Exhibit 99.1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
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: Chapter 11
In re: :
:
DIAMOND BRANDS OPERATING : Case No. 01-1825 (RJN)
CORP., et al., :
:
Debtors. : Jointly Administered :
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DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN OF
REORGANIZATION OF DIAMOND BRANDS OPERATING CORP. AND ITS DEBTOR
AFFILIATES PROPOSED BY THE DEBTORS AND JARDEN CORPORATION
---------------------------------------------------------
Timothy R. Pohl Gregg M. Galardi (I.D. No. 2991)
Rena M. Samole Patricia A. Widdoss (I.D. No. 3786)
SKADDEN, ARPS, SLATE, SKADDEN, ARPS, SLATE
MEAGHER & FLOM (ILLINOIS) MEAGHER & FLOM, LLP
333 West Wacker Drive One Rodney Square, P.O. Box 636
Chicago, Illinois 60606 Wilmington, Delaware 19899
Tel: (312) 407-0700 Tel: (302) 651-3000
Fax: (312) 407-0411 Fax: (302) 651-3001
Attorneys for the Debtors and Debtors-in Possession
Dated as of : Wilmington, Delaware
December 13, 2002
DISCLAIMER
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS INCLUDED
HEREIN FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE JOINT PLAN OF
REORGANIZATION (THE "PLAN") OF DIAMOND BRANDS OPERATING CORP. AND ITS DEBTOR
AFFILIATES PROPOSED BY THE DEBTORS AND JARDEN CORPORATION AND MAY NOT BE
RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE HOW TO VOTE ON THE PLAN.
NO PERSON MAY GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THE
INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DISCLOSURE STATEMENT
REGARDING THE PLAN OR THE SOLICITATION OF ACCEPTANCES OF THE PLAN.
ALL CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE
STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE
PLAN. PLAN SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN AND THE EXHIBITS AND
SCHEDULES ANNEXED TO THE PLAN AND THIS DISCLOSURE STATEMENT. 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.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH
SECTION 1125 OF THE UNITED STATES BANKRUPTCY CODE AND RULE 3016 OF THE FEDERAL
RULES OF BANKRUPTCY PROCEDURE AND NOT NECESSARILY IN ACCORDANCE WITH FEDERAL
OR STATE SECURITIES LAWS OR OTHER NON-BANKRUPTCY LAW. THIS DISCLOSURE
STATEMENT HAS NOT 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. PERSONS OR ENTITIES TRADING IN OR
OTHERWISE PURCHASING, SELLING OR TRANSFERRING SECURITIES OR CLAIMS OF DIAMOND
BRANDS OPERATING CORP. OR ANY OF THE DEBTOR AFFILIATES IN THESE CASES SHOULD
EVALUATE THIS DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSE FOR
WHICH THEY WERE PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, 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. THIS DISCLOSURE
STATEMENT SHALL NOT BE ADMISSIBLE IN ANY NON-BANKRUPTCY PROCEEDING NOR SHALL
THEY BE CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES OR OTHER
LEGAL EFFECTS OF THE PLAN AS TO HOLDERS OF CLAIMS AGAINST, OR EQUITY INTERESTS
IN, DIAMOND BRANDS OPERATING CORP. OR ANY OF THE DEBTOR AFFILIATES IN THESE
CASES.
ii
OVERVIEW OF THE CHAPTER 11 CASES AND THE DEBTORS
This Disclosure Statement contains, among other things, descriptions
and summaries of provisions of the Joint Plan of Reorganization of Diamond
Brand Operating Corp. and Its Debtor Affiliates Proposed by the Debtors and
Jarden Corporation (the "Plan Proponents"), dated as of November 27, 2002 (the
"Plan").
The following introduction and summary (the "Overview") is a general
overview only, which is qualified in its entirety by, and should be read in
conjunction with, the more detailed discussions, information and financial
statements and notes thereto appearing elsewhere in this Disclosure Statement
and the Plan. All capitalized terms not defined in this Disclosure Statement
have the meanings ascribed to such terms in the Plan. A copy of the Plan is
annexed hereto as Appendix A.
A. Business Overview
Diamond Brands Operating Corp. ("DBOC"), its parent holding
company, Diamond Brands Incorporated ("DBI") and its direct subsidiaries,
Forster, Inc. ("Forster") and Diamond Brands Kansas, Inc. ("DBK," and,
collectively, with DBOC, DBI And Forster, the "Debtors," the "Company," or
"Diamond Brands") are a leading manufacturer and marketer of consumer
products, consisting primarily of wooden matches, toothpicks, clothespins,
wooden crafts, and plastic cutlery. The Debtors' products are marketed
primarily under the nationally recognized Diamond and Forster brand names,
which have been in existence since 1881 and 1887 respectively. The Debtors
believe they have the leading domestic retail market share in the wooden
match, plastic cutlery, toothpick, clothespin and wooden craft product
categories.
The Debtors believe their leading market shares has been
achieved by: (1) capitalizing on the Debtors's strong brand name recognition,
high quality products and category management strategy to secure and maintain
retail shelf space; (ii) expanding their product offerings through strategic
acquisitions, including the acquisition of Forster in 1995; (iii) achieving
cost savings through the integration of the Forster businesses, including
headcount reductions and facilities consolidations; and (iv) focusing on
reducing manufacturing costs. The Debtors' products are sold in substantially
all major grocery stores, drug stores, and mass merchandisers in the United
States, as well as to institutional and other customers, such as food service
and food processing companies and redistributors, through a nationwide sales
network consisting primarily of independent broker organizations and directly
to selected mass merchandisers, including Wal-Mart.
The Debtors produce their products at three manufacturing
facilities located in Cloquet, Minnesota, East Wilton, Maine, and Strong,
Maine. The Debtors believe that they are the sole manufacturer of wooden
matches in the United States and hold the leading domestic retail market share
in the wooden match category. The Debtors also believe that they are the
largest domestic manufacturer of toothpicks and clothespins.
As discussed more fully herein, the Debtors' prepetition
liabilities arose primarily from a 1998 recapitalization of the Company (the
"Recapitalization"). In connection with the Recapitalization, the Debtors
undertook a number of capital improvements and other restructuring events that
were expected to lead to increased revenue, which would, in turn, be used to
fund the increased operating expenses created by the capital expenditures and
to service the debt incurred in connection with the Recapitalization. However,
increased operational costs due to higher raw material costs and lower volume
left the Debtors unable to generate the anticipated operating revenue
necessary to meet their numerous debt payment obligations. As a result, the
Debtors' balance sheet was significantly over-leveraged relative to their
existing operations, requiring a financial restructuring. Accordingly, on May,
22, 2001, the Debtors commenced cases under chapter 11 of the United States
Bankruptcy Code (the "Chapter 11 Cases").
iii
B. Summary of the Debtors' Existing Capital Structure
As of the Petition Date, the principal components of the Debtors'
capital structure were as follows:
1. DBOC was party to a Credit Agreement dated as of April
21, 1998 (the "Prepetition Credit Agreement") with the lenders signatory
thereto (the "Prepetition Lenders"), under which approximately $84 million was
outstanding (the "Prepetition Secured Bank Debt") as of the Petition Date. The
Prepetition Secured Bank Debt was guaranteed by DBI and secured by liens on
substantially all of the Debtors' assets. Wells Fargo, NA ("Wells Fargo") was
the administrative agent under the Prepetition Credit Agreement. Approximately
40% of the Prepetition Secured Bank Debt was held by affiliates of Black
Diamond Capital Management ("Black Diamond").
2. DBOC was the issuer of the 101/8% Senior Subordinated
Notes due 2008 (the "DBOC Notes"), which are unsecured and are not guaranteed
by DBI. Approximately $106 million was outstanding as of the Petition Date
under the DBOC Notes (which includes outstanding principal plus interest
accrued but unpaid through the Petition Date).
3. DBI was the issuer of the 127/8% Senior Discount
Debentures due 2009 (the "DBI Notes"), which are unsecured and are not
guaranteed by DBOC. The DBI Notes are zero-coupon notes. Approximately $31
million had accreted and was outstanding under the DBI Notes as of the
Petition Date.
4. DBI was the issuer of two 127/8% Convertible Notes due
2009 (the"DBI Convertible Notes"), which are unsecured and are not guaranteed
by DBOC. Approximately $10.6 million in the aggregate was outstanding as of
the Petition Date under the DBI Convertible Notes (which includes outstanding
principal plus interest accrued but unpaid through the Petition Date).
5. As of the Petition Date, DBOC and its subsidiaries had
various unsecured trade debt obligations outstanding. As of the date hereof,
the Debtors estimate that outstanding prepetition trade debt obligations
aggregate less than $700,000.
6. The Debtors are party to a swap agreement entered into
prepetition with Wells Fargo (the "Wells Fargo Swap Agreement"). Estimated
liabilities under the Wells Fargo Swap Agreement are $1.3 million as of
November 2002. There is a dispute between Wells Fargo and the Creditors'
Committee as to whether DBOC or DBI is the Debtor party to the Wells Fargo
Swap Agreement, and thus whether the Debtors' obligations under the Wells
Fargo Swap Agreement are secured by the assets of DBOC. Wells Fargo asserts
that such obligations are fully secured. See Section V.G.
