claim or Equity Interest entitled to vote to accept or
reject the Plan should read this Disclosure Statement and the Plan in their
entirety before voting. No solicitation of votes to accept or reject the Plan
may be made except pursuant to this Disclosure Statement and section 1125 of the
Bankruptcy code. Except for the Debtor and its professionals, no person has been
authorized to use or promulgate any information concerning the Debtor, its
businesses, or the Plan other than the information contained in this Disclosure
Statement. You should not rely on any information relating to the Debtor, its
businesses, and the Plan other than that contained in this Disclosure Statement
and the Plan and the exhibits hereto and thereto.
After carefully reviewing this Disclosure Statement, including the
attached exhibits, 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
same to the address set forth on the ballot, in the enclosed return envelope so
that it will be actually received by the Debtor's tabulation agent, Logan &
Company, Inc., 615 Washington Street, Second Floor, Hoboken, New Jersey 07030 no
later than 4:00 p.m., Prevailing Eastern Time, on August, 20, 1999.
You may be bound by the Plan if it is accepted by the requisite holders
of Claims or Equity Interests, even if you do not vote to accept the Plan. See
"Confirmation of the Plan -- Solicitation of Votes; Vote Required for Class
Acceptance," "-- Requirements for Confirmation of the Plan," and "--
Confirmation Without Acceptance of All Impaired Classes."
TO BE SURE YOUR BALLOT IS COUNTED, YOUR BALLOT MUST BE ACTUALLY
RECEIVED NO LATER THAN 4:00 P.M., PREVAILING EASTERN TIME, ON August 20, 1999.
For a general description of the voting instructions and the name, address and
phone number of the person you may contact if you have questions regarding the
voting procedures, see "Confirmation of the Plan -- Solicitation of Votes."
Pursuant to section 1128 of the Bankruptcy Code, the Bankruptcy Court
has scheduled a hearing to consider confirmation of the Plan (the "Confirmation
Hearing") on August 24, 1999, at 3:00 p.m., Prevailing Eastern Time, in the
United States Bankruptcy Court, District of Delaware. The Bankruptcy Court has
directed that objections, if any, to confirmation of the Plan be filed and
served on or before 4:00 p.m. on August 20, 1999, in the manner described under
the caption, "Confirmation of the Plan -- Confirmation Hearing."
III. EXPLANATION OF CHAPTER 11
A. Overview of Chapter 11
Chapter 11 is the principal reorganization chapter of the Bankruptcy
Code. Pursuant to chapter 11, the debtor in possession attempts to reorganize
its business for the benefit of the debtor, its creditors, its stockholders, and
other parties in interest. The present chapter 11 Case commenced with the filing
by the Debtor of a voluntary petition for protection under chapter 11 of the
Bankruptcy Code on January 14, 1999. The Chapter 11 Case has been assigned Case
No. 99-88(PJW) by the clerk of the Bankruptcy Court.
The commencement of a chapter 11 Case creates an estate comprising all
the legal and equitable interests of the debtor in property as of the date the
petition is filed. Sections 1101, 1107, and 1108 of the Bankruptcy Code provide
that a debtor may continue to operate its business and remain in possession of
its property as a "debtor in possession" unless the bankruptcy court orders the
appointment of a trustee. In the present Chapter 11 Case, the Debtor has
remained in possession of its property and continues to operate its businesses,
as a debtor in possession. See "The Chapter 11 Case -- Commencement of the
Chapter 11 Case."
The filing of a chapter 11 petition also triggers the automatic stay
provisions of the Bankruptcy Code. Section 362 of the Bankruptcy Code provides,
among other things, for an automatic stay of all attempts to collect prepetition
claims from the debtor or otherwise interfere with its property or business.
Except as otherwise ordered by the bankruptcy court, the automatic stay remains
in full force and effect until the effective date of a confirmed plan of
reorganization.
The formulation of a plan of reorganization is the principal purpose of
a chapter 11 Case. The plan sets forth the means for satisfying the holders of
claims against and interests in the debtor. Unless a trustee is appointed, only
the debtor may file a plan during the first 120 days of a chapter 11 Case (the
"Exclusive Period"). However, section 1121(d) of the Bankruptcy Code permits the
court to extend or reduce the Exclusive Period upon a showing of "cause." After
the Exclusive Period has expired, a creditor or any other party in interest may
file a plan, unless the debtor has filed a plan within the Exclusive Period, in
which case, the debtor is given 60 additional days (the "Solicitation Period")
during which it may solicit acceptances of its plan. The Solicitation Period may
also be extended or reduced by the court upon a showing of "cause."
B. Plan of Reorganization
Although referred to as a plan of reorganization, a plan may provide
anything from a complex restructuring of a debtor's business and its related
obligations to a simple liquidation of the debtor's assets. In either event,
upon confirmation of the plan, it becomes binding on the debtor and all of its
creditors and equity holders, and the obligations owed by the debtor to such
parties are compromised and exchanged for the obligations specified in the plan.
In the present Chapter 11 Case, the Plan, as proposed by the Debtor, provides
for the continuance of the Debtor as a separate corporate entity in essentially
its current form, with all of the existing Equity Interests in the Debtor being
canceled, and new common stock being issued to the holders of certain Allowed
Claims and Interests. See "The Plan -- Classification and Treatment of Claims
and Interests." The Plan contemplates that the recoveries of creditors will be
based on the Debtor's going concern value (which will provide recoveries
substantially in excess of liquidation recoveries), and that the Debtor's
business will be continued as a viable business enterprise. See "Valuation of
the New UPC Common Stock."
After a plan of reorganization has been filed, the holders of claims
against and interests in a debtor are permitted to vote to accept or reject the
plan. Before soliciting acceptances of the proposed plan, 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 and Equity
Interests in the Debtor to satisfy the requirements of section 1125 of the
Bankruptcy Code in connection with the Debtor's solicitation of votes on the
Plan.
If all classes of claims and equity interests accept a plan of
reorganization, the bankruptcy court may confirm the plan if the court
independently determines that the requirements of section 1129 of the Bankruptcy
Code have been satisfied. See "Confirmation of the Plan -- Requirements for
Confirmation of the Plan." Section 1129 sets forth the requirements for
confirmation of a plan and, among other things, requires that a plan meet the
"best interests" of creditors test and be "feasible." The "best interests" test
generally requires that the value of the consideration to be distributed to the
holders of claims or equity interests under a plan may not be less than those
parties would receive if the debtor were liquidated pursuant to a hypothetical
liquidation occurring under chapter 7 of the Bankruptcy Code. Under the
"feasibility" requirement, the court generally must find that there is a
reasonable probability that the debtor will be able to meet its obligations
under its plan without the need for further financial reorganization. The Debtor
believes that the Plan satisfies all the applicable requirements of section
1129(a) of the Bankruptcy Code, including, in particular, the best interests of
creditors test and the feasibility requirement.
Chapter 11 does not require that each holder of a claim or interest in
a particular class vote in favor of a plan of reorganization in order for the
bankruptcy court to determine that the class has accepted the plan. See
"Confirmation of the Plan -- Solicitation of Votes; Vote Required For Class
Acceptance." Rather, a class of claims will be determined to have accepted the
plan if the court determines that the plan has been accepted by a majority in
number and two-thirds in amount of those claims actually voting in such class.
Similarly, a class of equity interests (equity securities) will have accepted
the plan if the court determines that the plan has been accepted by holders of
two-thirds of the number of shares actually voting in such class. In the present
case, only the holders of Claims or Equity Interests who actually vote will be
counted as either accepting or rejecting the Plan.
In addition, classes of claims or equity interests that are not
"impaired" under a plan of reorganization are conclusively presumed to have
accepted the plan and thus are not entitled to vote. See "Confirmation of the
Plan -- Solicitation of Votes; Definition of Impairment" and "Classes Impaired
Under the Plan." Accordingly, acceptances of a plan will generally be solicited
only from those persons who hold claims or equity interests in an impaired
class. A class is "impaired" if the legal, equitable, or contractual rights
associated with the claims or equity interests of that class are modified in any
way under the plan. Modification for purposes of determining impairment,
however, does not include curing defaults and reinstating maturity or payment in
full in cash on the effective date of the plan. Except for Classes 1, 3 and 4,
all classes of Claims and Equity Interests are impaired under the Plan, and thus
entitled to vote on the Plan.
The bankruptcy court may also confirm a plan of reorganization even
though fewer than all the classes of impaired claims and equity interests accept
it. For a plan of reorganization to be confirmed despite its rejection by a
class of impaired claims or equity interests, the proponent of the plan must
show, among other things, that the plan does not "discriminate unfairly" and
that the plan is "fair and equitable" with respect to each impaired class of
claims or equity interests that has not accepted the plan.
See "Confirmation of the Plan -- Cramdown."
Under section 1129(b) of the Bankruptcy Code, a plan is "fair and
equitable" as to a rejecting class of claims or equity interests if, among other
things, the plan provides: (a) with respect to secured claims, that each such
holder will receive or retain on account of its claim property that has a value,
as of the effective date of the plan, equal to the allowed amount of such claim;
and (b) with respect to unsecured claims and equity interests, that the holder
of any claim or equity interest that is junior to the claims or equity interests
of such class will not receive or retain on account of such junior claim or
equity interest any property at all unless the senior class is paid in full.
A plan does not "discriminate unfairly" against a rejecting class of
claims or equity interests if (a) the relative value of the recovery of such
class under the plan does not differ materially from that of any class (or
classes) of similarly situated claims or equity interests, and (b) no senior
class of claims or equity interests is to receive more than 100% of the amount
of the claims or equity interests in such class.
The Plan has been structured so that it will satisfy the foregoing
requirements as to any rejecting class of Claims or Equity Interests, and can
therefore be confirmed, if necessary, over the objection of any classes of
Claims or Equity Interests.
IV. SUMMARY OF THE PLAN
The following summary is intended only to highlight information
contained elsewhere in this Disclosure Statement. This summary is qualified in
its entirety by the more detailed information, the financial statements,
including the notes thereto, the projections of certain financial data and the
assumptions thereto, the pro forma information appearing elsewhere in this
Disclosure Statement, the Appendices hereto, and the other documents referenced
herein.
The centerpiece of the Plan, as discussed throughout this Disclosure
Statement, is the Merger of the business conducted under the Farm Stores(R)
tradename with and into the Debtor's business. The following table sets forth
the current holdings of each of the impaired Classes and the consideration they
will receive under the Plan (including the New UPC Preferred Stock), as well as
the current principal and interest of the outstanding debt and liquidation
preference and dividend arrearage of the preferred stock of the Debtor (unless
otherwise stated, the indicated percentage ownership is computed after the
consummation of the Merger):
- ------------------------------------------------------------- ---------------------------------- ------------------
Other
Principal and New UPC Common Stock Ownership Consideration
Interest Outstanding Post-Restructuring (2) In the
Before Restructuring (1) Restructuring
- ------------------------------------------------------------- ---------------------------------- ------------------
Restructuring Participant
Principal Interest Shares Percentage
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Debt Holders
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Infinity Secured Claim $7,000,000 $300,000 --------- --------- 70,000 New UPC
Preferred
Share(3)
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
6% Debentures $1,324,696 --------- 359,483 7.19
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
7% Debentures $3,549,120 --------- 963,126 19.26
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
18% Debentures $1,575,000 --------- 227,408(4) 4.55(4)
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Equity holders
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Series A Preferred Stock -------- -------- 552,212 11.04
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Series B Preferred Stock -------- -------- 97,788 1.96
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Common Stock holders -------- -------- 200,000(5) 4.00(5)
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
UPC Trust -------- -------- 200,000(4) 4.00(4)
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
FSCI Shareholder -------- -------- 2,400,000 48.00 70,000 New UPC
Preferred Shares
(3)(6)
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
Total 100% 5,000,000 100.00%
- ------------------------------ ----------------- ------------ --------------- ------------------ ------------------
(1) Assumes no conversion of Debentures or shares of Preferred Stock after the
Petition Date.
(2) After giving effect to the Merger
(3) Each share of New UPC Preferred Stock carries a liquidation preference in
the amount of $100.
(4) The distribution on account of the 18% Debentures excludes 200,000 shares
of New UPC Common Stock to be transferred to the New UPC Trust by Infinity
or its affiliates.
(5) The Common Stock holders and Infinity (or its affiliates) shall each be
eligible to receive 50% of the shares remaining in the UPC Trust after all
claims against the UPC Trust are satisfied in full and all expenses of the
UPC Trust are paid. See "The Plan -- Classification and Treatment of Claims
and Interests, and -- Creation of UPC Trust and Appointment of Trustee."
(6) The FSCI Shareholder receives all of its New UPC Common Stock and New UPC
Preferred Stock as consideration in the Merger.
1. Summary of the Terms of the Plan.
As set forth in this Disclosure Statement and in the accompanying
materials, the Plan provides for the following (in each case after giving effect
to the Merger):
(a) Conversion of Common Stock. The currently issued and
outstanding shares of Common Stock shall be exchanged for 200,000
shares of New UPC Common Stock, representing 4% of the shares of New
UPC Common Stock to be issued and outstanding upon effectiveness of the
Plan. See "Risk Factors to be Considered -- Risks Particular to the
Holders of Common Stock." Directors and executive officers of UPC own
5,433,762 shares of Common Stock, or approximately 17.8% (including
options to purchase 2,466,668 shares of Common Stock).
(b) Conversion of A-Note. The A-Note, which represents
$4,200,000 principal amount of indebtedness, shall be converted into
42,000 shares of New UPC Preferred Stock. The A-Note is secured by a
first lien on substantially all assets of the Debtor, Calibur and
Jackson, is guaranteed by Michael F. Thomas, UPC's President, has a
liquidation preference over all equity securities and unsecured debt
obligations, and is pari passu with the B-Note. The New UPC Preferred
Stock will be subordinate to all debts of the Debtor, as reorganized.
Each share of New UPC Preferred Stock carries a dividend rate of
approximately 9%. Such dividends will be cumulative and payable in
cash, or at UPC's option, in additional shares of New UPC Preferred
Stock. In addition, each share of New UPC Preferred Stock will have a
liquidation preference over the New UPC Common in the amount of $100
(plus cumulative unpaid dividends thereon), payable out of net proceeds
(after payments to all creditors) from any sale of the Debtor's assets.
Infinity is the holder of the A-Note. See "Risk Factors -- Risks
Particular to Holders of the A-Note."
(c) Conversion of B-Note. The B-Note, which represents
$2,800,000 principal amount of indebtedness, shall be converted into
28,000 shares of New UPC Preferred Stock. The B-Note is currently
secured by all of the same assets as the A-Note, is pari passu with the
A-Note, and has a liquidation preference over all equity securities and
unsecured debt obligations. Infinity is the holder of the B-Note. The
New UPC Preferred Stock issued in exchange for the B-Note will have the
same terms as the New UPC Preferred Stock issued in exchange for the
A-Note. See "Risk Factors to be Considered -- Risks Particular to
Holders of the B-Note."
(d) Conversion of Debentures. The principal amount of
Debentures, together with accrued and unpaid interest, of approximately
$6,448,816 and $1,049,694, respectively, at the Petition Date, shall be
converted into an aggregate of 1,750,000 shares of New UPC Common
Stock, representing approximately 35% of the shares of New UPC Common
Stock to be issued and outstanding upon effectiveness of the Plan.
Infinity, Seacrest and Fairway own approximately $1,175,000 aggregate
principal amount (88.7%) of the 6% Debentures, approximately $3,046,000
aggregate principal amount (85.8%) of the 7% Debentures, and 100% of
the 18% Debentures as of the Petition Date. The Debentures are
unsecured obligations of UPC, junior in right of payment and on
liquidation to the secured indebtedness of UPC and its subsidiaries,
and senior to the Preferred Stock and the Common Stock. See "Risk
Factors -- Risks Particular to Holders of Debentures." The expected
amount of principal and accrued interest due for each class of
Debenture at August 31, 1999, is presented below along with the number
of shares of New UPC Common Stock to be received per $1,000 of
principal and accrued interest and as a percentage of New UPC Common
Stock:
Class of Debentures
6% 7% 18% All
Principal Amount $1,324,696 $3,549,120 $1,575,000 $6,448,816
As of 1/14/99 Accrued Interest 97,070 532,507 420,117 1,049,694
---------- ---------- ----------- ----------
Total $1,421,766 $4,081,627 $1,995,117 $7,498,510
Number of shares of New UPC
Common Stock 359,483 963,126 427,408 1,750,000
Percent of fully diluted New
UPC Common Stock 7.19% 19.26% 4.55% 35.00%
(e) Conversion of Preferred Stock. Each share of Preferred
Stock shall be converted into approximately 55.34 shares of New UPC
Common Stock. In the aggregate, the Preferred Stock shall convert into
649,400 shares, representing 13%, of the New UPC Common Stock to be
issued and outstanding upon effectiveness of the Plan. Infinity,
Seacrest and Fairway own in the aggregate 7,918 shares (approximately
79.9%) of the Class A Preferred Stock, and no shares of the Class B
Preferred Stock, as of the Petition Date. The Preferred Stock is junior
in right of payment and on liquidation to the indebtedness of UPC and
its subsidiaries, and senior to the Common Stock. As of the Petition
Date, there was $9,912,000 in liquidation preference of the Class A
Preferred Stock and $1,833,000 in liquidation preference of the Class B
Preferred Stock. See "Risk Factors to be Considered -- Risks Particular
to Holders of Preferred Stock."
(f) Change in Composition of Board of Directors. The Plan
effectuates a change in the composition of the Board of Directors such
that the five members of the Board of Directors shall initially be
comprised of two designees of the current holders of Farm Stores,
consisting of Joe Bared and Carlos Bared, and two designees of the
holders of the Debentures, consisting of Messrs. Clark K. Hunt, and
Stuart J. Chasanoff and one independent member to be selected by the
foregoing members of the Board.
(g) Changes in the Certificate of Incorporation. UPC's charter
shall be amended to the extent necessary to implement the Plan, to
prohibit the issuance of nonvoting equity securities by UPC as required
by section 1123(a)(6) of the Bankruptcy Code, to opt out of Section 203
of the Delaware Generation Corporation Law ("Business Combinations with
Interested Stockholders"), and to restrict certain transfers of New UPC
Common Stock.
(h) Channeling of Securities Claims/Contribution of Shares to
the UPC Trust. All Securities Claims against UPC and the Infinity
Parties (e.g., claims arising in connection with the purchase, sale,
exchange or issuance of a UPC security, including without limitation,
claims asserted in the Pisacreta/Tucci Action described under "General
Information -- Legal Proceedings -- Pisacreta/Tucci", but only to the
extent such claims are not derivative claims) shall be enjoined and
channeled to a trust (the "UPC Trust") to be established pursuant to
the Plan and funded with, among other things, 200,000 shares of New UPC
Common Stock to be transferred by Infinity to the UPC Trust. The
channeling injunction and the UPC Trust shall terminate and holders of
Securities Claims that have been timely asserted shall be permitted to
assert such claims directly against the Infinity Parties if the UPC
Trustee notifies the Infinity Parties that the UPC Trust assets have
been expended and that additional Allowed Securities Claims exist or
that all Securities Claims have not yet been resolved and the Infinity
Parties fail to provide sufficient additional funds to the UPC Trust
within thirty (30) days of such notice. Any excess assets held by the
UPC Trust after satisfaction of all Securities Claims and related
expenses shall be allocated and distributed 50% to Infinity or its
affiliates and 50% to holders of currently issued and outstanding
shares of Common Stock. A putative class action lawsuit has been filed
by two Purchasers of the Debtor's common Stock, purportedly on behalf
of all stockholders who purchased shares of Common Stock during certain
periods in 1996 and 1997, against certain of the Infinity Parties and
certain other holders of the Debentures. The plaintiff alleges that the
defendants, in acquiring and disposing of Debentures, violated certain
provisions of the securities laws of the United States. The plaintiff
also alleges that the defendants breached a contract between the
defendants and the Debtor. Certain of the Infinity Parties have sued
the Debtor and asserted claims against the Debtor in such actions,
including, without limitation, claims for contribution and indemnity.
The Debtor believes that the claims asserted in the Pisacreta/Tucci
Action seek relief that is derivative in nature and that such claims
belong to the Debtor and may only be prosecuted or settled by the
Debtor. See "General Information -- Legal Proceedings --
Pisacreta/Tucci." In that regard, the Debtor has agreed to settle all
of its claims (including any derivative claims) against the Infinity
Parties on the terms set forth in the Plan. See "the Plan -- Compromise
and Settlement Between and Among the Debtor, the Infinity Parties and
the UPC Trust.)
(i) Termination of Outstanding Options and Warrants. Each
outstanding option, warrant or other right to acquire Common Stock of
the Debtor that is not exercised on or prior to the Effective Date of
the confirmation of the Plan will terminate and expire.
The applicable record date for purposes of determining which holders of
Debtor's outstanding Notes, Debentures, Preferred Stock and Common Stock are
entitled to vote on the Plan is July 22, 1999 (the "Record Date"). It is
important that the holders of Outstanding Notes, Debentures, Preferred Stock and
Common Stock read and carefully consider the matters described in this
Disclosure Statement, including, without limitation, all of the factors set
forth under the heading "Risk Factors to be Considered," and that such holders
respond promptly by returning their ballots to the Ballot Agent so that ballots
are actually received prior to the Voting Deadline.
Subject to limitations contained in the Plan, the Debtor also reserves
the right, in accordance with the Bankruptcy Code and subject to the consent of
the Infinity Parties and FSCI, to amend or modify the Plan at any time prior to
the entry by the Bankruptcy Court of the Confirmation Order. Under the
Bankruptcy Rules, such amendments or modifications may be approved by the
Bankruptcy Court at confirmation without resolicitation of the votes of the
members of any Class whose treatment is not adversely affected by the amendment
or modification. Any amendment or modification which adversely affects a Class
of Claims or Interests will require the resolicitation of votes from the holders
of Claims or Interests of any such affected Class, unless the amendment or
modification results in a Class of Claims or Interests not retaining or
receiving any property, in which case such Class will be deemed not to have
accepted the Plan, as amended or modified. The Plan provides that, in the event
that sufficient acceptances are not received from each Impaired Class, the
Debtor reserves the right to seek confirmation of the Plan over the objection of
such Class and to modify the Plan to provide treatment to the Class or Classes
not accepting the Plan necessary to meet the requirements of sections 1129(a)
and (b) of the Bankruptcy Code with respect to the rejecting Classes and any
other Classes affected by the modification.
2. Changes in Equity Ownership Effected by the Plan.
Implementation of the Plan will substantially change the current equity
ownership of UPC. The following table illustrates the equity ownership of UPC
before the Petition Date and the proposed equity ownership of UPC upon the
occurrence of the Effective Date by each class of debt or equity security that
will receive shares of New UPC Common Stock under the Plan.
- ------------------------------------------------------------------------ --------------------------------------
Common Stock Ownership New UPC Common Stock
Before Restructuring (1) Ownership Post-Restructuring (2)
- ------------------------------------------------------------------------ --------------------------------------
Restructuring Participant Shares Percentage Shares Percentage
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
6% Debenture holders -------- -------- 359,480 7.19
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
7% Debenture holders -------- -------- 963,116 19.26
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
18% Debenture holders -------- -------- 227,404(3) 4.55
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
Series A Preferred Stock -------- -------- 552,212 10.98
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
Series B Preferred Stock -------- -------- 97,788 2.02
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
Common Stock holders (4) 30,565,352 100% 200,000 4.00
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
UPC Trust -------- -------- 200,000 4.00
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
FSCI Shareholder 2,400,000 48.00
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
Total Shares 30,535,352 100% 5,000,000 100.00%
- -------------------------------------- --------------- ----------------- ---------------- ---------------------
(1) Assumes no conversion of Debentures or shares of Preferred Stock, and
excludes the New UPC Preferred Stock.
(2) After giving effect to the Merger.
(3) Excludes 200,000 shares of New UPC Common Stock to be transferred to the
New UPC Trust by Infinity or its affiliates.
(4) The Common Stock holders and Infinity (or its affiliates) shall each be
eligible to receive 50% of the shares initially contributed to the UPC
Trust that remain after all claims against the UPC Trust are satisfied in
full and all expenses of the UPC Trust are paid. See "The Plan --
Classification and Treatment of Claims and Interests, and -- Creation of
UPC Trust and Appointment of Trustee."
3. Other Significant Provisions in the Plan.
o The centerpiece of the Plan is Debtor's acquisition, by
merger, of the Farm Stores'(R) chain of 65 walk-in
convenience stores that sell gas and its acquisition by
purchase of (i) Farm Stores'(R) chain of 23 walk-in
convenience stores that sell do not presently sell gas
(the chain of 88 walk-in stores that do and do not
presently sell gas is called the "Walk-In Stores", and
(ii) a 10% interest in the Farm Stores' business
consisting of approximately 108 Farm Stores Express(R)
drive-through specialty grocery stores (the "Drive-Thru
Stores"). The Walk-In Stores and Drive-Thru Stores are
located in South and Central Florida and, together with
UPC's existing properties, will be the primary business
of the Debtor post-Merger.
o The Plan provides for a discharge and broad release of
UPC from all claims and causes of action that are held
by holders of Claims against and Equity Interests in
UPC.
o The Plan provides for the exclusion of the Debtor, Farm
Stores(R), and the Infinity Parties from all liability,
except for willful misconduct or gross negligence, for
any act or omission in connection with or arising out
of the solicitation of votes on, or their
administration of, the Plan or the property to be
distributed thereunder.
o The Plan provides for the rejection of all executory
contracts and unexpired leases of UPC, except for those
expressly assumed by UPC with Bankruptcy Court
approval.
o The Plan provides under certain circumstances for the
amendment or modification of the Plan and the right to
withdraw the Plan any time prior to the entry of the
Confirmation Order.
V. GENERAL INFORMATION
A. The Debtor
UPC is a holding company that has two operating subsidiaries: Calibur
and Jackson. Calibur's primary business activities consist of the operation of
retail car wash and automotive related service facilities, and Jackson's primary
business activities consist of the acquisition and development of oil and gas
properties. As of the date of this Disclosure Statement, Calibur operates eight
car wash facilities in Tennessee and Georgia and leases two facilities to an
independent operator in Georgia. Of these facilities, three have on-site
convenience stores that offer a variety of automotive products and snack foods,
beverages and sundries to customers. Four of the facilities sell gasoline,
diesel fuel and/or other petroleum products and five provide express lubrication
services. In addition, Calibur has two free standing express lubrication
locations<F2>. Jackson owns a seventy-five percent (75%) working interest in
sixteen oil and gas wells located in Pennsylvania, which is the subject of a
contract to sell. Jackson also has a mineral lease covering approximately 26,000
acres of real property located in central Kentucky, which Jackson presently
intends to market for sale.
- ---------------
<F2> In June, 1999, a third express lube center located in Knoxville, Tennessee
was sold by Caliber to Pinnacle Sales Company for the sum of $310,000.00.
The Debtor's offices are presently located at 2620 Mineral Springs
Road, Suite A, Knoxville, Tennessee 37917. The Debtor's telephone number is
(423) 688-6204.
B. Cash Collateral
In connection with the issuance of the A-Note and the B-Note, the
Company granted Infinity a security interest in substantially all of the
Company's assets, including, without limitation, all of the Company's cash. As a
result, section 363 of the Bankruptcy Code requires the Debtor to either obtain
Bankruptcy Court approval to use the cash collateral of Infinity or obtain
approval of an agreement with Infinity regarding the use of such cash. Without
access to and the ability to use Infinity's cash collateral, the Debtor could
not, among other things, meet its payroll, pay utility expenses, meet its
overhead, as well as make other payments necessary for its continued operation.
In that regard, on February 25, 1999, the Bankruptcy Court entered its order
(the "Cash Collateral Order") authorizing and approving the Debtor's agreement
with Infinity, under which, among other things, Infinity consented to the
Debtor's use of Infinity's cash collateral during the pendancy of the Chapter 11
Case and Infinity was granted a superpriority administrative expense equal to
the amount of Infinity's cash collateral expended by the Debtor.
C. Farm Stores
Farm Stores, Inc., the predecessor to the F.S. Partnerships, began its
convenience store operations (the "F.S. Business") in the late 1950's with the
opening of its first store in Miami-Dade County and the subsequent acquisition
of a portfolio of stores. Over time, Farm Stores, Inc. developed into a leading
Florida-based chain of stores. In 1990, Farm Stores, Inc.'s then owners
experienced financial difficulties due to a failed leveraged buyout attempt and
a difficult industry-wide operating environment. Later that year, Farm Stores,
Inc. filed a petition for relief under chapter 11 of the Bankruptcy Code. Over
the next two years, the company restructured its business through the shutdown
of approximately 40 underperforming stores and the re-negotiation of many
leases. In September 1992, the current owners, led by Joe Bared ("Bared") and
the Isaias family ("Isaias") purchased assets of Farm Stores, Inc. and brought
it out of bankruptcy. The F.S. Business was organized into three related and
affiliated partnerships, REWJB Investments, REWJB Gas Investments and REWJB
Dairy Plant Associates (collectively, the "F.S. Partnerships"). Each of the F.S.
Partnerships has two partners, one of which is owned by Bared (the "Bared
Corporations") and the other of which is owned by Isaias (the "Isaias
Corporations"). Since acquiring the F.S. Business, the F.S. Partnerships have
solidified their position as independent convenience store operators and
established the Farm Stores(R) trademark as one of the leading brand names in
Florida. The F.S. Partnerships have built a strong operational team and, as
recognized by the Greater Miami Chamber of Commerce, reconfigured the F.S.
Business into a profitable and growing enterprise.
In 1999 Bared and Isaias entered into an agreement (the "Toni Option")
under which the Bared Corporations have the option to purchase 100% of the
equity currently held by the Isaias Corporations in the F.S. Partnerships. Thus,
upon consummation of the Toni Option, Bared would have effective control over
100% of the F.S. Business.
Currently, the F.S. Business consists of 92 Walk-In Stores (including 4
Walk-In Stores that are affected by casualties, that the Reorganized Debtor may
elect to rebuild or return to FSG) and 108 Drive-Thru Stores. All of the Walk-In
and Drive-Thru Stores are located in South and Central Florida. The State of
Florida offers a number of favorable demographic fundamentals that benefit a
strong retail operation. Florida's population, the 11th largest in the nation,
has grown at a compounded annual rate of 1.6% from 1992 to 1996, which is 60%
over the comparable U.S. growth rate. Further, the F.S. Business benefits from
operating efficiencies as stores are largely clustered in key Florida counties,
including Dade Broward, Hillsborough, Highlands, Polk, Palm Beach and Sarasota,
all of which are highly developed markets with significant barriers to entry
under local zoning, concurrency and other laws. Thus, the F.S. Business also
benefits from the relative scarcity of attractive real estate making it
difficult for competitors to gain a foothold.
In October, 1998, the F.S. Business sold the good will of its dairy
business in an arms' length transaction to Velda Farms, Inc. ("Velda"), and
entered into a 10 year supply agreement providing for Velda to supply the F.S.
Business' requirements of milk, ice cream, and certain other products (the
"Velda Agreement"). The F.S. Business believes that the prices provided for in
the Velda Agreement are as favorable as could be obtained from a comparable
vendor. The proceeds of this sale, and the assets of the dairy plant operation,
are excluded from the Merger; however, the reorganized Debtor and FSG will
remain obligated to perform under the Velda Agreement.
D. F.S. Convenience Stores, Inc.
At or before the effective time of the Merger, and upon the
consummation of the Toni Agreement, the reorganized Debtor (i) will be the
successor to the F.S. Partnerships interest in any and all assets associated
with the Walk-In Stores (ii) will hold a 10% equity interest in FSG, a recently
formed corporation which will be the successor to the F.S. Partnerships interest
in any and all assets associated with the Drive-Thru Stores, and (iii) will hold
a royalty-free license to use the "Farm Store" name and all related trademarks
(clauses (i) - (iii) hereinafter collectively referred to as the "FSCI Assets").
E. Walk In Stores
Farm Stores operates 92 Walk-In Stores, including four that are not
currently operating (the "Casualty Stores") due to natural disaster, and which
are currently at different stages of reconstruction. The reorganized Debtor will
have the right to rebuild these Casualty Stores with its own funds, or to return
the Casualty Stores to FSG. The Walk-In Stores include two formats: (i) 23
Walk-In Stores without gasoline operations ("Non-gas Stores"), and (ii) 69
Walk-In Stores with gasoline operations ("Gas Stores"), only 13 of which are
branded. For the year ended August 30, 1998, the Walk-In Stores had revenues of
$116,739,000 and store-level operating income of $4,902,000.
An average of approximately 63,000 merchandise customers visit the
Walk-In Stores per day. The Walk-In Stores are typically located in
free-standing buildings with distinctive and recognizable interior and exterior
designs. The average store size is approximately 2,300 square feet, with a range
of 620 square feet to 3,100 square feet. The Walk-In Stores generally have ample
parking facilities for quick shopping and are located in neighborhood areas, at
major intersections or on main thoroughfares, in shopping centers, or on other
sites where they are highly visible and accessible. Of the 92 Stores, 55 are
open 24 hours while the remaining 37 Stores offer extended hours. Each Store
carries an average of 2,500 to 3,500 SKU's. All Walk-In Stores offer cigarettes,
beer, soft drinks and dairy products. With an operating history dating back to
the 1970's, the Walk-In Stores have established a customer base because they are
well situated, carry a wide variety of merchandise and have a good reputation
for products and service.
Sources of non-food and non-gas income include money orders (all
Walk-In Stores), food stamps (all Walk-In Stores), public pay phones (73 Walk-In
Stores), phone cards (81 Walk-In Stores), lottery tickets (90 Walk-In Stores),
and lotto (91 Walk-In Stores). These services bring in additional income to the
Walk-In Stores and serve to increase customer traffic, impulse buying and store
patronage. The Walk-In Stores have a strong presence as a money order vendor in
Florida. Money orders generate a significant source of income since many of the
Walk-In Stores are located in high demand neighborhoods. The Walk-In Stores have
established a customer base for money orders for both overseas remittance and
traditional domestic uses. If the Debtor were to operate the money order
business as a principal, it could generate higher profits from the Walk-In
Stores on more favorable clearing terms.
Farm Stores currently offers deli services in only 14 Walk-In Stores
and branded fast food in only three Walk-In Stores, as Blimpie franchisees.