At the commencement of the Chapter 11 Cases, to ensure that
the Debtors would have sufficient liquidity to operate their businesses in
Chapter 11, the Debtors entered into negotiations with the Prepetition Lenders
for a debtor in possession credit facility and for the consent of the
Prepetition Lenders to allow the Debtors to continue to utilize cash proceeds
generated from the Prepetition Lenders' collateral, on a consensual basis. As
a result of these negotiations, the Debtors and the Prepetition Lenders
entered into a debtor-in-possession credit facility (the "DIP Facility"),
which was approved by the Bankruptcy Court on a final basis on July 13, 2001.
Under the DIP Facility, all Prepetition Secured Bank Debt was converted into
debt under the DIP Facility. As a result, as of the date hereof, the
Prepetition Secured Bank Debt has been fully repaid. The Debtors have
approximately $84 million outstanding under the DIP Facility, which
obligations are secured by liens on substantially all of the Debtors' assets
and which obligations constitute postpetition administrative claims that have
priority in right of payment over virtually all other claims against the
Debtors. See Section V.C.
C. Exploration of Strategic Alternatives and Establishment of Competing
Plan Process
During the Chapter 11 Cases, the Debtors pursued two
parallel paths in an effort to maximize the value of their businesses and
assets for the benefit of the Debtors' creditor constituencies. First, prior
to the Petition Date through early 2002, the Debtors, assisted by their
financial advisors, conducted an active marketing and sales process as part of
their exploration of opportunities for a sale of substantially all of the
assets of the Company.
iv
Second, the Debtors worked with the Creditors' Committee in an effort to
formulate a consensual plan of reorganization.
In order for a reorganization plan to be able to be
confirmed under the Bankruptcy Code, all valid administrative priority claims
are required to be paid in full in cash, unless otherwise agreed to by the
holder of such claims. 11 U.S.C. ss. 1129(a)(9). In the Debtors' cases, this
includes the approximately $84 million of obligations outstanding under the
DIP Facility.
By April 2002, after almost a year in chapter 11, the
Debtors had not been able to procure a firm proposal from any third party that
contained sufficient funding to allow a plan of reorganization to be able to
be confirmed. Firm proposals received by that date were insufficient for the
DIP Facility obligations to be paid in full, and would not have provided any
recovery to unsecured creditors.
On April 30, 2002, the DIP Facility matured by its terms. As
a result, all obligations under the DIP Facility became immediately due and
payable. Pursuant to the final order entered by the Bankruptcy Court approving
the DIP Facility, the lenders thereunder (the "DIP Lenders") had been granted
the right to seek to foreclose on the Debtors' assets. The DIP Lenders were
the same lenders that had been the Prepetition Lenders (because the DIP
Facility essentially refinanced the Prepetition Secured Bank Debt). At that
time, the Debtors were able to obtain short-term forbearance agreements from
the DIP Lenders, but the DIP Lenders could elect not to renew such
forbearances essentially at any time.
In April 2002, the Debtors received an offer from DBOC
Acquisition LLC ("DBOC Acquisition"), an affiliate of Black Diamond, pursuant
to which DBOC Acquisition proposed to acquire substantially all of the assets
of the Company for an amount equivalent to the uncontested amount of
obligations outstanding under the DIP Facility (the "DBOC Acquisition Asset
Purchase Proposal").
Under the DBOC Acquisition Asset Purchase Proposal, DBOC
Acquisition offered to assume certain (but not all) administrative priority
claims. Under that proposal, prepetition unsecured creditors would have
received no recovery. The DBOC Acquisition Asset Purchase Proposal was a
proposal to purchase the Debtors' assets in a sale under section 363 of the
Bankruptcy Code, not pursuant to a reorganization plan.
The DBOC Acquisition Asset Purchase Proposal conditioned the
economic offer contained therein upon the implementation of a formal auction
process by the Bankruptcy Court. Under that proposed auction process, the
Debtors would have the ability to attempt to procure from any third party a
competing proposal, either in the form of a section 363 asset sale or a
funded, confirmable reorganization plan. That is, the Debtors would have the
ability to seek to obtain bids that were higher and better than the offer
being made by DBOC Acquisition. For the Debtors to have the ability to do so,
however, and at the same time have DBOC Acquisition remain obligated to its
proposal, the DBOC Acquisition Asset Purchase Proposal was conditioned upon
the Debtors granting DBOC Acquisition certain bid protections (the "Bid
Protections"). Accordingly, the DBOC Acquisition Asset Purchase Proposal
required the Debtors to file a motion with the Bankruptcy Court seeking
authority (i) to implement a formal auction process and grant DBOC Acquisition
the Bid Protections and (ii) after a 60-day auction period, to enter into a
transaction based upon the highest and best bid received during the auction
process (the "Sale Motion").
As part of the negotiations with DBOC Acquisition over the
terms and conditions of the DBOC Acquisition Asset Purchase Proposal, the
Debtors obtained the agreement of certain DIP Lenders to execute a forbearance
agreement pursuant to which the DIP Lenders party to such forbearance
agreement agreed not to exercise any rights or remedies against the Debtors or
their assets under the expired DIP Facility (the "DIP Forbearance") until
October 31, 2002. Because a majority of the DIP Lenders entered into the DIP
Forbearance, the Debtors were assured that the DIP Lenders would not seek to
foreclose on the Debtors' assets prior to the expiration of the DIP
Forbearance. Importantly, the DIP Forbearance remained in effect by virtue of
the Debtors filing the Sale Motion, regardless of whether the Bankruptcy Court
ultimately approved any aspect of the Sale Motion, including the establishment
of the proposed auction process or the granting to DBOC Acquisition of the Bid
Protections.
v
As a result, (i) to obtain the DIP Forbearance and (ii) in
an effort to commence a process designed to allow the Debtors to make a final
attempt to procure an offer from a third party sufficient to fund a
confirmable reorganization plan (i.e., to pay the DIP Facility and other
allowed administrative and priority claims in full and provide some recovery
to unsecured creditors), the Debtors completed negotiations of the DBOC
Acquisition Asset Purchase Proposal and filed the Sale Motion on August 9,
2002 (Docket No. 430). A hearing was set by the Bankruptcy Court for August
29, 2002 to consider the Debtors' request under the Sale Motion to establish
an auction and grant DBOC Acquisition the Bid Protections (the "Bid Procedures
Hearing").
From June through early August 2002, at the same time that
the DBOC Acquisition Asset Purchase Proposal was being negotiated, the Debtors
redoubled efforts to obtain a better offer from other third parties. The
Debtors consulted with the Creditors' Committee regarding these efforts. A
number of parties contacted the Debtors during this time period and performed
due diligence.
Just prior to the Bid Procedures Hearing, the Debtors
received a firm proposal from an entity related to a former Creditors'
Committee member, DB Investments LLC, an affiliate of the Trump Group of
companies based in Florida (the "Trump Group") that was sufficient to fund a
reorganization plan; such proposal proposed to pay all administrative priority
claims (including the DIP Facility) in full, and to provide some recovery to
prepetition unsecured creditors. As a result, the Debtors commenced the Bid
Procedures Hearing by announcing the receipt of such proposal and by
withdrawing their request that the Bankruptcy Court approve the proposed
section 363 auction process and provision of the Bid Protections to DBOC
Acquisition as set forth in the Sale Motion, with the consent of the Creditors
Committee.
Given the October 31, 2002 expiration of the DIP
Forbearance, and the Debtors' year-long, unsuccessful efforts to obtain firm
offers to purchase the Company or fund a reorganization plan, the Bankruptcy
Court (with the agreement of the Debtors and the Creditors' Committee),
determined to establish a process designed to allow the Debtors and the
Creditors' Committee to attempt to obtain the highest and best value for the
Company and its creditors through a reorganization plan, but also to allow
these Chapter 11 Cases to be completed as quickly as practicable. That process
was set forth in an order entered by the Bankruptcy Court on August 30, 2002
(Docket No. 459) (the "Scheduling Order"). At the Bid Procedures Hearing, the
exclusive right of the Debtors to file a proposed reorganization plan was
lifted by the Bankruptcy Court, allowing any third party to propose a
competing reorganization plan. Pursuant to the Scheduling Order:
o third parties were required to file proposed
reorganization plans by September 19, 2002;
o proposed reorganization plans were not permitted to
contain any "due diligence" or "financing"
contingencies; and
o proposed reorganization plans were required to be
accompanied by proposals for non- refundable earnest
money deposits by the proponents.
Also pursuant to the Scheduling Order, a hearing was
scheduled for September 23, 2002, at which the Bankruptcy Court would consider
all proposed reorganization plans received by September 19, 2002, and
determine which plan or plans would be distributed to creditors to solicit
their votes (the "Plan Selection Hearing").
Four (4) reorganization plan proposals were filed by
September 19, 2002, in compliance with the Scheduling Order. However, shortly
before September 19, 2002, the Debtors became aware of potential tax issues
that resulted in each of the four proposed reorganization plans being subject
to the satisfaction of certain conditions related to such issues. As a result,
at the September 23, 2002 hearing, the Debtors and the Creditors' Committee
requested that the Bankruptcy Court continue the Plan Selection Hearing to
allow additional time for the Debtors to analyze, and for the parties to
address the potential tax issues. See Article IX for a description of the
Debtors' tax attributes and the Debtors' views with respect to tax matters.
Accordingly, the Plan Selection Hearing was continued until October 11, 2002.
In conjunction therewith, the Bankruptcy Court entered an order requiring the
four bidders that had submitted qualifying plan proposals to file any
amendments to their plan proposals by October 7, 2002.
vi
Upon the request of the Debtors and the Creditors' Committee, the
Plan Selection Hearing was subsequently continued until November 19, 2002, and
the deadline for the four bidders to submit modified plan proposals was
continued until November 7, 2002 (Docket No. 536).
On November 7, 2002, amended or modified plan proposals were
filed by three of the four original bidders: Jarden Corporation, DB
Acquisition LLC ("Hunter"), and the Trump Group. Each proposed plan provided
for the acquisition by the proponent of substantially all assets of the
Debtors, and the subsequent distribution of the proceeds of sale to the
Debtors' creditors, consistent with the legal priorities established in the
Bankruptcy Code. From November 7, 2002 until the Plan Selection Hearing, the
Debtors and the Creditors' Committee negotiated with each of the proponents of
such amended proposed plans to, among other things, improve the economic terms
of the respective proposed plans and related asset purchase agreements,
minimize the conditions to closing and improve other contractual components of
the respective proposed transactions. Each of these bidders filed additional
amendments to their respective plans prior to the Plan Selection Hearing to
reflect certain such improvements.
As a result of the additional modifications and
clarifications to each proposed plan negotiated for by the Debtors and the
Creditors' Committee, as well as the further modifications and clarifications
made on the record at the Plan Selection Hearing after continued negotiations
at such hearing, the Debtors and the Creditors' Committee determined that the
plan proposed by Jarden Corporation ("Jarden" or "Purchaser"), as so modified,
was the highest and best plan and was the plan that should be distributed to
creditors for voting. As a result, at the Plan Selection Hearing, the plan
proposed by Jarden was selected by the Bankruptcy Court for distribution to
creditors. Modifications that had been agreed to at the Plan Selection Hearing
were incorporated, and the resulting Plan was filed on November 27, 2002. See
Appendix A annexed hereto.
D. Sale to Jarden and Sources and Uses of Cash and Other Consideration
to be Distributed Pursuant to the Plan
The Plan provides for a sale of substantially all of the
Debtors' assets to Jarden, for cash and, potentially, a distribution of fully
registered Jarden common stock (the "Sale"). Jarden is a leading provider of
niche consumer products used in home food preservation. Jarden's consumer
products segment is the U.S. market leader in home vacuum packaging systems
and accessories, under the FoodSaver(R) brand and home canning and related
products, primarily under the Ball(R), Kerr(R) and Bernardin(R) brands.
Jarden's materials based group is the country's largest producer of zinc strip
and manufactures injection molded and industrial plastics. Jarden's common
stock is publicly traded on the New York Stock Exchange and listed as JAH.(1)
The Plan provides for the distribution of the proceeds of
the Sale to creditors. The following table sets forth a summary of the
anticipated sources and uses of cash and other consideration to be distributed
pursuant to the Plan. All amounts shown under "Anticipated Uses of Cash" are
estimates. There can be no assurance that there will not be material variances
between such estimates and the actual amounts of any distributions.
__________________
(1) As set forth in Jarden's annual reports, for the nine months ended
September 30, 2002, Jarden reported net sales of $263.1 million and
net income of $27.0 million or $1.95 per fully diluted share. On a
pro forma basis for the year ended December 31, 2001, net sales would
have been $425.5 million and net income would have been 20.3 million
or $1.59 per fully diluted share. As of September 30, 2002, total
assets were $348 million and net assets were $69.8 million. Based on
the closing market price of Jarden common stock on November 25, 2002
of $24.26, the market capitalization of Jarden is approximately $347
million. For more detail financial information regarding Jarden, see
www.jarden.com.
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vii
Sources of Cash and Other Consideration
o Cash Consideration for Acquired Assets at Closing(2) $ 97.85 million
o Additional Consideration(3) $ 6.0 million
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Total: $103.85 million
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Anticipated Uses of Cash
o Approximate cash payments with respect to Allowed DIP
Facility Claims $ 84.1 million
o Cash payments with respect to Allowed Administrative Claims
and Allowed Priority Tax Claims (estimate) $ 3.0 million
o Payments anticipated to be made on account of taxes payable as
Administrative Claims as a result of the Sale (estimate)(4) $ 6.0 million
o Remaining consideration available to holders of Allowed
General Unsecured Claims (estimate) $ 10.75 million
Total: $103.85 million
-----
In addition, under the Plan, Jarden will assume the following
liabilities of the Debtors:
o General Assumed Obligations under the Purchase Agreement
(estimate) $ 6.68 million
o Payments due on the Effective Date under the Key Employee
Retention Plan $ 1.2 million
o Wells Fargo Swap Agreement obligation (estimate) $ 1.3 million
o Cure Payments for Assumed Contracts and Leases (estimate) $0.111 million
o Assumed Retirement Benefits (estimate) $1.963 million
--------------
Total Assumed Liabilities: $11.254 million
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________________
(2) The Plan provides that, to the extent that Allowed Administrative
Claims exceed $3.0 million, Jarden will pay to or on behalf of the
Debtors an amount equal to fifty percent (50%) of the amount of
Allowed Administrative Claims paid after the date of the Purchase
Agreement in excess of $3.0 million, up to $4.7 million. The Debtors
have assumed (and the figure set forth in this table reflects) that
this additional Cash will in fact be paid, as a result of the
anticipated Administrative Claims for taxes payable as set forth
above. The Creditors' Committee has not agreed to this assumption as
of this date. In addition, under the Plan, this Additional
Consideration shall be secured by a Letter of Credit to be delivered
by the Purchaser at Closing.
(3) The additional consideration will either be in the form of Cash or
shares of fully registered common stock of Jarden, at Jarden's
election, payable no later than six (6) months from Closing.
(4) See Section VIII of this Disclosure Statement for a discussion of the
assumptions utilized by the Debtors with respect to all tax issues
and certain risks related thereto. The Creditors' Committee has not
agreed to these assumptions as of this date.
viii
E. Summary of Treatment of Claims and Interests under the Plan
As contemplated by the Bankruptcy Code, DIP Facility Claims,
Administrative Claims and Priority Tax Claims are not classified under the
Plan. Allowed DIP Facility Claims and Allowed Administrative Claims are to be
paid in full on the Effective Date (or thereafter when they become Allowed),
or, for ordinary course Administrative Claims, when such claims become due.
See Section VI.
Substantially all of the Debtors' assets are owned by, and
the Debtors' operations are conducted by, the DBOC Debtors. As set forth
above, DBI and DBOC have separate prepetition liabilities, which are not
guaranteed by one another. As a result, the Plan provides for the substantive
consolidation of DBOC and its Subsidiaries (the "DBOC Debtors"), but does not
provide for the substantive consolidation of DBI and the DBOC Debtors for any
reason. Instead, the Plan is comprised of separate plans for DBI and the DBOC
Debtors, respectively. Accordingly, the Plan contains separate classes for the
prepetition creditors and interest holders of DBI and the DBOC Debtors,
respectively.
As set forth above, the Plan provides for Jarden to purchase
substantially all of the Debtors' assets. In recognition of the fact that each
Debtor estate has some assets being purchased, and in recognition of potential
intercompany claims and other issues that could be asserted between DBI and
DBOC, the Plan contains a mechanism to provide a recovery to the holders of
General Unsecured Claims against both DBI and the DBOC Debtors by allocating
among DBI and the DBOC Debtors, respectively, the amount of consideration
received from the Sale anticipated to be available for distribution to the
holders of General Unsecured Claims against DBI and the DBOC Debtors,
respectively (the "Net Available Unsecured Creditor Proceeds"). Pursuant to
that mechanism, the Net Available Unsecured Creditor Proceeds (which are
estimated to be approximately $10.75 million prior to payment of Indenture
Trustee Fees), will be divided pursuant to a sliding scale such that, assuming
that $10.75 million in the aggregate is available to unsecured creditors,
$1.35 million would be distributed to the DBI Estate for distribution to
holders of General Unsecured Claims against DBI (the "DBI Recovery Pool") and
$9.40 million would be distributed to the DBOC Debtors' Estates for
distribution to holders of General Unsecured Claims against the DBOC Debtors
(the "DBOC Unsecured Creditor Distribution Pool"). See Section VI.E for a full
description of this allocation mechanism.
The Debtors and the Creditors' Committee believe that this
allocation of value among DBI and the DBOC Debtors under the Plan is fair,
reasonable and appropriate given the relative value of the assets owned by DBI
and the DBOC Debtors, respectively, and taking into account certain
intercompany issues. The request to confirm the Plan constitutes a request to
approve such allocation as a settlement.