Several well-known fast food operators have approached management of the F.S.
Partnerships to open branded outlets at the Walk-In Stores.
Management of the F.S. Partnerships anticipates that the reorganized
Debtor could significantly enhance revenues and profits by expanding fast food,
particularly branded fast food offerings, and selling other higher margin items
in the Walk-In Stores. Currently, only the Gas Stores accept credit cards. The
13 branded Gas Stores accept privately labeled gasoline cards, and none of the
Walk-In Stores accept debit cards. Expanding the Walk-In Stores' payment options
could enhance the Walk-In Stores' competitive position.
The Gas Stores have a particularly high merchandise sales component, at
53%, reflecting the strength of the Gas Stores' inside traffic. Management of
the F.S. Partnerships have not emphasized gasoline operations at the Walk-In
Stores. Only 13 of the Walk-In Stores offer branded gasoline products, and 23 of
the Walk-In Stores do not currently offer gasoline. Only 14 Gas Stores offer
pay-at-the pump services. Many of the Gas Stores have the capacity to add more
pumps and increase these Gas Stores' gasoline revenues. Management of the F.S.
Partnerships believes that upgrading the Gas Stores' gasoline equipment
(pay-at-the-pump) and branding can increase the Gas Stores' profits,
particularly by increasing the volume of premium gasoline sold. In 1998, average
per store gasoline sales at an unbranded fuel store was approximately $700,000,
whereas a branded fuel store had average sales of $2 million. Average annual
fuel gallons were approximately 620,000 per unbranded store and 1.8 million per
branded store. Many of the national gasoline companies have sought to brand the
Walk-In Stores. Branded outlets may also increase customer traffic and generate
higher merchandise revenues.
F. Drive-Thru Stores
The F.S. Partnerships operate 108 Drive-Thru Stores located throughout
South and Central Florida. The Drive-Thru Stores utilize a patented full-service
double drive-through concept that has become well known to consumers in its
markets. While the Drive-Thru Stores differ in many respects from typical
convenience stores, there are some operational similarities. For the year ended
August 30, 1998, the Drive-Thru Stores had revenues of $67.1 million and
store-level operating income of $4.0 million.
Immediately prior to the consummation of the Merger, the operating
assets and liabilities of the Drive-Thru Stores (other than the underlying real
estate) will be contributed to FSG. Among the assets being contributed to FSG is
the ownership of the Farm Stores(R) name and related trademarks, and the patent
for the double-drive through building design. FSG will license the Farm
Stores(R) name and related trademarks to the reorganized Debtor under a
royalty-free license. The equity ownership schedule and the financial
information throughout this Disclosure Statement assume that the above
transaction has been completed.
With 108 stores at present, the F.S. Partnerships are the first and
only large-scale operator of drive-through grocery stores. The use of
drive-through formats to deliver products and services to consumers has
experienced dramatic growth. First popularized by fast food restaurants, the
format has been adopted by banks, dry cleaners, drug stores, ice cream parlors,
fresh coffee shops and video rental stores. The growth of drive-through is a
natural competitive response to consumer preferences for convenience, reduced
transaction times and safety.
Drive-Thru Stores are currently located in 9 counties in southern and
central Florida. The stores are located in free-standing buildings, are situated
at highly visible and accessible sites, on highly traveled thoroughfares,
generally with driveways large enough to permit cueing of at least 10 vehicles.
Of the 108 stores, 48 are open 24 hours while the remaining 60 stores offer
extended hours. Drive-Thru Stores are distinguished by their innovative building
design, the distinct "wing" canopies and the friendly dairy cow logo. Over the
last several years, the F.S. Partnerships have fine-tuned and standardized the
Drive-Thru Store prototype that it will use for all future store expansion. The
prototype design is 756 square feet in size; utilizes a prefabricated building
and custom store fixture package; and incorporates the distinctive winged
canopies and Farm Stores(R) imaging found in all Drive-Thru Stores.
The Drive-Thru Stores seek to offer consumers a convenient, safe and
friendly way to access grocery merchandise staples at value prices. The
Drive-Thru Stores are intended to compete only indirectly with traditional
convenience stores. Rather, Drive-Thru Stores are intended to capture "fill-in"
purchases of grocery staples which consumers require in between trips to the
supermarket. Drive-Thru Stores' target customers are the same individuals within
a household, typically middle- to upper-income parents, who do the household's
grocery shopping at supermarkets. Management of the F.S. Partnerships believe
that it is necessary to compete on convenience, location and service, rather
than price alone. Drive-Thru Stores' merchandising strategy differentiates them
from convenience stores through a variety of means, including drive-through
service; an emphasis on dairy products; its premium Farm Stores(R) branded
products; and its reasonable consumer price points. Convenience stores, in
contrast, have target customers that are overwhelmingly less-affluent males, and
their merchandising and imaging is generally much different than that of
Drive-Thru Stores.
Drive-Thru Stores carry approximately 1500 SKU's, compared with 2,500
to 3,000 SKU's at a typical convenience store and over 40,000 at a modern
supermarket. The Express Store prototype utilizes 756 square feet of space,
while convenience stores are typically 2,000 to 3,000 square feet. Drive-Thru
Stores derive 32% of their revenues from dairy items, compared to 4% for a
typical convenience store.
Drive-Thru Store locations are typically one-third acre in size, and
located on primary roads having two curb cuts and preferably no fixed median.
Drive-Thru Stores are manufactured to specifications and transported by truck to
the site for final improvements. A standard Drive-Thru Store requires $200,000
to $225,000 to develop, including prefabricated building, equipment, site
improvements and beginning inventories. Land, if owned, costs an additional
$200,000 to $250,000. FSG will also seek to remodel its older Drive-Thru Stores,
which generally experience a material increase in sales after remodeling.
G. Directors and Officers
1. Existing Officers and Directors.
The following table sets forth the name, age and position of each
current director and executive officer of the Debtor and amount of Common Equity
Interests of UPC held by each:
- ----------------------------------------- --------- ---------------------- -------------------------
Name and Address Age Position Common Equity Interests
- ----------------------------------------- --------- ---------------------- -------------------------
Michael F. Thomas 46 CEO, President and 4,162,548<F3>
2620 Mineral Springs Road Director 13.6%
Suite A
Knoxville, TN 37917
Dwight S. Thomas 46 Secretary, Treasurer 396,384<F4>
2620 Mineral Springs Road and Director 1.3%
Suite A
Knoxville, TN 37917
Walter L. Helton 65 Director 118,000<F5>
c/o Tennessee Tech University less than 1%
P.O. Box 5062
Cookeville, TN 38505
Steven Bauer Director 150,000<F6>
less than 1%
Eugenio (Rolando) Martinez 76 Director 179,000<F4>
Apt. 106 1821 Jefferson less than 1%
Miami Beach, FL 33139
Antonio Julio Gonzalez Gimenez Director 150,000<F4>
Av. Diaz Moreno Edif. El Juncal less than 1%
Piso 3, Officina 33
Valencia, Edo - Carobabo Venezuela
L. Douglas Keene, Jr. 45 Executive Vice 281,830<F5>
2620 Mineral Springs Road President and CFO less than 1%
Suite A
Knoxville, TN 37917
* Michael F. Thomas and Dwight S. Thomas are cousins. There are no other family
relationships between any directors or executive officers of the Debtor.
<FN>
<F3> Consists of 2,329,214 shares held directly and currently exercisable
options to purchase 1,833,334 shares.
<F4> Consists of 60,050 shares held directly and currently exercisable options
to purchase 333,334 shares.
<F5> Includes currently exercisable options to purchase 50,000 shares.
<F6> Includes currently exercisable options to purchase 150,000 shares.
<F5> Consists of 31,831 shares held directly and currently exercisable options
to purchase 250,000 shares.
</FN>
2. Existing Officer & Director Compensation.
Directors: Inside directors do not receive any additional compensation
for their services as a director. Outside directors receive $1,000 for each in
person meeting attended, plus reimbursement of travel expenses and $500 for each
telephonic board meeting.
Officers: Michael Thomas has a written employment contract with UPC
dated September 18, 1996. The contract has a five year term and, among other
things, provides for an annual salary of $400,000, incentive compensation, stock
options, a fee for guaranteeing certain company obligations, commissions with
respect to certain transactions, automobile allowance, club dues, medical
insurance and life and disability insurance coverage. Additionally, the contract
provides a severance benefit to Mr. Thomas equal to 2.99 years of his base
salary in the event he is terminated without cause or as a result of a change in
control. In the third quarter of 1997, as a result of the termination of two
leases UPC had with Michael Thomas, Mr. Thomas' salary was reduced to $300,000
per year. Additionally, as a result of the Debtor's financial difficulties and
at the request of Infinity, in the fall of 1998, Mr. Thomas' salary was further
reduced by agreement of the parties. Presently, Mr. Thomas receives a salary
from UPC in the amount of $125,000 per year, plus a monthly automobile allowance
of $500.00, a monthly gasoline allowance of $250.00 and a monthly insurance
allowance of $900.00. As management of the post-Merger Debtor will likely be the
responsibility of the current management of FSCI, it is unclear what Mr.
Thomas's role will be after the Effective Date of the Plan. It is anticipated,
however, that a consensual resolution will be reached, the terms of which will
be disclosed before the Confirmation Date.
L. Douglas Keene, Jr. has a written employment contract with UPC dated
September 18, 1996. The contract has a five year term, and among other things,
provides for an annual salary of $120,000, incentive compensation, stock
options, commissions with respect to certain transactions, automobile allowance,
club dues, medical insurance and life and disability insurance. Additionally,
the contract provides a severance benefit to Mr. Keene equal to 2.99 years of
his base salary in the event he is terminated without cause or as a result of a
change in control. As a result of the Debtor's financial difficulties and at the
request of Infinity, in the fall of 1998, Mr. Keene's compensation was reduced
by agreement of the parties. Presently, Mr. Keene receives a salary of $100,000
per year, plus a monthly automobile allowance of $500.00. As management of the
post-Merger Debtor will likely be the responsibility of the current management
of FSCI, it is unclear what Mr. Keene's role will be after the Effective Date of
the Plan. It is anticipated that Mr. Keene and the Reorganized Debtor will enter
into an agreement providing for Mr. Keene's continued employment by the
Reorganized Debtor at his current salary through January 31, 2000 with his
association with Reorganized Debtor after such date to be determined at a later
time. It is expected that such arrangement will be in lieu of his current
agreement with the Debtor.
3. Proposed Directors.
The following is a list of the director names proposed to be elected
pursuant to the Plan to serve as directors upon the Effective Date of the Plan
which list may be modified at or prior to the Confirmation Hearing:
Name and Address Age
Joe Bared 57
Carlos E. Bared 31
Clark K. Hunt 33
1601 Elm Street, Suite 4000
Dallas, TX 75201
Stuart J. Chasanoff 33
1601 Elm Street, Suite 4000
Dallas, TX 75201
Following the Effective Date, the compensation of directors will be the
same as presently exists. The proposed directors may be changed at or prior to
the Confirmation Hearing. It is anticipated that a fifth director will be
appointed by mutual agreement of the foregoing four members of the Board after
the Effective Date.
Proposed Director Biographies
Joe Bared: Jose P. "Joe" Bared, Chairman, Chief Executive
Officer, and President. Mr. Bared, 57 years old, was born in Havana, Cuba in
1941 and arrived in the United States in 1960. He graduated from the University
of Miami in 1964 with a degree in mechanical engineering. In 1967, he founded
The Bared Company, Inc., which grew to become one of the top 50 mechanical
construction companies in the United States with annual revenues of $58 million.
In three separate transactions from 1991 to 1993, the principal operating
divisions of The Bared Company were sold to company managers.
In 1992, Mr. Bared led an investor group which purchased the
assets of Farm Stores out of bankruptcy. He has served as CEO of the Company
since the purchase. Together with his management team, Mr. Bared has led a
significant turnaround in the profitability of the Company. From 1970 to 1999,
Mr. Bared was a director of Republic Banking Corporation of Florida, where he
served on various board committees, including the loan committee, executive
committee and audit committee. The bank grew during that time from $17 million
to $1.5 billion in assets and, prior to its sale to Union Planters Bank this
year, was the largest independent bank in the State of Florida. In February
1999, Republic completed its initial public stock offering and trades on the
NADSAQ under the symbol "RBCF." Mr. Bared has been a Trustee of the University
of Miami since 1978. He is also a member of the Board of Overseers of the
Sylvester Cancer Center of the University of Miami. He is actively involved with
several professional associations including the American Bankers Association and
the National Association of Convenience Stores. Civic memberships include
service as an advisor to the Florida Department of Professional Regulation
(appointed by the Governor of Florida in 1979 and serving for nine years),
director of the Leukemia Foundation of South Florida, and cabinet member of the
United Way.
Carlos Bared: Chief Financial Officer, Vice-President-Finance.
Mr. Bared, 31 years old, attended Loyola University in New Orleans and graduated
with a BBA degree in finance. He earned his MBA degree in 1995 from the
University of Miami. Mr. Bared joined the Company in August 1997. From 1992 to
1997, he was the President and Chief Financial Officer of the remaining
operations of the Bared Company, Inc., an electrical and mechanical engineering
contracting firm. He was the President of the Construction Financial Management
Association (CFMA) from 1994 to 1997 and was a director of CFMA from 1993 to
1997. Mr. Bared is a director of the non-for-profit Miami Children's Museum, and
a founder and vice president of the non-for-profit Network Miami, Inc. He has
been an advisory board member of the Miami-Dade County Commission's Business
Impact Committee since 1995.
Clark Knoebel Hunt: President of Hunt Financial Group, L.L.C.,
a Dallas, Texas based financial services concern. Through Hunt Financial, Mr.
Hunt is responsible for the management of investment funds with assets in excess
of $300,000,000. Mr. Hunt is also involved in venture capital investor, Hunt
Capital Group, real estate and mining conglomerate, Hunt Midwest Enterprises,
and Hunt Sports Group. Hunt Sports Group is the management company responsible
for overseeing the Hunt family's investments in the Kansas City Chiefs of the
National Football League, the Chicago Bulls of the National Basketball
Association and two franchises in the newly launched Major League Soccer. Clark
K. Hunt has a connection to Infinity in that Infinity is a Nevis, West Indies
Corporation advised by HW Partners, L.P., a Texas limited partnership, the
general partner of which is HW Finance, L.L.C., a Texas limited liability
company whose managers include Clark K. Hunt.
Stuart J. Chasanoff: In 1996, Mr. Chasanoff (a 1990 cum laude
graduate of the Fordham University School of Law, and a 1987 graduate of the
University of Virginia), joined H.W. Partners, L.P., as Senior Vice President
and in-house corporate counsel, involved with investment companies and corporate
mergers and acquisitions. For the preceding seven years, Mr. Chasanoff was an
associate corporate attorney with White & Case's New York office, dealing with
mergers/acquisitions, corporate reorganizations and financial services.
Additionally, he served as in-house counsel at PepsiCo., Inc. for two years,
affecting mergers and acquisitions.
4. Post Effective Date Officers and Compensation.
Debtor presently anticipates that after the Effective Date, Mr. Joe
Bared and Mr. Carlos Bared will serve as CEO and CFO, respectively. The terms of
Mr. Joe Bared's and Mr. Carlos Bared's (son of Joe Bared) employment after the
Effective Date has not yet been finalized, but is expected to be on terms
similar to those they presently have with Farm Stores. Presently, Mr. Joe Bared,
receives an annual salary of $372,000, plus an automobile lease and insurance,
health and life insurance and other benefits generally made available to Farm
Store Employees. Mr. Carlos Bared presently receives an annual salary of
$150,000, plus an automobile and insurance allowance, health and life insurance
and other benefits generally made available to Farm Store Employees
H. Insider Relationships and Transactions
Transactions involving Michael F. Thomas. During 1997, the Company sold
a number of retail facilities to Mr. Thomas, the Company's President and Chief
Executive Officer.
One location (Farragut) was sold for $1,140,000 (it had an appraised
value of $1,100,500). This location was declared in default by its lender
shortly before the sale and the Company determined that it was not able to
refinance the location. Mr. Thomas had guaranteed this obligation on behalf of
the Company.
The second location (Cookeville) was sold for $879,000 (it had an
appraised value of $961,500). This location had been operating at a cash flow
loss to the Company prior to its sale and the Company was unable to refinance
the mortgage on this location such that the location would contribute to the
cash flow of the Company. The Board therefore determined that it was in the best
interests of the Company to sell the location. Mr. Thomas had guaranteed this
obligation on behalf of the Company.
A third location (Murfreesboro) was transferred to Mr. Thomas in
exchange for Mr. Thomas's assumption and repayment of the debt on the location,
for which he was a guarantor. The Company had received a notice of foreclosure
on this location and the Board determined that it was in the best interests of
the Company to sell this location.
A fourth location (Knoxville) was sold to Mr. Thomas for $300,000 in
order to raise working capital for the Company. This location consisted only of
a lease of the land and buildings occupied by the store and was under
environmental remediation with an estimated cost of $50,000, which Mr. Thomas
assumed. There was no debt on this location.
The Company also transferred a piece of unimproved real estate located
in Knoxville to Mr. Thomas in exchange for Mr. Thomas' assumption of the debt on
the location, for which he was a guarantor. The property had been acquired from
Exxon for approximately $125,000 in 1995. The outstanding debt on the property
was approximately $138,000 and Mr. Thomas paid approximately $150,000 for the
property including the assumption of the debt.
During the third quarter of 1997, the Company sold a location (Oak
Ridge) to a non-affiliated local petroleum distributor in order to repay a loan
in the amount of $300,000 to Mr. Thomas and to raise additional capital. The
sale enabled the Company to pay off the existing first mortgage from
NationsBank, pay off the note to Mr. Thomas and raise approximately $144,548 in
working capital. The location continues to be operated by the Company as the
transaction was in the form of a sale/lease back. The Company entered into a ten
year lease with the non-affiliated distributor with monthly payments of $8,804.
At the option of the Company, the lease could have been canceled after the first
six months and the Company had the option to repurchase the store during the
first year at a purchase price of $950,000, and during the second year at a
purchase price of $1,000,000. By mutual consent between landlord and company the
lease was terminated in May of 1999.
During the third quarter of 1997, the leases of two locations that were
being leased from Mr. Thomas for a monthly rental of $27,000, were canceled by
mutual agreement between the Company and Mr. Thomas as a result of the Company's
failure to pay 1996 and 1997 property taxes, which had caused loans owed by Mr.
Thomas related to the properties to be in default. The two locations produced a
combined annual cash flow of approximately $100,000, and Mr. Thomas agreed to a
reduction of his annual compensation by $100,000 in exchange for the
cancellation of the leases. The lease payments on these properties, included on
the income statements among general and administrative expenses, amounted to
approximately $177,000 in 1997 and $356,000 in 1996, and the Company had not
paid $91,796 in property taxes for 1996 and 1997 that Mr. Thomas assumed. In
other lease transactions with Mr. Thomas, the Company rented, under
month-to-month operating leases, certain vehicles. Expenses related to these
transactions were approximately $25,000 and $45,000 in 1997 and 1996,
respectively.
During the third quarter of 1997, the Company transferred an Exxon
distributorship contract to TCS Systems, Inc., ("TCS"), a corporation controlled
by Mr. Thomas and engaged in the manufacturing and distribution of items related
to the Company's automotive subsidiary. Upon the expiration of the letter of
credit posted by the Company in favor of Exxon in connection with the contract,
Exxon required that the letter of credit be renewed and increased from $100,000
to $200,000. Because the Company was unable to obtain such letter of credit, the
contract was transferred to TCS, which continues to make available to the
Company gasoline for $0.01 per gallon above the wholesale price available to
TCS, plus freight charges. Prior to the confirmation, it is anticipated that a
consensual resolution will be reached regarding the nature of this contract.
On July 1, 1997, the Company entered into a ten year agreement with
TCS, to purchase exclusively, in areas served by TCS, its gasoline inventories
at a price of $.01 per gallon above the wholesale price available to TCS plus
freight charges. Aggregate purchases of gasoline under this agreement during
1997 were approximately $989,000 and $525,000, respectively (no sales were made
under the agreement in 1996). In 1998, 1997 and 1996, transactions between the
Company and TCS included equipment sales and certain ongoing construction
activities conducted for the Company by TCS. Equipment sales and construction
activities totaled approximately $258,500, $323,271 and $182,603, in 1998, 1997
and 1996, respectively. Prior to confirmation, it is anticipated that a
consensual resolution will be reached regarding the nature of this contract.
The above-referenced transfers of Company properties and assets to Mr.
Thomas were analyzed and approved by UPC's Board of Directors, Chief Financial
Officer and accounting department. In order to ensure that the transactions were
fair and equitable to the Company, an assumption agreement was entered into
between the Company and Mr. Thomas on July 3, 1997. The agreement provided,
among other things, that Mr. Thomas would assume or pay the following: (i) a
note payable to Pennzoil in the approximate amount of $219,829, (ii) the
Pennzoil Unearned Discount in the amount of $200,000, (ii) a note payable to
Coffman Oil Company, Inc. in the approximate amount of $25,406 (iv) a note
payable to Sun Trust Bank in the approximate amount of $389,387, (v) a note
payable to First American Bank in the approximate amount of $140,000, (vii) real
estate taxes in the approximate amount of $85,529 and (viii) pay cash to the
Company in the sum of $300,000. As a result of the divestitures and the
assumption of numerous debts of the Company, the Company experienced a loss on
the sales of approximately $22,966.27. These transactions decreased the
liabilities of the Company by approximately $1,137,935. As of August 19, 1998,
these assumptions had been completed.
In August 1998, Mr. Thomas guaranteed the payment of indebtedness of
the Company to Infinity under the A-Note referred to in Management's Discussion
and Analysis of Financial Condition and Results of Operations. In fiscal 1997
and 1996, the Company paid Mr. Thomas fees for acting as guarantor on Company
indebtedness of $81,280 and $98,682 (one percent of the amount guaranteed).
Additionally, in 1998. the Company paid rent in the approximate amount of
$20,000 to Mr. Thomas prior to relocating its corporate offices to their current
location.
Transactions involving Dwight S. Thomas. During 1997, the Company sold
a location (Cookeville) to Dwight S. Thomas, the Company's Secretary and a
member of the Company's Board of Directors. The purpose of the sale was to raise
working capital. The location was sold for $516,000 (it had an M.A.I. appraised
value of $536,000) and resulted in net proceeds to the Company of approximately
$152,385. The location was in need of capital improvements, including
approximately $80,000 worth of environmental updates of underground petroleum
storage tanks necessary to meet 1998 standards. In exchange for the sale, Dwight
Thomas agreed to the cancellation of his employment contract with the Company
dated December 2, 1996.
Transactions involving Farm Stores. Following the Merger, the
reorganized Debtor will be involved in several affiliated transactions involving
Farm Stores and its affiliates. Principally among these will be the Management
Agreement and the License Agreement between the reorganized Debtor and FSG.
The Management Agreement will contemplate that the exchange for the
Management Fees (as such term is defined in the Management Agreement) the
general and administrative personnel and related expenses of FSG will be
transferred to the reorganized Debtor, and that the reorganized Debtor will
manage the operations of FSG<F7>. The Management Agreement involves significant
potential conflicts of interest, and includes indemnity and exculpation
provisions. The reorganized Debtor shall have the right to terminate the
Management Agreement upon short notice, and the Directors appointed to the UPC
Board by Farm Stores shall abstain in considerations of such a termination. Upon
such a termination, it is expected that the management personnel that the Debtor
hired from Farm Stores will become the management of FSG.
- -----------------
<F7> Alternatively, management services may be provided through a separate
entity or other means. None of these alternatives will materially effect
the economics of the management arrangement.
The License Agreement allows the reorganized Debtor to continue to use
the Farm Stores name and related trademarks for the Walk-In Stores without
payment of royalties.
Under the Purchase Agreement, the reorganized Debtor may purchase up to
15% of the equity of FSG within one year after the Effective Date, at $1 Million
per 2% of such equity.
FSG will lease the real estate underlying nine (9) of its Drive Thru
Stores from an affiliate of Bared, such leases to be on market terms.
It is expected that the management and administrative personnel for the
reorganized Debtor will occupy the facility presently occupied by the F.S.
Partnerships' administrative personnel. These premises will be owned by an
affiliate of the FSCI Shareholder. The reorganized Debtor would assume
responsibility for the costs of operating this facility, including but not
limited to maintenance, security, taxes, equipment rentals and insurance, but
would not otherwise pay rent. However, the FSCI Shareholder expects to market
this property, and upon its sale, the reorganized Debtor would have to relocate
to other premises.
I. The Restructuring
1. Background and Reason for Commencing the Chapter 11 Case.
In 1996, the Debtor undertook a business strategy of growing through
acquisitions. In order to fund anticipated acquisitions, the Debtor, in a series
of private placement offerings, issued convertible debentures in the approximate
principal amount of $27,500,000. The anticipated acquisitions, however, did not
take place as a result of the Debtor's inability to identify suitable
acquisition candidates on acceptable terms, and the Debtor then used a portion
of the proceeds of the offerings to fund a drilling program. Shortly after the
completion of the foregoing private placement, the price of the Debtor's stock
began to decline precipitously. Based upon its investigation, the Debtor
concluded that the decline was brought about by certain holders of the
Debentures short selling the Debtor's stock. The only parties actually
identified by the Debtor as having short sold the Debtor's stock, and who
acknowledged their short-selling activities to the Debtor were Mantel
International Investments, Ltd. and Lake Management, LDC. Certain parties have
asserted that the Infinity Parties short sold the Debtor's stock. The Infinity
Parties have repeatedly denied that they short sold the Debtor's stock and
Debtor presently has no information to support a contrary conclusion.
Subsequently, the Debtor suffered significant cash losses when amounts
advanced to underwriters and consultants (in order to fund the repurchase of
shares of the Debtor's common stock and to prevent the disorderly liquidation of
a large block of stock held by such groups) were not utilized as expected or
repaid to the Debtor. See General Information Legal Proceedings; TAJ/National."
Notwithstanding management's efforts, the Debtor's revenues were
insufficient to satisfy the Debtor's obligations. In April 1997, the Debtor
restructured the debentures, exchanging a substantial portion of such debentures
for shares of Preferred Stock, and borrowed additional funds for working capital
needs. Despite these efforts, the Debtor was still unable to generate sufficient
revenues to satisfy its obligations. The Debtor's results of operations,
combined with the potential conversion of the Debentures and Preferred Stock
depressed the price of the Debtor's Common Stock and adversely affected the
Debtor's ability to raise additional needed capital. In the second quarter of
1998, two holders of Calibur's mortgage notes in the outstanding principal
amount of approximately $2,500,000 declared the notes in default and demanded
payment in full. These notes, as well as Calibur's remaining mortgage notes,
were refinanced in June and August of 1998 through a line of credit provided by
Infinity which matured on January 1, 1999. The Debtor's management and Board of
Directors have determined that the continuing viability of the Debtor requires
the conversion of a substantial portion of its indebtedness and preferred stock
to common equity by means that can only be implemented in chapter 11.
2. Rationale of the Restructuring and the Merger.
The Debtor first filed for chapter 11 relief in order to achieve
changes in its financial structure, reducing the Debtor's excessive
debt levels and fixed charges (including its obligations to make
payments in respect of interest and dividends), to enable the Debtor to
continue to implement its revised business strategy and to help assure
the Debtor's long-term viability. The Debtor had hoped that it could
continue as a viable concern if it were able to (a) substantially
reduce its debt service and dividend obligations, (b) eliminate
miscellaneous existing and potential litigation, and (c) create an
appropriate capital structure. In that regard, on February 16, 1999 the
Debtor filed its initial plan and disclosure statement which
contemplated a stand alone plan of reorganization. However, prior to
holding a hearing to consider approval of the initial disclosure
statement, it became apparent that without a dramatic increase in
revenues, the Debtor would be unsuccessful in meeting its debt service
and operating obligations, even with the reduced debt levels and
capital structure proposed in the original plan.
During the pendency of the Chapter 11 Case, Infinity was approached
regarding the possibility of combining a substantial portion of the
F.S. Business with that of the Debtor's. Infinity recognized the
potential synergy that could be created by a merger of the F.S.
Business with that of the Debtor's and began preliminary due diligence
in an effort to determine whether such a business combination would in
deed benefit the Debtor. As evidenced by the reorganized Debtor's
financial statements (prepared by F.S. Management, and attached hereto
as Exhibit E) the merger is designed to achieve significant savings and
advantages, such that the value of the combined entity is significantly
greater than the value of UPET and FSCI standing separately.
The Merger Agreement provides for the merger of FSCI with and into UPC Merger
Sub, a newly created wholly owned subsidiary of the Debtor. Pursuant to the
Merger Agreement:
(a) the Debtor and FSCI, with the assistance of Infinity, undertake to
obtain up to $23 million of secured financing (the "Merger Financing")
to be secured by, the Walk-In Stores,
(b) FSCI undertakes that it will own, immediately prior to the
consummation of the Merger, (i) all of the interests relating to the
Gas Stores currently held by the Bared Corporations, (ii) a royalty
free license for the use of the Farm Stores(R) name and related
trademarks, and (iii) subject to its receipt of $17 Million in net
proceeds from the Merger Financing, FSCI will exercise the Toni Option,
such that FSCI shall purchase from Isaias Corporations for $17 Million
(x) all remaining interests in the Walk-In Stores; and (y) ten percent
(10%) of the issued and outstanding capital stock of FSG, and
(c) FSCI's shareholder will receive, upon consummation of the Merger,
(i) 48% of the New UPC Common Stock, (ii) $7 Million principal amount
(50% of the authorized and outstanding class) of New UPC Preferred
Stock, and (iii) $3 Million in cash.
After the Merger, the reorganized Debtor shall own 100% of the equity interests
relating to the Walk-In Stores and a 10% interest in FSG.
In connection with the Merger, the following material agreements will come into
effect or remain in effect, as noted:
(a) The general and administrative personnel of the FS Partnerships
will become employed by the reorganized Debtor , which will enter into
the Management Agreement (to be filed as a Plan Document).
(b) The reorganized Debtor and FSG will enter into a royalty free
license allowing the reorganized Debtor to use the Farm Stores brands
and trademarks.
(c) FSG and Reorganized Debtor will remain obligated to perform under
the Velda Agreement.
(d) FSG will lease the real estate underlying certain of the Drive-Thru
Stores from an affiliate of Bared.
Time is of the essence in order to effect the Merger. As discussed above, the
F.S. Business is currently owned by both Bared and Isaias (see "General
Information -- Farm Stores"). However, pursuant to the Toni Option, which must
be consummated by August 25, 1999, Bared has the ability to acquire Isaias's
interest in the F.S. Business. Thus, if the Debtor is unsuccessful in
consummating the Plan and acquiring the Merger Financing by August 25, 1999, the
Toni Option will expire and neither Bared, the Debtor nor UPC Merger Sub would
have the right to acquire the Isaias's interest in the F.S. Business. To insure
that it could satisfy the requirements under the Bankruptcy Code regarding the
length of notice that must be provided prior to a hearing on the Disclosure
Statement and confirmation of the Plan, the Debtor is soliciting votes on the
Plan prior to finalizing and executing the Merger Agreement and prior to the
completion of its due diligence. Nevertheless, among other things, the Merger
Agreement contemplates the Debtor's (and FSCI's) need to complete due diligence
and conditions closing of the Merger on the parties' satisfaction with their due
diligence investigations and the satisfaction or waiver of the conditions
precedent to closing set forth in the Merger Agreement.
3. Merger Financing.
Closing under the Merger Agreement and consummation of the Plan are
conditioned upon the Debtors and FSCI's ability to obtain $20 million to $23
million of financing on acceptable terms. To date, the merger financing has not
been obtained. The Debtor, Infinity Parties and FSCI and their respective
financial advisors are working to and are hopeful that they will be able to
obtain the necessary financing on acceptable terms and that the closing under
the Merger Agreement can occur by the August 25, 1999 deadline. If, however,
sufficient merger financing on acceptable terms cannot be obtained or, if
obtained, cannot be closed by August 25, 1999, the Merger Agreement may not
close and the Plan may never be consummated.
J. Legal Proceedings
1. NASDAQ Allegations.
In 1997, NASDAQ alleged that the Debtor (a) had entered into various
consulting agreements with the sole purpose of expanding investor interest in
the Debtor's shares, which arrangements are said to have led to a deterioration
of stockholder value, (b) facilitated and pursued manipulative transactions in
the Debtor's stock, and (c) violated various other NASDAQ rules. Despite the
Debtor's vigorous response and objection to NASDAQ's allegations, NASDAQ
delisted the Common Stock from the NASDAQ SmallCap Market in December 1997. In
the one year prior to the stock being delisted, the stock had a high closing
price of $.65625 and a low closing price of $.0625
2. TAJ/National.
In March of 1996, the Debtor was approached by Ronald Berkowitz, a
securities promoter in Miami, Florida affiliated with Strategic Holdings
Corporation ("Strategic"). Among other things, Berkowitz represented that
Strategic could raise substantial capital for the Debtor in private placement
transactions that would not adversely affect the market price of the Debtor's
common stock. Shortly thereafter, Berkowitz introduced the Debtor to Wilbur
Jurdine ("Jurdine"), the president and principal shareholder of TAJ Global
Equities, Inc. ("TAJ"). Among other things, Jurdine represented that TAJ had the
ability to make a market in the Debtor's common stock. Subsequently, the Debtor
issued the Debentures in the aggregate face amount of approximately $27.5
million in a series of substantially similar private placement transactions
arranged by Strategic. Shortly after the foregoing private placement in early
1997, the price of the Common Stock began to fall sharply. Believing that the
lower prices were not justified, and in an effort to stabilize the market in the
shares, the Debtor's Board of Directors authorized a share buy-back program,
which was never successfully implemented. In connection with this program, the
Debtor deposited some of the proceeds of the Debenture sale with TAJ for use if
and when purchases were desired. At that time, the Debtor had engaged TAJ to act
as the Debtor's underwriter for a planned offering of Common Stock.
TAJ, without the Debtor's knowledge or consent, purchased over 3
million shares of the Debtor's stock from its own customers when the price of
the shares began to fall. Those purchases were initially made through the TAJ
trading account apparently maintained by TAJ for its own trading activities. The
shares were subsequently transferred to the account of Strategic for which TAJ
had a power of attorney. Strategic, which had assisted the Debtor in connection
with the sale of the Debentures and which had a consulting agreement with the
Debtor, contends that it did not authorize such transaction and that it did not
know they had taken place.