The table below summarizes the classification and treatment
of the prepetition Claims and Interests under the Plan. For certain classes of
Claims, estimated percentage recoveries are also set forth below. Estimated
percentage recoveries have been calculated based upon a number of assumptions
for purposes of the Plan, as discussed below.
The estimated percentage recoveries set forth below assume
that the aggregate amount of Administrative Claims that ultimately become
Allowed are as set forth in the estimates contained in the tables above. There
can be no assurance that the estimates will turn out to be correct. In the
event that the ultimate amount of Allowed Administrative Claims (including
taxes payable) exceeds such estimates, proceeds of the Sale available to
holders of General Unsecured Claims against DBI and the DBOC Debtors (Classes
H-3 and O-3) would be reduced.
In addition, for certain Classes of Claims, the actual
amounts of Allowed Claims could exceed or could be less than the estimated
amounts shown in the table that follows. The Debtors do not anticipate having
reviewed and fully analyzed all Proofs of Claim filed in these cases by
the Confirmation Date. Estimated Claim
ix
amounts for each Class set forth below are based upon the Debtors' review of
their books and records and of certain Proofs of Claim, and include estimates
of a number of Claims that are contingent, disputed, and/or unliquidated. With
respect to Class H-3 and O-3, if the aggregate amount of General Unsecured
Claims that are ultimately Allowed exceeds the Debtors' estimates, the
estimated percentage recovery set forth below for holders of such Claims would
be reduced.
Accordingly, for these reasons, no representation can be or
is being made with respect to whether the estimated percentage recoveries
shown in the table below for Class H-3 and O-3 will actually be realized by
the holders of Allowed Claims in those Classes.
Classification of DBI Claims and Interests
------------------------------------------
Class Description Treatment Under Plan
- ----------------- --------------------
Class H-1 - Secured Claims Class H-1 consists of separate subclasses
Against DBI for each Secured Claim against DBI
secured by a Lien upon property in which
DBI has an interest. Each subclass is
deemed to be a separate Class for all
Estimated Allowed Claims: purposes under the Bankruptcy Code.
Approximately $0.00.
On, or as soon as reasonably
practicable after, the latest of (i)
the Distribution Date, (ii) the date
such Claim becomes an Allowed Class H-1
Claim, or (iii) the date such Class H-2
Claim becomes payable pursuant to any
agreement between DBI and the holder of
such Class H-1 Claim, each holder of an
Allowed Class H-1 Claim shall receive,
in full satisfaction, settlement,
release, and discharge of and in
exchange for such Allowed Class H-1
Claim (x) Cash equal to the unpaid
portion of such Allowed Class H-1 Claim
or (y) such other treatment as to which
DBI and such holder shall have agreed
upon in writing. Class H-1 Claims are
Unimpaired and therefore not entitled
to vote on the Plan. Estimated
Percentage Recovery: 100%.
Class H-2 - Other Priority Class H-2 consists of all against DBI
Claims entitled to priority Claims pursuant to
Against DBI section 507(a) of the Bankruptcy Code
other than Priority Tax Claims or
Administrative Claims.
Estimated Allowed Claims: On, or as soon as reasonably
Approximately $0.00. practicable after, the latest of (i)
the Distribution Date, (ii) the date
such Claim becomes an Allowed Class H-2
Claim, or (iii) the date such Class H-1
Claim becomes payable pursuant to any
agreement between DBI and the holder of
such Class H-2 Claim, each holder of an
Allowed Class H-2 Claim shall receive,
in full satisfaction, settlement,
release, and discharge of and in
exchange for such Allowed Class H-2
Claim (x) Cash equal to the unpaid
portion of such Allowed Class H-2 Claim
or (y) such other treatment as to which
DBI and such holder shall have agreed
upon in writing. Class H-2 Claims are
Unimpaired and therefore not entitled
to vote on the Plan. Estimated
Percentage Recovery: 100%.
x
Class Description Treatment Under Plan
- ----------------- --------------------
Class H-3 - General Unsecured Class H-3 consists of any Claim against
Claims Against DBI that is not a DIP Facility Claim,
DBI Administrative Claim, Priority Tax Claim,
Other Priority Claim, Other Secured
Claim, or Subordinated Claim, including
Old Note Claims.
Estimated Allowed Claims: On or as soon as reasonably practicable
Approximately $41.6 million. after the Distribution Date, each
holder of an Allowed Class H-3 Claim,
shall receive, in full satisfaction,
settlement, release and discharge of
and in exchange for such Allowed Class
H-3 Claim, its Pro Rata share of 100%
of the DBI Recovery Pool received by
the DBI Estate pursuant to Section 2.4
of the Plan. Class H-3 Claims are
Impaired under the Plan and entitled to
vote on the Plan. Estimated Percentage
Recovery: 3.25%.
Class H-4 - DBI Interests and Class H-4 consists of all DBI Interests
Subordinated Claims and all Subordinated against DBI. Under
Against DBI the Plan, the holders of such Claims or
Interests Claims shall not receive or
retain any property on account of such
Claim or DBI Interests. On the
Effective Date, all of the DBI
Interests shall be deemed cancelled and
extinguished. Class H-4 DBI Interests
and Subordinated Claims are Impaired
and will receive no distribution under
the Plan and are therefore deemed to
reject the Plan and are not entitled to
vote on the Plan.
Classification of DBOC Debtors' Claims and Interests
----------------------------------------------------
Class Description Treatment Under Plan
- ----------------- --------------------
Class O-1 - Secured Claims Class O-1 consists of separate subclasses
Against the DBOC for each Secured Claim against the DBOC
Debtors secured by a Lien upon property
in which Debtors the DBOC Debtors has
an interest. Each subclass is deemed to
be a separate Class for all purposes
under the Bankruptcy Code.
Estimated Allowed Claims:
Approximately $0.00. On, or as soon as reasonably practicable
after, the latest of (i) the
Distribution Date, (ii) the date such
Claim becomes an Allowed Class O-1
Claim, or (iii) the date such Class O-1
Claim becomes payable pursuant to any
agreement between a DBOC Debtor and the
holder of such Class O-1 Claim, each
holder of an Allowed Class O-1 Claim
shall receive, in full satisfaction,
settlement, release, and discharge of
and in exchange for such Allowed Class
O-1 Claim (x) Cash equal to the unpaid
portion of such Allowed Class O-1 Claim
or (y) such other treatment as to which
a DBOC Debtor and such holder shall
have agreed upon in writing. Class O-1
Claims are Unimpaired and therefore not
entitled to vote on the Plan. Estimated
Percentage Recovery: 100%.
Class O-2 - Other Priority Class O-2 consists of all Claims
Claims Against the against a DBOC Debtor entitled to
DBOC Debtors priority pursuant to section 507(a) of
the Bankruptcy Code other than Priority
Tax Claims or Administrative Claims.
xi
Class Description Treatment Under Plan
- ----------------- --------------------
On, or as soonr as reasonably
Estimated Allowed Claims: practicable after, the latest of (i)
Approximately $0.00. the Distribution Date, (ii) the date
such Claim becomes an Allowed Class O-2
Claim, or (iii) the date such Class O-2
Claim becomes payable pursuant to any
agreement between a DBOC Debtor and the
holder of such Class O-2 Claim, each
holder of an Allowed Class O-2 Claim
shall receive, in full satisfaction,
settlement, release, and discharge of
and in exchange for such Allowed Class
O-2 Claim (x) Cash equal to the unpaid
portion of such Allowed Class O-2 Claim
or (y) such other treatment as to which
a DBOC Debtor and such holder shall
have agreed upon in writing. Class O-2
Claims are Unimpaired and therefore not
entitled to vote on the Plan. Estimated
Percentage Recovery: 100%.
Class O-3 - General Unsecured Class O-3 consists of any Claim against
Claims Against a DBOC Debtor that is not a DIP
the DBOC Facility Claim, Administrative Claim,
Debtors Priority Tax Claim, Other Priority
Claim, Other Secured Claim, or
Subordinated Claim, including Old Note
Claims.
On or as soon as reasonably practicable
Estimated Allowed Claims: after the Distribution Date, each
Approximately $106.8 million. holder of an Allowed Class O-3 Claim,
shall receive, in full satisfaction,
settlement, release and discharge of
and in exchange for such Allowed Class
O-3 Claim, its Pro Rata share of 100%
of the DBOC Unsecured Creditor
Distribution Pool. Class O-3 Claims are
Impaired under the Plan and entitled to
vote on the Plan. Estimated Percentage
Recovery: 8.8%.