In order to settle its account with National Financial Services Corp.
("National"), in late August and early September of 1996, TAJ began trying to
liquidate its holdings of the Debtor's common stock by selling such stock to
TAJ's customers. This additional selling activity created downward pressure on
the price of the Debtor's stock however, and TAJ found itself unable to pay or
otherwise clear its account with National as the then current price for the
Debtor's stock was less than the amount at which TAJ acquired the 3 million
shares. When TAJ and Strategic were unable to pay for the shares they had
acquired, TAJ and National, TAJ's clearing broker, demanded payment from the
Debtor, threatening to summarily liquidate the shares and thereby transform the
orderly market in the Debtor's Common Stock into a disorderly market, an action
which would have damaged the interests of the Debtor's stockholders. In an
effort to prevent such consequences, the Debtor paid for the shares.
In March 1997, the Debtor commenced a civil action styled United
Petroleum Corporation v. TAJ Global Equities, Inc., et al (the "TAJ Action")
against TAJ, Mr. Wilbur Jurdine (a principal of TAJ) ("Jurdine") and National,
in the United States District Court for the Eastern District of Tennessee (the
"Tennessee Federal Court"). In it, the Debtor seeks compensatory and punitive
damages arising from a conspiracy to engage in a course of misconduct intended
to defraud the Debtor, for conversion of the Debtor's property, and under
theories of unjust enrichment, breach of fiduciary duty and other causes of
action.
By Order dated April 22, 1999 (the "April 22 Order") the Tennessee
Federal Court dismissed the TAJ Action with respect to TAJ and Jurdine for
failure to effect service of process on such entities. Also in the April 22
Order, the Tennessee Federal Court directed the Debtor to show cause why the TAJ
Action should not be dismissed as well.
The Debtor moved for reconsideration of the April 22 Order by Motion
dated April 30, 1999. By Order dated May 24, 1999, the Tennessee Federal Court
vacated the April 22 Order and reinstated in full the TAJ Action.
The Debtor believes that its claims and causes of action in this
litigation have merit; however, this matter is in its earliest stages, and the
timing, amount and likelihood of any recovery for the Debtor are impossible to
predict at this time. Additionally, even if the Debtor prevails in the TAJ
Action and obtains an award of money damages against one or more of the
Defendants therein, it is unclear whether the Debtor would be able to
successfully enforce and collect upon such a judgment against these parties. The
Debtor expects that any proceeds realized in the TAJ Action will be used either
to fund ongoing operations or to reduce the Debtor's principal and interest
obligations under its secured borrowing facility. In any event, if the Plan is
not consummated, however, it is unlikely that the Debtor will have the
wherewithal to prosecute the action.
3. Strategic.
On October 6, 1998, the Debtor was sued by Strategic Holdings
Corporation of Miami, Florida. The suit, styled Strategic Holdings Corporation
v. United Petroleum Corporation, was filed in the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County, Florida. The action seeks damages
of approximately $550,000 arising from the Debtor's alleged breach of an
agreement. The Debtor believes the claims are without merit. As of the Petition
Date, the time for the Debtor to answer or otherwise respond had not occurred.
If Strategic's claim are determined to have merit, Strategic would have a
General Unsecured Claim.
4. Ishmael.
In June of 1997, the Debtor was sued by Kevin Ishmael, a former
employee, alleging that the Debtor had dismissed him improperly. Ishmael
obtained a final judgment against the Debtor for back pay and damages totaling
$54,422.03. The Debtor has also been ordered to reinstate the employee. This
matter has been resolved by the payment of the back pay and damages.
5. Unifirst.
In May of 1997, the Debtor was sued by Unifirst, Inc. ("Unifirst"), a
supplier of work uniforms for breach of contract. During the pendancy of the
suit, counsel for the Debtor became terminally ill and died. During that period,
counsel for Unifirst obtained a default judgment against the Debtor in the
amount of $72,844.22. The Debtor then obtained new counsel and petitioned the
court to set aside the default judgment. The Debtor believes it has valid
defenses to Unifirst's Claims. However, if Unifirst obtains a judgment, its
claim would be a General Unsecured Claim.
6. In re United Petroleum.
On May 18, 1998, an involuntary bankruptcy petition, styled In re
United Petroleum Corporation d/b/a Jackson-United Petroleum Corporation and
Calibur Systems, Inc. was filed in the United States Bankruptcy Court in the
Eastern District of Tennessee by three preferred stockholders of the Debtor, Dan
Dotan, Ben Golan and Shemulik Zeitoni. This petition was never served on the
Debtor, and the petitioners' counsel of record subsequently withdrew and was not
replaced. On July 28, 1998, the Debtor filed a motion to dismiss the petition
for lack of standing. On September 10, 1998, the plaintiff requested that the
court dismiss the petition and on that date the court entered an order
dismissing the case.
7. Pisacreta/Tucci.
In March 1997, a putative class action lawsuit (the "Pisacreta Action")
was filed by John Pisacreta, a purchaser of the Debtor's Common Stock, in the
Tennessee Federal Court, purportedly on behalf of all purchasers who purchased
shares of Common Stock during the period of May 1, 1996 through January 16,
1997. This suit was filed against Ronald Berkovitz, Infinity Investors Limited,
Dan Dotan, Fairway Capital Limited, Lake Management LDC, Laurel Angela
MacDonald, Seacrest Capital Limited and Mohamed Ghaus Khalifa as discussed more
fully below. In or around October 1997, Mohamed Ghaus Khalifa and Dan Dotan were
dismissed from the Pisacreta Action. In the lawsuit, the plaintiff alleges that
the defendants, in acquiring and disposing of certain of the Debentures,
participated in a fraudulent and manipulative scheme in violation of certain
provisions of the securities laws of the United States. The plaintiff also
alleges that the defendants committed fraud and deceit under common law and
breached a contract between the defendants and the Debtor. The defendants filed
a motion to dismiss the complaint for failure to state a claim upon which relief
can be granted. The Tennessee Federal Court granted the motion in part,
dismissing one of the two federal securities law claims, as well as the claim
for common law fraud. Following a July 16, 1999 hearing before the United States
Magistrate Judge for the United States District Court for the Eastern District
of Tennessee at Knoxville, an order was entered denying John Pisacreta's request
for class certification.
In November 1997, Lisa Tucci, a purchaser of the Debtor's Common Stock
and the daughter of John Pisacreta, filed a putative class action lawsuit (the
"Tucci Action") in the Tennessee Federal Court against Clark K. Hunt ("Hunt"),
purportedly on behalf of all persons and entities who purchased Common Stock
from May 1, 1996 through January 16, 1997. The lawsuit was based on factual
allegations identical to those set forth in the Pisacreta Action, described
above. The plaintiff claims that Hunt is the controlling person of certain of
the purchasers of the Debentures and is secondarily liable under the securities
laws of the United States for the violations alleged in the Pisacreta Action.
In January 1998, the defendant filed a motion to dismiss for failure to
state a claim or alternatively to dismiss the complaint for improper venue. In
April 1998, the Tennessee Federal Court dismissed the Tucci Action for improper
venue. In May 1998, the plaintiff filed a notice of her intent to appeal the
court's ruling to the United States Court of Appeals. After the appeal was filed
in the Tucci Action, the plaintiff in the Pisacreta Action filed a motion to
amend his complaint to add Hunt as a defendant under the theory of controlling
person liability. The motion was ultimately granted and Hunt was added as a
defendant in the Pisacreta Action. The Debtor believes that the appeal in the
Tucci Action has been abandoned and that the order dismissing that matter has
become final.
In December 1998, Hunt answered the complaint in the Pisacreta/Tucci
Action and impleaded the Debtor as a third-party defendant, alleging that the
Debtor is liable for any claims of the plaintiffs under theories of indemnity
and contribution. Thereafter, the Tennessee Federal Court entered an agreed
order permitting Infinity, Fairway, and Seacrest to assert similar causes of
action against the Debtor. Pursuant to order of the Tennessee Federal Court
dated June 3, 1999 the plaintiff's motion to sever the third party claims
asserted against the Debtor from the claims asserted against the defendants in
the Pisacreta/Tucci Action was granted.
These parties' claims for indemnification and contribution rest, in the
first instance, upon provisions in the Subscription Agreements wherein the
Debtor covenanted to indemnify and hold harmless the Infinity Parties in the
event the Debtor breached any of the provisions of the Subscription Agreements.
While the Debtor vigorously disputes that it has committed any such breach, the
Infinity Parties have alleged that the Debtor made certain misrepresentations
regarding use of proceeds to induce the Infinity Parties to execute the
Subscription Agreements. Additionally, the Infinity Parties allege that to the
extent Pisacreta ultimately succeeds on his claim that the Subscription
Agreements were non-compliant with Regulation S, the Debtor is liable to
indemnify the Infinity Parties for damages arising therefrom. Infinity's claims
in this regard stem from the contention that compliance with exemptions to
registration is the obligation of the issuer/seller of the securities, not of
the Infinity Parties.
The Debtor denies that it has any obligation for indemnity or
contribution to the Infinity Parties in connection with the Piscreta/Tucci
Action. However, if the Infinity Parties succeed in their claims for indemnity
and contribution against the Debtor, the Debtor would ultimately be liable for
all or part of any award rendered in favor of the Plaintiffs in the Pisacreta
Action.
Pisacreta currently has articulated three separate claims pending in
the Tennessee Federal Court: (i) alleged violations of the Securities and
Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder;
(ii) breach of contract; and (iii) controlling person liability against Clark K.
Hunt under Section 20(a) of the 1934 Act for the purported violations of Section
10(b) by Infinity. Investors Limited ("Infinity"), Fairway Capital Limited
("Fairway") and Seacrest Capital Limited ("Seacrest").
With respect to claims arising under Section 10 (b) 5 of the 1934 Act,
Pisacreta's claim for market manipulations are based upon allegations that
Infinity, Seacrest and Fairway converted their debentures and thereafter sold
their holdings of the Debtor's Stock in such a way as to cause an artificial
inflation in the price of the Debtor's Stock. The Infinity Parties have asserted
that Pisacreta lacks standing to assert claims under Section 10(b) against
Infinity, Fairway and Seacrest and that he did not rely on statements of any of
the Defendants in the Pisacreta Action in purchasing securities of the Debtor.
Assuming that they prevail in the foregoing defense, the Infinity Parties
believe that the lack of liability for Infinity, Seacrest and Fairway will
similarly dispose of the "controlling person" claim against Clark K. Hunt.
Pisacreta's breach of contract claim is based on alleged breaches of
the Subscription Agreements entered into by and between the Debtor and each of
the defendants in the Pisacreta Action (except for Clark K. Hunt). Pisacreta's
claims in this regard are largely predicated upon allegations that Fairway and
Seacrest are not true offshore entities, such that these parties'
representations in the Subscription Agreements regarding compliance with
Regulation "S" were false. In addition, Pisacreta asserts (and the Tennessee
Federal Court has ruled) that Pisacreta and all holders of the Debtor's Common
Stock are third-party beneficiaries of the Subscription Agreements.
The Infinity Parties assert that, even if Pisacreta is a third-party
beneficiary under the Subscription Agreements (a point the Infinity Parties
dispute and expect to appeal), Pisacreta lacks standing to sue the Infinity
Parties thereunder because the Debtor -- from whom Pisacreta's rights derive --
has previously released Infinity, Seacrest and Fairway. Finally, the Infinity
Parties vigorously dispute the proposition that Infinity, Fairway and Seacrest
are not offshore entities.
Finally, the Debtor believes that the relief sought in the causes of
action presently asserted by the plaintiff in the Pisacreta/Tucci Action is
derivative in nature and that such claims properly belong to the Debtor. The
Debtor believes that the securities law claim asserted in the Pisacreta/Tucci
action is not premised on unique harm or injury to any particular stockholder,
but rather, is based on the argument that the defendants' conduct improperly
diluted the interests of all stockholders. The breach of contract claim is based
on the Infinity Parties alleged breach of a contract with the Debtors, not the
plaintiffs. As a result, the Debtor believes that the claims asserted in the
Pisacreta/Tucci Action belong to the Debtor's chapter 11 estate and that the
plaintiffs are stayed from prosecuting the claims. The Pisacreta/Tucci Plaintiff
disputes Debtor's characterization of its claims as derivative in nature and
believes that the claims asserted in the Pisacreta/Tucci Action are direct
claims and not derivative. There can be no certainty that a Court will agree
with the Debtor's characterization. Perhaps more importantly, based on the
Debtor's assessment of the value of the claims asserted in the Pisacreta/Tucci
Action, the Debtor believes that such claims are appropriately resolved pursuant
to the settlement contained in Article XIV of the Plan between the Debtor and
the Infinity Parties.
On February 4, 1999, the Debtor commenced an action in the Bankruptcy
Court to stay the Tennessee Litigation, and for a determination of whether the
claims asserted in such action are derivative in nature. After briefing and a
hearing on February 22, 1999, the Bankruptcy Court ruled that it would "not
enjoin [the plaintiff]...from pursuing the Tennessee Litigation," but that it
would "issue a very modified injunctive order," restricting the prosecution of
the Tennessee Litigation to (i) continued prosecution of plaintiff's motion to
sever the debtor from the Tennessee Litigation, (ii) continued prosecution of
plaintiff's motion to compel production of documents and (iii) continuing
plaintiff's efforts to take the deposition of Mr. Clark Hunt. At the February
25, 1999 hearing the Judge also stated that the issue of whether Pisacreta's
claims were derivative or direct was "sufficiently subject to serious debate"
that he could not conclude that the Debtor was likely to prevail on that issue.
Additionally, the Bankruptcy Court specifically ruled that its order would
expire on the later of May 25, 1999 or confirmation of the Debtor's Plan. On May
24, 1999, the Debtor moved the Bankruptcy Court for an extension of the
preliminary injunctions. On June 14, 1999, the Bankruptcy Court denied the
Debtor's motion, freeing the plaintiff to pursue the Tennessee Litigation.
Nevertheless if the Plan is confirmed, the claims asserted in the Tennessee
Litigation would be channeled into, and so long as the UPC Trust remains funded,
could be pursued only against the UPC Trust.
8. Dotan/Mantel
Dan Dotan ("Dotan") and Mantel International Investments, Ltd.
("Mantel") have advised the Debtor that they assert claims against the Infinity
Parties related to or arising from the Debentures or the restructuring thereof,
which, as discussed under "X. The Plan - B. Classification and Treatment of
Claims - 2. Classified Claims - (e) Class 5 - Debenture Claims" with respect to
claims asserted against the Debtor, are not Securities claims and are not
subject to the channelling injunction into the UPC Trust. Dotan and Mantel have
advised the Debtors that they may also assert claims against the Infinity
Parties which would constitute Securities Claims, which claims may impact upon
the Court's consideration of the proposed Infinity Settlement. No action has
been commenced with respect to such asserted claims. Such claims are disputed by
the Debtor and Infinity Parties.
VI. FINANCIAL INFORMATION
The Debtor's historical and projected income statements, growth and
margin analysis and balance sheets for the years ended December 31, 1997,
through December 31, 2002 are attached hereto as Exhibit C and incorporated
herein by reference. The combined historical and projected income statements,
growth and margin analysis, balance sheets and cash flows for the portion of the
F.S. Business which relates to the Walk-In Stores, for fiscal years ended August
29, 1997 through August 29, 2002 along with F.S. Management's discussions of the
results of operations are attached hereto as Exhibit D and incorporated herein
by reference.
VII. BUSINESS PLAN AND PROJECTIONS
The financial projections for the post-Merger reorganized Debtor,
attached hereto as Exhibit E, were prepared by management of the F.S. Business
("F.S. Management"), and reflect F.S. Management's best estimates regarding the
expected results of operations, cash flows and financial position of UPC Merger
Sub for the years ended August 29, 1999, through August 29, 2002. To the extent
that the Financial Projections related to the expected performance of the UPC
stores, F.S. Management has relied on information and assumptions provided by
the Debtor's management. F.S. Management believes that the basis for the
Financial Projections is reasonable, taking into account the purpose for which
they were prepared. HOWEVER, THE FINANCIAL PROJECTIONS WERE NOT PREPARED WITH A
VIEW TOWARD COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE SECURITIES AND
EXCHANGE COMMISSION OR THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
REGARDING PROJECTIONS OR FORECASTS. DELOITTE & TOUCHE LLP, THE F.S.
PARTNERSHIP'S INDEPENDENT ACCOUNTANTS, HAS NEITHER EXAMINED REVIEWED NOR
COMPILED THE FINANCIAL PROJECTIONS AND, CONSEQUENTLY, DOES NOT EXPRESS AN
OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT TO THEM. F.S. Management
believes that the Financial Projections are presented on a basis consistent in
all material aspects with generally accepted accounting principles as applied to
its historical financial statements.
The Financial Projections are based on numerous assumptions with
respect to future events and circumstances, including industry performance,
general business and economic conditions and other matters, many of which are
beyond management's control. In addition, unanticipated events and circumstances
may affect the actual financial results of the reorganized Debtor, which may
cause such financial results to differ materially from those set forth in the
Financial Projections. The assumptions set forth herein are those that F.S.
Management believes are significant to the Financial Projections. F.S.
Management believes that such assumptions are reasonable. However, to the extent
that the Financial Projections related to the expected operation of the UPC
Stores, Debtor's management has provided the information and assumptions
relating thereto. Debtor's management believes that its assumptions relating to
the UPC stores are reasonable. Nevertheless, accurate forecasting is very
difficult due to, among other factors, the effects of unforeseen circumstances
on the post-Merger business plans, such as lower levels of consumer demand than
anticipated, unfavorable weather conditions and volatility in wholesale fuel
prices. Therefore, the assumptions made in forecasting results could prove to be
inaccurate, including in particular the following assumptions: in forecasting
results post-merger, management assumed that general and administrative expenses
would decline, and that F.S. management would successfully negotiate an
agreement to sell branded gas products at the Gas Stores, and sales of gas at
those stores would increase. A detailed discussion of these and other risks is
located in this Disclosure Statement under the heading "Risk Factors to be
Considered.
The approach utilized by F.S. Management in developing the Financial
Projections for 2000, 2001 and 2002 involved a "top down" methodology whereby
revenues and expenses were estimated on a macro basis by applying overall
relationships and expectations about future operating variables. While F.S.
Management believes that such an approach is reasonable, the results might
differ had F.S. Management utilized a "bottom-up" methodology whereby revenues
and expenses were estimated on a micro basis using, for example, detailed
departmental budgeting procedures.
Because the Projections are based on assumptions that may not
materialize as anticipated, and because of this choice of approach in
forecasting financial results, it is likely that there will be differences
between the projected and actual results.
Such differences may be material.
THE REORGANIZED DEBTOR WILL NOT HAVE PRIOR CONSOLIDATED OPERATING
HISTORY AND DOES NOT EXPECT TO PUBLISH ITS BUDGET OR DISCLOSE PUBLICLY
PROJECTIONS OR FORECASTS OF ITS EXPECTED RESULTS OF OPERATIONS, CASH FLOWS OR
FINANCIAL POSITION. ACCORDINGLY, THE REORGANIZED DEBTOR DOES NOT INTEND TO, AND
DISCLAIMS ANY OBLIGATION TO (A) UPDATE OR OTHERWISE REVISE FOR THE HOLDERS OF
CLAIMS OR INTERESTS PRIOR TO THE CONFIRMATION DATE, THE FINANCIAL PROJECTIONS TO
REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS (EVEN IN THE EVENT THAT THE ASSUMPTIONS
UNDERLYING THE FINANCIAL PROJECTIONS ARE SHOWN TO BE INACCURATE), EXCEPT AS
REQUIRED BY APPLICABLE LAW AFTER THE EXPIRATION OF THE PLAN SOLICITATION, (B)
INCLUDE ANY UPDATED INFORMATION IN SECURITIES AND EXCHANGE COMMISSION FILINGS,
OR (C) OTHERWISE MAKE SUCH INFORMATION PUBLICLY AVAILABLE.
THE FINANCIAL PROJECTIONS HAVE BEEN PREPARED SOLELY BY F.S. MANAGEMENT
AND HAVE NOT BEEN AUDITED OR COMPILED BY OUTSIDE AUDITORS, FINANCIAL ADVISORS OR
OTHER ADVISORS. THE DEBTOR AND ITS FINANCIAL ADVISORS ARE STILL COMPLETING THEIR
DUE DILIGENCE WITH RESPECT TO THE FINANCIAL PROJECTIONS AND ACCORDINGLY, NEITHER
THE DEBTOR NOR ITS OUTSIDE AUDITORS, FINANCIAL ADVISORS NOR ANY OTHER ADVISOR
HAS EXPRESSED ANY OPINION, MADE ANY REPRESENTATION OR WARRANTY OR OTHERWISE
GIVEN ANY OTHER ASSURANCES WITH RESPECT TO THE ACCURACY OR ADEQUACY OF THE
FINANCIAL PROJECTIONS OR OF THE UNDERLYING ASSUMPTIONS. HOLDERS OF CLAIMS
AGAINST AND INTERESTS IN THE DEBTOR ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THE FINANCIAL PROJECTIONS IN DETERMINING WHETHER OR HOW TO VOTE ON THE PLAN OR
WHETHER TO ACCEPT THE PLAN.
THE FINANCIAL PROJECTIONS SHOULD BE READ IN CONJUNCTION WITH THE
ASSUMPTIONS, QUALIFICATIONS, LIMITATIONS AND EXPLANATIONS RELATING THERETO AND
TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE REORGANIZED DEBTOR.
A. Assumptions - Nature and Limitations of Projections
The accompanying projected financial statements present, to the best of
F.S. Management's knowledge and belief, the reorganized Debtor 's expected
financial position as of August 29, 1999 through December 31, 2002, and the
results of its operations and its cash flows for the years then ended, assuming
consummation of the Plan on August 15, 1999. The projected statements reflect
F.S. Management's judgment as of June 15, 1999, the date of these projections,
of the expected conditions and management's expected course of action. To the
extent that these projections related to the expected performance of the UPC
stores, F.S. Management has relied upon the Debtor's management to provide the
necessary information and assumptions. Because events and circumstances
frequently do not occur as expected, differences between the projected and
actual results which may be material, should be anticipated.
B. Assumptions - Nature of Operations
The accompanying projected financial statements include the accounts of
the F.S. Partnership which relate to the Walk-In Stores, as well as UPC and its
wholly owned subsidiaries, Calibur and Jackson, and give effect to the Plan as
discussed elsewhere in this Disclosure Statement. The general assumptions used
to prepare the projections include the following:
1. Sales.
Sales are projected for 1999 using 36 weeks actual data and the balance
of the year based on historical averages under normal operating conditions. The
projection assumes a 4.0%, 3.5% and 3.5% increase in Merchandise Sales in 2000,
2001 and 2002, based on the following planned events: (1) reopening of three
casualty stores damaged in recent months by fire and tornado, (2)
re-merchandising and remodeling of Farm Stores' convenience stores, similar to a
recent successful effort in the Drive-Thru Stores, (3) leasing available space
in existing stores to fast food and other food service operators, (4) obtaining
a national brand for sales of gasoline at the Gas Stores, and, (5) acquisition
of new stores. Fuel Sales are projected to increase 13%, 22% and 3% in 2000,
2001 and 2002 respectively, based on branding of the Gas Stores. This projected
increase contributes substantially to the projected financial results, and in
particular, to the projected growth in the Walk-In Stores' earnings. Assumed
increase in gas earnings accounts for 26% and 71% of the projected increase in
the Walk-In Stores' earnings for the fiscal years 2000 and 2001, respectively.
F.S. Management has also selected eleven UPC stores for inclusion in the
projection, based on an assessment of historical operating performance and an
estimate of future profitability. The remainder of the UPC stores is not
included in this projection. These stores, together with certain underperforming
Walk-In Stores (whose results are also excluded from the projections) will be
sold over the projection period. F.S. Management routinely reviews acquisitions
of companies with complementary operations and has held discussions with a
number of acquisition candidates. The projection does not give effect to these
potential acquisitions, despite management's intention to pursue such
opportunities when acquisitions are available on favorable terms.
2. Cost of Sales.
Cost of sales are projected using historical percentages, where the UPC
properties are adjusted for cost savings measures and overhead reductions as a
result of the implementation of a Farm Stores model. Cost of sales should
decrease over the period covered by the projection, due to a number of
management's initiatives described above in Sales. Branding the Gas Stores is
projected to increase margins in this business by increasing the proportion of
premium grade gasoline that the Gas Stores sell. This gain in gross margin from
non-gas operations is projected from the re-merchandising of the Walk-In Stores
units, renegotiating deals with key vendors, revamping some of the stores to
emphasize fast food, and by altering pricing structures where applicable.
3. Expenses.
Expenses are projected based on historical amounts and percentages,
giving effect to planned reductions in staffing and overhead. The general and
administrative burden of the F.S. Business included operating a dairy plant for
period prior to October, 1998. Included in the staffing and overhead reductions
are $693,721 in UPC overhead eliminations resulting from the consolidation of
the F.S. Partnerships and UPC operations and the relocation of the UPC
headquarters to Miami. Additionally, management expects to discontinue
operations in certain underperforming stores and all of the Jackson operations
(oil and gas exploration and development) in 2000, 2001 or 2002. These stores
and Jackson's assets will be sold, and the proceeds from the sale will be
invested in FSG or used for general corporate purposes, including working
capital and debt repayment. The expected synergies of the Merger depend in large
part upon the substantial savings in general and administrative expenses the
Projections assume will occur.
4. Other Income.
Projected other income includes interest expense, gains or losses
estimated on the sale of fixed assets, management fee income, goodwill
amortization and miscellaneous income estimated using historical averages.
5. Reorganization Expenses.
Reorganization expenses are projected based on estimates obtained from
various professionals expected to assist in the Chapter 11 process.
6. Depreciation.
Depreciation is estimated based on the most recent historical amounts
included in the F.S. Partnerships historical financial statements with
additional depreciation coming from the UPC stores which will remain in
operation. Such amounts are computed using primarily straight line depreciation
methodology and estimated useful lives of 7 to 31.5 years for used buildings and
improvements, 3 to 7 years for equipment, 3 to 4 years for vehicles and 3 to 10
years for leasehold improvements. All capitalized costs of gas and oil
properties are amortized on the unit-of-production method using estimates of
proved reserves.
7. Capital Expenditures.
F.S. Management believes that $1,821,000, $1,121,000 and $1,121,000
will be required in 2000, 2001 and 2002, respectively, to improve and maintain
existing locations. This translates to approximately $11,000 per store per year.
The 2000 capital expenditures projection includes $700,000 in equipment upgrades
to prepare for the branding of the fuel stores.
8. Receivables.
Receivables are projected based on historical sales of 3.2 days.
9. Inventory.
Inventories are projected based on historical turns of 20 times.
10. Debt Service and Interest.
Debt service and interest expense are projected based on the terms of
the expected financing under the Merger Financing.
11. Effects of Plan Consummation.
Reorganization transactions are projected as follows:
Post-Petition Reorganization costs are projected to be at least
$500,000, based on estimates provided to management from professionals providing
the necessary services and management's estimate of travel, printing and other
incidental costs. The majority of these expenses are projected to be paid upon
consummation of the Plan.
As a preliminary step in preparing the Projected Consolidated Financial
Statements for the years ending August 29, 2000, 2001 and 2002, F.S. Management
has prepared the Unaudited Proforma UPC Balance Sheet as of the Effective Date,
an Unaudited Proforma Farm Stores Balance Sheet as of the Effective Date, and an
Unaudited Consolidated Balance Sheet for the surviving company, UPC Merger Sub.
The Unaudited Proforma Consolidated Balance Sheet, which follows, reflects F.S.
Management's projections with respect to the financial position of the Debtor
and Farm Stores, assuming: (a) the Debtor meets its projections for the balance
of fiscal 1999, (b) Farm Stores meets its projections for fiscal 1999 and (c)
the effects of certain transactions that will occur upon consummation of the
Plan, assumed to be August 24, 1999.
Step 1: UPC Reorganization
The accounting treatment for the Plan will be in accordance with the
accounting principles required by the provisions of the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." Pursuant to SOP 90-7, the
Company will adopt "fresh start" reporting as of the Effective Date of the Plan.
F.S. Management has estimated that the Debtor's reorganization value is equal to
the carrying values of the assets at the Effective Date. Liabilities expected to
exist as of the Effective Date are stated at the present values of amounts to be
paid. Accordingly, the resulting shareholders equity of $24,512,000 is
represented by 140,000 shares of New UPC Preferred Stock with an assigned value
equal to its liquidation value of $14,000,000 ($100 per share) and 5,000,000
shares of New UPC Common Stock, with an assigned value of $10,512,000 ($2.10 per
share). As a result of adopting fresh start reporting upon emerging from Chapter
11 status, the Debtor will have no beginning retained earnings or deficit. In
future reporting periods, UPC's financial statements will be presented on a
different basis than for prior reporting periods and, therefore will not be
comparable with those financial statements prepared before the Plan is
confirmed.
Step 2: Merger with FSCI
Immediately prior to the Merger and with $17 Million of the net
proceeds of the Merger Financing, FSCI and its affiliates will perform the Toni
Agreement. After the reorganization of the Debtor's balance sheet according to
the terms of Chapter 11, the reorganized Debtor will merge with FSCI. Upon
consummation of the merger and the Toni Agreement: (1) UPC will succeed to all
of the assets and liabilities of FSCI and will own or lease 100% of the Walk-In
Stores and a 10% equity interest in FSG, the operator of the Drive-Thru Stores;
(2) the shareholders of FSCI will receive (x) approximately 48% of the New UPC
Common Stock, (y) 50% ($7 million aggregate liquidation preference) of the New
UPC Preferred Stock; and (z) cash in the amount of $3 million; (3) the existing
unsecured creditors and equity holders of UPC (including but not limited to
UPC's unsecured creditors, equity holders and the Trustee of the litigation
settlement trust contemplated by the Chapter 11 plan in the proceedings) will
receive approximately 52% of the common stock of UPC; and (4) Infinity will
receive, on account of its secured claims against UPC, 50% ($7 million aggregate
liquidation preference) of the New UPC Preferred Stock.
F.S. Management has prepared the Unaudited Proforma Consolidated
Balance Sheet as of the Effective Date. Merger-related adjustments to the
balance sheets reflective of the above transaction are as follows: (1) write-up
of Farm Stores' contributed assets in the amount of $1,900,000 to reflect fair
market value; (2) contribution of $3,300,000 in FSG common stock; (3)
contribution of deferred tax assets, resulting from UPC net operating loss
carryforwards, in the amount of $10,000,000; (4) the issuance of $20,000,000 in
debt to (x) pay the $17,000,000 purchase price of Isaias, a non-managing partner
of the F.S. Partnerships, and (y) fund the $3 million cash payment due to Bared
upon consummation of the Merger; (5) issuance of 140,000 shares of New UPC
Preferred Stock and 5,000,000 shares of New UPC Common Stock (having a par value
of $0.001 per share); (6) the creation of $14,268,000 in post-transaction
goodwill associated with the Merger; and, (7) the conversion of $2,002,281 of
retained earnings into paid in capital, thereby reducing the retained earnings
balance to zero.
The Unaudited Proforma Consolidated Balance Sheet is not necessarily
indicative of the results which would have actually been obtained had all the
transactions referred to above occurred on such dates. The Unaudited Proforma
Consolidated Balance Sheet should be read in conjunction with the Debtor's
consolidated financial statements and the notes thereto.
Additional assumptions on which the Unaudited Proforma Consolidated
Balance Sheet is based are set forth as follows:
(a) Represents F.S. Management's assessment of the write-up to fair
market value of the Farm Stores contributed assets.
(b) Represents goodwill created through the merger
(c) Represents the present value of the UPC net operating loss
carryforward contributed to UPC Merger Sub.
(d) Represents the value of 10% of the stock of FSG.
(e) Represents new debt secured upon the assets of UPC Merger Sub to
effect the Merger Financing.
(f) Represents the New UPC Preferred Stock issued according to the
terms of the Plan and the Merger Agreement.
(g) Represents the New UPC Common Stock issued according to the terms
of the Plan and the Merger Agreement.
12. Taxes.
In connection with the reorganization transactions discussed in 11
above, Debtor's management estimates that there will be a gain on the
reorganization of approximately $975,000 on the conversion of the Debentures and
accumulated interest. The projections assume that any such gain will be offset
by net operating loss carryforwards. As discussed elsewhere in this Disclosure
Statement, UPC Merger Sub's net operating loss carryforwards subsequent to the
reorganization may be subject to disallowance. For purposes of these
projections, no part of the potential net operating loss carryforwards that may
be retained by UPC have been utilized in the years ending December 31, 2000,
2001 and 2002. Income taxes for the years ending August 29, 2000, 2001 and 2002
have been projected using tax rates effective as of the date of the projections.
Deferred taxes are provided for the estimated accumulated temporary differences
due to basis differences for assets and liabilities for financial reporting and
income tax purposes. The projected differences are primarily due to different
financial reporting and tax methods for depreciation and amortization.
13. Effects of Chapter 11 Case.
It has been assumed that no adverse effects will result from the
commencement of the Chapter 11 Case. It is possible that sales (and,
accordingly, earnings) would decline during pendancy of the Chapter 11 Case and
that UPC Merger Sub would be unable to recover such lost sales (and earnings)
during any future period.
VIII. VALUATION OF THE NEW UPC COMMON STOCK
The valuation information contained herein is not a prediction or
guarantee of the future trading price of the New UPC Common Stock to be issued
under the Plan. The trading price of securities issued under a plan of
reorganization is subject to many unforseeable circumstances and therefore
cannot be accurately predicted. In addition, the actual amount of Allowed Claims
and Interests could materially exceed the amounts estimated by the Debtor for
purposes of valuing the anticipated percentage recoveries by the holders of such
Claims and Interests. As noted below, the valuation of New UPC Common Stock is
based on the average projected EBITDA for 2000-2001, and there can be no
assurance that the trading market for the New UPC Common Stock will give effect
to this analysis. Accordingly, no representation can be or is being made with
respect to whether such percentage recoveries will actually be realized by the
holders of Allowed claims and Interests.
In connection with certain matters relating to the Plan, F.S.
Management determined that it was necessary to estimate the value of the New UPC
Common Stock as of the Effective Date. Accordingly, F.S. Management has
performed certain analyses and estimated the value for the New UPC Common Stock
to be issued under the Plan. Specifically, the valuation was developed for
purposes of (a) evaluating the relative recoveries of holders of claims and
Equity Interests, and (b) evaluating whether the Plan meets the "best interests
of creditors" test under section 1129(a)(7) of the Bankruptcy Code.
In preparing its analysis, F.S. Management and its financial advisors
considered, among other factors: (1) "comparable company analysis" which
consisted of reviewing net income, EBITDA and other statistics of selected
publicly traded companies deemed similar to the reorganized Debtor; (ii)
"comparable transaction analysis," which consisted of reviewing valuation
multiples of consolidated net income, consolidated EBITDA and store-level EBITDA
achieved typically in transactions involving sales of control ownership
positions by multi-store operators in the convenience store industry; (iii) the
likely present value of the net operating loss carry forwards held by the
Debtor; and (iv) the estimated value of the 10% stake the Debtor will hold in
Farm Stores Grocery, Inc., a chain of approximately 108 drive-through specialty
grocery stores. In its comparable company analyses, management considered the
stock market valuations of such growth-oriented convenience store operators as
Casey's General Stores and The Pantry. For the comparable transactions analyses,
F.S. Management's valuation assumptions were based on their judgment and
experience gained from analysis of a number of comparable control transactions
in the industry, rather than relying on a small set of specific transactions. In
control transactions in the Debtor's industry, valuations are often based on
"store-level" earning power rather than consolidated net income or cash flow.
Because of the difficulty of obtaining store-level profitability data in
transactions involving publicly traded suitors and targets, F.S. Management felt
it was better to rely on its knowledge of valuations seen in those (typically
private) transactions where F.S. Management could accurately observe store-level
profitability data. Each analysis valued both the enterprise value and the value
of the New UPC Common Stock. The enterprise value is equal to the market value
of the Common Stock plus the value of the New UPC Preferred Stock (plus accrued
dividends) plus the market value of interest-bearing liabilities (including
accrued interest) less cash and marketable securities.
In summary, F.S. Management's estimate of the value of the New UPC
Common Stock was arrived at in the following manner:
(in thousands, except per share data)
Fiscal 2000 estimated EBITDA $ 5,257
Fiscal 2001 estimated EBITDA $ 8,539
------------
Average $ 6,898<F1>
EBITDA multiple assumed $ 6.0<F2>
------------
Enterprise value of Debtor's
convenience store operations $ 41,385
Estimated value of Debtor's 10%
share of Farm Stores Grocery, Inc. $ 3,300
Estimated present value of tax
Shelter from Debtor's $ 8,878<F3>
Total enterprise value $ 53,566
Subtract: post transaction debt $ 20,738
preferred stock face value $ 14,000
============
Equity value $ 18,828
============
Common shares outstanding $ 5,000
Estimated value per common share $ 3.77
Notes:
<FN>
<F1> An average of the next two fiscal years is used because fiscal 1999 is
anticipated to be a transition year where the benefits of combining the two
businesses and of branding the Gas Stores will not be fully realized.
Fiscal 2000's projected earning power should capture both the benefits of
the merger and the full impact of a fuel branding program expected to
commence in the first calendar quarter of 2000. An average of the two
EBITDA figures is more appropriate for comparisons with public companies
than simply using 2001 projected data, as the most distant earnings
estimates published by securities analysts for comparable public companies
are for the year ending December 31, 2000.
<F2> The assumed EBITDA-based valuation multiple used in this analysis, 6.0
times, represents a modest discount to the average multiple of 2000 EBITDA
data for comparable public companies.
<F3> The present value of the tax shelter associated with the Debtor's
approximately $30 million NOL carryforwards assumes utilization of the NOL
of $1,603,000; $5,899,000; $9,977,000; $9,977,000 and $2,500,000 in years 1
through 5, respectively.
</FN>
Estimates of reorganization value do not purport to be appraisals nor
do they necessarily reflect the values that may be realized if assets are sold
in arm's length transactions between buyers and sellers. The estimates of value
herein represent hypothetical reorganization values that were developed solely
for the purposes cited above. Such estimates reflect computations of the
estimated equity values of the Debtor though application of various valuation
techniques and do not purport to reflect or constitute appraisals of the actual
market value that may be realized through the sale of the New UPC Common Stock
to be issued pursuant to the Plan, which may be significantly different from the
amounts set forth herein. The valuation of the New UPC Common Stock is subject
to uncertainties and contingencies, all of which are difficult to predict.
The actual market price of the New UPC Common Stock at the time of
issuance will depend upon prevailing interest rates, market conditions, the
conditions and prospects, financial and otherwise, of the reorganized Debtor,
including the anticipated initial securities holdings of prepetition creditors,
some of which may prefer to liquidate their investment rather than hold it on a
long-term basis, and other factors that generally influence the prices of
securities. The actual market price of the New UPC Common Stock may be affected
by the reorganized Debtor's performance during the pendency of the Chapter 11
Case or by other factors not possible to predict.
Many of the analytic assumptions upon which the valuations are based
are beyond the control of the reorganized Debtor and F.S. Management, and
accordingly, there will be variations between such assumptions and the actual
results. These variations may be material. The New UPC Common Stock is likely to
trade at values that differ from the amounts assumed herein, and which differ
from the common shareholders' equity per share shown in the financial/exhibits
attached hereto. In the event that the estimated value of the reorganized Debtor
is different from the actual trading market value after the Effective Date,
actual recoveries realized by one or more of the classes of the claims or Equity
Interests may be significantly higher or lower than estimated in this Disclosure
Statement.
F.S. Management believes that the Projections have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgment as to the future operating and financial performance of the Debtor.
Accordingly, the valuation herein assumes that the operating results projected
by F.S. Management will be achieved in all material respects. However, no
assurance can be given that the projected results will be achieved. In
particular, the projected results include assumed substantial increases in gas
revenues and decreases in general and administrative expenses, which combine to
create substantially more earnings than the F.S. Business and the Debtor have
realized in the past. Thus to the extent that the valuation is dependent upon
the reorganized Debtor's achievement of the projections, the valuation must be
considered speculative.
The summary set forth above does not purport to be a complete
description of the analysis performed by the F.S. Management. The preparation of
an estimate involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods in
the particular circumstances and, therefore, such an estimate is not readily
susceptible to summary description. In performing its analysis, numerous
assumptions were made with respect to industry performance, business and
economic conditions, and other matters. The analyses contained herein are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
As a result of the analyses, reviews, discussions, consideration and
assumptions summarized herein, F.S. Management believes that the value of the
New UPC Common Stock is equal to $3.77 per common share. This estimate is
necessarily based on economic, market, financial and other conditions as they
exist on, and on the information made available as of, the date of this
Disclosure Statement. Although subsequent events may affect the conclusions,
F.S. Management has no obligation to update, revise or reaffirm its estimate of
its reorganized value.
By way of comparison, based upon the pro forma balance sheet attached
hereto as Exhibit E, the common stock will have a book value of approximately
$2.00 share.
IX. THE CHAPTER 11 CASE
A. Commencement of the Chapter 11 Case
On January 14, 1999 (the "Petition Date"), the Debtor commenced this
Chapter 11 Case by filing a voluntary petition for protection under the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware, the Honorable Peter J. Walsh presiding.
B. Continuation of Business After the Petition Date
Since the Petition Date, the Debtor has continued to operate its
business and manage its property as a debtor in possession pursuant to sections
1107(a) and 1108 of the Bankruptcy Code. During the period immediately following
the Petition Date, the Debtor sought and obtained authority from the Bankruptcy
Court with respect to a number of matters deemed by the Debtor to be essential
to its smooth efficient transition into chapter 11 administration and to
stabilize its operations.
In addition to seeking entry of the Cash Collateral Order, shortly
after the commencement of the Chapter 11 Case, the Debtor has sought certain
additional orders, including the following: (a) orders authorizing the retention
of professionals (including accountants and attorneys) in connection with the
Chapter 11 Case, (b) an order authorizing the Debtor to maintain its prepetition
bank account and to continue use of existing business forms and existing books
and records (c) an order authorizing the payment of certain payroll taxes, and
(d) an order extending the Debtor's time to file its schedules of assets and
statement of financial affairs.
On February 4, 1999, the Debtor commenced an action in the Bankruptcy
Court to stay the Tennessee Litigation, and for a determination of whether the
claims asserted in such action are derivative in nature. After briefing and a
hearing on February 25, 1999, the Bankruptcy Court preliminarily enjoined the
plaintiff in the Tennessee Litigation from continuing to prosecute its action in
the Tennessee Federal Court in any way except (i) continued prosecution of
plaintiff's motion to sever the Debtor from the Tennessee Litigation, (ii)
continued efforts to take certain document discovery and (iii) continuing
Plaintiff's efforts to take the deposition of Mr. Clark K. Hunt. Additionally,
the Bankruptcy Court specifically ruled that its order would expire on the
earlier of May 25, 1999 or confirmation of the Debtor's Plan. On May 24, 1999,
the Debtor moved the Bankruptcy Court for an extension of the preliminary
injunctions. On June 14, 1999, the Bankruptcy Court denied the Debtor's motion,
freeing the plaintiff to pursue the Tennessee Litigation. Nevertheless if the
Plan is confirmed, the claims asserted in the Tennessee Litigation would be
channeled into, and so long as the UPC Trust remains funded, could be pursued
only against the UPC Trust.
C. Representation of the Debtor
Shortly before the Petition Date, the Debtor retained and has since
been represented by the law firm of Young Conaway Stargatt & Taylor, LLP located
at Rodney Square North, 11th Floor, P.O. Box 391, Wilmington, Delaware
19899-0391, as bankruptcy counsel. Additionally, the Debtor has retained and is
represented by the law firm of Wood, Exall & Bonnet, L.L.P. who serves as
special corporate and securities counsel. The Debtor has also retained the
accounting firm, J.H. Cohn as its financial advisor.
X. THE PLAN
A. General
THE FOLLOWING IS A SUMMARY OF CERTAIN MATTERS CONTEMPLATED TO OCCUR
EITHER PURSUANT TO OR IN CONNECTION WITH THE CONSUMMATION OF THE PLAN. THIS
SUMMARY HIGHLIGHTS CERTAIN OF THE SUBSTANTIVE PROVISIONS OF THE PLAN, AND IS
NOT, NOR IS IT INTENDED TO BE, A COMPLETE DESCRIPTION OR A SUBSTITUTE FOR A FULL
AND COMPLETE REVIEW OF THE PLAN. STATEMENTS REGARDING PROJECTED AMOUNTS OF
CLAIMS OR DISTRIBUTIONS (OR VALUE OF SUCH DISTRIBUTIONS) ARE ESTIMATES BASED
UPON CURRENT INFORMATION AND ARE NOT REPRESENTATIVE AS TO THE ACCURACY OF THESE
AMOUNTS. FOR AN EXPLANATION OF THE BASIS FOR, LIMITATIONS OF, AND UNCERTAINTIES
RELATING TO THE VALUE OF THE STOCK TO BE ISSUED UNDER THE PLAN, SEE THE SECTION
VIII OF THIS DISCLOSURE STATEMENT ENTITLED "VALUATION OF THE NEW UPC STOCK." THE
DEBTOR URGES ALL HOLDERS OF CLAIMS AND INTERESTS AND OTHER PARTIES IN INTEREST
TO READ AND STUDY CAREFULLY THE PLAN, A COPY OF WHICH IS ATTACHED HERETO AS
EXHIBIT A.
Section 1123 of the Bankruptcy Code provides that a plan of
reorganization must classify claims against and equity interests in a debtor.
Although the Bankruptcy Code gives a debtor significant flexibility in
classifying claims and interests, section 1122 of the Bankruptcy Code requires
that a plan of reorganization may only place a claim or an interest into a class
containing claims or interests that are substantially similar to such claim or
interest.
The Plan designates six Classes of Claims and two Classes of Interests.
These Classes take into account the differing nature and priority of Claims
against and Interests in the Debtor. In addition, Administrative Expense Claims
and Priority Tax Claims are not classified for purposes of voting or receiving
distributions under the Plan, as is permitted by section 1123(a)(1) of the
Bankruptcy Code. Rather, all such Claims are treated separately as Unclassified
Claims.
The Plan provides different treatment for each class of Claims and
Equity Interests. Only holders of Allowed Claims or Equity Interests are
entitled to receive distributions under the Plan. Allowed Claims are Claims that
are not in dispute, are not contingent, are liquidated in amount, and are not
subject to objection or estimation.
In accordance with the Plan, unless otherwise provided in the Plan or
the Confirmation Order, the treatment of any Claim or Equity Interest under the
Plan will be in full satisfaction, settlement, release, and discharge of and in
exchange for such Claim or Equity Interest.
Article 2 of the Plan classifies the Claims against and Equity
Interests in the Debtor. Article 4 of the Plan provides for the treatment of
Claims and Equity Interests. Article 5 of the Plan provides for the treatment of
unclassified Claims. The following discussion summarizes the classification
scheme and treatment method proposed by and for the Debtor and is qualified in
its entirety by the terms of the Plan, which is attached hereto as Exhibit "A",
and which should be read carefully by you in considering whether to vote to
accept or reject the Plan.
B. Classification and Treatment of Claims and Interests
If the Plan is confirmed by the Bankruptcy Court, each holder of an
Allowed Claim or Allowed Interest in a particular Class will receive the same
treatment as the other holders in the same Class of Claims or Interests, whether
or not such holder voted to accept the Plan. Moreover, upon confirmation, the
Plan will be binding on all creditors and stockholders of UPC regardless of
whether such creditors or stockholders voted to accept the Plan. Such treatment
will be in full satisfaction, release and discharge of and in exchange for such
holder's respective Claims against or Interests in UPC, except as otherwise
provided in the Plan.
1. Unclassified Claims.
The Bankruptcy Code does not require classification of certain priority
claims against a debtor. In this case, these unclassified Claims include
Administrative Expense Claims and Priority Tax Claims.
(a) Administrative Expense Claims. An Administrative Expense
Claim is any cost or expense of administration of the Chapter 11 Case
incurred by UPC (or its Estate) on or after the Petition Date and
before the Effective Date, and which is entitled to and allowed
priority under Section 503(b) of the Bankruptcy Code. These Claims
include, without limitation, any reasonable, actual and necessary costs
and expenses of preserving the Estate and operating the business of UPC
during the Chapter 11 Case. In the present case, Administrative Expense
Claims are primarily composed of professional fees and costs, which the
Debtor has estimated will be at least $500,000.
Each holder of an Allowed Administrative Expense Claim shall
receive (i) the amount of such holder's Allowed Administrative Expense
Claim in one cash payment on the Distribution Date, or (ii) such other
treatment as may be agreed upon in writing by UPC and such holder;
provided, that an Administrative Expense Claim representing a liability
incurred in the ordinary course of business of UPC may be paid at UPC's
election in the ordinary course of business by UPC.
Certain Claims which may have accrued before the Petition Date
or may accrue after the Petition Date, but arise out of executory
contracts with UPC made before the Petition Date, and which would
ordinarily be treated as General Unsecured Claims, may constitute
Administrative Expense Claims as a result of the Debtor's assumption,
pursuant to section 365 of the Bankruptcy Code, of the agreement giving
rise to the Claim. Because the Plan provides that Claims in Class 4,
consisting of General Unsecured Claims, are unimpaired, the distinction
is de minimis. Accordingly, holders of such Claims may elect not to
apply for treatment of such Claims as Administrative Expense Claims.
Regardless of the class into which any such postpetition Claim is
placed, any such postpetition Claim that is considered to be for
"services or for costs and expenses in or in connection with the
Chapter 11 Case, or in connection with the Plan and incident to the
case," must be approved by or be subject to the approval of the
Bankruptcy Court as reasonable.
(b) Priority Tax Claims. A Priority Tax Claim is that portion
of any Claim against UPC for unpaid taxes which is entitled to priority
in right of payment under section 507(a)(8) of the Bankruptcy Code. UPC
believes that it was substantially current on its tax obligations at
the time of commencement of the Chapter 11 Case. Accordingly, UPC
anticipates that Priority Tax Claims will be less than $40,000.
Pursuant to the Plan, each holder of an Allowed Priority Tax
Claim shall receive from the Debtor in full satisfaction of such
holder's Allowed Priority Tax Claim, (i) the amount of such holder's
Allowed Claim, with Post-Confirmation Interest thereon, in equal annual
cash payments on each anniversary of the Distribution Date, until the
sixth anniversary of the date of assessment of such Claim (provided
that the Debtor may prepay the balance of any such claim at any time
without penalty); (ii) a lesser amount in one cash payment as may be
agreed upon in writing by the Debtor and such holder; or (iii) such
other treatment as may be agreed upon in writing by the Debtor and such
holder.
2. Classified Claims.
The following describes the Plan's classification of the Claims and
Interest that are required to be classified under the Bankruptcy Code and the
treatment that the holders of Allowed Claims or Allowed Interests will receive
for such Claims or Interests:
(a) Class 1 -- Priority Non-Tax Claims. A Priority Non-Tax
Claim is any Claim against UPC for an amount entitled to priority under
section 507(a) of the Bankruptcy Code, other than an Administrative
Claim or a Priority Tax Claim. Such Claims are primarily for employee
wages, vacation pay, severance pay, contributions to benefit plans and
other similar obligations. The Debtor estimates that the aggregate
allowed amount of Priority Non-Tax Claims will be no more than $10,000
on the Effective Date. All holders of Allowed Priority Non-Tax Claims
will have all of their legal, contractual and equitable rights
reinstated pursuant to the Plan and therefore are unimpaired under the
Plan.
(b) Class 2 -- Infinity Secured Claim. The Infinity Secured
Claim shall be Allowed pursuant to the Plan and on the Effective Date
the holder of the Infinity Secured Claim shall receive 70,000 shares of
New UPC Preferred Stock in full satisfaction and release of the
Infinity Secured Claim.
(c) Class 3 -- Secured Claims (Other than the Infinity Secured
Claim). This Class includes all Claims that are secured by Liens on any
asset of UPC, excluding the Infinity Secured Claim. The Debtor
currently believes that the only such Claim is the Secured Claim of the
Small Business Administration (the "SBA") with respect to the Marietta,
Georgia location. The SBA's Secured Claim is comprised of first and
second mortgage loans in the combined principal amount of approximately
$908,045 to Calibur, which are secured by real property owned by the
Debtor. As of December 31, 1998, the combined balance of the two notes
was $930,000, which balance should decrease because monthly payments
are being made on the SBA notes by Calibur's tenant on the Marietta,
Georgia Property. Each holder of an Allowed Secured Claim shall be
unimpaired under the Plan and, pursuant to section 1124 of the
Bankruptcy Code, all of the legal, equitable, and contractual rights of
each holder of a Secured Claim in respect of such Claim shall be fully
reinstated and retained as though the Chapter 11 Case had not been
filed. Notwithstanding the foregoing, the Debtor and any holder of an
Allowed Secured Claim may agree to any alternate treatment of such
Secured Claim, which treatment may include preservation of such
holder's Lien; provided, that such treatment shall not provide a return
to such holder having a present value as of the Effective Date in
excess of the amount of such holder's Allowed Secured Claim.
(d) Class 4 -- General Unsecured Claims. This Class includes
all Claims against UPC that are not secured by a Lien on any asset of
UPC, excluding the Debenture Claims and Securities Claims. General
Unsecured Claims are composed primarily of trade debt incurred by UPC
for goods and services provided before the commencement of the Chapter
11 Case, and other miscellaneous obligations arising from the
prepetition operations of UPC's business. The Debtor currently
estimates that the allowed amount of such Claims will not exceed
$250,000. However, the Debtor has scheduled as disputed approximately
$900,000 of unsecured claims and proofs of unsecured claims, which the
Debtor likewise disputes, have been filed totaling approximately
$2,000,000. Although the Debtor believes that all of the disputed
scheduled and filed claims will ultimately be disallowed by the
Bankruptcy Court, there can be no assurance that some or all of the
disputed scheduled and filed claims will not be allowed by the
Bankruptcy Court. The allowance of a substantial portion of such
disputed claims would have a deleterious effect on the ability of the
Debtor to consummate the Plan, as under the Plan, each holder of an
Allowed General Unsecured Claim shall be unimpaired and, pursuant to
section 1124 of the Bankruptcy Code, all of the legal, equitable and
contractual rights of each holder of an Allowed General Unsecured Claim
in respect of such Claim shall be fully reinstated and retained as
though the Chapter 11 Case had not been filed.
(e) Class 5 -- Debenture Claims. The Debenture Claims shall be
Allowed pursuant to the Plan and on the Effective Date each holder of
an Allowed Debenture Claim shall receive a Pro Rata Share of 1,750,000
shares of New UPC Common Stock. Infinity or its affiliates will
transfer 200,000 shares of the New UPC Common Stock that it receives on
account of its Debentures to the UPC Trust; provided, that Infinity or
its affiliates shall be entitled to receive one-half (1/2) of any such
assets that remain in the UPC Trust, if any, after all distributions
have been made by the UPC Trust under the Plan in respect of Allowed
Securities Claims. As of January 14, 1999, the outstanding principal
amount of (i) the 6% Debentures was $1,324,696 and accrued interest was
$97,020, (ii) the outstanding principal amount of the 7% Debentures was
$3,549,120 and accrued interest was $532,507, and (iii) the outstanding
principal amount of the 18% Debentures was $1,575,000 and accrued
interest was $420,117. As of December 31, 1998, the aggregate
outstanding principal amount of the Debentures was $6,448,816 and
accrued interest was $1,049,694. In addition to the principal and
interest owing under the Debentures, Class 5 Debenture Claims also
include any other claims arising under or in any way relating to the
Debentures, and would include any Causes of Action. The only Debenture
Claims filed other than for principal and interest were filed by Dan
Dotan and Mantel International Investments, Ltd. ("Mantel"). Dan Dotan
filed three claims<F8> in unliquidated amounts (the "Dotan Claims")
which assert claims for diversion, recision and failure to convert,
arising out of his prior ownership of Debentures. Debtor's records
reflect that Dan Dotan holds a Debenture Claim in the amount of
$200.00. Additionally, Mantel filed an unliquidated claim for fraud,
breach of contract and other causes of action arising out of his
ownership of Debentures (the "Mantel Claims"). Debtor's records reflect
that Mantel holds no Debenture Claim. Debtor believes the Dotan Claims
and Mantel Claim are without merit and the Debtor intends to vigorously
contest such Claims. To the extent such claims are allowed by the
Court, the total amount of claims in Class 5 will increase and the
percentage recovery to holders of Class 5 Claims will be diminished
proportionately.
<F8> Additionally, Dan Dotan filed a claim arising out of his Preferred Stock
holding which claim, to the extent allowed, will be treated in Class 6.
(f) Class 6 -- Preferred Equity Interests. The Preferred
Equity Interests shall be Allowed pursuant to the Plan and on the
Effective Date each holder of an Allowed Preferred Equity Interest
shall receive a Pro Rata Share of 650,000 shares of New UPC Common
Stock. As of December 31, 1998, the Class A Preferred Stock had an
aggregate liquidation preference of $9,912,000 and a dividend rate of
18%, and the Class B Preferred Stock had an aggregate liquidation
preference of $1,833,000 and a dividend rate of 8%. Preferred Equity
Interests will be canceled, annulled and extinguished on the Effective
Date.
(g) Class 7 -- Common Equity Interests. This Class includes
all shares of Common Stock outstanding on the Petition Date (which UPC
currently estimates to be 30,565,352 shares). All Common Equity
Interests (except for Securities Claims) will be canceled, annulled and
extinguished as of the Effective Date. Each holder of an Allowed Common
Equity Interest as of the Distribution Record Date shall receive (i) a
Pro Rata Share of 200,000 shares of New UPC Common Stock, and (ii) the
right to receive a Pro Rata Share of one-half ( 1/2) of any assets
initially contributed to the UPC Trust pursuant to Sections 7.2 and 7.3
of the Plan, which remain after all distributions have been made by the
UPC Trust under the Plan in respect of Allowed Securities Claims.
(h) Class 8 - UPC Securities Claims. This class includes all
UPC Securities Claims, if any. All UPC Securities Claims shall be
liquidated and allowed pursuant to the ADR, together with the Infinity
Securities Claims. On the distribution Date, each holder of an Allowed
UPC Securities Claim shall receive a distribution from the UPC Trust as
provided by the UPC Trust Agreement and the ADR.
C. Means for Implementation of the Plan
1. Continued Corporate Existence.
UPC and its subsidiaries, Calibur and Jackson, shall continue to exist
after the Effective Date as separate corporate entities, with all corporate
powers, in accordance with the laws of the State of Delaware and pursuant to
their respective charters and new by-laws (in the Debtor's case, its New Charter
and By-Laws which shall become effective upon the occurrence of the Effective
Date).
The vast majority of the Company's employees are employed by, and the
vast majority of the Company's trade creditors are creditors of, Calibur, which
operates the Company's car wash, gas station, lube center and convenience store
businesses. As a result, because the Company does not contemplate commencing a
chapter 11 case for Calibur, the Chapter 11 Case should have no direct impact on
the vast majority of the Company's employees or trade creditors. All employees
or trade creditors of Calibur and Jackson may continue to transact business with
the Company in the ordinary course and the companies intend to pay such claims
in the ordinary course during the pendancy of the Chapter 11 Case of UPC.
The Plan provides that valid Claims of trade creditors are unimpaired;
such claims are to be to be paid in full and the holders of any such Claim shall
not be required to file a proof of claim or take any other formal action to
obtain such payment unless such holder disagrees with the amount scheduled for
such Claim by the Company.
The Debtor intends that, except as may be provided in the Plan,
separate motion filed with the Bankruptcy Court, the Merger Agreement or the
Management Agreement, salaries, wages, expense reimbursements, accrued paid
vacations, health-related benefits, severance benefits and similar benefits of
employees of UPC will be unaffected by the Plan. However, after the Effective
Date, the employees of the Debtor will become subject to the benefit plans and
programs of F.S. Partnerships rather than those of the Debtor. The Plan provides
for all UPC employee claims and benefits to be paid or honored no later than the
date on or after the Effective Date when such payment or other obligation
becomes due and performable.
2. Actions Prior to the Effective Date.
On or prior to the Effective Date (except as otherwise indicated), the
following actions shall have been effected:
(a) title to the Estate Assets shall vest in UPC, free and
clear of all liens, claims, and interests, except as expressly provided
in the Plan;
(b) pursuant to the Merger Agreement, title to the FSCI Assets
shall vest in UPC Merger Sub, and pursuant to the Merger Agreement and
the consummation of the Toni Option, UPC Merger Sub will own 100% of
the assets consisting of the Walk-In Stores and 10% of the stock of
FSG.
(c) the management, control, and operation of UPC shall become
the general responsibility of the board of directors of UPC, as
reconstituted pursuant to the Plan and Merger Agreement,
(d) UPC's charter and bylaws shall be amended and restated to
provide for, among other things, the implementation of the Plan, UPC's
opting out of Section 203 of the Delaware General Corporation Law, a
prohibition against the issuance of nonvoting equity securities as
required by section 1123(a)(6) of the Bankruptcy Code, and restrictions
on certain transfers of New UPC Common Stock (See Description of
Securities and Instruments to be issued in Connection with the Plan;
Common Stock to be Issued Pursuant to the Plan);
(e) the Debentures, the A-Note, the B-Note and all related
loan, security and other documents, and all existing shares of Common
Stock and the Series A and Series B Preferred Stock shall be canceled,
annulled, and extinguished;
(f) UPC shall issue and distribute 2,600,000 shares of New UPC
Common Stock (representing a 52% common equity interest in UPC) as
follows: (i) 1,750,000 shares shall be issued to the holders of Allowed
Debenture Claims (of which Infinity or its affiliates shall transfer
200,000 shares to the UPC Trust); (ii) 650,000 shares shall be issued
to the holders of Allowed Preferred Equity Interests; and (iii) 200,000
shall be issued to the holders of Allowed Common Equity Interests;
(g) UPC shall issue and distribute to Infinity 70,000 shares
of New UPC Preferred Stock in exchange for the cancellation of the
Infinity Secured Claim as specified in the Infinity Settlement
Agreement;
(h) UPC shall issue and distribute 2,400,000 shares of New UPC
Common Stock (representing a 48% common equity interest in UPC), 70,000
shares of New UPC Preferred Stock and $3 Million to the FSCI
Shareholder pursuant to the Merger Agreement;
(i) except as otherwise provided in the Plan, all promissory
notes, share certificates, instruments, indentures, or agreements
evidencing, giving rise to, or governing any Claim or Equity Interest
shall be deemed canceled and annulled without further act or action
under any applicable agreement, law, regulation, order, or rule, and
the obligations of UPC under such promissory notes, share certificates,
instruments, indentures, or agreements shall be discharged;
(j) the UPC Trustee, the Debtor, and the Infinity Parties
shall enter into and execute the UPC Trust Agreement, the UPC Trust
shall be established, and the property to be transferred to the UPC
Trust shall automatically vest in the UPC Trust without further action
on the part of the Debtor, Infinity or the UPC Trustee, with the
execution, delivery and filing or recording as necessary of appropriate
documents of conveyance and physical delivery of such property
occurring as soon thereafter as practicable; and
(k) all Securities Claims against UPC and the Infinity Parties
shall be (i) channeled to the UPC Trust for liquidation pursuant to the
ADR resolution procedures established pursuant to the Plan (as attached
to the Plan as Appendix II thereto) and satisfied from the assets of
the UPC Trust, and (ii) enjoined from being asserted against or
collected from UPC or the Infinity Parties.
3. Sources and Uses of Funds.
The Debtor estimates that, on the Effective Date, it will be required
to make cash payments totaling up to approximately $20.9 million (i.e., the cash
required to pay $3 Million to the FSCI shareholder upon consummation of the
Merger, the $17 Million payment under the Toni Option, Administrative Expense
Claims, Priority Tax Claims, Priority Non-Tax Claims and General Unsecured
Claims). The Company believes that the $23 million Merger Financing it hopes to
obtain will be more than adequate to cover its cash obligations under the Plan,
as well as to provide UPC with sufficient working capital to meet its ongoing
obligations and any additional cash needs after the Effective Date. However,
this belief is based on assumptions and projections as to the reorganized
Debtor's future performance, including, among other things, projections
concerning profit margins that assume certain cost savings resulting from the
Merger, and there can be no assurance that the actual performance of the
reorganized Debtor, and therefore its ability to cover its cash obligations
under the Plan, will be as favorable as projected. See "Business Plan and
Assumptions." All Cash necessary for the UPC Trust to make payments to the
holders of Allowed Securities Claims shall be obtained from the assets
contributed by Infinity to the UPC Trust pursuant to the Plan, or the proceeds
thereof.
4. Use of Cash Collateral.
In connection with the issuance of the A-Note and the B-Note, the
Company granted Infinity a security interest in substantially all of the
Company's assets, including, without limitation, all of the Company's cash. As a
result, section 363 of the Bankruptcy Code requires the Debtor to either obtain
Bankruptcy Court approval to use such cash or obtain approval of an agreement
with Infinity regarding the use of such cash. In that regard, the Debtor has
entered into and obtained Bankruptcy Court approval of an agreement with
Infinity authorizing the use of cash collateral during the pendancy of the
Chapter 11 Case.
5. Filing and Execution of Plan Documents.
On or before five (5) business days prior to the deadline for parties
to vote to accept or reject the Plan, UPC shall file with the Bankruptcy Court
substantially final forms of the agreements and other documents that have been
identified as Plan Documents, which documents and agreements shall implement and
be controlled by the Plan. Entry of the Confirmation Order shall (a) ratify all
actions taken by the Debtor during the Chapter 11 Case, and (b) authorize the
officers of UPC to execute, enter into, and deliver all documents, instruments
and agreements, including, but not limited to, the Plan Documents, and to take
all actions necessary or appropriate to implement the Plan. To the extent the
terms of any of the Plan Documents conflict with the terms of the Plan, the Plan
shall control.
6. Intercompany Causes of Action.
Except for valid intercompany payables and receivables between and
among UPC, Jackson and Calibur, which shall be unaffected by the Chapter 11
Case, all rights, claims, Causes of Action, obligations, and liabilities between
and among UPC and its Affiliates shall be waived, released, and discharged upon
the occurrence of the Effective Date.
7. Vesting of Causes of Action.
Because of the exigencies relating to the Merger and in order to
minimize administrative expenses so as to maximize distributions to creditors,
the Proponent has filed the Plan and this Disclosure Statement on an expedited
basis. As a result, the Proponent has yet to undertake and complete a thorough
analysis of possible Causes of Action and the potential defendants in respect
thereof.
Except as otherwise provided in the Plan, all Causes of Action
assertable by UPC including, without limitation, all Causes of Action assertable
pursuant to sections 542, 543, 544, 545, 547, 548, 549, 550, or 553 of the
Bankruptcy Code shall be retained by UPC and shall be vested in UPC upon the
occurrence of the Effective Date. Any net recovery realized by UPC on account of
such Causes of Action shall be property of UPC.
Further, without limiting the scope of the above paragraph or the
universe of potential defendants, all creditors who received transfers or
payments which may be avoidable under Bankruptcy or non-Bankruptcy law,
directors and former officers of the Debtor, and advisors to the Debtor (except
to the extent expressly released pursuant to the Plan), may be targets in such
litigation.
The entry of the Confirmation Order shall not constitute res judicata
or otherwise bar or inhibit the prosecution of Causes of Action by the Debtor.
8. Injunction for Indemnities.
The entry of the Confirmation Order shall constitute a permanent
injunction against the prosecution of all claims and causes of action of any
Person against the officers, directors, employees and attorneys of UPC, who
served in such capacities as of the Effective Date, to the extent such claims or
causes of action (a) are based in whole or in part on events occurring on or
before the Effective Date, and (b) have been indemnified by UPC Debtor under its
charter, its bylaws, applicable state law or as specified by agreement, or any
combination of the foregoing. The obligations of UPC to indemnify, reimburse, or
limit the liability of such directors, officers, employees, or attorneys against
any claims or causes of action as provided in UPC's charter, UPC's bylaws,
applicable state law, or specified by agreement, or any combination of the
foregoing, shall survive confirmation of the Plan, remain unaffected thereby,
and not be discharged to the extent such claims or causes of action are (a)
asserted against individuals who served in such capacities on the Effective
Date, and (b) based in whole or in part on events occurring on or before the
Effective Date.