Class O-4 - DBOC Interests Class O-4 consists of all DBOC
Interests. Under the Plan, the holders
of such Claims or Interests shall
receive the DBI Recovery Pool, which
shall be distributed to the DBI Estate
on account of such Interests. After
such distribution to the DBI Estate,
all of the DBOC Interests shall be
deemed cancelled or extinguished. Class
0-4 DBOC Interests Claims are Impaired
under the Plan and entitled to vote on
the Plan.
xii
THE PLAN PROPONENTS (I.E., JARDEN AND EACH OF THE DEBTORS) AND THE
CREDITORS' COMMITTEE BELIEVE THAT THE PLAN PROVIDES THE BEST RECOVERIES
POSSIBLE FOR HOLDERS OF CLAIMS AGAINST THE DEBTORS AND THUS STRONGLY RECOMMEND
THAT YOU VOTE TO ACCEPT THE PLAN.
xiii
Table of Contents
DISCLAIMER..................................................................................................ii
OVERVIEW OF THE CHAPTER 11 CASES AND THE DEBTORS...........................................................iii
A. Business Overview........................................................................iii
B. Summary of the Debtors' Existing Capital Structure........................................iv
C. Exploration of Strategic Alternatives and Establishment of Competing
Plan Process..............................................................................iv
D Sale to Jarden and Sources and Uses of Cash and Other Consideration......................vii
E. Summary of Treatment of Claims and Interests..............................................ix
I. INTRODUCTION.............................................................................................1
II. PLAN VOTING INSTRUCTIONS AND PROCEDURES.................................................................2
A. Notice to Holders of Claims and Interests..................................................2
B. Holders of Claims Entitled to Vote.........................................................3
C. Solicitation Package.......................................................................3
D. Voting Procedures, Ballots and Voting Deadline.............................................3
E. Confirmation Hearing and Deadline for Objections to Confirmation...........................4
III. HISTORY AND STRUCTURE OF THE DEBTORS...................................................................4
A. Overview of Business and Operations........................................................4
1. Description of the Company's Business.............................................4
(a) Cutlery/Straws...........................................................5
(b) Matches and Fire Starters................................................5
(c) Toothpicks...............................................................6
(d) Clothespins and Clotheslines.............................................6
(e) Consumer Wooden Crafts...................................................6
(f) Institutional/Industrial.................................................6
2. History...........................................................................6
3. Financial Results.................................................................6
B. Capital Structure of the Company...........................................................7
1. Prepetition Equity................................................................7
2. The Prepetition Senior Secured Credit Facility....................................7
3. Prepetition Notes.................................................................7
C. Corporate Structure of the Company.........................................................7
1. Current Corporate Structure.......................................................7
2. Board of Directors................................................................7
3. Executive Officers................................................................9
IV. EVENTS LEADING TO COMMENCEMENT OF THE CHAPTER 11 CASES..................................................9
V. CHAPTER 11 CASES........................................................................................10
A. Continuation of Business; Stay of Litigation..............................................10
B. First Day Orders .........................................................................10
C. Debtor in Possession Financing............................................................11
1. The DIP Facility.................................................................11
2. Authorization to Use Cash Collateral.............................................12
D. Appointment of Creditors' Committee.......................................................12
E. Other Material Relief Obtained During the Chapter 11 Cases................................13
1. Retention of Debtors' Professionals..............................................13
2. Employee Retention Program.......................................................13
3. Extension of Time to Assume or Reject Leases.....................................13
4. Extension of Exclusive Periods...................................................13
F. Summary of Claims Process and Bar Date....................................................14
1. Schedules and Statements of Financial Affairs....................................14
2. Claims Bar Date and Proofs of Claim..............................................14
G. Summary of Material Litigation Matters....................................................14
1. Misemer Action...................................................................14
2. Wells Fargo Swap Agreement.......................................................15
3. DIP Lender Adversary Proceeding..................................................15
H. Development and Summary of The Debtors' Business Plan.....................................16
1. Strategic Elements...............................................................16
(a) Continue to Produce High Quality Products...............................16
(b) Expand Category Management Strategy to Increase Retail
Shelf Space.............................................................16
(c) Enter New Distribution Channels.........................................16
(d) Capitalize on Strong Brand Names and National
Distribution to Introduce New Products..................................17
(e) Pursue Attractive Acquisition Opportunities.............................17
2. Product Categories...............................................................17
(a) Cutlery/Straws..........................................................17
(b) Matches and Firestarters................................................17
(c) Toothpicks..............................................................18
(d) Clothespins and Clotheslines............................................18
(e) Consumer Wooden Crafts..................................................18
(f) Institutional/Industrial Products.......................................18
3. The Projections..................................................................19
VI. SUMMARY OF THE PLAN OF REORGANIZATION..................................................................19
A. Purpose and Effect of the Plan............................................................19
B. The Purchase Agreement....................................................................20
C. Substantive Consolidation.................................................................22
D. Classification and Treatment of Claims and Interests......................................23
1. Treatment of Unclassified Claims Under the Plan..................................24
(a) DIP Facility Claims.....................................................24
(b) Administrative Claims...................................................25
(c) Priority Tax Claims.....................................................25
2. Treatment of Classified DBI Claims and Interests Under the Plan..................25
(a) Unimpaired Classes of DBI Claims and Interests Under the Plan...........25
(i) Class H-1 - Secured Claims against DBI..........................25
(ii) Class H-2 - Other Priority Claims against DBI...................26
(b) Impaired Classes of DBI Claims and Interests Under the Plan.............26
(i) Class H-3 - General Unsecured Claims against DBI................26
(ii) Class H-4 - DBI Interests and Subordinated Claims...............26
3. Treatment of Classified DBOC Debtors Claims and Interests
Under the Plan...................................................................27
(a) Unimpaired Classes of DBOC Debtors Claims
and Interests Under the Plan............................................27
(i) Class O-1 - Secured Claims against the
DBOC Debtors....................................................27
(ii) Class O-2 Other Priority Claims against the
DBOC Debtors....................................................27
(b) Impaired Classes of DBOC Debtors Claims and Interests
Under the Plan..........................................................27
(i) Class O-3 - General Unsecured Claims against the
DBOC Debtors....................................................27
(ii) Class O-4 - DBOC Interests......................................27
4. Reservation of Rights Regarding Claims...........................................28
E. Net Recovery Allocation Mechanics and Intercompany Settlement.............................28
F. Distributions Under the Plan..............................................................29
1. Distributions for Claims Allowed as of the Effective Date........................30
(a) Record Date for Distributions to Holders of Lender Claims
and Old Notes...........................................................30
(b) Delivery of Distributions...............................................30
(c) Old Notes...............................................................30
(d) Lost, Stolen, Mutilated or Destroyed Old Notes..........................31
(e) Failure to Surrender Canceled Old Notes.................................31
2. Resolution and Treatment of Disputed, Contingent, and1
Unliquidated Claims and Disputed Interests.......................................32
(a) Objections to Claims....................................................32
(b) Authority to Prosecute Objections.......................................32
(c) Treatment of Disputed Claims............................................32
(d) Disputed Claims Reserves................................................32
(e) Distributions on Account of Disputed Claims Once They Are
Allowed and Additional Distributions on Account of Previously
Allowed Claims..........................................................32
G. The Plan Administrator....................................................................32
1. Rights, Powers and Duties of the Reorganized Debtors and
the Plan Administrator...........................................................32
2. Compensation of the Plan Administrator...........................................33
3. Indemnification..................................................................33
4. Authority to Object to Claims and Interests and to Settle Disputed Claims........33
H. Dissolution of the Creditors' Committee...................................................33
1. Creditors' Committee and Plan Committee..........................................33
(a) Dissolution of Creditors' Committee.....................................33
(b) Plan Committee..........................................................34
I. Post-Consummation Operations of the Debtors...............................................34
1. Continued Corporate Existence....................................................34
2. Cancellation of Old Securities and Agreements....................................35
3. Certificates of Incorporation and By-laws........................................35
4. Restructuring Transactions.......................................................35
J. Summary of Releases Under the Plan........................................................36
K. Compensation and Benefit Programs.........................................................36
L. Directors and Officers of Reorganized Debtors.............................................37
M. No Revesting of Assets....................................................................37
N. Preservation of Rights of Action..........................................................37
O. Other Matters.............................................................................38
1. Treatment of Executory Contracts and Unexpired Leases............................38
(a) Assumed Contracts and Leases............................................38
(b) Payments Related to Assumptions of Contracts and Leases.................38
(c) Rejected Contracts and Leases...........................................38
(d) Rejection Damages Bar Date..............................................39
2. Administrative Claims............................................................39
3. Professional Fee Claims..........................................................39
4. Withholding and Reporting Requirements...........................................39
5. Setoffs..........................................................................40
P. Confirmation and/or Consummation..........................................................40
1. Requirements for Confirmation of the Plan........................................40
2. Conditions to Confirmation.......................................................41
3. Conditions to Effective Date.....................................................41
4. Waiver of Conditions.............................................................42
Q. Effects of Confirmation...................................................................42
1. Binding Effect...................................................................42
2. Discharge of the Debtors.........................................................43
3. Permanent Injunction.............................................................43
4. Exculpation and Limitation on Liability; Indemnity...............................43
R. Retention of Jurisdiction.................................................................44
S. Payment of Statutory Fees.................................................................45
T. Conversion of Cases if Plan Not Confirmed.................................................45
VII. CERTAIN FACTORS TO BE CONSIDERED......................................................................46
A. General Considerations....................................................................46
B. Certain Bankruptcy Considerations.........................................................46
1. Failure to Confirm or Consummate the Plan........................................46
2. Disruption of Operations Due to the Filing of the Chapter 11 Cases...............47
C. Administrative Claims.....................................................................47
D. Environmental Matters.....................................................................47
E. Unimpaired and Unknown Claims.............................................................48
F. Industry Cyclicality......................................................................48
G. Business and Competition..................................................................48
1. Commodity Risk...................................................................48
2. Competition......................................................................48
H. Certain Litigation .......................................................................49
1. Legal Proceedings and Environmental Matters......................................49
VIII. CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN...............................................................................................49
IX. FEASIBILITY OF THE PLAN AND BEST INTERESTS OF CREDITORS...............................................53
A. Feasibility of the Plan....................................................................53
B. Acceptance of the Plan.....................................................................54
C. Best Interests Test........................................................................54
D. Liquidation Analysis.......................................................................55
E. Application of the "Best Interests" of Creditors Test to the
Liquidation Analysis and the Plan..........................................................61
F. Confirmation Without Acceptance of All Impaired Classes: The "Cramdown"
Alternative...............................................................................62
X. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN...........................................................................62
A. Alternative Plan(s) of Reorganization.....................................................62
B. Liquidation under Chapter 7...............................................................63
XI. THE SOLICITATION; VOTING PROCEDURE.....................................................................63
A. Parties in Interest Entitled to Vote......................................................63
B. Classes Impaired under the Plan ..........................................................64
C. Waivers of Defects, Irregularities, Etc...................................................64
D. Withdrawal of Ballots; Revocation.........................................................64
E. Further Information; Additional Copies....................................................65
F. Internet Access to Bankruptcy Court Documents.............................................65
XII. RECOMMENDATION AND CONCLUSION.........................................................................66
Table of Appendices
Appendix Name
- -------- ----
Appendix A Joint Plan of Reorganization of Diamond Brands
Operating Corp. and Its Debtor
Affiliates Proposed by the Debtors and Jarden Corporation
Appendix B Prepetition Financial Results
I. INTRODUCTION
Diamond Brands Operating Corp ("DBOC"), its parent company
Diamond Brands Incorporated ("DBI"), and its direct subsidiaries that are also
debtors and debtors-in-possession (the "Affiliate Debtors," and collectively
with DBOC and DBI, the "Debtors" or the "Company") in the above-referenced
Chapter 11 cases submit this disclosure statement (the "Disclosure Statement")
pursuant to section 1125 of the Bankruptcy Code, for use in the solicitation
of votes on the Joint Plan of Reorganization of Diamond Brands Operating Corp.