Dan Dotan and Mantel have advised the Debtor that they have claims
against present or former directors and officers of UPC, on which claims said
directors and officers are asserted to be jointly liable with UPC. Dan Dotan and
Mantel therefore assert that indemnification by UPC and the proposed injunction
in favor of such persons violates 11 U.S.C. section 502(e) and 520(b), which
assertion UPC disputes.
9. Severance Policies.
Other than as may be provided for in the Merger Agreement, the
Management Agreement or separate motion filed with the Bankruptcy Court prior to
entry of the Confirmation Order, all employment and severance practices,
policies, and agreements, and all compensation and benefit agreements, plans,
policies, and programs of UPC applicable to its directors, officers, or
employees, including, without limitation, all savings plans, health care plans,
severance benefit plans, incentive plans, employment agreements, workers'
compensation programs, and life, disability, and other insurance plans, to the
extent in full force and effect on the date of the commencement of the
Confirmation Hearing are treated as executory contracts under the Plan, and the
Plan constitutes and incorporates a motion to assume all such practices,
policies, agreements, plans, and programs pursuant to section 365(a) of the
Bankruptcy Code, as modified by the Plan.
D. Creation of UPC Trust and Appointment of Trustee
On the Effective Date, the UPC Trust will be created pursuant to the
UPC Trust Agreement for the benefit of all holders of Securities Claims. The UPC
Trust shall be administered by an independent trustee who shall be designated by
UPC, subject to approval of the Bankruptcy Court. In consideration for the
property transferred and the payments made to the UPC Trust pursuant to the
Plan, the UPC Trust shall assume all Securities Claims against UPC and the
Infinity Parties and indemnify them for any claims for reimbursement or
contribution. So long as the property transferred to the UPC Trust has not been
exhausted, or if exhausted, replenished by Infinity, the Confirmation Order
shall enjoin the holders of Securities Claims (including, without limitation,
the Claims asserted in the Pisacreta/Tucci Action to the extent they are not
derivative claims belonging to the Debtor) from asserting against, or collecting
such claims from, the Infinity Parties and their assets. See "General
Information - Legal Proceedings" and "The Plan-Injunctive Projection for the
Debtor and the Infinity Parties."
As of the Effective Date, UPC shall transfer and assign (or deliver, as
applicable) to the UPC Trust in accordance with the UPC Trust Agreement, (1) all
Causes of Action of UPC for contribution and indemnity with respect to
Securities Claims against any Person, excluding the Infinity Parties, and (2)
all of its documents and records relating to the transactions and events that
purportedly give rise to Securities Claims, except those documents necessary for
the Company's continuing operations.
As of the Effective Date, Infinity shall transfer and assign (or
deliver, as applicable) or cause to be transferred and assigned (or delivered,
as applicable) to the UPC Trust in accordance with the UPC Trust Agreement,
effective as of the Effective Date, (1) 200,000 shares of New UPC Common Stock,
and (2) all Causes of Action of the Infinity Parties for contribution and
indemnity with respect to Securities Claims against any Person, excluding UPC,
its affiliates and their respective officers, directors, attorneys and
representatives.
As of the Effective Date, the UPC Trust shall (1) establish the
Securities Claims Resolution Facility and assume responsibility for the
liquidation of all Securities Claims as specified in the ADR, (2) assume the
defense of all Causes of Action against UPC and the Infinity Parties that
constitute or may give rise to Securities Claims, (3) assume the defense of all
Causes of Action against any Person that may give rise to an indemnification
liability against the Infinity Parties; and (4) prosecute such Causes of Action,
rights, and claims of UPC and the Infinity Parties that have been transferred
and assigned to the UPC Trust as the UPC Trustee shall determine is appropriate
under the circumstances.
Any assets initially contributed to the UPC Trust pursuant to Sections
7.2 and 7.3 of the Plan, that remain after satisfaction of all Allowed
Securities Claims and related expenses shall be allocated and distributed in
accordance with the Infinity Settlement Agreement 50% to Infinity or its
affiliates and 50% to the holders of Allowed Common Equity Interests.
E. Compromise and Settlement Between and Among
the Debtor, the Infinity Parties, and the UPC Trust
Pursuant to 1123(b)(3)(a) of the Bankruptcy Code, the Plan provides for
the settlement of all disputes and controversies between the Debtor, the
Infinity Parties, and the UPC Trust. In accordance with Bankruptcy Rule 9019, at
the Confirmation Hearing, the Debtor will request that the Bankruptcy Court
approve the settlements embodied in Article XIV of the Plan. The evaluation of
the settlements by the Bankruptcy Court will entail the consideration of certain
factors to determine whether such settlements are in the best interests of the
Debtor's estate and its creditors, and should thus be approved. Among the
determinative factors to be considered are:
o the probability of success in litigation;
o the complexity of the litigation and the expenses, inconveniences
and delays necessarily attendant to prosecution of the litigation;
o the difficulties, if any, to be encountered in the collection of
any judgment that might be obtained; and
o the interests of the debtor's estate, including those of the
creditors and other parties in interest with appropriate deference
to the reasonable views expressed by them in relation to the
proposed settlement.
In evaluating proposed settlements, the Bankruptcy Court is not to
substitute its judgment for that of the Debtor. Thus, there is a strong initial
presumption that the compromises and settlements negotiated by the Debtor are
fair and reasonable. Based upon the factors set forth above, the Debtor believes
that the proposed settlements fall well within the range of reasonableness and
therefore should be approved by the Bankruptcy Court.
The Plan constitutes a motion pursuant to Bankruptcy Rule 9019 for the
entry of an order authorizing and approving the following compromise and
settlement between and among the Debtor, the UPC Trust and the Infinity Parties:
1. For and in consideration of the undertakings and other agreements of
the Infinity Parties under and in connection with the Plan and the Infinity
Settlement Agreement, as of the Effective Date, the Debtor shall: (a) issue
70,000 shares of New UPC Preferred Stock to Infinity, or its designee; and (b)
release the Infinity Parties from any and all Causes of Action arising in whole
or in part from conduct or events that occurred prior to the Effective Date
(including, without limitation, derivative claims which the Debtor otherwise has
legal power to assert, compromise or settle in connection with the Chapter 11
Case), except as otherwise provided in the Plan and the Infinity Settlement
Agreement.
2. For and in consideration of the undertakings and agreements of UPC
under and in connection with the Plan and the Infinity Settlement Agreement, as
of the Effective Date, the Infinity Parties shall (a) waive and release all of
their rights, interests and claims in and under the A-Note and the B-Note, (b)
contribute 200,000 shares of New UPC Common Stock to the UPC Trust as provided
in Section 7.3 of the Plan, and (c) release the Debtor, and its Affiliates, and
their respective past and present directors, officers, employees, agents, sales
representatives, and attorneys from any and all Causes of Action arising in
whole or in part from conduct or events that occurred prior to the Effective
Date, except as otherwise provided in the Plan and the Infinity Settlement
Agreement.
3. As of the Effective Date, the Infinity Parties and the Debtor shall
release the UPC Trust and the UPC Trustee from any and all Causes of Action
arising in whole or in part from conduct or events that occurred prior to the
Effective Date, except as otherwise provided in the Plan and the Infinity
Settlement Agreement.
F. Injunctive Protection for the Debtor and the Infinity Parties
Upon approval of the UPC Trust and the Effective Date of the Plan, and
subject to the provisions of Section 16.12(b) of the Plan, all Securities Claims
otherwise assertable against the Debtor, or the Infinity Parties, shall be
channeled and asserted against the assets of the UPC Trust and all persons who
have been, are, or may become holders of such claims shall be enjoined from
taking any of the following actions against the Debtor or the Infinity Parties
(other than actions to enforce rights under the Plan, the Plan Documents, and
appeals, if any, from the Confirmation Order):
1. commencing, conducting or continuing in any manner, directly or
indirectly, any suit, action or other proceeding of any kind against such party
or its assets or property, or its direct or indirect successors in interest, or
any assets or property of such transferee or successor (including, without
limitation, all suits, actions, and proceedings that are pending as of the
Effective Date, which must be withdrawn or dismissed with prejudice);
2. enforcing, levying, attaching, collecting or otherwise recovering by
any manner or means whether directly or indirectly any judgment, award, decree
or order against such party or its assets or property, or its direct or indirect
successors in interest, or any assets or property of such transferee or
successor;
3. creating, perfecting or otherwise enforcing in any manner, directly
or indirectly, any Lien against such party or its assets or property, or its
direct or indirect successors in interest, or any assets or property of such
transferee or successor;
4. asserting any set-off, right of subrogation or recoupment of any
kind, directly or indirectly against any obligation due such party, or its
assets or property, or its direct or indirect successors in interest, or any
assets or property of such transferee or successor; and
5. proceeding in any manner in any place whatsoever that does not
conform to or comply with the provisions of the Plan, or the settlements set
forth in Article XIV of the Plan, the UPC Trust Agreement or the Infinity
Settlement Agreement.
If, within thirty (30) days after the UTC Trustee files, at any time or
from time to time, with the Bankruptcy Court and serve upon the Infinity
Parties, a certificate stating that the assets of the UTC Trust have been
totally liquidated and distributed and that either (i) additional Allowed
Securities Claims exist or (ii) all timely asserted Securities Claims have not
yet been liquidated, the Infinity Parties do not make an additional contribution
to the UTC Trust in an aggregate amount equivalent to (A) not less than $100,000
(provided that such amount must be at least enough to satisfy all then Allowed
Securities Claims in full and provide at least $25,000 to fund the expenses of
the UPC Trust in liquidating any remaining Securities Claims) or (B) such lesser
amount as may be agreed to by the UTC Trustee, then the UPC Trust and the
injunction shall terminate so that all parties that timely asserted Securities
Claims that as of that date have not been liquidated and paid in full may pursue
such claims directly against the Infinity Parties.
G. Description of Securities and Instruments
to be Issued in Connection With the Plan
1. Preferred Stock to be Issued Pursuant to the Plan.
Under the Plan, UPC will issue 140,000 shares of New UPC Preferred
Stock, par value $.01 per share. The New UPC Preferred Stock will be the only
preferred stock of UPC issued and outstanding. Each share of New UPC Preferred
Stock will have a preference of $100.00 plus accrued and unpaid dividends (the
"Preference Amount") upon any voluntary or involuntary liquidation, dissolution,
or winding up of the affairs of UPC. In the event of such voluntary or
involuntary liquidation, dissolution or winding up of the affairs of UPC,
holders of the New UPC Preferred Stock will be entitled to receive ratably (in
proportion to the number of shares of New UPC Preferred Stock held) those
amounts or assets available (up to the Preference Amount) after payment or
provision for payment of amounts due to holders of all indebtedness or
liabilities of UPC, but before any distribution is made to the holders of the
New UPC Common Stock. Holders of New UPC Preferred Stock will be entitled to
receive cumulative quarterly dividends at the annual rate of approximately 9
percent (9%) of the $100 initial Preference Amount payable in cash out of funds
legally available for the payment thereof, or at the option of UPC in New UPC
Preferred Stock valued as of the date of payment of such dividends. Each share
of New UPC Preferred Stock is redeemable at any time by UPC at the Preference
Amount. If there are funds available to redeem a portion of the New UPC
Preferred Stock, the redemption shall be carried out on a pro rata basis among
all of the holders of the New UPC Preferred Stock. There is no current intention
of the Board of Directors to redeem any shares of the New UPC Preferred Stock.
If at any time or times dividends on the New UPC Preferred Stock shall be in
arrears and unpaid for a total of eight (8) consecutive full quarterly dividend
periods, then the number of directors constituting the board of directors,
without further action, shall be increased by two (2) and the holders of shares
of New UPC Preferred Stock shall have the exclusive right, voting separately as
a class, to elect the directors to fill such newly-created directorships.
2. Common Stock to be Issued Pursuant to the Plan.
Under the Plan, there will be 5,000,000 shares of New UPC Common Stock
issued and outstanding on the Effective Date, 200,000 of which will be held by
the current holders of Common Stock. The relative rights, preferences and
limitations of the New UPC Common Stock will be essentially identical to those
of the existing Common Stock with the exception of (a) the number of outstanding
shares, and (b) changes resulting from the amendments to UPC's charter (i) to
opt out of Section 203 of the Delaware General Corporation Law (described
below), (ii) to prohibit the issuance of nonvoting equity securities as required
by section 1123(a)(6) of the Bankruptcy Code, (iii) to restrict certain
transfers of New UPC Common Stock and (iv) to implement the Plan. Shares of New
UPC Common Stock may be issued at such time or times and for such consideration
(but not less than par value) as the Board of Directors of UPC deems advisable,
subject to limitations set forth in the laws of the State of Delaware, or UPC's
charter or bylaws. Holders of New UPC Common Stock are not entitled to
preemptive or other subscription rights, and are not subject to assessment or
further call. Each share of New UPC Common Stock is entitled to one vote on all
matters on which holders of common stock are entitled to vote. Holders of New
UPC Common Stock are not entitled to convert the shares to any other securities
of UPC. Holders of the New UPC Common Stock are entitled to receive such
dividends as may be declared, from time to time, by the Board of Directors of
UPC out of funds legally available therefor. UPC has the right to, and may from
time to time, enter into borrowing arrangements or issue other debt instruments,
the provisions of which may contain restrictions on payment of dividends and
other distributions on the New UPC Common Stock. The Board of Directors is also
authorized to issue shares of preferred stock which could contain provisions
restricting the payment of dividends and other distributions on the New UPC
Common Stock unless the payment of dividends or other payments with respect to
such preferred stock have been paid. UPC's current and proposed indebtedness and
preferred stock contain provisions limiting UPC's ability to declare or pay
dividends on the Common Stock or the New UPC Common Stock. In the event of the
voluntary or involuntary liquidation, dissolution, distribution of assets or
winding-up of UPC, holders of Common Stock are entitled to receive ratably in
proportion to the number of shares held, those amounts or assets available after
payment or provision for payment of amounts due to holders of any outstanding
preferred stock (including without limitation, the New UPC Preferred Stock)
which has been issued with a liquidation preference provision, and of all
indebtedness or other liabilities to any other Person.
Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (a) prior to the date of the business
combination, the transaction is approved by the board of directors of the
corporation; (b) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock; or (c) on or after such date, the
business combination is approved by the board of directors and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder. A "business combination" includes mergers,
asset sales, and other transactions resulting in a financial benefit to the
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock. As described above, the Debtor intends to opt
out of Delaware General Corporations Law Section 203.
In order to avoid certain federal income tax consequences caused by
certain subsequent ownership changes, the New UPC Charter will contain a "5%
Ownership Limitation," effective until the last day of the taxable year of UPC
that includes the second anniversary of the Effective Date. (See Certain Federal
Income Tax Consequences of the Plan). It is expected that this limitation will
provide that no person who beneficially owns, directly or indirectly, five
percent or more of the total fair market value of the New UPC Common Stock, or
who, upon the purchase, sale, or other transfer of any shares of New UPC Common
Stock, would beneficially own, directly or indirectly, or would cause any other
person beneficially to own, directly or indirectly, five percent or more of the
total fair market value of the common stock of UPC (a "5% Holder"), may sell or
purchase any shares of common stock (or any option, warrant or other right to
purchase or acquire shares of common stock or any securities convertible into or
exchangeable for shares of common stock), except as authorized by the Board of
Directors or its designee, subject to the waiver or modification of this
restriction by the holders of a majority of the outstanding common stock. The
purpose of the 5% Ownership Limitation is to reduce the risk that any change in
the ownership of New UPC Common Stock may jeopardize the preservation of federal
income tax attributes of UPC for purposes of Section 382 and 383 of the Internal
Revenue Code.
In conjunction with the 5% Ownership Limitation in the New UPC Charter,
in order to further reduce the risk that a change in ownership of the New UPC
Common Stock will occur that may jeopardize UPC's federal income tax attributes,
each certificate representing shares of New UPC Common Stock shall bear a legend
in substantially the following form:
"The shares of New UPC Common Stock represented by this certificate are
issued pursuant to the Plan of Reorganization for United Petroleum
Corporation, as confirmed by the United States Bankruptcy Court for the
District of Delaware. The Corporation's Certificate of Incorporation
contains restrictions prohibiting the sale, transfer, disposition,
purchase or acquisition of any shares of Common Stock without the prior
written authorization of the Corporation's Board of Directors (or its
designee) by or to any person (a) who beneficially owns, directly or
through attribution (as determined under Section 382 of the Internal
Revenue Code of 1986 as amended from time to time (the "Code")), 5% or
more of the total fair market value of the then issued and outstanding
shares of Common Stock of the corporation, or (b) who, upon the sale,
transfer, disposition, purchase or acquisition of any shares of Common
Stock of the Corporation would beneficially own, directly or through
attribution (as determined under Section 382 of the Code), or would
cause another person beneficially to own, directly or through
attribution (as determined under Section 382 of the Code), 5% or more
of the total fair market value of the then issued and outstanding
shares of common stock, if that sale, transfer, disposition, purchase
or acquisition would jeopardize UPC's preservation of its federal
income tax attributes pursuant to Sections 382 or 383 of the Code;
provided however, that for so long as the percentage point changes in
ownership of the common stock (as described in Section 382(g)(1) of the
Code) since the Effective Date do not total more than thirty (30)
percentage points, the above restrictions shall be applied by
substituting "10%" for "5%". UPC will furnish a copy of its Certificate
of Incorporation to the holder of record of this certificate without
charge upon written request addressed to UPC at its principal place of
business."
H. Exemption from Securities Registration for New Securities
1. Initial Issuance of New UPC Common Stock and New UPC Preferred
Stock.
Section 1145 of the Bankruptcy Code provides that the securities
registration requirements of federal, state and local laws do not apply to the
offer or sale of stock, warrants or other securities issued by a debtor (or its
successor) if (i) the offer or sale occurs under a plan of reorganization and
(ii) the securities are transferred in exchange (or principally in exchange) for
a claim or interest in a debtor. Accordingly, under section 1145 of the
Bankruptcy Code, the Debtor believes the issuance of New UPC Preferred Stock to
the holder of the Class 2 Claim and the issuance of New UPC Common Stock holders
of Class 5, 6, 7 and 8 Claims and Interests pursuant to the Plan is exempt from
registration under the securities laws.
With respect to the distribution of New UPC Common Stock and New UPC
Preferred Stock to the FSCI shareholder as merger consideration, Debtor believes
such issuance will fall under a private-placement exemption of the securities
laws. To the extent it is determined that registration is required, the
appropriate documentation will be filed.
2. Transfer of Plan Securities.
Any person other than the Debtor who is not an "underwriter" under
section 1145 of the Bankruptcy Code or a "dealer" under the Securities Act of
1933, as amended (the "1933 Act"), and who transfers New UPC Preferred Stock or
New UPC Common Stock received under the Plan need not comply with the
registration requirements of the 1933 Act or under the state "blue sky" laws.
The term "underwriter," as used in section 1145 of the Bankruptcy Code,
includes four categories of persons, which are referred to in this Disclosure
Statement as "Controlling Persons," "Accumulators,", "Distributors" and
"Syndicators." Dealers and the four types of underwriters are discussed below.
EACH PARTY RECEIVING NEW COMMON STOCK PURSUANT TO THE PLAN IS URGED TO CONSULT
ITS OWN LEGAL ADVISORS TO DETERMINE WHETHER SUCH PARTY MAY BE DEEMED A DEALER OR
UNDERWRITER UNDER THESE DEFINITIONS.
(a) Controlling Persons
"Controlling Persons" are persons who, after the Effective
Date, have the ability, whether direct or indirect and whether formal or
informal, to control the management and policies of the reorganized Company.
Whether a person has such power depends on a number of factors, including the
person's equity in the reorganized Company relative to other equity holders, and
whether the person, acting alone or in concert with others, has a contractual or
other relationship giving that person power over management policies and
decisions. Controlling Persons are permitted to sell or otherwise dispose of New
Common Stock only by complying with the registration requirements of the 1933
Act and state "blue sky" laws, or an exemption therefrom.
Directors, executive officers and beneficial owners of 10% or
more of the outstanding stock of any issuer may be presumed to be controlling
persons of that issuer and thus an underwriter for purposes of section 1145 of
the Bankruptcy Code. The Debtor believes the Infinity Parties will be considered
to be underwriters for purposes of section 1145 of the Bankruptcy Code.
(b) Accumulator and Distributors
"Accumulators" are persons who purchase a claim against or
interest in the Debtor with a view to distribution of any New UPC Preferred
Stock or New UPC Common Stock to be received under the Plan in exchange for such
claims or interest. "Distributors" are persons who offer to sell New UPC
Preferred Stock or New UPC Common Stock for the holders of those securities.
(c) Syndicators
"Syndicators" are persons who offer to buy New UPC Preferred
Stock or New UPC Common Stock from the holders with a view to distribution,
under an agreement made in connection with the Plan, with consummation of the
Plan or with the offer or sale of securities under the Plan. The Debtors are not
aware of any arrangements for the resale of New UPC Preferred Stock or New UPC
Common Stock which would make any person a Syndicator.
(d) Dealers
"Dealers" are persons who engage either for all or part of
their time, directly or indirectly, as agent, broker, or principal, in the
business of offering, buying, selling, or otherwise dealing or trading in
securities. Section 4(3) of the 1933 Act exempts transactions in New UPC
Preferred Stock or New UPC Common Stock by dealers taking place more than 40
days after the Effective Date. Within the 40-day period after the Effective
Date, transactions by dealers who are stockbrokers are exempt from the 1933 Act
pursuant to section 1145(a)(4) of the Bankruptcy Code, as long as the
stockbrokers deliver a copy of this Disclosure Statement (and supplements
hereto, if any, as ordered by the Court) at or before the time of delivery of
New UPC Preferred Stock or New UPC Common Stock to their customers. This
requirement specifically applies to trading and other after-market transactions
in such securities.
I. Market for New Securities
The Reorganized Debtor intends to apply to have the New UPC Common
Stock listed for trading on a national securities exchange. No guarantee can be
given that the Reorganized Debtor will be successful in getting the stock listed
or that a market for the stock will develop.
J. Executory Contracts and Unexpired Leases
The Plan constitutes and incorporates a motion to reject all
prepetition executory contracts, and all prepetition unexpired leases to which
the Debtor is a party, except for an executory contract or lease that (1) has
been assumed or rejected pursuant to Final Order of the Bankruptcy Court; (2) is
specifically designated in the Plan as an executory contract or lease to be
assumed; or (3) is the subject of a motion to assume or reject that is pending
before the Bankruptcy Court on the Effective Date. The Confirmation Order shall
represent and reflect an order of the Bankruptcy Court approving such rejections
and assumptions of executory contracts and leases as of the Effective Date.
UPC currently intends to assume most of the Debtor's executory
contracts and unexpired leases in accordance with their terms.
K. Other Provisions of the Plan
1. Discharge.
Except as otherwise expressly provided in the Plan or in the
Confirmation Order, the confirmation of the Plan will (a) bind all holders of
Claims and Interests, whether or not they accept the Plan, and (b) discharge and
release UPC, pursuant to section 1141(d)(1) of the Bankruptcy Code, effective on
the Effective Date, from any Claim, Interest or any "debt" (as that term is
defined in section 101(2) of the Bankruptcy Code) that arose or was incurred
before the Confirmation Date, and completely extinguish all liabilities in
respect thereof, including, without limitation, any liability of a kind
specified in section 502(g) of the Bankruptcy Code, regardless of whether: (i) a
proof of the Claim or Interest was filed, or the Interest or Claim was scheduled
by UPC, (ii) the Claim or Interest is an Allowed Claim or Allowed Interest, as
the case may be, or (iii) the holder of such Claim or Interest voted to accept
or reject, or abstained from voting on, the Plan. In addition, except as
otherwise provided in the Plan, confirmation of the Plan pursuant to the
Confirmation Order will act as a discharge and release, effective as of the
Effective Date, as to each holder of a Claim or Interest receiving or entitled
to receive any distribution under the Plan in respect of any direct or indirect
right, Claim or Interest such holder had or may have had against or in UPC.
Except as otherwise provided in the Plan, on and after the Effective Date, every
holder of a Claim or Interest shall be precluded and enjoined from asserting
against UPC, their respective assets or properties, any further Claim or
Interest based on any document or instrument or act, omission, transaction or
other activity of any kind or nature that occurred prior to the Confirmation
Date.
2. Retention and Waiver of Causes of Action.
Under the Plan, UPC will retain all of its rights, causes of action and
defenses under the Bankruptcy Code or similar applicable non-bankruptcy law and
retain and reserve all rights and causes of action against or with respect to
any Claim left unimpaired by the Plan, excluding such claims, rights and causes
of action as are released by UPC pursuant to the Plan.
3. Objections to Claims and Interests/Distributions.
The Plan provides that as soon as practicable, but in no event later
than sixty (60) days after the Effective Date (subject to being extended by the
Bankruptcy Court upon Motion of the Debtor without notice or a hearing),
objections to Claims (except Securities Claims) shall be filed with the
Bankruptcy Court and served upon the holders of each of the Claims to which
objections are made; provided, that no objection may be filed with respect to
any Claim that is or becomes Allowed on or before the Effective Date. After the
date of entry of the Confirmation Order, only the Disbursing Agent shall have
authority to file, litigate, settle, or withdraw objections to Claims (except
for Securities Claims, as to which all disputes regarding existence, amount and
treatment shall be resolved pursuant to ADR).
The Disbursing Agent (or the UPC Trustee, as applicable) may, at any
time, request that the Bankruptcy Court estimate any Contested Claim or Equity
Interest pursuant to section 502(c) of the Bankruptcy Code regardless of whether
the Disbursing Agent (or the UPC Trustee, as applicable) has previously objected
to such Claim or Equity Interest or whether the Bankruptcy Court has ruled on
any such objection, and the Bankruptcy Court will retain jurisdiction to
estimate any Claim or Equity Interest at any time during litigation concerning
any objection to any Claim, including during the pendancy of any appeal relating
to any such objection. All of the objection, estimation, settlement, and
resolution procedures set forth in the Plan are cumulative and not necessarily
exclusive of one another. Claims or Equity Interests may be estimated and
subsequently compromised, settled, withdrawn or resolved by any mechanism
approved by the Bankruptcy Court.
4. Term of Injunctions or Stays.
Unless otherwise provided in the Plan, all injunctions or stays
provided for in the Chapter 11 Case pursuant to section 105 or 362 of the
Bankruptcy Code or otherwise in effect on the Confirmation Date will remain in
full force and effect until the Effective Date. On the Effective Date, all
Persons who have been, are, or may be holders of Claims against or Equity
Interests in UPC shall be enjoined from taking any of the following actions
against or affecting UPC, its Estate, or its assets and property with respect to
such Claims or Equity Interests (other than actions brought to enforce any
rights or obligations under the Plan and appeals, if any, from the Confirmation
Order):
(a) commencing, conducting or continuing in any manner,
directly or indirectly, any suit, action or other proceeding of any
kind against UPC, its Estate, or its assets or property, or any direct
or indirect successor in interest to UPC, or any assets or property of
such transferee or successor (including, without limitation, all suits,
actions, and proceedings that are pending as of the Effective Date,
which must be withdrawn or dismissed with prejudice);
(b) enforcing, levying, attaching, collecting or otherwise
recovering by any manner or means whether directly or indirectly any
judgment, award, decree or order against UPC, its Estate, or its assets
or property, or any direct or indirect successor in interest to UPC, or
any assets or property of such transferee or successor;
(c) creating, perfecting or otherwise enforcing in any manner,
directly or indirectly, any Lien against UPC, its Estate, or its
respective assets or property, or any direct or indirect successor in
interest to any of UPC, or any assets or property of such transferee or
successor other than as contemplated by the Plan;
(d) asserting any setoff, right of subrogation or recoupment
of any kind, directly or indirectly against any obligation due UPC, its
Estate, or its respective assets or property, or any direct or indirect
successor in interest to any of UPC, or any assets or property of such
transferee or successor; and
(e) proceeding in any manner in any place whatsoever that does
not conform to or comply with the provisions of the Plan or the
settlement set forth in Article XIV of the Plan to the extent such
settlements have been approved by the Bankruptcy Court in connection
with confirmation of the Plan.
With respect to the Securities Claims, the Plan provides that from and
after the Effective Date, any Securities Claim otherwise assertable against the
Infinity Parties or UPC (including, without limitation, the Causes of Action
asserted in the Pisacreta Action and the Tucci Action, see "Legal Proceedings --
Pisacreta/Tucci Action") shall channel and transfer to the UPC Trust, and all
Persons who have been, are, or may be holders of any such Securities Claim shall
be enjoined, so long as the UPC Trust is funded, from taking any action against
or affecting the Infinity Parties or UPC or their respective assets and property
with respect to such Securities Claim (other than actions brought to enforce any
rights or obligations under the Plan, the UPC Trust Agreement and the Infinity
Settlement Agreement). See "The Plan - Injunctive Protection for the Debtor and
the Infinity Parties."
5. Release.
Any consideration distributed under the Plan shall be in exchange for
and in complete satisfaction, discharge, and release of all Claims of any nature
whatsoever against UPC and any of its assets or properties; and, except as
otherwise provided in the Plan, upon the Effective Date, UPC shall be deemed
discharged and released to the extent permitted by section 1141 of the
Bankruptcy Code from any and all Claims, including but not limited to demands
and liabilities that arose before the Effective Date, and all debts of the kind
specified in sections 502(g), 502(h), or 502(i) of the Bankruptcy Code, whether
or not (a) a proof of Claim based upon such debt is filed or deemed filed under
section 501 of the Bankruptcy Code; (b) a Claim based upon such debt is allowed
under section 502 of the Bankruptcy Code; or (c) the holder of a Claim based
upon such debt has accepted the Plan. The Confirmation Order shall be a judicial
determination of discharge of all liabilities of UPC. As provided in section 524
of the Bankruptcy Code, such discharge shall void any judgment against UPC at
any time obtained to the extent it relates to a Claim discharged, and operates
as an injunction against the prosecution of any action against UPC, or its
property, to the extent it relates to a Claim discharged.
6. Exculpation.
None of UPC, Infinity, the F.S. Partnerships, F.S. Management, any of
their respective partners, Affiliates, nor any of their respective partners,
members, managers, officers, directors, employees, agents, or professionals
shall have or incur any liability to any holder of a Claim or Equity Interest
for any act, event, or omission in connection with, or arising out of, the
dissemination of this Disclosure Statement, or documents prepared in connection
herewith, the solicitation of votes with respect to the Plan, the Chapter 11
Case, the confirmation of the Plan, the consummation of the Plan, or the
administration of the Plan or the property to be distributed under the Plan,
except for willful misconduct.
7. Retention of Jurisdiction.
Notwithstanding the entry of the Confirmation Order and the occurrence
of the Effective Date, the Bankruptcy Court shall retain such jurisdiction over
the Chapter 11 Case after the Effective Date as legally permissible, including,
but not limited to, jurisdiction to: (a) allow, disallow, determine, liquidate,
classify, estimate or establish the priority or secured or unsecured status of
any Claim, including the resolution of any request for payment of any
Administrative Claim and the resolution of any and all objections to the
allowance or priority of Claims; (b) grant or deny any applications for
allowance and payment of any Fee Claim for periods ending on or before the
Effective Date; (c) resolve any matters related to the assumption, assumption
and assignment or rejection of any executory contract or unexpired lease to
which UPC is a party or with respect to which UPC may be liable and to hear,
determine and, if necessary, liquidate, any Claims arising therefrom, including
those matters related to the amendment after the Effective Date pursuant to
Article XVI of the Plan to add any executory contracts or unexpired leases to
Appendix II of the Plan; (d) ensure that distributions to holders of Allowed
Claims are accomplished pursuant to the provisions of the Plan, including ruling
on any motion filed pursuant to Article XII; (e) decide or resolve any motions,
adversary proceedings, contested or litigated matters and any other matters and
grant or deny any applications involving UPC that may be pending on or commenced
after the Effective Date; (f) enter such orders as may be necessary or
appropriate to implement or consummate the provisions of the Plan and all
contracts, instruments, releases, indentures and other agreements or documents
created in connection with the Plan or this Disclosure Statement, including
without limitation the UPC Trust Agreement and the Infinity Settlement
Agreement, including to correct any defect, cure any omission or reconcile any
inconsistency, except as provided in the Plan; (g) resolve any cases,
controversies, suits, or disputes that may arise in connection with the
consummation, interpretation or enforcement of the Plan or the UPC Trust
Agreement or any entity's obligations incurred in connection with the Plan or
the UPC Trust Agreement, or any other agreements governing, instruments
evidencing or documents relating to any of the foregoing; (h) issue injunctions,
enter and implement other orders or take such other actions as may be necessary
or appropriate to restrain interference by any entity with consummation or
enforcement of the Plan, except as otherwise provided herein; (i) enter and
implement such orders as are necessary or appropriate if the Confirmation Order
is for any reason modified, stayed, reversed, revoked or vacated; (j) determine
any other matters that may arise in connection with or relate to the Plan, this
Disclosure Statement, the Confirmation Order or any contract, instrument,
release, indenture or other agreement or document created in connection with the
Plan or this Disclosure Statement, including without limitation the UPC Trust
Agreement, except as provided in the Plan; and (k) enter a Final Decree as
contemplated by Bankruptcy Rule 3022.
8. Failure of Court to Exercise Jurisdiction.
If the Bankruptcy Court abstains from exercising, or declines to
exercise, jurisdiction or is otherwise without jurisdiction over any matter
arising in, arising under or related to the Chapter 11 Case, including matters
discussed in "Retention of Jurisdiction" above, the Plan shall have no effect
upon and shall not control, prohibit or limit the exercise of jurisdiction by
any other court having competent jurisdiction with respect to such matter.
9. Payment Dates.
Whenever any payment to be made under the Plan is due on a day other
than a Business Day, such payment will instead be made, without interest, on the
next Business Day.
10. Successors and Assigns.
The rights, benefits and obligations of any person or entity named or
referred to in the Plan will be binding upon, and will inure to the benefit of,
the heir, executor, administrator, successor or assign of such person.
11. Payment of Statutory Fees.
All fees payable pursuant to Section 1930 of Title 28 of the United
States Code, as determined by the Bankruptcy Court, will be paid on or before
the Effective Date. Any such fees incurred after the Effective Date until the
Chapter 11 Case is closed, will be paid when due.