and its Debtor Affiliates Proposed by the Debtors and Jarden Corporation (the
"Plan Proponents"), dated as of November 27, 2002 and filed with the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
A copy of the Plan is annexed as Appendix A to this Disclosure Statement.
This Disclosure Statement sets forth certain information
regarding the Debtors' prepetition operating and financial history, the need
to seek Chapter 11 protection, significant events that have occurred during
the Chapter 11 Cases, and the anticipated organization, operations and
financing of the Debtors upon successful emergence from Chapter 11 (the
"Reorganized Debtors"). In addition, this Disclosure Statement discusses the
confirmation process and the voting procedures that holders of Claims entitled
to vote under the Plan must follow for their votes to be counted.
Except as otherwise provided herein, capitalized terms not
otherwise defined in this Disclosure Statement have the meanings ascribed to
them in the Plan. Unless otherwise noted herein, all dollar amounts provided
in this Disclosure Statement and in the Plan are given in United States
dollars.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISKS AND OTHER
FACTORS PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS, PLEASE SEE
SECTION VI OF THE DISCLOSURE STATEMENT, ENTITLED "SUMMARY OF THE PLAN OF
REORGANIZATION," AND SECTION VII OF THE DISCLOSURE STATEMENT, ENTITLED
"CERTAIN FACTORS TO BE CONSIDERED."
THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN
PROVISIONS OF THE PLAN, CERTAIN STATUTORY PROVISIONS, CERTAIN DOCUMENTS
RELATING TO THE PLAN, CERTAIN EVENTS THAT HAVE OCCURRED IN THE CHAPTER 11
CASES AND CERTAIN FINANCIAL INFORMATION. ALTHOUGH THE PLAN PROPONENTS BELIEVE
THAT THE SUMMARIES OF THE PLAN AND RELATED DOCUMENT SUMMARIES ARE FAIR AND
ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT SET
FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS. FACTUAL
INFORMATION (OTHER THAN THE SUMMARIES OF THE PLAN) CONTAINED IN THIS
DISCLOSURE STATEMENT HAS BEEN PROVIDED BY THE DEBTORS' MANAGEMENT, EXCEPT
WHERE OTHERWISE SPECIFICALLY NOTED. THE DEBTORS DO NOT WARRANT OR REPRESENT
THAT THE INFORMATION CONTAINED HEREIN, INCLUDING THE FINANCIAL INFORMATION, IS
WITHOUT ANY MATERIAL INACCURACY OR OMISSION.
THE PLAN PROPONENTS AND THE CREDITORS' COMMITTEE BELIEVE
THAT THE PLAN WILL ENABLE THE DEBTORS TO ACCOMPLISH THE OBJECTIVES OF CHAPTER
11 AND THAT ACCEPTANCE OF THE PLAN IS IN THE BEST INTERESTS OF THE DEBTORS AND
THE HOLDERS OF ALL CLAIMS. THE PLAN PROPONENTS AND THE CREDITORS' COMMITTEE
URGE HOLDERS OF CLASS H-3, 0-3, AND O-4 CLAIMS AND INTERESTS TO VOTE TO ACCEPT
THE PLAN.
FOR FURTHER INFORMATION AND INSTRUCTION ON VOTING TO ACCEPT OR
REJECT THE PLAN, SEE SECTION XI OF THE DISCLOSURE STATEMENT, ENTITLED "THE
SOLICITATION; VOTING PROCEDURE."
II. PLAN VOTING INSTRUCTIONS AND PROCEDURES
A. Notice to Holders of Claims and Interests
This Disclosure Statement will be transmitted to holders of
Claims and Interests that are entitled under the Bankruptcy Code to vote on
the Plan. A discussion and listing of those holders of Claims and Interests
that are entitled to vote on the Plan and those holders of Claims and
Interests that are not entitled to vote on the Plan is provided herein. The
purpose of this Disclosure Statement is to provide adequate information to
enable such Claim and Interest holders to make a reasonably informed decision
with respect to the Plan prior to exercising their right to vote to accept or
reject the Plan.
The Bankruptcy Court has been asked to approve this
Disclosure Statement as containing information of a kind and in sufficient and
adequate detail to enable such Claim and Interest holders to make an informed
judgment with respect to acceptance or rejection of the Plan. THE BANKRUPTCY
COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT (WHEN SUCH APPROVAL IS OBTAINED)
DOES NOT CONSTITUTE EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF THE
INFORMATION CONTAINED HEREIN, OR AN ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY
COURT.
ALL HOLDERS OF CLAIMS AGAINST THE DEBTORS ARE ENCOURAGED TO
READ THIS DISCLOSURE STATEMENT AND ITS APPENDICES CAREFULLY AND IN THEIR
ENTIRETY BEFORE DECIDING TO VOTE EITHER TO ACCEPT OR TO REJECT THE PLAN. This
Disclosure Statement contains important information about the Plan,
considerations pertinent to acceptance or rejection of the Plan, and
developments concerning the Chapter 11 Cases.
THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT TO BE USED IN
CONNECTION WITH THE SOLICITATION OF VOTES ON THE PLAN. No solicitation of
votes may be made except after distribution of this Disclosure Statement , and
no person has been authorized to distribute any information concerning the
Debtors other than the information contained herein.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE
STATEMENT IS BY ITS NATURE FORWARD LOOKING AND CONTAINS ESTIMATES AND
ASSUMPTIONS THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL, FUTURE RESULTS.
Except as otherwise specifically
and expressly stated herein, this Disclosure Statement does not reflect any
events that may occur subsequent to the date hereof and that may have a
material impact on the information contained in this Disclosure Statement. The
Debtors do not anticipate that any amendments or supplements to this
Disclosure Statement will be distributed to reflect such occurrences.
Accordingly, the delivery of this Disclosure Statement shall not under any
circumstance imply that the information herein is correct or complete as of
any time subsequent to the date hereof.
EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION
CONTAINED HEREIN HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTING FIRM
AND HAS NOT BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
B. Holders of Claims Entitled to Vote
Pursuant to the provisions of the Bankruptcy Code, only
holders of allowed claims or equity interests in classes of claims or equity
interests that are impaired and that are in a class that will receive a
distribution under a proposed chapter 11 plan are entitled to vote to accept
or reject a proposed chapter 11 plan. Classes of claims or equity interests in
which the holders of claims or equity interests are unimpaired under a chapter
11 plan are deemed to have accepted the plan and are not entitled to vote to
accept or reject the plan. Classes of claims or interests that receive no
distribution on account of their claims or interests are deemed to have
rejected the plan and are not entitled to vote to accept or reject the plan.
Under the Plan, only holders of Claims or Interests in Classes H-3, O-3 and
O-4 are entitled to vote on the Plan.
2
The Bankruptcy Code defines "acceptance" of a plan by a
class of claims as acceptance by creditors in that class that hold at least
two-thirds in dollar amount and more than one-half in number of the claims
that cast ballots for acceptance or rejection of the plan. Acceptance of a
plan by a class of interests requires acceptance by at least two-thirds of the
number of shares in such class that cast ballots for acceptance or rejection
of the plan. For a more detailed description of the requirements for
confirmation of the Plan, see Section VI in the Disclosure Statement entitled,
"Confirmation and Consummation."
Section 1129(b) of the Bankruptcy Code permits the
confirmation of a plan notwithstanding the non-acceptance of a plan by one or
more impaired classes of claims or interests. Under that section, a plan may
be confirmed by a bankruptcy court if it does not "discriminate unfairly" and
is "fair and equitable" with respect to each non-accepting class. For a more
detailed description of the requirements for confirmation of a non-consensual
plan, see Section IX.
C. Solicitation Package
Along with the mailing of this Disclosure Statement, as part
of the solicitation of acceptances of the Plan, the Debtors will send copies
of (1) the Plan; (2) the notice of, among other things, the time for
submitting Ballots to accept or reject the Plan, the date, time and place of
the hearing to consider confirmation of the Plan and related matters, and the
time for filing objections to confirmation of the Plan (the "Confirmation
Hearing Notice"); (3) if you are the holder of a Claim or Interest entitled to
vote on the Plan, one or more Ballots (and return envelopes) to be used by you
in voting to accept or to reject the Plan; and (4) the order entered by the
Bankruptcy Court approving the procedures to be utilized in soliciting
acceptances of the Plan (the "Solicitation Procedures Order").
D. Voting Procedures, Ballots and Voting Deadline
If you are entitled to vote to accept or reject the Plan, a
Ballot is enclosed for the purpose of voting on the Plan. If you hold Claims
in more than one (1) Class and you are entitled to vote Claims in more than
one (1) Class, you will receive separate Ballots that must be used for each
separate Class of Claims. After carefully reviewing the Plan, this Disclosure
Statement, and the detailed instructions accompanying your Ballot, please
indicate your acceptance or rejection of the Plan by voting in favor of or
against the Plan on the enclosed Ballot. You must complete and sign your
original Ballot (copies will not be accepted) and return it in the envelope
provided.
Each Ballot has been coded to reflect the Class of Claims it
represents. Accordingly, in voting to accept or reject the Plan, you must use
only the coded Ballot or Ballots sent to you with this Disclosure Statement.
IN ORDER FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE
PROPERLY COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING
INSTRUCTIONS ON THE BALLOT AND RECEIVED NO LATER THAN JANUARY 22, 2003 AT 4:00
P.M. (EASTERN TIME) (THE "VOTING DEADLINE") BY LOGAN AND COMPANY (THE "VOTING
AGENT"). DO NOT RETURN ANY STOCK CERTIFICATES OR DEBT INSTRUMENTS WITH YOUR
BALLOT.
If you have any questions about (1) the procedure for voting
your Claim or Interest or with respect to the packet of materials that you
have received or (2) the amount of your Claim, or if you wish to obtain, at
your own expense, unless otherwise specifically required by Federal Rule of
Bankruptcy Procedure 3017(d), an additional copy of the Plan, this Disclosure
Statement or any appendices or exhibits to such documents, please contact:
Diamond Brands Operating Corp.
c/o Logan and Company
546 Upper Valley Road
Upper Montclair, NJ 07043
(973) 509-3190 (telephone)
(973) 509-3191 (facsimile)
3
E. Confirmation Hearing and Deadline for Objections to Confirmation
Pursuant to Section 1128 of the Bankruptcy Code, the
Confirmation Hearing will be held on January 29, 2002 at 10:00 a.m.,
prevailing Eastern Time, before the Honorable Randall J. Newsome, United
States Bankruptcy Judge, at the United States District Court for the District
of Delaware, 844 North King Street, Second Floor, Courtroom 2B, Wilmington,
Delaware 19801. The Bankruptcy Court has directed that objections, if any, to
confirmation of the Plan be served and Filed so that they are received on or
before January 22, 2003, at 4:00 p.m., prevailing Eastern Time, in the manner
set forth in the Solicitation Procedures Order. The Confirmation Hearing may
be adjourned from time to time by the Court without further notice except for
the announcement of the adjournment date made at the Confirmation Hearing or
at any subsequent adjourned Confirmation Hearing.
III. HISTORY AND STRUCTURE OF THE DEBTORS
A. Overview of Business and Operations
1. Description of the Company's Business
-------------------------------------
The Debtors are a leading designer, manufacturer and
marketer of a broad range of consumer products including disposable plastic
cutlery and straws, matches, toothpicks, clothespins and wooden crafts, sold
primarily under the nationally recognized Diamond(R) and Forster(R) brand
names. As a result of strong brand awareness, the Debtors have established
leading and dominant market positions in the plastic cutlery, match,
toothpick, clothespin and wooden craft categories. The Debtors' products are
distributed to approximately 50,000 retail customers and sold in most major
grocery stores, drug stores and mass merchandisers in the United States. The
Debtors' three manufacturing facilities are located in Cloquet, Minnesota,
East Wilton, Maine and Strong, Maine and their products are sold primarily
through a nationwide network of broker organizations, as well as direct to
customers through Company sales representatives. The Debtors are headquartered
in Cloquet, Minnesota and have approximately 634 employees.
The Debtors have a diverse product portfolio and have
developed strong relationships with their customers by employing a category
management strategy and a corporate rebate program that provides incentives to
retailers to buy multiple products. These initiatives, along with the Debtors'
diverse product portfolio and market leadership, have created significant
barriers for competitors attempting to enter the market. The Debtors believe
that they are the low-cost producer in most of their product categories, thus
allowing the Debtors and their customers to achieve superior profitability. By
providing attractive margins and a diverse product portfolio to retailers, the
Debtors have been able to control and increase valuable shelf space and
strengthen their customer relationships. The Debtors believe their fundamental
strengths include their stable, diverse, and profitable product portfolio of
leading brands, as well as their broad and well-established distribution
system, both of which provide attractive opportunities for growth.
The Debtors believe that there are substantial opportunities
to grow their existing business by increasing their marketing focus with the
goal of entering new distribution channels and geographic markets.
Furthermore, the Debtors believe their products possess substantial brand
equity that will facilitate the introduction of logical line extensions also
expected to expand the reach of Diamond Brands. Strategic acquisitions also
represent an exciting opportunity to grow the business and enter new product
segments and distribution channels.
The fundamental strength of the Debtors is reflected in
their portfolio of leading brands across multiple product categories, with a
stable product portfolio and dominant market share. The Debtors' operations
are organized into six product groups: Cutlery/Straws ("Cutlery"), Matches and
Fire Starters ("Matches"), Toothpicks ("Toothpicks"), Clothespins and
Clotheslines ("Laundry Care"), Consumer Wooden Crafts ("Wooden Crafts"), and
Institutional/Industrial products ("Institutional/Industrial").
4
(a) Cutlery/Straws
--------------
The Debtors produce a wide range of injection-molded
disposable plastic cutlery under the Diamond(R) and Forster(R) brand names.
The Debtors' cutlery products are sold in various weights (full-size, heavy-
duty and lightweight), colors (including holiday themes) and packages (boxes
of 24, 48, bags of 48, 100 etc.). In 1997, the Debtors entered the retail
plastic straws category to offer customers a more complete product line and
have steadily increased sales in this category. In addition, the Debtors
expanded their Cutlery line with servingware. The Debtors also supply private
label plastic cutlery to retailers. The Debtors believe that private label
sales will continue to represent an attractive growth area. They also hold the
leading domestic retail market share in the plastic cutlery category. The
Debtors' Cutlery products are sold through Diamond Brands' base of over 50,000
retail outlets in substantially all major grocery stores, drug stores and mass
merchandisers in the U.S. In 2001, the Cutlery product group generated gross
sales of $55.3 million.
(b) Matches and Fire Starters
-------------------------
The Debtors are the only wooden match manufacturer in North
America. In 2000, the Debtors consolidated their match brands, which
previously included Ohio Blue Tip and Fire Chief, under the widely recognized
and highly respected Diamond(R) brand name. Diamond Brands' Matches product
lines include kitchen matches, penny matches, fireplace matches, book matches,
advertising matches and fire starters (Strike-A-Fire). Moreover, the Debtors
are the primary supplier of wooden advertising matches to the two leading
distributors of advertising matches in North America. In addition, the Debtors
have begun to sell collectible kitchen and penny matches, and have recently
developed lines of grill matches and candle matches. The Debtors recently
redesigned the packaging of their book matches and moved production in-house
into the Cloquet, Minnesota facility from a third-party manufacturer. The
majority of the Debtors' products are positioned in non-smoking related
segments. Although this category is relatively mature, the Debtors have
maintained stable sales and attractive gross margins. The Debtors' Match
products are sold in substantially all major grocery stores, drug stores and
mass merchandisers in the U.S. In 2001, the Matches product segment generated
gross sales of $23.3 million.