XI. COMPARISON OF RIGHTS IN SECURITIES TO BE ISSUED
UNDER THE PLAN TO RIGHTS HELD IN PREPETITION SECURITIES
A. Comparison of the Rights of Holders of
A-Note and the New UPC Preferred Stock
Under the Plan, Infinity, in its capacity as the holder of the A-Note
and the B-Note, will receive 70,000 shares of New UPC Preferred Stock in
exchange for its A-Note and B-Note. There are material differences between the
rights of the holder of the A-Note and the B-Note and those of the holder of New
UPC Preferred Stock, certain of which are summarized as follows:
1. Seniority.
In the event of the liquidation, dissolution, distribution of assets or
winding-up of the Company, the holder of the A-Note and the B-Note would be
entitled to receive the principal balance of the A-Note and the B-Note together
with accrued and unpaid interest prior to distribution to the holders of junior
liens in the Company's assets, unsecured debt of the Company, the Preferred
Stock or the Common Stock. As a holder of the New UPC Preferred Stock, any
distribution of the Preference Amount would be made only after the payment of
all secured and unsecured liabilities of the Company, including the payment of
any current or future promissory notes incurred in connection with borrowing of
funds by the Company.
2. Voting.
The holder of the A-Note and the B-Note has no voting rights except as
to such rights as might be granted by statute. The holder of the New UPC
Preferred Stock will have no right to vote on any matters, unless if at any time
or times dividends on the New UPC Preferred Stock are in arrears and unpaid for
a total of eight (8) consecutive full quarterly dividend periods.
3. Dividends/Interest Payments.
The holder of the A-Note and the B-Note is entitled to the payment of
interest at the rate of 12% per annum and to repayment of principal on its
maturity date. The holder of the New UPC Preferred Stock will be entitled to
receive cumulative quarterly cash dividends when, as and if declared by the
Board of Directors.
4. Conversion.
The holder of the A-Note and the B-Note is not entitled to convert the
note into any other securities of the Company. The New UPC Preferred Stock
shares will likewise not be convertible into any other securities of the
Company.
5. Security.
The A-Note and the B-Note is secured by a first lien on substantially
all of the assets of Calibur, Jackson and UPC, and is guaranteed by Michael
Thomas. The New UPC Preferred Stock will be unsecured and will not be entitled
to the benefits of the liens or the guaranties supporting the repayment of the
A-Note and the B-Note .
B. Comparison of the Rights of Holders of
Debentures and New UPC Common Stock
Under the Plan, the holders of the Debentures will receive shares of
New UPC Common Stock in substitution for their Debentures. There are material
differences between the rights of the holders of Debentures and those of holders
of New UPC Common Stock, certain of which are summarized as follows:
1. Seniority.
In the event of the liquidation, dissolution, distribution of assets or
winding-up of the Company, holders of the Debentures would be entitled to
receive payment of the principal balance of their Debentures together with
accrued and unpaid interest prior to any distribution to either the holders of
UPC's preferred stock or common stock. As a holder of New UPC Common Stock, any
such distribution would be made only after the payment of all liabilities of the
Company and the distribution of the Preference Amount to the holders of any
preferred stock (including, without limitation, the New UPC Preferred Stock).
2. Voting.
Holders of Debentures have no voting rights except as to such rights as
might be granted by statute. Holders of the New UPC Common Stock have the right
to vote on all matters on which holders of common stock are entitled to vote.
3. Dividends/Interest Payments.
Holders of the Debentures are entitled to the payment of interest on a
quarterly basis, at either the rate of 6%, 7% or 18%. Holders of New UPC Common
Stock are entitled to receive dividends if, as and when declared by the Board of
Directors. Historically, the Company has not paid dividends on Common Stock and
such dividends are not anticipated in the foreseeable future. UPC's indebtedness
and preferred securities will impose limitations on UPC's ability to declare or
pay dividends on the New UPC Common Stock after the Effective Date.
4. Conversion.
The holders of the Debentures are entitled to convert their Debentures
at any time to Common Stock of UPC at the market price (or a discount thereto)
of the Common Stock. Holders of New UPC Common Stock are not entitled to convert
their shares to any other securities of UPC. The New UPC Common Stock which the
holders of the Debentures will receive as a part of the reorganization proposed
in the Plan will equal 35% of the issued and outstanding shares of New UPC
Common Stock as of the date of the reorganization proposed in the Plan. If all
of the Debenture holders were to convert their Debentures to Common Stock of UPC
at the present time, the resulting percentage of ownership in Common Stock could
be substantially in excess of 35% of the shares of outstanding Common Stock
(although UPC does not have a sufficient number of authorized shares of Common
Stock to effect such conversion). The Company believes that such conversion
would not yield to the holders of the Debentures the other potential benefits
anticipated to be gained from the Plan.
C. Comparison of the Rights of Holders
of Preferred Stock and New UPC Common Stock
Under the Plan, the holders of the Preferred Stock will receive shares
of New UPC Common Stock in substitution for their Preferred Stock. There are
material differences between the rights of the holders of Preferred Stock and
those of holders of New UPC Common Stock, certain of which are summarized as
follows:
1. Seniority.
In the event of the liquidation, dissolution, distribution of assets or
winding-up of the Company, holders of the Preferred Stock would be entitled to
receive the amount of the liquidation preference payable on each series of
Preferred Stock together with accrued and unpaid dividends prior to any
distribution to the holders of the Common Stock. The liquidation preference of
the Series A Preferred Stock is approximately $9,912,000 and the liquidation
preference of the Series B Preferred Stock is approximately $1,813,000. As a
holder of New UPC Common Stock, any such distribution would be made only after
the payment of all liabilities of the Company and the distribution of the
liquidation preference amount to the holders of any outstanding preferred stock
(including, without limitation, the New UPC Preferred Stock) and would be shared
pro rata with the other holders of New UPC Common Stock.
2. Voting.
Holders of Preferred Stock have no voting rights except as to such
rights as might be granted by statute. Holders of New UPC Common Stock have the
right to vote on all matters on which holders of common stock are entitled to
vote.
3. Dividends/Interest Payments.
Holders of the Preferred Stock are entitled to the payment of
cumulative dividends in cash or shares of Common Stock at the rate of 18% per
annum for the holders of Series A Preferred Stock and 8% per annum for the
holders of Series B Preferred Stock. Holders of New UPC Common Stock are
entitled to receive dividends if, as and when declared by the Board of
Directors. Historically, UPC has not paid dividends on Common Stock and such
dividends are not anticipated with respect to the New UPC Common Stock for the
foreseeable future. UPC's indebtedness and preferred securities (including,
without limitation, the New UPC Preferred Stock) will impose limitations on
UPC's ability to declare or pay dividends on the New UPC Common Stock after the
Effective Date.
4. Conversion.
The holders of the Preferred Stock are entitled to convert their shares
of Preferred Stock into Common Stock of UPC. The Preferred Stock shares are
convertible into shares of Common Stock based on the preference amount at the
rate of 1/13th for Series A and 1/15th for Series B per month beginning on July
1, 1997. The price at which the conversions may be effected is the greater of
the market price for the Common Stock or a floor price (currently $.50 for
Series A and $1.00 for Series B). Shares of the New UPC Common Stock are not
convertible into any other securities of UPC. The New UPC Common Stock which the
holders of the Preferred Stock will receive as a part of the Plan will equal 13%
of the issued and outstanding shares of New UPC Common Stock as of the Effective
Date. If all of the Preferred Stock holders were to convert their Preferred
Stock into Common Stock at the present time, the resulting percentage of
ownership in Common Stock could be in excess of 13% of the shares of outstanding
Common Stock (although UPC does not have a sufficient number of authorized
shares of Common Stock to effect such conversion). The Company believes that
such conversion would not yield to the holders of the Preferred Stock the other
potential benefits anticipated to be gained from the Plan.
XII. CERTAIN RISK FACTORS TO BE CONSIDERED
A. Risks Relating to the Debtor's Financial Condition
The Debtor has experienced substantial net losses in recent years, with
a net loss of approximately $(4,270,000), $(12,138,000) and $(11,572,000) for
the years ended December 31, 1998, December 31, 1997 and December 31, 1996. As
of December 31, 1998, the Debtor had current liabilities of $17.4 million and
approximately $492,000 of current assets. The Debtor failed to achieve an
operating profit from its business operations during 1996, 1997 and 1998. Sales
of the Debtor declined from $13.234 million for the year ended December 31, 1996
to $9.721 million for the year ended December 31, 1997 and to $6.179 million for
the year ended December 31, 1998. Even if the Plan is approved and the Plan and
Merger Agreement are consummated, there can be no assurance that the Reorganized
Debtor will not continue to experience losses. The Reorganized Debtor's ability
to become profitable and generate cash flow will likely depend upon the success
of the Walk-In Stores, the Debtor's ability to raise additional debt or equity
capital and to successfully implement its business strategy. There can be no
assurance that the Reorganized Debtor will be able to accomplish the foregoing.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
B. Liquidity Risks
The Debtor is presently in default under the A-Note, the B-Note, its
outstanding Debentures and the Preferred Stock. The Debtor ceased paying
interest on the Debentures and ceased paying dividends on the outstanding
Preferred Stock effective December 31, 1997. Prior to this date, the Debtor had
been paying interest on the Debentures and dividends on Preferred Stock via the
issuance of shares of Common Stock. As of December 31, 1998, accrued interest on
the Debentures totaled $1,026,030 and accrued dividends on the Preferred Stock
totaled $2,113,362. In addition, the Debtor is in default under the A-Note and
B-Note, which matured by their terms on January 1, 1999. The Reorganized Debtor
will remain leveraged even after the consummation of the Merger and the
acquisition of Farm Stores, due to the Merger Financing of up to $23 Million.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
The Plan is intended to convert much of the debt and preferred stock of
the Reorganized Debtor into shares of New UPC Common Stock or New UPC Preferred
Stock. However, the Debtor's historical capital requirements have been
significant and the Reorganized Debtor's future capital requirements could vary
significantly and may be affected by general economic conditions, industry
trends, the performance of the acquired Walk-In Stores, weather conditions and
otherwise, many of which factors are not within the Reorganized Debtor's
control. Historically, the Debtor has had difficulty financing its operations
due, in part, to its significant losses, and there can be no assurance that the
Reorganized Debtor will be able to obtain financing in the future. Even if the
Plan is approved and consummated, there can be no assurance that the Reorganized
Debtor will not continue to experience losses. The Reorganized Debtor's ability
to become profitable and generate cash flow will likely depend upon the
performance of the Walk-In Stores, its ability to raise additional debt or
equity capital and to successfully implement its business strategy. There can be
no assurance that the Reorganized Debtor will be able to accomplish the
foregoing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
C. Ability of the Reorganized Debtor to Continue as a Going
Concern; Explanatory Paragraph in Auditors' Report
The Debtor's independent auditors have included an explanatory
paragraph in their report for the fiscal year ended December 31, 1997, stating
that the consolidated financial statements included in this Disclosure Statement
have been prepared assuming that the Reorganized Debtor will continue as a going
concern and that the Reorganized Debtor's financial condition raises substantial
doubts about its ability to continue as a going concern. The form and content of
future auditors' reports (including any explanatory paragraphs the auditors deem
necessary) will be based upon, among other factors, the application of their
professional judgment to the facts and circumstances related to the Reorganized
Debtor and its business at the time any such report is rendered. Accordingly,
there can be no assurance that future auditors' reports on the Reorganized
Debtor's financial statements will not include explanatory paragraphs relating
to uncertainties regarding the Reorganized Debtor's ability to continue as a
going concern, even if the Plan is consummated. The existence of an explanatory
paragraph may materially adversely affect the Reorganized Debtor's ability to
raise additional funds, and its relationships with suppliers and prospective
suppliers, restrict ordinary credit terms or require guarantees of payment, and
therefore could have a material adverse effect on the Reorganized Debtor's
business, financial condition and results of operations.
D. Risks Regarding the Financial Projections
The Financial Projections included elsewhere in this Disclosure
Statement were developed by F.S. Management in connection with the planning and
development of the Plan, and illustrate the estimated effects of the Plan and
certain related transactions on the results of operations, cash flow and
financial position of the Reorganized Debtor for the periods indicated. The
Financial Projections are qualified by the introductory paragraphs thereto and
the accompanying assumptions, and must be read in conjunction with such
introductory paragraphs and assumptions, which constitute an integral part of
the Financial Projections. The Financial Projections are based upon a variety of
assumptions as set forth therein, and the Reorganized Debtor's future operating
results are subject to and likely to be affected by a number of factors,
including significant business, economic, regulatory and competitive
uncertainties, many of which are beyond the control of the Reorganized Debtor;
and, accordingly, actual results may vary materially from those shown in the
Financial Projections. F.S. Management believes that the industries in which the
Reorganized Debtor will be operating are volatile due to numerous factors,
including the risks described in "-- Risks Relating to the Company's Business
and Farm Stores Business Acquired in the Merger" all of which make accurate
forecasting very difficult. Although it is not possible to predict all risks
associated with the Financial Projections and the assumptions underlying those
projections, there are some risks which F.S. Management is presently able to
identify. The Financial Projections assume that all aspects of the Plan,
including the Merger and the Merger Financing, will be successfully implemented
on the terms set forth in this Disclosure Statement, and that the publicity
associated with the bankruptcy proceeding contemplated by the Plan will not
adversely affect the Reorganized Debtor's operating results. There can be no
assurance that these two assumptions are accurate, and the failure of the Plan
to be successfully implemented, or adverse publicity, could materially adversely
affect the Reorganized Debtor's business, results of operations and financial
condition.
The Financial Projections also assume that most of the Reorganized
Debtor's earnings growth will derive from (a) a branding contract for the Gas
Stores, generating substantially increased revenues and profits from gas sales,
and (b) substantial savings in general and administrative expenses. As explained
in the paragraphs that follow, these two assumptions are subject to various
risks that could cause such assumptions to be inaccurate, and therefore the
projected earnings growth could fail to occur.
The Gas Stores historically have relied on sales of non-gas products to
produce most of their earnings. Proposed Management of the Reorganized Debtor
plans to negotiate an agreement for the sale of branded gas products in the Gas
Stores, and the Reorganized Debtor will focus its efforts on increasing sales of
gas products at the Gas Stores. The Financial Projections assume that all
aspects of this plan to sell branded gas products will be successful, including
that the Reorganized Debtor will negotiate an acceptable agreement for the
supply of branded gas products and will enjoy a significant increase in sales of
branded gas products. However, there can be no assurance that this plan will
succeed, and the likelihood that the Reorganized Debtor will be able to
consummate a branding arrangement and successfully reorient the Gas Stores to
emphasize sales of branded gas products must be considered in light of the
difficulties and delays inherent in any such enterprise. For example, it may not
be possible to locate a supplier of branded gasoline products to supply those
products on terms acceptable to the Reorganized Debtor. Or, assuming an
acceptable agreement is made with a branded supplier, sales of the branded gas
products may not increase as anticipated, due to factors such as fluctuation in
gas prices that decrease consumer demand, inability to compete effectively with
other suppliers of branded gas products, changes in laws regulating sales of
gasoline products, political events in gas producing nations that reduce the
supply of gas products, and other risks relating to this line of business. See
"Risks Relating to the Company's Business and Farm Stores' business Acquired in
the Merger - Competition; -- Government Regulation; -- Possible Environmental
Liabilities and Regulation; -- Volatility of Natural Gas and Oil Prices." If any
one or more aspects of this plan to sell branded gas products were to fail,
actual results of the Reorganized Debtor could fall far short of the Financial
Projections.
Another significant and untested assumption in the Financial
Projections is the projected decline in general and administrative expenses. The
projected decline is based upon anticipated cost savings and business synergies
resulting from the Merger. Realization of cost savings and synergies could be
affected by factors such as unfavorable general economic conditions, unexpected
increases in operating costs (including costs that might be incurred in
connection with the proposal to sell branded gas products), responses of
competitors requiring additional expenditures to compete effectively, and
unfavorable regulatory developments. In such case, general and administrative
expenses probably would not decrease as projected, thereby negatively impacting
the Reorganized Debtor's projected growth and profitability. The projected
decline in general and administrative expenses also must be considered in light
of the difficulty in combining the business and operations of the Debtor with
the F.S. Business. It may not be possible to combine the business and operations
of the Debtor and F.S. Business as efficiently as projected. Inefficiencies and
difficulties could result from having different potentially incompatible
operating practices and systems. Further, personnel problems could result form
consolidating personnel with different backgrounds and corporate cultures into
one company. As a result, the Reorganized Debtor may not achieve anticipated
cost savings and operating efficiencies and may have difficulties in managing,
integrating and operating its business post-Merger.
In summary, it is likely that there will be differences between the
forecasted results for the Reorganized Debtor, as set forth in the Financial
Projections, and actual results, and that such differences may be material. The
Financial Projections assume substantial increases in the reorganized Debtor's
earnings above historical results. Because the Financial Projections are subject
to significant uncertainties and are based upon assumptions that may not be
realized, holders of Impaired Claims and Interests and holders of the
Reorganized Debtor's Securities are cautioned not to place undue certainty on
these Financial Projections. See "Financial Projections of Certain Financial
Data."
E. Risks Relating to Certain Debt and Equity Holders
1. Risks Particular to Holders of Outstanding Notes.
Under the Plan, the holder of the A-Note and the B-Note will receive
70,000 shares of New UPC Preferred Stock in substitution for the A-Note and the
B-Note. In agreeing to the Plan, the holder of the A-Note will be consenting to
the exchange of its interests in a secured senior security, which has a stated
interest rate and a liquidation preference over unsecured debt and equity
securities, for New UPC Preferred Stock, which will be subordinate to all
creditor claims, including trade creditors. There can be no assurance that the
value of the shares of New UPC Preferred Stock that are to be issued pursuant to
the Plan will equal or exceed the value of the A-Note and the B-Note. See
"Comparison of the Rights of Holders of A-Note and the B-Note and the New UPC
Preferred Stock."
2. Risks Particular to Holders of Debentures.
If the Plan is confirmed and consummated, holders of the Debentures
will receive shares of New UPC Common Stock in substitution for their
Debentures. In agreeing to the Plan, holders of the Debentures will be
consenting to the exchange of their interests in a senior debt security, which
has a stated interest rate, a repayment date and a liquidation preference over
equity securities, for shares of New UPC Common Stock, which will be subordinate
to all creditor claims, including trade creditors, and the $14,000,000 aggregate
liquidation preference rights of the New UPC Preferred Stock. As of the
Effective Date, the principal and interest on the Debentures will total
approximately $7,500,000.
3. Risks Particular to Holders of Preferred Stock.
If the Plan is confirmed and consummated, holders of Preferred Stock
will receive shares of New UPC Common Stock in substitution for their Preferred
Stock. In agreeing to the Plan, holders of Preferred Stock will be consenting to
the exchange of their shares of a senior equity security, which has a stated
dividend rate and a liquidation preference over common equity, for shares of New
UPC Common Stock, which will be subordinate to all creditor claims, including
trade creditors, and the $14,000,000 aggregate liquidation preference rights of
the New UPC Preferred Stock.
4. Risks Particular to the Holders of Common Stock.
If the reorganization proposed in the Plan is confirmed and
consummated, existing holders of Common Stock will have their percentage
ownership of the common equity of the Reorganized Debtor reduced from 100% of
the issued and outstanding common equity to 200,000 shares of New UPC Common
Stock, representing approximately 4% of the shares of New UPC Common Stock to be
issued and outstanding (assuming conversion of the New UPC Preferred Stock) upon
effectiveness of the Plan (assuming conversion of the New UPC Preferred Stock).
In addition to the 5,000,000 shares of Common Stock which will be outstanding
after the consummation of the Plan (assuming conversion of the New UPC Preferred
Stock), the Reorganized Debtor will have an additional 5,000,000 shares of
Common Stock that are authorized for future issuance. The New UPC Common Stock
will be subordinate to all creditor claims, including the Merger Financing and
trade creditors, and the $14,000,000 aggregate liquidation preference rights of
the New UPC Preferred Stock.
5. No Prior Active Market; Possible Volatility of Stock Price.
There is no current active market for the Common Stock and there can be
no assurance that an active trading market for the New UPC Common Stock will
develop or, if developed, that such market will be sustained following the
Effective Date or that the market price of the New UPC Common Stock will not
decline. While the Debtor intends to apply to have New UPC Common Stock listed
for trading on a national securities exchange, there can be no assurance that
such request will be granted or that an active trading market for the New UPC
Common Stock will develop. The trading price of the Common Stock has been
subject to wide fluctuations, and the trading price of the New UPC Common Stock
could be subject to wide fluctuations in the future in response to variations in
the Debtor's results of operations, as well as developments that affect the
industry, the overall economy and the financial markets.
6. Control by Principal Stockholder.
After the Effective Date, the Infinity Parties and the shareholders of
FSCI, collectively, will own approximately 84.5% of the outstanding shares of
New UPC Common Stock (approximately 36.5% to Infinity and 48% to FSCI). This
ownership will give the Infinity Parties and the FSCI shareholder control over
any stockholder vote, including a vote for election of all of the members of the
Debtor's Board of Directors, a vote for the adoption of amendments to the
Debtor's charter and bylaws and a vote for the approval of a merger,
consolidation, asset sale or other corporate transaction requiring approval of
the stockholders of the Debtor.
F. Risks Relating to Confirmation of the Plan
Section 1129 of the Bankruptcy Code, which sets forth the requirements
for confirmation of a plan of reorganization, requires, among other things, a
finding by the bankruptcy court (1) that the plan is "feasible" (i.e., that
confirmation of the plan is not likely to be followed by the liquidation, or the
need for further financial reorganization, of the debtor), (2) that all Claims
and Interests have been classified in compliance with the provisions of section
1122 of the Bankruptcy Code, and (3) that, under the plan, holders of Claims and
Interests within Impaired Classes either accept the plan or receive or retain
cash or property of a value, as of the date the plan becomes effective, that is
not less than the value such holders would receive or retain if the debtor was
liquidated under Chapter 7 of the Bankruptcy Code. See "The Plan--Confirmation
of the Plan." Although the Debtor believes that the Plan complies with all
relevant requirements for confirmation, there can be no assurance that the
Bankruptcy Court will agree without first requiring material modifications which
may or may not be acceptable to the Debtor, FSCI, the Infinity Parties and other
parties in interest or which would not require a resolicitation of votes on the
Plan.
The confirmation and effectiveness of the Plan are also subject to
certain conditions being satisfied on its "Effective Date", which is projected
to occur on August 25, 1999. See "The Plan--Conditions to Confirmation." No
assurances can be given that these conditions will be satisfied or waived or
that any necessary consent will be obtained.
In the event any Impaired Class of Claims or Interests rejects the
Plan, the Bankruptcy Court, pursuant to section 1129(b) of the Bankruptcy Code
(the "cramdown" provisions), may nevertheless confirm the Plan at the
Reorganized Debtor's request if at least one Impaired Class of Claims has
accepted the Plan (with such acceptance being determined without including the
acceptance of any "insider" in such Class) and, as to each Impaired Class which
has not accepted the Plan, the Bankruptcy Court determines that the Plan "does
not discriminate unfairly" and is "fair and equitable" with respect to such
Impaired Class and if all of the other applicable requirement of section 1129(a)
of the Bankruptcy Code are met. The Debtor reserves the right to request
confirmation pursuant to section 1129(b) of the Bankruptcy Code in the event
that any Impaired Class of Claims or Interests rejects the Plan. See "The Plan
- -- Confirmation of the Plan." If the Plan is not confirmed as a result of the
rejection by any Impaired Class of Claims or Interests and the Plan is not
confirmed pursuant to section 1129(b) of the Bankruptcy Code, then the Debtor
may be required to continue its bankruptcy case without the agreement of its
major creditors as to the terms of a reorganization plan, possibly resulting in
the complications discussed above.
G. Risks Relating to Approval of the UPC Trust
Bankruptcy Court approval of the UPC Trust and the channeling of all
Securities Claims against UPC and the Infinity Parties to the UPC Trust is a
condition precedent to Infinity's willingness to support the Plan. Although the
Debtor believes that a channeling injunction such as that proposed by the Plan
is appropriate and within the equitable power of the bankruptcy courts, it is
not certain that the Bankruptcy Court will reach the same conclusion. Further,
although it is possible if the Bankruptcy Court denies approval of the
channeling injunction, that Infinity will waive such condition, it cannot be
certain that the Infinity Parties would be willing to do so. In making its
decision whether the UPC Trust and channeling injunction should be approved, it
is likely that the Bankruptcy Court will review the following factors: (1)
whether the non-debtor has contributed substantial assets to the reorganization;
(2) whether the injunction is essential to reorganization and, without it, there
is little likelihood of success; (3) whether the plan provides a mechanism for
the payment of the claims of the class or classes affected by the injunction;
and (4) whether there is an identity of interest between the debtor and the
third party (e.g. an indemnity relationship), such that a suit against the
non-debtor either operates as a suit against the debtor or will deplete assets
of the estate.
H. Risks Relating to the Company's Businesses and Farm Stores(R)
Business Acquired in The Merger
1. Industry and Geographic Concentration.
The acquired Farm Stores' business, which will be the primary business
of the Debtor post-Merger, consists of walk-in convenience stores and drive-thru
specialty convenience stores. As a result, a downturn in the convenience store
industry could have a material adverse effect on the Debtor's business. Further,
both the acquired F.S. Business and the business of Calibur are concentrated
geographically (the F.S. Business in Florida; Calibur in Tennessee and Georgia);
and it is anticipated that the business of Jackson will be sold subsequent to
consummation of the Plan. Operating results in individual geographic markets
will be adversely affected by local and or regional economic downturns. Such
economic downturns could have an adverse impact on the Debtor's financial
condition and results of operations.
2. Competition
The convenience store and retail gasoline industries are highly
competitive. The number and type of competitors vary by location. The Debtor
will compete with other convenience stores, gasoline service stations,
supermarket chains, neighborhood grocery stores, fast food operations and other
similar retail outlets, some of which are well-recognized national or regional
retail chains with significantly greater resources than Debtor. Key competitive
factors will include, among others, location, ease of access, store management,
product selection, pricing, hours of operation, store safety, cleanliness,
product promotions and marketing. Even assuming the reorganization proposed in
the Plan is completed, there can be no assurance that Debtor will be able to
compete effectively.
3. Government Regulation.
The Debtor is and will continue to be subject to numerous federal,
state and local laws, regulations and ordinances. In addition, various federal,
state and local legislative and regulatory proposals are made from time to time
to, among other things, increase the minimum wage payable to employees and
increase taxes on the retail sale of certain products; in particular, sales of
milk, gasoline, tobacco products and alcoholic beverages are subject to
extensive regulation. Changes to such laws, regulations or ordinances may
adversely affect the Debtor's performance by increasing the costs or affecting
sales of certain products at the Debtor's existing stores and the acquired Farm
Stores' stores.
The F.S. Business to be acquired in the Merger sells tobacco and
alcoholic beverages where such sales are legally permitted. Sales of tobacco
products and alcoholic beverages are regulated by state and local laws. Changes
in such laws significantly restricting such sales, or the revocation of any
license or permit required to make such sales, could have a material adverse
impact on sales and profits. Similarly, the sale of gasoline, including the
price charged for gasoline, is subject to extensive regulation. If the Walk-In
Stores were required to pay higher prices to purchase gasoline that could not be
supported by price increases at the pump, or if due to changes in regulations
those stores were to become unable to sell gasoline, it would have a material
adverse effect on the Walk-In Stores' sales and profits.
In recent years, sellers of alcoholic beverages have been held
responsible for damages caused by persons who purchased alcoholic beverages from
them and who were at the time of the purchase, or subsequently became,
intoxicated. There is potential exposure to the Debtor as a seller of alcoholic
beverages.
The F.S. Business sells a significant amount of milk products. Under
the Federal Milk Marketing Order program, the federal government and some state
agencies established minimum regional prices paid to producers for raw milk. In
1996, the U.S. Congress passed legislation to phase out the Federal Milk
Marketing Order program. This program is currently scheduled to be phased out by
October 1999. The U.S. Department of Agriculture has also recently proposed
changes to this program, including changes in pricing classifications for
certain dairy products. It is not known whether the Department of Agriculture
will adopt its proposed changes in their current or another form, and what
effect any final changes or the termination of this federal program will have on
the market for dairy products. In addition, various states have adopted or are
considering adopting compacts among milk producers, which would establish
minimum prices paid by milk processors, to raw milk producers. It is not known
whether new compacts will be adopted or the extent to which these compacts would
affect the prices paid for milk
4. Possible Environmental Liabilities and Regulations.
The Debtor is and will continue to be subject to various federal,
state, and local environmental, health and safety laws and regulations; in
particular, federal and state regulations regarding underground storage tanks
and related equipment that apply to acquired walk-in convenience stores selling
gasoline. Certain of the more significant federal laws are described below. The
implementation of these laws by the United States Environmental Protection
Agency ("EPA") and the states will continue to affect the Debtor's operations by
imposing operating and maintenance costs and capital expenditures required for
compliance.
The Resource Conservation and Recovery Act of 1976, as amended, affects
the Debtor through its substantial reporting, record keeping and waste
management requirements. In addition, standards for underground fuel storage
tanks and associated equipment may increase operating expenses. The
Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA"), as amended, creates the potential for substantial liability for the
costs of study and clean-up of waste disposal sites and includes various
reporting requirements. CERCLA could result in joint and several liability even
for parties not primarily responsible for hazardous waste disposal sites. The
Clean Air Act, as amended, and similar regulations at the state and local
levels, impose significant responsibilities on the Debtor through certain
requirements pertaining to vapor recovery, sales of reformulated gasoline and
related record keeping.
The gasoline sales operations conducted by the Walk In Stores and
Calibur entail certain inherent environmental risks. Each operation utilizes
underground storage tanks for its petroleum products. The leakage of underground
storage tanks would result in environmental remediation obligations for the
Debtor under federal and state environmental laws, could give rise to third
party claims, and could result in civil or criminal enforcement actions. The
State of Florida has a program for the remediation of environmental
contamination from underground storage tanks, and Farm Stores participates in
such programs. In accordance with the requirements of such program, Farm Stores
carries insurance against certain environmental risks. However, there can be no
assurance that the operating results and financial condition of the reorganized
Debtor will not be materially adversely affected by environmental liabilities,
including increase in premiums and uninsured losses.
Jackson's business is regulated by certain local, state and federal
laws and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and natural
gas. Its business is also subject to extensive and changing environmental and
safety laws and regulations governing plugging and abandonment, the discharge of
materials into the environment or otherwise relating to environmental
protection. As with any owner of property, Jackson is also subject to cleanup
costs and liability for hazardous materials, asbestos or any other toxic or
hazardous substance that may exist on or under any of its properties. The
implementation of new, or the modification of existing, laws or regulations
could have a material adverse effect on Jackson. Although the reorganized Debtor
intends to sell Jackson's assets after the Effective Date, there can be no
assurance that its business will not be adversely affected by these matters
prior to the sale, or pursuant to any indemnification obligations that may
survive a sale of Jackson's assets.
5. Volatility of Natural Gas and Oil Prices.
Revenues generated from the sale of gasoline at the Walk-In Stores and
Calibur stores, from the sale of Jackson's oil and gas properties, are highly
dependent upon the price of, and supply of and demand for petroleum products
and, as to Jackson, natural gas as well. Historically, the markets for petroleum
products and natural gas have been volatile and are likely to continue to be
volatile in the future. Prices for petroleum and natural gas are subject to wide
fluctuations in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of the Debtor. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of petroleum products and
natural gas, the price of foreign imports and overall economic conditions. It is
impossible to predict future petroleum products and natural gas price movements
with any certainty.
6. Drilling Risks.
The Debtor currently anticipates that it will sell its non-producing
oil and gas properties after the Effective Date. Nevertheless, to the extent the
Debtor undertakes drilling activities, they involve numerous risks, including
the risk that no commercially productive natural gas or oil reservoirs will be
discovered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including unexpected drilling conditions or
pressure irregularities in formations, equipment failures, accidents, adverse
weather conditions and shortages or delays in the delivery of equipment. The
Debtor's drilling activities have in the aggregate been historically
unproductive and may be unsuccessful in the future and, if unsuccessful, such
failure will have an adverse effect on Debtor's future results of operations and
financial condition.
7. Uncertainty of Reserve Information and Future Net Revenue
Estimates.
There are numerous uncertainties inherent in estimating oil and natural
gas reserves and their estimated values, including many factors beyond the
control of the producer. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured in an exact manner. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially and such reserve estimates may be subject to downward or
upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to Debtor's reserves will likely vary from estimates,
and such variances may be material. There can be no assurance that the
Reorganized Debtor will be able to sell Jackson's assets for any price related
to the book or carrying values of these assets on the Debtor's books.
8. Operating Risks of Oil and Gas Operations.
The oil and gas business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Debtor. The availability of a ready market
for the Debtor's oil and natural gas production also depends on the proximity of
reserves to, and the capacity of, oil and gas gathering systems, pipelines and
trucking or terminal facilities. In addition, the Debtor may be liable for
environmental damage caused by previous owners of property purchased and leased
by the Debtor. As a result, liabilities to third parties or governmental
entities may be incurred, the payment of which could reduce or eliminate the
funds available for development, acquisitions or exploration, or result in the
loss of the Debtor's properties. The Debtor does not carry business interruption
insurance. The occurrence of an event not covered by insurance could have a
material adverse effect on the financial condition and results of operations of
the Debtor.
9. Dependence on Personnel.
The business of the Reorganized Debtor will depend upon the ability and
expertise of certain key employees, including Mr. Joe Bared and Mr. Carlos
Bared. If one or more key employees of the Reorganized Debtor terminate their
employment, the Reorganized Debtor's operations could be adversely affected.
There can be no assurance that one or more key employees will not resign from
employment with the Reorganized Debtor.
10. Need For Additional Financing.
In the event that cash from operations and other available funds prove
to be insufficient to fund the Reorganized Debtor's presently anticipated
operations, the Reorganized Debtor will be required to seek additional
financing. Even if the Reorganized Debtor has no future capital expenditures,
the Reorganized Debtor's operations could require more cash than is generated
from the Reorganized Debtor's operations and other available funds, in which
case the Reorganized Debtor would require additional financing. There can be no
assurance that, if additional or replacement financing is required, it will be
available on acceptable terms, or at all. Nor can any assurances be given that
the Infinity Parties would be willing to refinance or to fund any additional
operational requirements of the Reorganized Debtor in the future. Additional
financing may involve substantial dilution to the interests of the Reorganized
Debtor's then-current stockholders, including the holders of the New UPC Common
Stock.
11. Legal Proceedings.
The Debtor is involved in certain legal proceedings as described in
"Legal Proceedings." While the Debtor intends to defend such lawsuits, any
adverse decisions or settlements and the costs of defending such suits, could
have a material adverse effect on the Debtor. In addition, the Debtor has filed
a lawsuit seeking the recovery of substantial damages. See "Legal Proceedings --
TAJ/National." This lawsuit is in the early stages and there can be no
assurances of the timing or amounts of any recovery. In the event the Debtor is
ultimately successful in such lawsuit, the holders of the Common Stock of the
Debtor would receive less of the benefits from the recovery, if any, if the Plan
is confirmed and consummated. However, if the Plan is not approved, the Debtor
would not have sufficient funds to pursue the litigation.
12. Year 2000 Compliance.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than twelve months, computer
systems and/or software used by many companies will need to be upgraded to
comply with such "Year 2000" requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance. Management does not
anticipate that the Debtor will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be Year 2000
compliant. The occurrence of any of the foregoing could have a material adverse
effect on the Debtor's business, operating results or financial condition.
Although the Debtor believes the software and hardware it uses
internally comply with Year 2000 requirements and is not aware of any material
operational issues or costs associated with preparing its internally used
software and hardware for the Year 2000, there can be no assurances that the
Debtor will not experience serious, unanticipated negative consequences and/or
material costs caused by undetected errors or defects in the technology used in
its internal systems. The occurrence of any of the foregoing could have a
material adverse effect on the Debtor's business, operating results or financial
condition.
13. Benefits of Combining the F.S. Business and the Debtor's
Business May not be Realized.
There can be no assurance that the anticipated benefits of merging the
Walk-In Stores with the Debtor's business, and the Debtor's investment in the
Drive-Thru Stores, will be achieved. Further, any difficulties encountered in
the transition and integration of the Walk-In Stores' business with the Debtor's
business could have an adverse effect on the profitability of either or both of
the Debtor's existing business and the Walk-In Stores. To the extent that the
Financial Projections assume earnings growth in the Reorganized Debtor from
reductions in general and administrative expenses, the reasonableness of this
assumption must be evaluated in light of the above factors.
14. Conflicts of Interest; Exculpation and Indemnification.
The proposed Management Agreement among the reorganized Debtor involves
substantial conflicts of interest. The Management Agreement contemplates that
the existing management of the F.S. Business will become employed by the
reorganized Debtor , and manage UPC as well as FSG, a company in which UPC will
have only a 10% equity interest<F9>. The remaining equity in FSG is owned by
Bared affiliates. FSG will pay a management fee for UPC's management services
under this Agreement. However, the management of UPC will experience conflicts
of interest in allocating their time, and the resources of the UPC and FSG, and
with respect to agreements that may involve one or the other, or both of such
concerns. There can be no assurance that such conflicts will be resolved in
favor of UPC. Moreover, the Management Agreement will contain provisions
providing exculpation and indemnification for the benefit of (a) the management
personnel of UPC, with respect to claims by or in the right of UPC or FSG, and
(b) UPC, with respect to claims by FSG. These provisions will protect these
beneficiaries against claims for mismanagement, conflict of interest, and the
like, unless it is finally established that such claims arose out of bad faith,
or willful misconduct. It is the intended effect of these provisions that UPC
and FSG shall have more restricted rights than would exist absent these
provisions. There can be no assurance that these provisions will not materially
adversely affect UPC and FSG.
<F9> Alternatively, management services may be provided through a separate
entity or other means. None of these alternatives will materially effect
the economics of the management arrangement.
15. Weather Related Risk.
The largest single source of revenues for Calibur is from the operation
of car washes, which represented approximately 46.9% and 44.1% of the Debtor's
revenues for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. These revenues are significantly adversely
affected by adverse weather conditions, since car washes are generally utilized
less frequently during wet and/or severe freezing weather. During 1997 and the
first and second quarters of 1998, the El Nino weather condition produced
unusually wet weather, which resulted in decreased usage of the Debtor's
facilities and had a negative effect on revenues. Long term weather conditions
are difficult, if not impossible, to predict accurately and may have a material
adverse effect on the Debtor's results of operations and financial condition.
XIII. CERTAIN MATERIAL INCOME TAX CONSEQUENCES OF THE PLAN
THE PLAN AND ITS RELATED TAX CONSEQUENCES ARE COMPLEX. MOREOVER, MANY
OF THE INTERNAL REVENUE CODE PROVISIONS DEALING WITH THE FEDERAL INCOME TAX
ISSUES ARISING FROM THE PLAN HAVE BEEN THE SUBJECT OF RECENT LEGISLATION AND, AS
A RESULT, MAY BE SUBJECT TO AS YET UNKNOWN ADMINISTRATIVE OR JUDICIAL
INTERPRETATIONS. THE DEBTOR HAS NOT REQUESTED A RULING FROM THE IRS WITH RESPECT
TO THESE MATTERS. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN AS TO THE
INTERPRETATION THAT THE IRS WILL ADOPT. THERE ALSO MAY BE STATE, LOCAL OR OTHER
TAX CONSIDERATIONS APPLICABLE TO EACH CREDITOR. CREDITORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE CONSEQUENCES OF THE PLAN TO THEM UNDER FEDERAL
AND APPLICABLE STATE, LOCAL AND OTHER TAX LAWS.
A. U.S. Federal Income Tax Consequences to Holders of Allowed
Claims and Equity Interests
The U.S. federal income tax consequences to holders of an Allowed
Claim, Common Equity Interest or Preferred Equity Interest arising from the
distributions to be made under the Plan may vary depending upon, among other
things: the type of consideration received by the holder in exchange for its
Claim or Interest; for Claims, the nature of the indebtedness owing to the
holder; whether the holder has previously claimed a bad debt or worthless
security deduction in respect of such holder's Claim or Interest; and whether
such Claim or Interest constitutes a "security" for purposes of the
reorganization provisions of the Tax Code.
As noted above, the U.S. federal income tax consequences of the Plan to
holders of Allowed Claims will depend, in part, on whether the indebtedness
underlying their Claims constitutes securities for purposes of the
reorganization provisions of the Tax Code. Neither the Tax Code nor the
regulations thereunder define the term "securities." The determination of
whether a Claim constitute a "security" depends upon the nature of the
indebtedness or obligation. Important factors to be considered include, among
other things, the length of time to maturity, the degree of continuing interest
in the issuer, and the purpose of the borrowing. Generally, corporate debt
instruments with maturities when issued of less than five years are not
considered securities, and corporate debt instruments with maturities when
issued of ten years or more are considered securities. Claims for accrued
interest are generally not considered securities. Subject to the discussion
below regarding characterization of the Debentures, based on these factors, all
Allowed Claims should not be considered securities.
Characterization of the Debentures is uncertain. The Debtor believes
that the Debentures should not constitute "securities" because all of the
Debentures matured within approximately two years of their issue date. However,
other characteristics of the Debentures, such as the ability of holders to have
converted the Debentures into shares of Old UPC Common Stock, may cause the
Debentures to be characterized as securities. Unless otherwise specifically
noted, the remainder of this discussion assumes that the Debentures will not be
characterized as securities. However, due to the uncertainty regarding this
characterization, holders of Debentures are urged to consult their own tax
advisors.
HOLDERS OF ALLOWED CLAIMS SHOULD EVALUATE THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN TO THEM BASED UPON THEIR OWN PARTICULAR CIRCUMSTANCES
AND SHOULD NOT RELY SOLELY ON THE GENERAL DISCUSSION HEREIN.
1. Tax Consequences by Class.
Subject to the discussion below in "Certain Other U.S. Federal Income
Tax Considerations for Holders of Allowed Claims":
(a) Holders of Allowed Claims That Are Not Securities. Pursuant to
the Plan, holders of Allowed Claims that are not securities
will receive either (i) payment in full in cash (General
Unsecured Claims); (ii) New UPC Preferred Stock (the Infinity
Secured Claim); or (iii) New UPC Common Stock (Debenture
Claims and Securities Claims). Generally, a holder of an
Allowed Claim that is not a security will realize gain or loss
on the exchange in the amount equal to the difference between
(i) the "amount realized" in respect of such Claim (other than
in respect of accrued interest) and (ii) the holder's tax
basis in its Claim (other than any Claim in respect of accrued
interest). The "amount realized" will be equal to the fair
market value of the property received. The holder's tax basis
in its Allowed Claim will generally equal the amount paid, if
any, by the holder for the Claim increased by the amount of
any accrued original issue discount and decreased by the
amount of any loss deduction previously taken with respect to
such Claim. A holder's tax basis in the property received will
be equal to the fair market value of such property at the time
of the exchange and the holder's holding period with respect
to such property received will begin on the day after the
Effective Date. The gain or loss should generally be capital
in nature if the Allowed Claim is a capital asset within the
meaning of Section 1221 of the Tax Code, otherwise, such gain
or loss will be ordinary income. Any capital gain or loss
would be long-term if the Allowed Claim was held by the holder
for more than one year as of the Effective Date, otherwise
such capital gain or loss will be short-term.
(b) Holders of Allowed Claims That Are Securities. In general, if
the Debentures constitute securities, the exchange of such
Debentures for New UPC Common Stock should qualify as a
"recapitalization" for U.S. federal income tax purposes. In
such case, holders of the Debentures will generally not
recognize gain or loss on the receipt of New UPC Common Stock
in satisfaction of their Debentures, and the initial tax basis
of the New UPC Common Stock received (other than such stock
received in exchange for accrued interest) will be equal to
the adjusted basis of the Debentures surrendered in exchange
for such stock. Further, if the Debentures constitute
securities, the New UPC Common Stock received (other than such
stock received in exchange for accrued interest) will have a
holding period that includes the period during which the
holders held their Debentures.
(c) Holders of Allowed Equity Interests. All Equity Interests (the
Preferred Stock and the Common Stock) should constitute
securities under the federal tax laws. The exchange of an
Equity Interest for shares of New UPC Common Stock should
qualify as a "recapitalization" for U.S. federal income tax
purposes. In such case, holders of Equity Interests will
generally not recognize gain or loss on the receipt of New UPC
Common Stock in satisfaction of their Equity Interests. The
initial tax basis of the stock received (other than stock
received in exchange for accrued dividends) generally will be
equal to the adjusted basis of the Equity Interest surrendered
in exchange for such stock. The stock received (other than
stock received in exchange for accrued dividends) will have a
holding period that includes the period during which the
holders of such Equity Interests held their Equity Interests.
B. Certain Other U.S. Federal Income Tax Considerations for
Holders of Allowed Claims
(a) Accrued Interest and Accrued Dividends.
Notwithstanding the discussion above in "Tax Consequences by Class",
holders of Allowed Claims or Equity Interests in respect of which interest or
dividends accrue may have different tax consequences. Holders of Allowed Claims
or Equity Interests will be treated as having received ordinary income to the
extent that the shares of the New UPC Common Stock or the New UPC Preferred
Stock the holder receives is allocable to accrued but unpaid interest (including
original issue discount) or dividends, if any, on the Allowed Claims or Equity
Interests, provided that the holder has not previously included such amount in
gross income. Holders who have previously included such accrued interest or
dividends in gross income will recognize a loss equal to the extent the amount
of such previous inclusion in gross income exceeds the fair market value of the
New UPC Common Stock or the New UPC Preferred Stock received by the holder that
is allocable to such accrued interest or dividends. With respect to holders of
Allowed Claims or Equity Interests who do not receive full payment of their
claims (including accrued interest or dividends), the manner in which the
property received by the holders should be allocated to accrued interest or
dividends as opposed to their underlying claim is not clear. The initial tax
basis of stock received that is allocable to accrued interest or dividends is
equal to the fair market value of such stock on the Effective Date. The holding
period of the stock received that is allocable to accrued interest or dividends
commences on the day after the Effective Date.
(b) Market Discount.
"Market discount" arises when a debt instrument is purchased or
acquired for less than its stated redemption price at maturity, unless the
discount amount is no more than a specified de minimis amount. A holder of an
Allowed Claim with "market discount," as described above, must treat any gain
recognized with respect to the principal amount of such Claim as ordinary income
to the extent of the market discount accrued during the holder's period of
ownership, unless the holder has elected to include the market discount in
income as it accrued. Any additional gain will be characterized as discussed
above.
C. U.S. Federal Income Tax Consequences to the Debtor
1. Discharge of Indebtedness Income.
The Debtor will generally realize cancellation of debt ("COD") income
to the extent a creditor receives an amount of consideration in respect of its
claim that is less than the amount of such claim. Pursuant to the Plan, the
Debtor will issue New UPC Common Stock and New UPC Preferred Stock in
satisfaction of certain indebtedness. As a result, the Debtor will be treated as
having satisfied the indebtedness with an amount of money equal to the fair
market value of the newly issued stock that is issued in satisfaction of such
indebtedness. The extent by which the amount of the debt discharged exceeds any
consideration therefor, if any, will be COD income under the Tax Code. Because
the discharge of indebtedness of the Debtor will occur in a proceeding under the
Bankruptcy Code, the Reorganized Debtor will be able to exclude any COD income
from gross income. As a consequence of this exclusion (the "Bankruptcy
Exclusion"), the Debtor must reduce certain tax attributes.
Under the Plan, all of the Allowed Claims are to be satisfied in full,
other than the Debenture Claims. The Debenture Claims will be satisfied by the
issuance of new UPC Common Stock. As a result of the satisfaction of the
Debenture Claims, the Debtor will realize COD income under the Plan. However, as
a result of the Bankruptcy Exclusion, the Debtor will not recognize gross income
as a result of this COD income. Instead, the Debtor must reduce certain tax
attributes to the extent of the income excluded under the Bankruptcy Exclusion.
Pursuant to the Tax Code, tax attribute reduction occurs after the tax
liability for the taxable year of debt discharge is determined. Unless the
Debtor elects to first reduce its tax basis in depreciable property, the amount
of any COD income will first be applied against and reduce the Debtor's net
operating losses and net operating loss carryovers ("NOLs"), on a
dollar-for-dollar basis, and then be applied to reduce other specified tax
attributes in the order of priority specified in the Tax Code. Accordingly, as a
result of the exclusion of COD income pursuant to the Bankruptcy Exclusion, the
Debtor will be required to reduce its available NOLs by approximately $5 to $10
million.
2. Accrued Interest.
To the extent that there exists accrued but unpaid interest on the
indebtedness owing to holders of Allowed Claims and to the extent that such
accrued but unpaid interest has not previously been deducted by the Debtor,
portions of payments made in consideration for the indebtedness underlying such
Allowed Claims that are allocable to accrued but unpaid interest should be
deductible by the Reorganized Debtor. Any such interest that is not paid will
not be deductible by the Reorganized Debtor and will not give rise to COD
income.
To the extent that the Debtor has previously taken a deduction for
accrued but unpaid interest, any amounts so deducted that are paid will not give
rise to any tax consequences to the Reorganized Debtor. If such amounts are not
paid, they will give rise to COD income that would be excluded from gross income
pursuant to the Bankruptcy Exclusion. As a result, the Debtor would be required
to further reduce its NOLs to the extent of such interest previously deducted
and not paid. The Debtor has not determined the precise amount by which the NOLs
would be further reduced as a result of interest previously deducted and not
paid; however, this amount would not exceed [$1,500,000.]
3. The Merger.
The Merger should qualify as a reorganization under Sections
368(a)(1)(A) and 368(a)(2)(D) of the Tax Code, and no tax gain or loss will be
recognized by the Reorganized Debtor or UPC Merger Sub as a result of the
Merger.
After consummation of the Merger, the Reorganized Debtor will elect to
file a consolidated tax return with UPC Merger Sub. In general, this election
will cause the Reorganized Debtor and UPC Merger Sub to be treated as a single
entity for tax purposes.
One principal advantage of filing a consolidated tax return is that, in
general, losses of one member of the consolidated group may be used to offset
income of other members. Thus, subject to certain exceptions and limitations
(the significant exceptions and limitations are discussed in Section 4 below),
the Reorganized Debtor's losses (including NOLs) generally may be used to offset
the income of UPC Merger Sub (or vice versa) to reduce the tax liability of the
group.
4. Utilization of Debtor's Net Operating Loss Carryovers.
(a) Section 382.
Section 382 of the Tax Code provides rules limiting the utilization of
a corporation's NOLs following a more than 50% change in ownership of a
corporation's equity (an "ownership change"). An ownership change will occur
with respect to the Reorganized Debtor in connection with the Plan. Therefore,
the Reorganized Debtor's NOLs will be limited by Section 382 of the Tax Code,
unless the Bankruptcy Exception (described below) applies to the transactions
contemplated by the Plan. Unless the Bankruptcy Exception applies, the amount of
post-ownership change annual taxable income of the Reorganized Debtor's
consolidated group that can be offset by the Reorganized Debtor's pre-ownership
change NOLs generally cannot exceed an amount equal to the product of (i) the
fair market value of the Reorganized Debtor's stock prior to the Merger (subject
to various adjustments) multiplied by (ii) the federal long-term tax-exempt rate
in effect on the date of the ownership change (the "Annual Limitation"). The
value of the Reorganized Debtor's stock for purposes of this computation would
reflect the increase, if any, in value resulting from any surrender or
cancellation of creditors' claims in the bankruptcy reorganization. The federal
long-term tax-exempt rate in effect as of June, 1999 is 4.85%. Accordingly, the
Debtor estimates that, unless the Bankruptcy Exception is applicable, the Annual
Limitation would be approximately $400,000.
Unless the Bankruptcy Exception is applicable, the Annual Limitation
may also apply to limit the Reorganized Debtor's ability to utilize certain
losses and deductions (other than its NOLs) that are generated and reportable
after the Effective Date, but that are "built-in" as of the Effective Date.
Section 382(l)(5) of the Tax Code (the "Bankruptcy Exception") provides
that the Annual Limitation will not apply to limit the utilization of the
Reorganized Debtor's NOLs if the stock of the Reorganized Debtor owned by those
persons who were shareholders of the Reorganized Debtor immediately before the
ownership change, together with certain stock of the Reorganized Debtor received
by certain holders of Allowed Claims pursuant to the Plan, comprise 50% or more
of the value and voting power of all of the stock (other than "Straight
Preferred Stock", described below) of the Reorganized Debtor outstanding
immediately after the ownership change. Stock received by such holders will be
included in the 50% calculation if, and to the extent that, the holders
constitute "historic creditors." A "historic creditor" is a holder of an Allowed
Claim that (i) was held by such holder since July 14, 1997 (the date that is 18
months before the date on which the Reorganized Debtor filed its petition with
the Bankruptcy Court) or (ii) arose in the ordinary course of business and is
held by the person who at all times held the beneficial interest in such Allowed
Claim. In determining whether the Bankruptcy Exception applies, certain
creditors who would own a de minimis amount of Reorganized Debtor stock pursuant
to the Plan are presumed to have held their Claims since the origination of such
Claims. In general, this de minimis rule applies to creditors who would own
directly or indirectly less than 5% of the total fair market value of the
Reorganized Debtor's stock pursuant to the Plan.
The Reorganized Debtor could elect to not have the Bankruptcy Exception
apply, in which event the Annual Limitation would apply. The Reorganized Debtor
has determined not to make such an election.
In making the 50% calculation, "straight preferred stock" issued by the
Reorganized Debtor is not counted as stock. Straight preferred stock includes
stock that (i) is not entitled to vote, (ii) is limited and preferred as to
dividends and does not participate in corporate growth to any significant
extent, (iii) has redemption and liquidation rights that do not exceed the issue
price of such stock (except for a reasonable redemption or liquidation premium),
and (iv) is not convertible into another class of stock. Prior to the
Confirmation Date, the Debtor shall seek a determination that the shares of New
UPC Preferred Stock will have a fair market value equal to their face amount as
of the Effective Date and that the Reorganized Debtor will have sufficient
assets and cash flow (not taking into account future growth of the Reorganized
Debtor's assets) to meet all required payments on the New UPC Preferred Stock.
Based upon the characteristics of the New UPC Preferred Stock, if the
Reorganized Debtor obtains such a determination, the Reorganized Debtor believes
that the New UPC Preferred Stock will qualify as straight preferred stock.
However, the IRS could challenge the characterization of the New UPC Preferred
Stock as straight preferred stock. If such challenge is successful, the
Bankruptcy Exclusion would not apply and the Annual Limitation would apply to
the Reorganized Debtor's NOLs.
If the Bankruptcy Exception applies, a subsequent ownership change with
respect to the Reorganized Debtor occurring within two (2) years after the
Effective Date will result in the reduction of the Annual Limitation that would
otherwise be applicable to the subsequent ownership change to zero. Thus, a
subsequent ownership change within two years after the Effective Date would
eliminate the Reorganized Debtor's NOLs.
In order to avoid a subsequent ownership change, the Amended UPC
Charter will contain a "5% Ownership Limitation," effective until the last day
of the taxable year of Reorganized Debtor that includes the second anniversary
of the Effective Date. It is expected that this limitation will provide that no
person who beneficially owns, directly or indirectly, five percent or more of
the total fair market value of the Reorganized Debtor's stock, or who, upon the
purchase, sale, or other transfer of any shares of the Reorganized Debtor's
stock, would beneficially own, directly or indirectly, or would cause any other
person beneficially to own, directly or indirectly, five percent or more of the
total fair market value of the Reorganized Debtor's stock (a "5% Holder"), may
sell or purchase any shares of stock (or any option, warrant or other right to
purchase or acquire shares of the Reorganized Debtor's stock or any securities
convertible into or exchangeable for shares of stock), except as authorized by
the Board of Directors or its designee, subject to the waiver or modification of
this restriction by the holders of a majority of the outstanding stock. For
purposes of the 5% Ownership Limitation, "stock" means stock for U.S. federal
income tax purposes, but does not include stock that qualifies as Straight
Preferred Stock. The purpose of the 5% Ownership Limitation is to reduce the
risk that a change in the ownership of the Reorganized Debtor may result in the
loss or reduction of federal income tax attributes of the Reorganized Debtor for
purposes of Sections 382 and 383 of the Tax Code. However, the implementation of
the 5% Ownership Limitation also could have the effect of impeding an attempt to
acquire a significant or controlling interest in the Reorganized Debtor interest
and, as a practical matter, may make it impossible for a 5% Holder to pledge
such securities on margin.
Any 5% Holder who proposes to transfer shares of stock that would be
subject to the 5% Ownership Limitation must, prior to the date of the proposed
transfer, request in writing (a "Request") that the Directors or the designee of
the Directors (as defined in the Restated Certificate) review and authorize the
proposed transfer. A Request must, among other things, be delivered to the
President of the Reorganized Debtor and must include (i) the name, address and
telephone number of the 5% Holder, (ii) a description of the stock proposed to
be transferred by or to the 5% Holder, (iii) the date of the proposed transfer,
(iv) the name of the transferor and transferee of such shares of stock, and (v)
a request that the Board of Directors or its designee authorize, if appropriate,
the transfer by or to the 5% Holder. If the 5% Holder seeks to buy or sell
shares, then within fifteen (15) business days of receipt by the President of a
Request, either the Directors or the designee shall determine whether to
authorize the proposed transfer described in the Request. In any case, the
Directors or the designee shall conclusively determine whether to authorize the
proposed transfer and shall immediately inform such 5% Holder of such
determination; provided however, that the Directors or the designee shall
authorize a transfer by or to a 5% Holder if that transfer will not jeopardize
the Reorganized Debtor's preservation of its federal income tax attributes
pursuant to Sections 382 and 383 of the Tax Code.
For purposes of applying the 5% Ownership Limitation (including the
determination of whether a holder is a 5% Holder), 10% shall be substituted for
5% for so long as the percentage point changes in the ownership of the
Reorganized Debtor's stock (as determined in accordance with Section 382(g)(1)
of the Tax Code) since the Effective Date (taking into account the proposed
transfer) do not total more than 30 percentage points.
Any transfer of shares of stock that are subject to the 5% Ownership
Limitations in violation of the requirements of the Amended UPC Charter shall be
null and void. The purported transferor shall remain the owner of the
transferred shares and the Reorganized Debtor, as agent for the purported
transferor, shall be authorized to sell such shares to an eligible transferee
that is not subject to the 5% Ownership Limitation. The proceeds of any such
sale shall be applied to reimburse the Reorganized Debtor for its expenses, then
to reimburse the intended transferee for any payments made by the intended
transferee to the transferor, and the remainder, if any, to the original
transferor.
New UPC Common Stock certificates will bear a legend reflecting the
existence of the transfer restrictions.
Although the Annual Limitation will not restrict the deductibility of
the Reorganized Debtor's NOLs if the Bankruptcy Exception applies, the
Reorganized Debtor's NOLs will nevertheless be reduced by any interest paid or
accrued by the Reorganized Debtor during the three (3) taxable years preceding
the taxable year in which the ownership change occurs and during the portion of
the taxable year of the ownership change preceding the ownership change with
respect to all Allowed Claims converted into stock. The Debtor has estimated
that, if the Bankruptcy Exception applies to the Debtor, the aggregate NOLs that
would be available to the Reorganized Debtor after the Bankruptcy Exception
reduction (and after the reduction as a result of the exclusion of COD income)
would be in the range of $15 to $20 million.
(b) Section 384.
In certain circumstances, Section 384 of the Tax Code generally
prevents a corporation from applying its preacquisition NOLs against an acquired
corporation's "Recognized Built-In Gains." "Recognized Built-In Gains" are gains
that are recognized after an acquisition (such as the Merger) with respect to an
asset held by the acquired corporation prior to the acquisition, but only to the
extent the fair market value of the asset exceeded the asset's tax basis as of
the acquisition date. Therefore, where Section 384 of the Tax Code applies, it
will limit the ability of an acquiring corporation from applying its
preacquisition NOLs against the preacquisition appreciation of the acquired
corporation's assets; however, Section 384 of the Tax Code will not limit the
ability of the acquiring corporation from applying its preacquisition NOLs
against the post-acquisition appreciation of the acquired corporation's assets.
Furthermore, Section 384 of the Tax Code does not apply to any gains recognized
more than five (5) years after the acquisition date.
Section 384 of the Tax Code may apply to limit the use of the NOLs of
the Reorganized Debtor with respect to certain gains recognized by the
Reorganized Debtor's consolidated group after the Reorganized Debtor's
acquisition of FSCI in the Merger. In order for Section 384 of the Tax Code to
apply, the Farm Stores Assets must have an aggregate fair market value on the
Effective Date (the "Aggregate Fair Market Value") that exceeds FSCI's aggregate
basis in such assets by the lesser of (i) 15% of the Aggregate Fair Market
Value, or (ii) $10,000,000. The Debtor has not determined the amount, if any, of
such excess; accordingly, it is uncertain whether Section 384 of the Tax Code
would apply. If Section 384 of the Tax Code does apply, the Reorganized Debtor's
consolidated group would generally be unable to utilize the Reorganized Debtor's
NOLs against gains recognized by the Reorganized Debtor's consolidated group
with respect to the sale of any of the Farm Store Assets, to the extent such
asset's fair market value on the Effective Date exceeded its tax basis.
Notwithstanding the foregoing, Section 384 of the Tax Code would not apply to
any gains recognized by the Reorganized Debtor's consolidated group from sales
consummated more than five years after the Effective Date.
Because the Reorganized Debtor intends to continue to operate the
business of FSCI after the Merger, the Reorganized Debtor does not believe that
it will dispose of any significant assets of FSCI in the foreseeable future.
Accordingly, the Reorganized Debtor does not believe that Section 384 of the Tax
Code, if it applied, would be materially applicable to the Reorganized Debtor.
However, if Section 384 of the Tax Code applies, and if the Reorganized Debtor
disposed of any of the Farm Stores Assets within five (5) years after the
Effective Date, Section 384 of the Tax Code may prevent the Reorganized Debtor's
consolidated group from using its NOLs against some or all of the gain generated
from such disposition.
(c) Section 269.
Pursuant to section 269(a)(1) of the Tax Code, the IRS may disallow a
corporate tax benefit if the principal purpose for an acquisition of 50% or more
(in vote or value) of the stock of a corporation (an "Applicable Stock
Acquisition") is the evasion or avoidance of federal income tax by securing a
corporate tax benefit that would not otherwise be available. Furthermore,
pursuant to section 269(a)(2) of the Tax Code, the IRS may disallow a corporate
tax benefit if the principal purpose for certain asset acquisitions ("Applicable
Asset Acquisitions") is the evasion or avoidance of federal income tax by
securing a corporate tax benefit that would not otherwise be available. On the
Effective Date, more than 50% in value of the total outstanding stock of the
Reorganized Debtor will be issued to holders of Allowed Claims, and the Merger
will constitute an Applicable Asset Acquisition. Thus, in addition to the
limitations on, and reductions in, the NOLs set forth in Section 382 of the Tax
Code, the IRS may assert that Section 269(a)(1) of the Tax Code authorizes it to
disallow deductions with respect to some or all of the Reorganized Debtor's NOLs
if either the Plan or the Merger is determined to have been structured
principally for tax avoidance purposes. This determination is primarily a
question of fact.
If the IRS asserts Section 269 of the Tax Code with respect to an
Applicable Stock Acquisition or an Applicable Asset Acquisition, the taxpayer
has the burden of proof because the IRS's determination of a tax avoidance
principal purpose is presumptively correct. If the taxpayer is unable to carry
the burden of proving a principal purpose other than tax avoidance, the
determination of a tax avoidance will stand.
The regulations under Section 269 of the Tax Code provide that, in
cases where the Bankruptcy Exception applies, there is a presumption that
Section 269(a)(1) of the Tax Code will disallow any deduction of the Debtor's
NOLs if the Debtor does not carry on more than an insignificant amount of an
active trade or business during and subsequent to the Chapter 11 Case. The
regulations under the Tax Code provide that this presumption controls unless
rebutted by strong evidence to the contrary. The Reorganized Debtor intends to
retain and continue to operate substantially all of its business as well as the
businesses of FSCI. Accordingly, the Reorganized Debtor does not believe that
this presumption will apply to it. However, if the Reorganized Debtor in the
future were to substantially reduce the amount of its business and the
businesses of FSCI, the IRS, using hindsight, could attempt to apply the
presumption to disallow the Reorganized Debtor's utilization of NOLs.
Even though the presumption in the regulations should not apply, the
IRS could assert that the principal purpose of the Plan and the Merger is to
enhance the ability of the Reorganized Debtor to utilize its NOLs through the
Reorganized Debtor's and UPC Merger Sub's acquisition of the historically
profitable businesses of FSCI. This assertion can be negated by the Reorganized
Debtor's showing that a business purpose (other than tax avoidance) was the
principal motivation for both the Plan and the Merger. Although the Reorganized
Debtor will be required to carry the burden of proof with respect to this issue,
the IRS itself has recognized that courts are generally reluctant to invoke
Section 269 of the Tax Code where a reasonable business purpose existed for the
timing and form of the acquisition, even if the availability of NOLs was a major
consideration in the transaction. As noted above, the determination of whether
tax avoidance is the principal motivation with respect to a transaction is
primarily a question of fact.
The Debtor believes that, if the Plan is challenged by the IRS, the
Reorganized Debtor could show that reasonable business purposes existed for the
implementation of the Plan and that tax avoidance was not the principal
motivation for the Plan. Accordingly, the Debtor believes that Section 269 of
the Tax Code should not apply to the Plan. The Debtor believes that the
creditors' acquisition of control of the Reorganized Debtor pursuant to the Plan
will be made for reasonable business purposes. The creditors have been offered
stock because the Reorganized Debtor cannot offer them sufficient cash and/or
new debt instruments to preserve their investment in the Reorganized Debtor. In
light of business exigencies requiring the Reorganized Debtor to satisfy most of
its indebtedness with stock, tax avoidance should not be considered the
principal motivation for the Plan.
Although the appropriate application of Section 269 of the Tax Code to
the Merger is less certain, the Reorganized Debtor believes that, if the Merger
is challenged by the IRS, the Reorganized Debtor could show that reasonable
business purposes exist for the consummation of the Merger and that tax
avoidance is not the principal motivation for the Merger. Accordingly, the
Debtor believes that Section 269 should not apply to the Merger. The Debtor
believes that the Merger will be consummated principally for reasonable business
purposes. The Merger is anticipated to reap significant synergistic benefits,
create critical mass, accomplish geographical diversity, provide management with
significant experience in the Company's core business, and enhance the
efficiency of all of the reorganized Company's businesses.
Even though the Debtor believes that Section 269 of the Tax Code should
not apply to either the Plan or the Merger, the IRS could assert that Section
269 of the Tax Code applies to either or both of the Plan and the Merger. If
such assertion is successful, Section 269 of the Tax Code would severely limit
or even extinguish the Reorganized Debtor's ability to utilize its pre-ownership
change NOLs. Although the Debtor believes that Section 269 of the Tax Code
should not apply, due to the highly factual nature of the issue, there can be no
assurance that the IRS would not prevail on this issue if it asserts the
application of Section 269 of the Tax Code to the Plan or the Merger.
THE ABOVE SUMMARY HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY.
ALL HOLDERS OF ALLOWED CLAIMS AND EQUITY INTERESTS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES OF THE PLAN.
XIV. CONFIRMATION OF THE PLAN
A. Solicitation of Votes; Voting Procedures
1. Ballots and Voting Deadlines.
A ballot to be used for voting to accept or reject the Plan, together
with a envelope, is enclosed with all copies of this Disclosure Statement mailed
to all holders of Claims and Equity Interests entitled to vote. BEFORE
COMPLETING YOUR BALLOT, PLEASE READ CAREFULLY THE INSTRUCTION SHEET THAT
ACCOMPANIES THE BALLOT. HOLDERS OF COMMON STOCK SHOULD CAREFULLY READ THE
INSTRUCTIONS ACCOMPANYING THIS DISCLOSURE STATEMENT REGARDING HOW TO PROPERLY
COMPLETE THE BALLOT OR MASTER BALLOW, AS APPROPRIATE, WITH RESPECT TO CLASS 7.
The Bankruptcy Court has directed that, in order to be counted for
voting purposes, ballots for the acceptance or rejection of the Plan must be
actually received no later than 4:00 p.m., Prevailing Eastern Time, on August
20, 1999, at the following address:
United Petroleum Balloting
c/o Logan & Company, Inc.
615 Washington Street
Second Floor
Hoboken, New Jersey 07030
YOUR BALLOT MAY NOT BE COUNTED IF IT IS RECEIVED AT THE ABOVE ADDRESS
AFTER 4:00 P.M., PREVAILING EASTERN TIME, ON AUGUST 20, 1999.
2. Parties Entitled to Vote.
Any holder of a Claim against or Equity Interest in the Debtor at the
date on which the order is entered approving the Disclosure Statement whose
Claim or Equity Interest has not previously been disallowed by the Bankruptcy
Court is entitled to vote to accept or reject the Plan, if such Claim or Equity
Interest is impaired under the Plan and either (a) such holder's Claim or Equity
Interest has been scheduled by the Debtor (and such Claim or Equity Interest is
not scheduled as disputed, contingent or unliquidated) or (b) such holder has
filed a proof of claim or proof of interest on or before March 30, 1999, the
last date set by the Bankruptcy Court for such filings. Any Claim or Equity
Interest as to which an objection is filed on or prior to the voting deadline is
not entitled to vote, unless the Bankruptcy Court, upon application of the
holder to whose Claim or Equity Interest an objection has been made, temporarily
allows such Claim or Equity Interest in an amount that it deems proper for the
purpose of accepting or rejecting the Plan. Any such application must be heard
and determined by the Bankruptcy Court on or before commencement of the
Confirmation Hearing. A vote may be disregarded if the Bankruptcy Court
determines, after notice and a hearing, that such vote was not solicited or
procured in good faith or in accordance with the provisions of the Bankruptcy
Code.
IF YOU HAVE ANY QUESTIONS REGARDING THE PROCEDURES FOR VOTING ON THE
PLAN, PLEASE CONTACT THE DEBTOR'S TABULATION AGENT AT THE FOLLOWING ADDRESS:
Logan & Company, Inc.
615 Washington Street
Second Floor
Hoboken, New Jersey 07030
(201) 798-1031
3. Definition of Impairment.
As set forth in section 1124 of the Bankruptcy Code (as applicable to
the Debtor's Chapter 11 case), a class of claims or equity interests is impaired
under a plan of reorganization unless, with respect to each claim or equity
interest of such class, the plan:
(a) leaves unaltered the legal, equitable, and contractual
rights of the holder of such claim or equity interest; or(a) leaves unaltered
the legal, equitable, and contractual rights of the holder of such claim or
equity interest; or
(b) notwithstanding any contractual provision or applicable
law that entitles the holder of a claim or equity interest to demand or receive
accelerated payment of such claim or equity interest after the occurrence of a
default:
(i) cures any such default that occurred before or after
the commencement of the case under the Bankruptcy Code, other than a default of
a kind specified in section 365(b)(2) of the Bankruptcy Code;o (i) cures any
such default that occurred before or after the commencement of the case under
the Bankruptcy Code, other than a default of a kind specified in section
365(b)(2) of the Bankruptcy Code;
(ii) reinstates the maturity of such claim or interest as
it existed before such default;
(iii) compensates the holder of such claim or interest
for any damages incurred as a result of any reasonable reliance on such
contractual provision or such applicable law; ando (iii) compensates the holder
of such claim or interest for any damages incurred as a result of any reasonable
reliance on such contractual provision or such applicable law; and
(iv) does not otherwise alter the legal, equitable or
contractual rights to which such claim or interest entitles the holder of such
claim or interest.o (iv) does not otherwise alter the legal, equitable or
contractual rights to which such claim or interest entitles the holder of such
claim or interest.
4. Classes Impaired Under the Plan.
The following classes of claims and equity interests are impaired under
the Plan and holders of claims and equity interests in such classes are entitled
to vote to accept or reject the Plan:
Class 2: Infinity Secured Claims
Class 5: Debenture Claims
Class 6: Preferred Equity Interests
Class 7: Common Equity Interests
Class 8: UPC Securities Claims
All other classes of claims or interests are unimpaired under the Plan,
are deemed to have accepted the Plan, and are not entitled to vote with respect
to the acceptance or rejection of the Plan.
5. Vote Required for Class Acceptance.
The Bankruptcy Code defines acceptance of a plan by a class of claims
as acceptance by holders of at least two-thirds in dollar amount, and more than
one-half in number, of the claims of that class which actually cast ballots for
acceptance or rejection of the Plan. Thus, class acceptance takes place only if
at least two-thirds in amount and a majority in number of the holders of claims
voting cast their ballots in favor of acceptance.
The Bankruptcy Code defines acceptance of a plan by a class of equity
interests as acceptance by holders of at least two-thirds in amount of the
equity interests of that class that actually cast ballots for acceptance or
rejection of the plan. Thus, class acceptance takes place only if at least
two-thirds in amount of the holders of equity interests voting cast their
ballots in favor of acceptance.
B. Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after notice, to hold a hearing on confirmation of a plan. By order of the
Bankruptcy Court, the Confirmation Hearing has been scheduled for August 24,
1999, at 3:00 p.m., Prevailing Eastern Time in the United States Bankruptcy
Court, District of Delaware. The Confirmation Hearing may be adjourned from time
to time by the Bankruptcy Court without further notice except for an
announcement made at the confirmation hearing or any adjournment thereof.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of a plan. Any objection to confirmation of
the Plan must be made in writing and filed with the Bankruptcy Court and served
upon the following parties, together with proof of service, on or before 4:00
p.m. on August 20, 1999:
Young Conaway Stargatt & Taylor, LLP
Attn: Joel A. Waite
Rodney Square North
1100 North Market Street
P.O. Box 391
Wilmington, DE 19899
Office of the United States Trustee
601 Walnut Street
Curtis Center, Suite 950 West
Philadelphia, PA 19106
Objections to confirmation of the Plan are governed by Bankruptcy Rule
9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, IT WILL
NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
C. Requirements for Confirmation of the Plan
In order for the Plan to be confirmed, regardless of whether all
Impaired Classes of Claims and Interests vote to accept the Plan, the Bankruptcy
Code requires that the Bankruptcy Court determine that the Plan complies with
the requirements of section 1129 of the Bankruptcy Code. In order for the Plan
to be confirmed, section 1129 of the Bankruptcy Code requires, among other
things, that: (i) the Plan receive sufficient acceptances from each Impaired
Class of Claims and Interests, except to the extent that confirmation, despite
the failure of one or more of such Impaired Classes to accept the Plan, is
available under section 1129(b) of the Bankruptcy Code (see below "Confirmation
Without Acceptance of All Impaired Classes"); (ii) the Plan is feasible (that
is, there is a reasonable probability that the Debtor will be able to perform
its obligations under the Plan and continue to operate its business without the
need for further financial reorganization) (see below "Feasibility of the
Plan"); and (iii) the Plan meets the requirements of section 1129(a)(7) of the
Bankruptcy Code, which specify that, with respect to each Impaired Class, each
holder of a Claim or Interest in such Class either (a) accepts the Plan or (b)
receives at least as much pursuant to the Plan as such holder would receive in a
liquidation of the Debtor under chapter 7 of the Bankruptcy Code (see below
"Application of section 1129(a)(7) of the Bankruptcy Code"). In addition, the
Debtor must demonstrate in accordance with section 1129 of the Bankruptcy Code
that (i) the Plan has been proposed in good faith, (ii) the Plan and the Debtor
have complied with the Bankruptcy Code, (iii) payment for services or costs and
expenses in or in connection with the Chapter 11 Case, or in connection with the
Plan, have been approved by or are subject to the approval of the Bankruptcy
Court, (iv) the individuals to serve as the officers and directors of the Debtor
have been disclosed and their appointment or continuance in such office is
consistent with the interests of creditors and Interest holders, (v) the
identity of any insider that will be employed or retained by the Debtor is
disclosed, as well as any compensation to be paid to such insider, (vi) adequate
provision for the payment of all priority claims has been made, (vii) all
statutory fees have been or will be paid, and (viii) the Plan provides for the
continued maintenance of retiree benefits at a certain level.
Although the Debtor believes that the requirements of section 1129 of
the Bankruptcy Code for confirmation of the Plan will be met, there can be no
assurance that the Bankruptcy Court will reach the same conclusion.
1. Acceptance of the Plan.
As a condition to confirmation, the Bankruptcy Code requires that each
Impaired Class of Claims or Interests accept a plan of reorganization, except as
described below under "Confirmation of the Plan -- Confirmation Without
Acceptance of All Impaired Classes." Classes of Claims or Interests that are not
impaired under a plan are deemed to have accepted the plan and are not entitled
to vote.
Classes 2, 5, 6, 7 and 8 are Impaired under the Plan, and, therefore,
must accept the Plan in order for it to be confirmed without application of
section 1129(b) of the Bankruptcy Code. In that regard, based on discussions and
negotiations between the Debtor and Infinity, the Debtor currently anticipates
that the holders of the requisite majorities of Claims and Interests, as
applicable, contained in Classes 2, 5 and 6 will vote to accept the Plan.
Section 1129(b) is discussed below in "Confirmation of the Plan -- Confirmation
Without Acceptance of All Impaired Classes."
2. Feasibility of the Plan.
The Bankruptcy Code requires that, in order to confirm the Plan, the
Bankruptcy Court must find that confirmation of the Plan will not likely be
followed by the liquidation or the need for further financial reorganization of
UPC, except as specifically contemplated by the Plan (the "Feasibility Test").
For the Plan to meet the Feasibility Test, the Bankruptcy Court must find that
it is reasonably likely that reorganized UPC will possess the resources and
working capital necessary to fund its operations and that is reasonably likely
that reorganized UPC will be able to meet its obligations under the Plan.
As part of its due diligence the Debtor will analyze and carefully
consider its ability to meet its obligations under the Plan. As part of its
analysis, the Debtor will consider the Financial Projections developed by F.S.
Management with respect to the Debtor's financial performance after consummation
of the Plan and the Merger. These projections and the significant assumptions on
which they are based are included in this Disclosure Statement. See "Business
Plan & Projections" and "The Plan -- Sources and Uses of Funds."
Holders of Claims and Interests are cautioned not to place undue
reliance on the Financial Projections prepared by F.S. Management or Debtor's
analysis thereof and are advised to consult with their own advisors. In
connection with confirmation of the Plan, the Bankruptcy Court will have to
determine that the Plan is feasible. There can be no assurance that the
Bankruptcy Court will agree with the Debtor's determinations. In particular,
there can be no assurance that the Bankruptcy Court will accept the projections
or the assumptions underlying F.S. Management's or the Debtor's determination.
3. Application of Section 1129(a)(7) of the Bankruptcy Code.
Even if the Plan is accepted by each Impaired Class of Claims and
Interests, in order to confirm the Plan, the Bankruptcy Court must determine
that either (i) each member of an Impaired Class of Claims or Interests has
accepted the Plan, or (ii) the Plan will provide each such non-accepting member
of an Impaired Class of Claims or Interests a recovery that has a value as of
the Effective Date at least equal to the value of the distribution that each
such member would receive if UPC were liquidated under chapter 7 of the
Bankruptcy Code on the Effective Date (the "Best Interests Test"). If all
members of an Impaired Class of Claims or Interests accept the Plan, the Best
Interests Test does not apply to that Class.
To determine what holders in each Impaired Class of Claims and
Interests would receive if UPC were liquidated, the Bankruptcy Court must
determine the dollar amount that would be generated from the liquidation of
UPC's assets and properties in the context of a chapter 7 liquidation case, as
well as consider the cash held by UPC as of the Effective Date. Secured Claims
and the costs and expenses of the liquidation case must then be paid in full
from the liquidation proceeds before the balance of those proceeds would be made
available to pay any other Claims and Interests.
Under chapter 7, absent subordination in accordance with section 510 of
the Bankruptcy Code, the rule of absolute priority of distribution applies.
Under that rule no junior creditor receives any distribution until the Allowed
Claims of all senior creditors are paid in full, and no holder of an Interest
receives any distribution until the Allowed Claims of all creditors and all
Senior Allowed Interests are paid in full.
After consideration of the effect that a chapter 7 liquidation case
would have on the ultimate proceeds available for distribution to the holders of
Impaired Claims and Interests, including (i) the increased costs and expenses of
liquidation under chapter 7 arising from fees payable to a trustee in bankruptcy
and professional advisors to such a trustee, (ii) the erosion in the value of
UPC's assets in the context of an expeditious liquidation as is required by
chapter 7 and the "forced sale" atmosphere that would prevail, (iii) the adverse
effects on the salability of business segments that could result from the
probable departure of key employees, (iv) the costs attributable to the time
value of money resulting from what is likely to be a more protracted proceeding
than if the Plan is confirmed (because of the time required to liquidate the
assets of UPC, resolve claims and related litigation and prepare for
distributions), (v) the application of the rule of absolute priority (as
described in the immediately preceding paragraph) to distributions in the
chapter 7 liquidation, and (vi) the likelihood that the commencement of a
chapter 7 case for UPC will necessitate the filing of chapter 7 cases for UPC's
operating subsidiaries, Calibur and Jackson, the Debtor believes that the
confirmation of the Plan will provide each holder of a Claim or Interest in an
Impaired Class with a recovery at least equal to the recovery that such holder
would receive pursuant to a liquidation of assets of UPC under chapter 7 of the
Bankruptcy Code. The Debtor did not assign a specific discount to the assets as
a result of any of the enumerated factors.
The Debtor's belief that confirmation of the Plan will provide each
holder of a Claim or Interest in an Impaired Class with a recovery at least
equal to the recovery that such holder would receive pursuant to a liquidation
under chapter 7 of the Bankruptcy Code is based on a comparison of the
liquidation values set forth below with the Debtor's estimate of the value of
the distributions to the holders of Claims and Interests pursuant to the Plan.
There can be no assurance that the liquidation value determined by the Debtor
will be accepted by the Bankruptcy Court. The Debtor's estimate of the value of
such distributions, together with the Debtor's estimate of the percentage of
each Claim to be satisfied under the Plan, is set forth in the table set forth
below.
The Liquidation Analysis set forth below reflects the Debtor's
estimates of the proceeds that would be realized if UPC, Calibur and Jackson
were to be liquidated under chapter 7 of the Bankruptcy Code by a court
appointed trustee. The Liquidation Analysis assumed that the liquidation period
would last two months and was based on the Debtor's income statement and balance
sheet as of September 30, 1998. The analysis assumed the assets of UPC and its
subsidiaries were sold for cash in an orderly liquidation process and the net
proceeds after payments of the Debtor's debts would be distributed to the
SECURITY HOLDERS. The Liquidation Analysis suggested that there would be no
remaining value (after repayment of debt obligations) for the holders of Common
Stock or Preferred Stock upon liquidation of the Debtor's assets.
Given that UPC would be under substantial financial pressure due to its
debt obligations, the Debtor's management assumed that any sale would likely be
at a discount to the Debtor's "going concern" market value. This discounted
value reflects the estimated value that could be realized if the owner of a
business were forced to sell or otherwise dispose of its assets under distressed
conditions, for cash or cash equivalents, within a short period of time. Based
upon the likelihood of a distressed sale, management anticipated that under such
circumstances buyers would substantially discount the "going concern" value and
that the net value for holders of unsecured debt and noteholders would be
substantially less than that which might be achieved under the Plan.
The following table details the computation of liquidation proceeds:
Hypothetical net liquidation proceeds(a)..............................$8,430,000
Less: chapter 7 administration costs(b).................................$225,000
Less: payment of disposition-related taxes....................................$0
Less: Amount owed under the secured A-Note and B-Note.................$7,300,000
Less: Amount owed other secured creditors..............................$930,000
Less: Trade debt of Calibur and Jackson.................................$150,000
Liquidation value available for distribution to pay Trade Debt of UPC..$(25,000)
Liquidation value available for distribution to holders of Debentures.........$0
Liquidation value available for distribution to Equity Interest holders
of the Debtor (including preferred and common)................................$0
- --------------
(a) Hypothetical net liquidation proceeds, as estimated by the Debtor. The
hypothetical net liquidation proceeds include interest on cash balances
during the liquidation period at an assumed pretax rate of 5% per annum
and reflect the estimated value of the assets available to creditors
and equity interest holders of the Debtor after the payment of specific
claims at each of UPC's subsidiaries, including: (i) any
disposition-related taxes, and (ii) severance payments, but without
subtracting the liabilities at each subsidiary which must be paid in
full before any obligations owed by UPC can be paid.
(b) Includes estimated asset disposition fee expenses of 3% of estimated
net liquidation proceeds.
The table below sets forth a comparison of the estimated distributions
to holders of Impaired Claims and Interests under the Plan with the estimated
recoveries of such holders in a liquidation of the Debtor.
Estimated Estimated
Estimated Liquidation Recovery Plan Recovery
--------- ---------------------------- ----------------------
Claim
Amount Amount Percent<F2> Amount Percent<F3>
------ ------ ----------- ------ -----------
Liquidation proceeds available $ 8,105,000
for distribution
Class 2 -- Infinity Secured $7,300,000 $ 7,300,000<F4> 100.0 7,000,000 100.0
Claim
Class 3 - Secured Claims 930,000 805,000<F5> 86.5 930,000 100.0
(Other than the Infinity
Security Claim)<F5>
Unclassified - Administrative 140,000 0 0.0 140,000 100.0
Claims
Unclassified - Priority Tax 30,000 0 0.0 30,000 100.0
Claims
Class I -- Priority Non-Tax 10,000 0 0.0 10,000 100.0
Claims
Class 4 -- General Unsecured 200,000 0 0.0 200,000 100.0
Claims<F6>
Class 5 - Debenture Claims<F7> 7,505,000 0 0.0 6,597,500 87.9
Class 6 - Preferred Equity 14,163,000 0 0.0 2,450,500 17.3
Interests<F8>
Class 7 - Common Equity 0 0 0.0 -- --
Interests<F9>
Class 8 - UPC 0 0 0.0 [] []
Securities Claims<F10>
<FN>
- --------------
<F1> For purposes of the Liquidation Analysis, Claims and Interests have
been grouped together in accordance with the rules of absolute priority
under the Bankruptcy Code, which UPC believes would be applied in a
liquidation.
<F2> Percentage shown in the table as "Estimated Liquidation Recovery --
Percentage" is the quotient of the present value of the available
liquidation proceeds divided by the estimated amount of Claims or
Interests in such Class.
<F3> Amount shown in the table as Estimated Plan Recovery -- Percentage is
the quotient of the assumed value of the securities to be distributed
to all holders of Claims or Interests in such Class under the Plan
divided by the estimated amount of such Claims or Interests. It should
be noted that depending on general market conditions and other factors
prevailing at the relevant times, the equity securities may trade at a
price other than that which was assumed for purposes of this analysis.
Accordingly, no representation can be, or is being, made with respect
to whether the percentage recoveries shown in the table above will
actually be realized by the holder of Claims or Interests in any
particular Class under the Plan.
<F4> Assumes all payments are received at the Calibur and Jackson levels,
where the obligations owed to Infinity under the A-Note and the B-Note
and the obligations owed to the SBA are secured by the assets of such
subsidiaries.
<F5> The SBA claim represents first and second mortgage loans in the
aggregate amount of $930,000 to Calibur, which are secured by UPC real
property titled in the name of the UPC. As of September 30, 1998, the
combined balance of the two notes was $922,284, and the balance should
decrease because the Debtor is making monthly payments on the SBA
notes. Additionally, the Debtor is currently leasing the location to a
non-affiliated third party which has the right to acquire the location
from the Debtor by assuming the SBA notes. Liquidation proceeds assumes
that either this third party or another party would assume the SBA
notes.
<F6> In a liquidation scenario, claims related to certain unliquidated,
contingent liabilities have conservatively been excluded from the class
of General Unsecured Claims. In a Plan, these liabilities are assumed
to be satisfied in the ordinary course of business.
<F7> Under the Plan, the holders of Debentures will receive 1,750,000 shares
of New UPC Common Stock. For purposes of this Liquidation Analysis, the
New UPC Common Stock has been assumed to have a value of $3.77 per
share, based upon the valuation of the New UPC Common Stock provided by
F.S. Management, see "Valuation of New UPC Common Stock."
<F8> Under the Plan the holders of Preferred Equity Interests will receive
650,000 shares of New UPC Common Stock. For purposes of this
Liquidation Analysis, the New UPC Common Stock has been assumed to have
a value of $3.77 per share, based upon the valuation of the New UPC
Common Stock provided by F.S. Management, see "Valuation of New UPC
Common Stock."
<F9> Under the Plan, the holders of Common Equity Interests which are
attributable solely to the ownership of shares of Common Stock prior to
the filing of the Chapter 11 Case will receive 200,000 shares of New
UPC Common Stock.. Additionally, holders of Common Equity Interests
will receive one-half of the remaining assets of the UPC Trust.
<F10> Securities Claimants will be entitled to pursue claims against the UPC
Trust, to which Infinity will transfer 200,000 shares of New UPC Common
Stock.
</FN>
4. Confirmation Without Acceptance of All Impaired Classes.
Section 1129(b) of the Bankruptcy Code provides that a plan can be
confirmed even if it is not accepted by all Impaired Classes of Claims and
Interests as long as at least one Impaired Class of Claims has accepted it,
without counting the votes of insiders. The Bankruptcy Court may confirm the
Plan notwithstanding the rejection of an Impaired Class of Claims or Interests
if the Plan "does not discriminate unfairly" and is "fair and equitable" as to
each Impaired Class that has rejected the Plan.
A plan does not discriminate unfairly within the meaning of the
Bankruptcy Code if a rejecting Impaired Class is treated substantially similar
to other classes of equal rank and priority.
A plan is "fair and equitable" with respect to a class of non-accepting
secured claimants, among other things, if the plan provides (a) that each
secured creditor in the class retains under the plan its liens on the property
securing its claims and receives 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 such secured creditor's interest in the estate's
interest in such property, (b) for the sale, subject to section 363(k) of the
Bankruptcy Code, of any property that is subject to the liens securing such
claims, free and clear of such liens, with such liens attaching to the proceeds
of such sale, and for the treatment of the liens on such proceeds as described
in (a) above or (c) below, or (c) for the realization by the secured creditor of
the indubitable equivalent of its secured claim.
A plan is "fair and equitable" with respect to a non-accepting Impaired
class of unsecured claims, among other things, 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) no holder of any Claim or Interest which is junior to the claims of such
non-accepting Impaired Class of unsecured claims receives or retains any
property under the plan on account of its Claim or Interest.
A plan is "fair and equitable" with respect to a non-accepting Impaired
Class of Interests if, among other things, (a) the plan provides that each
holder of an Interest in such class receives or retains property of a value as
of the effective date of the plan equal to the greater of (i) the allowed amount
of any fixed liquidation preference or fixed redemption price to which such
holder is entitled, or (ii) the value of such interest, or (b) no holder of any
interest which is junior to the interests of such non-accepting Impaired Class
of Interests receives or retains any property under the plan on account of its
interest.
The Debtor believes that the treatment afforded to each class of
Impaired Claims and Interests under the Plan (i) does not discriminate unfairly,
and (ii) is fair and equitable. No assurance can be given, however, that if any
of Class 2, Class 5, Class 6, Class 7 or Class 8 rejects the Plan, the
Bankruptcy Court will agree with the Debtor's conclusions and find that the Plan
is non-discriminatory and fair and equitable with respect to such rejecting
Class.
D. Alternatives to Confirmation of the Plan.
If the Plan is not confirmed, the Debtor (or any other party in
interest if the Debtor's exclusive right to propose a plan is terminated) could
attempt to formulate and propose a different plan or plans of reorganization.
Such plans could involve a reorganization and continuation of UPC's business, a
sale of UPC's businesses as going concerns, an orderly liquidation of UPC's
assets, or any combination thereof. If no plan of reorganization is confirmed by
the Bankruptcy Court, the Chapter 11 Case may be converted to a liquidation case
under chapter 7 of the Bankruptcy Code, and/or the Bankruptcy Court may grant
holders of Secured Claims relief from the automatic stay to foreclose on their
collateral and, accordingly, valuable assets of UPC may be lost.
In a chapter 7 case, a trustee will be appointed or elected with the
primary duty of liquidating the assets of UPC. Typically, in a liquidation,
assets are sold for less than their going concern value and, accordingly the
return to creditors would be reduced. Proceeds from liquidation would be
distributed to the creditors of UPC in accordance with the priorities set forth
in the Bankruptcy Code.
Because of the difficulties in estimating what the assets of UPC would
bring in a liquidation and the uncertainties concerning the aggregate claims to
be paid and their priority in liquidation, it is not possible to predict with
certainty what return, if any, each Class of Claims or Interests might receive
in a liquidation. Nevertheless, the Debtor believes that the most likely result
would be the sale of the assets of UPC at a price which is significantly less
than needed to pay the debts of UPC in full. The Debtor believes that holders of
Impaired Claims and Interests would realize a greater recovery under the Plan
than would be realized under a chapter 7 liquidation. See "Application of
Section 1129(a)(7) of the Bankruptcy Code."
Based upon discussions with Infinity, Debtor believes that if the
current Plan is not confirmed and consummated that Infinity will not support an
alternate plan of reorganization, but rather will seek to have the Debtor
liquidated either through a Chapter 11 liqudation or foreclosure action. If the
Debtor is liquidated, Debtor believes it is unlikely that any creditors, other
than Infinity, will receive any distribution. Because the Debtor does not
believe it could borrow sufficient funds to pay Infinity's secured claim or
otherwise satisfy the requirements of Section 1129(b) of the Bankruptcy Code
with respect to Infinity's secured claim, and in light of the Infinity Parties'
significant unsecured claims, the Debtor does not believe it could confirm a
Chapter 11 plan without Infinity's support of such plan. Accordingly, at the
present time, the Debtor believes the Plan and proposed merger are the only
viable alternative to liquidation of the Debtor.
XV. CONCLUSION AND RECOMMENDATION
The Debtor urges holders of impaired Claims and Interests to vote to
accept the Plan and to evidence such acceptance by returning their ballots so
that they will be received on or before 4:00 p.m., Prevailing Eastern Time on
August 20, 1999.
Dated: July 22, 1999
Respectfully submitted,
UNITED PETROLEUM CORPORATION
By:
-----------------------------------
Its:
----------------------------------
TABLE OF CONTENTS
Page
I. INTRODUCTION..........................................................1
II. NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS......................1
III. EXPLANATION OF CHAPTER 11.............................................3
A. Overview of Chapter 11.......................................3
B. Plan of Reorganization.......................................3
IV. SUMMARY OF THE PLAN...................................................6
1. Summary of the Terms of the Plan....................8
2. Changes in Equity Ownership Effected by the Plan...11
3. Other Significant Provisions in the Plan...........12
V. GENERAL INFORMATION..................................................13
A. The Debtor..................................................13
B. Cash Collateral.............................................14
C. Farm Stores.................................................14
D. F.S. Convenience Stores, Inc................................15
E. Walk InStores...............................................15
F. Drive-Thru Stores...........................................17
G. Directors and Officers......................................18
1. Existing Officers and Directors....................18
2. Existing Officer & Director Compensation...........20
3. Proposed Directors.................................21
4. Post Effective Date Officers and Compensation......23
H. Insider Relationships and Transactions......................23
I. The Restructuring...........................................27
1. Background and Reason for Commencing the Chapter
11 Case............................................27
2. Rationale of the Restructuring and the Merger......28
3. Merger Financing...................................30
J. Legal Proceedings...........................................30
1. NASDAQ Allegations.................................30
2. TAJ/National.......................................30
3. Strategic..........................................32
4. Ishmael............................................32
5. Unifirst...........................................32
6. In re United Petroleum.............................33
7. Pisacreta/Tucci....................................33
8. Dotan/Montel.......................................36
VI. FINANCIAL INFORMATION................................................36
VII. BUSINESS PLAN AND PROJECTIONS........................................37
A. Assumptions -Nature and Limitations of Projections..........39
B. Assumptions -Nature of Operations...........................39
1. Sales..............................................39
2. Cost of Sales......................................40
3. Expenses...........................................40
4. Other Income.......................................41
5. Reorganization Expenses............................41
6. Depreciation.......................................41
7. Capital Expenditures...............................41
8. Receivables........................................41
9. Inventory..........................................41
10. Debt Service and Interest..........................41
11. Effects of Plan Consummation.......................41
12. Taxes..............................................44
13. Effects of Chapter 11 Case.........................44
VIII. VALUATION OF THE NEW UPC COMMON STOCK................................44
IX. THE CHAPTER 11 CASE..................................................47
A. Commencement of the Chapter 11 Case.........................48
B. Continuation of Business After the Petition Date............48
C. Representation of the Debtor................................49
X. THE PLAN.............................................................49
A. General.....................................................49
B. Classification and Treatment of Claims and Interests........50
1. Unclassified Claims................................50
2. Classified Claims..................................52
C. Means for Implementation of the Plan........................55
1. Continued Corporate Existence......................55
2. Actions Prior to the Effective Date................55
3. Sources and Uses of Funds..........................57
4. Use of Cash Collateral.............................57
5. Filing and Execution of Plan Documents.............58
6. Intercompany Causes of Action......................58
7. Vesting of Causes of Action........................58
8. Injunction for Indemnities.........................59
9. Severance Policies.................................59
D. Creation of UPC Trust and Appointment of Trustee............59
E. Compromise and Settlement Between and Among
the Debtor, the Infinity Parties, and the UPC Trust.........60
F. Injunctive Protection for the Debtor and the Infinity
Parties.....................................................62
G. Description of Securities and Instruments
to be Issued in Connection With the Plan....................63
1. Preferred Stock to be Issued Pursuant to the Plan..63
2. Common Stock to be Issued Pursuant to the Plan.....64
H. Exemption from Securities Registration for New Securities...66
1. Initial Issuance of New UPC Common Stock and New
UPC Preferred Stock................................66
2. Transfer of Plan Securities........................66
I. Market for New Securities...................................68
J. Executory Contracts and Unexpired Lease.....................68
K. Other Provisions of the Plan................................68
1. Discharge..........................................68
2. Retention and Waiver of Causes of Action...........69
3. Objections to Claims and Interests/Distributions...69
4. Term of Injunctions or Stays.......................70
5. Release............................................71
6. Exculpation........................................71
7. Retention of Jurisdiction..........................72
8. Failure of Court to Exercise Jurisdiction..........73
9. Payment Dates......................................73
10. Successors and Assigns.............................73
11. Payment of Statutory Fees..........................73
XI. COMPARISON OF RIGHTS IN SECURITIES TO BE ISSUED
UNDER THE PLAN TO RIGHTS HELD IN PREPETITION SECURITIES..............73
A........Comparison of the Rights of Holders of
A-Note and the New UPC Preferred Stock...............................73
1. Seniority..........................................73
2. Voting.............................................74
3. Dividends/Interest Payments........................74
4. Conversion.........................................74
5. Security...........................................74
B. Comparison of the Rights of Holders of
Debentures and New UPC Common Stock.........................74
1. Seniority..........................................75
2. Voting.............................................75
3. Dividends/Interest Payments........................75
4. Conversion.........................................75
C. Comparison of the Rights of Holders
of Preferred Stock and New UPC Common Stock.................76
1. Seniority..........................................76
2. Voting.............................................76
3. Dividends/Interest Payments........................76
4. Conversion.........................................76
XII. CERTAIN RISK FACTORS TO BE CONSIDERED................................77
A. Risks Relating to the Debtor's Financial Condition..........77
B. Liquidity Risks.............................................77
C. Ability of the Company to Continue as a Going Concern;
Explanatory Paragraph in Auditors'Report....................78
D. Risks Regarding the Financial Projections...................79
E. Risks Relating to Certain Debt and Equity Holders...........81
1. Risks Particular to Holders of Outstanding Notes...81
2. Risks Particular to Holders of Debentures..........81
3. Risks Particular to Holders of Preferred Stock.....81
4. Risks Particular to the Holders of Common Stock....82
5. No Prior Active Market; Possible Volatility of
Stock Price........................................82
6. Control by Principal Stockholder...................82
F. Risks Relating to Confirmation of the Plan..................82
G. Risks Relating to Approval of the UPC Trust.................83
H. Risks Relating to the Company's Businesses and Farm
Stores(R)BusinessAcquired in The Merger.....................84
1. Industry and Geographic Concentration..............84
2. Competition........................................84
3. Government Regulation..............................84
4. Possible Environmental Liabilities and Regulations.85
5. Volatility of Natural Gas and Oil Prices...........87
6. Drilling Risks.....................................87
7. Uncertainty of Reserve Information and Future Net
Revenue7Estimates..................................87
8. Operating Risks of Oil and Gas Operations..........88
9. Dependence on Personnel............................88
10. Need For Additional Financing......................88
11. Legal Proceedings..................................89
12. Year 2000 Compliance...............................89
13. Benefits of Combining the F.S. Business and the
Debtor's Business May not be Realized..............90
14. Conflicts of Interest; Exculpation and
Indemnification....................................90
15. Weather Related Risk...............................90
XIII. CERTAIN MATERIAL INCOME TAX CONSEQUENCES OF THE PLAN.................91
A. U.S. Federal Income Tax Consequences to Holders of Allowed
Claims and Equity Interests.................................91
1. Tax Consequences by Class..........................92
B. Certain Other U.S. Federal Income Tax Considerations for
Holders of Allowed Claims...................................93
C. U.S. Federal Income Tax Consequences to the Debtor..........94
1. Discharge of Indebtedness Income...................94
2. Accrued Interest...................................95
3. The Merger.........................................95
4. Utilization of Debtor's Net Operating Loss
Carryovers.........................................96
XIV. CONFIRMATION OF THE PLAN............................................102
A. Solicitation of Votes; Voting Procedures...................102
1. Ballots and Voting Deadlines......................102
2. Parties Entitled to Vote..........................103
3. Definition of Impairment..........................104
4. Classes Impaired Under the Plan...................104
5. Vote Required for Class Acceptance................105
B. Confirmation Hearing.......................................105
C. Requirements for Confirmation of the Plan..................106
1. Acceptance of the Plan............................107
2. Feasibility of the Plan...........................107
3. Application of Section 1129(a)(7) of the
Bankruptcy Code...................................108
4. Confirmation Without Acceptance of All Impaired
Classes...........................................113
D. Alternatives to Confirmation of the Plan...................114
XV. CONCLUSION AND RECOMMENDATION.......................................115