(c) Toothpicks
----------
The Debtors sell a wide range of wood toothpick products
under the Diamond(R) and Forster(R) brand names, including round, flat,
square, colored and specialty toothpicks. The Debtors have recently introduced
lines of Parasol Picks, Handi Picks, Shake-A-Picks and Sword Picks. The
Debtors believe they are the market leader in toothpicks. Although this
category is relatively mature, the Debtors have maintained stable sales and
attractive gross margins. The Debtors' toothpick products are sold through
grocery stores, mass merchandisers and drug stores. In 2001, the Toothpicks
group generated gross sales of $13.7 million.
(d) Clothespins and Clotheslines
----------------------------
The Debtors' Laundry Care products include wooden and
plastic clothespins and clotheslines sold under the Diamond(R) and Forster(R)
brand names. Recently, the Debtors introduced a 100-count clothespin tray pack
and a 50-count clothespin brick pack. These new packages facilitate the ease
of display at retail. In 2001, the Debtors' Laundry Care group of products
generated gross sales of $6.5 million.
(e) Consumer Wooden Crafts
----------------------
The Debtors' Wooden Crafts include craft sticks, wooden
dowels, wood turnings and other wooden shapes, all of which are sold under the
Forster(R) brand names. The Debtors' Wooden Crafts are sold primarily through
Wal-Mart and craft retail stores, such as Michael's and Jo-Ann Fabrics. In
2001, The Debtors' Wooden Crafts group of products generated gross sales of
$6.8 million.
5
(f) Institutional/Industrial
------------------------
The Debtors' Institutional/Industrial product group
encompasses institutional/food service products and industrial woodenware such
as corn dog sticks. Products include wrapped toothpicks, heavy-duty reusable
plastic cutlery (PermaWare), bulk cutlery, coffee stirrers, skewers, steak
markers and other items. The Debtors are the largest producer of corn dog
sticks in North America. Institutional/Industrial products are sold directly
to food processing manufacturers by the Debtors' sales force.
Institutional/Industrial products are utilized by the Debtors' to maximize
production runs and enhance profitability through overhead absorption. In
2001, the Institutional/Industrial product group generated gross sales of $7.0
million.
2. History
-------
DBI's predecessor, Diamond Match, was formed in 1881
following the consolidation of a number of the largest stick or wooden match
producers in the United States. In 1895, Diamond Match started producing book
matches in manufacturing facilities throughout the United States. Today, the
"Diamond" name is still best known for its matches.
DBI was formed in 1986 to acquire certain assets of Diamond
Match. In 1991, DBI purchased certain assets of Universal Match, making DBI's
Cloquet, Minnesota manufacturing facility the sole producer of wooden stick
matches in the United States and Canada. In 1995, DBI acquired Forster
Holdings, Inc., located in Wilton, Maine, and added plastic cutlery and
clothespin production to DBI's product line. In 1997, DBI added candles to its
product portfolio through its acquisition of the business of Empire
Manufacturing Company and the formation of Empire Candle, Inc. ("Empire").
In March 1998, DBI and its existing stockholders (the
"Stockholders"), Seaver Kent-TPG Partners, L.P., and Seaver Kent I Parallel,
L.P. (collectively, the "Sponsors") entered into a Recapitalization Agreement
for the Recapitalization of DBI. In connection with the Recapitalization, DBOC
was organized. Pursuant to the Recapitalization Agreement, (i) the Sponsors
and other investors purchased $47 million shares of pay-in-kind preferred
stock of DBI (the "DBI Preferred Stock"), together with warrants to purchase
shares of common stock of DBI (the "DBI Warrants"); (ii) DBI purchased all
outstanding shares of DBI's capital stock, other than certain shares having
implied value; (iii) DBI issued $84 million of 127/8% Senior Discount
Debentures due 2009 (the "DBI Notes"); and (iv) DBOC issued $100 million of
101/8 Senior Subordinated Notes due 2008 (the "DBOC Notes"). Immediately prior
to the Recapitalization, DBI transferred substantially all of its assets and
liabilities to DBOC, making DBI a holding company.
In 1999, the Debtors discontinued their candle operations
and subsequently entered into an agreement to sell certain assets and
liabilities of Empire for a total consideration of approximately $2,900,000.
On December 14, 1999, Empire changed its name to Diamond Brands Kansas, Inc.
("DBK").
3. Financial Results
-----------------
Set forth in Appendix B is selected unaudited financial data
for the Company, including the its direct and indirect subsidiaries, on a
consolidated basis for the nine months ended September 30, 2002 and for the
years ended December 31, 2000 and 2001.
B. Capital Structure of the Company
1. Prepetition Equity
------------------
DBOC is a Delaware corporation, the capital stock of which
is 100% directly owned by DBI, a Minnesota corporation. DBOC directly owns
100% of the capital stock of the remaining Debtor Affiliates, Forster, a Maine
corporation and DBK, a Kansas corporation.
6
As of the Petition Date, DBI had 1,481,258 shares of common
stock outstanding. Substantially all of DBI's common stock is held by
twenty-seven (27) independent shareholders.
DBI has approximately $47 million of the DBI Preferred Stock
outstanding, as well as the DBI Warrants. The DBI Warrants are exercisable at
$0.01 per share of common stock and expire in April 2008. During 1998, 417,382
shares of common stock were issued in connection with the exercise of DBI
Warrants and 10,582 DBI Warrants were repurchased by DBI. During 1999, 52,436
DBI Warrants were repurchased by DBI, and during 2000, 10,582 DBI Warrants
were repurchased by DBI. As of the Petition Date, 3,205,528 DBI Warrants
remained outstanding.
2. The Prepetition Senior Secured Credit Facility
----------------------------------------------
As of the Petition Date, DBOC was a party to the Prepetition
Credit Agreement with the Prepetition Lenders and Wells Fargo, N.A. as
administrative Agent. The Prepetition Credit Agreement obligations were
guaranteed by DBI, were secured by liens on substantially all of the Debtors'
asserts, and totaled approximately $84 million, before being refinanced by the
DIP Facility.
3. Prepetition Notes
-----------------
As of the Petition Date, there were (i) approximately $31
million of outstanding accreted obligations under the DBI Notes, (ii)
approximately $106 million of outstanding obligations under the DBOC Notes,
which is comprised of $100,000,000 in principal and $6,103,125 of interest
accrued and unpaid as of the Petition Date, and (iii) approximately $10.6
million of outstanding obligations under the DBI Convertible Notes. All such
notes are unsecured. Neither the DBI Notes nor the DBI Convertible Notes are
guaranteed by any other Debtor. The DBOC Notes are guaranteed by Forster and
DBK.
C. Corporate Structure of the Company
1. Current Corporate Structure
---------------------------
The Debtors' principal operating assets are owned by DBOC, a
Delaware corporation, and its subsidiaries. DBI, a Minnesota corporation, is
the parent holding company and does not own any significant assets other than
the stock of DBOC and certain intellectual property. DBOC owns two other
subsidiary entities, Forster, a Maine corporation, and DBK, a Kansas
corporation.
2. Board of Directors
------------------
The following persons comprised the Board of Directors (the "Board")
of DBI and the other Debtors as of September 19, 2002:
Name Title
- ---- -----
Naresh K. Nakra Chairman of the Board and Chief
Executive Officer
Alexander M. Seaver Director
Bradley R. Kent Director
Alfred Aragona Director
Terry R. Peets Director
7
Naresh K. Nakra joined the Debtors as President, Chief
Executive Officer and a director in April 1998. In 1999, Dr. Nakra was
appointed Chairman of the Board. Prior to joining the Debtors, Dr. Nakra
served as President and CEO of Gruma Corporation, an U.S. subsidiary of Gruma,
S.A., from January 1993 to March 1998.
Alexander M. Seaver has been a director of the Debtors since
April 1998. Mr. Seaver is a principal and founding member of Seaver Kent.
Prior to forming Seaver Kent in October 1996, Mr. Seaver was a general partner
with InterWest Partners from 1987 to 1996. At InterWest Partners, Mr. Seaver
focused on non- technology acquisitions, recapitalizations and late-stage
venture capital investments. Mr. Seaver has served on the board of directors
of a variety of companies including Bojangles', Cafe Valley, Heidi's Fine
Desserts, Java City and Pacific Grain Products.
Bradley R. Kent has been a director of the Debtors since
April 1998. Mr. Kent is a principal and founding member of Seaver Kent. Prior
to forming Seaver Kent in October 1996, Mr. Kent was a general partner with
InterWest Partners from 1987 and 1996. At InterWest Partners, Mr. Kent focused
on non-technology acquisitions, recapitalizations and late-stage venture
capital investments. Mr. Kent has served on the board of directors of Cafe
Valley, Artco-Bell Holding and MidWest Folding Products.
Alfred Aragona has been a director of the Debtors since July
1998. From 1998 to 2001, Mr. Aragona served as Chairman and Chief Executive
Officer of Cafe Valley, a national baked goods company. From 1992 to 1996, Mr.
Aragona served as Chief Executive Officer and President of Pacific Grain
Products, Inc. ("Pacific Grain"), an international grain company. Since 1996,
Mr. Aragona has served as Chairman of Pacific Grain. From 1986 to 1992, Mr.
Aragona served as President and Chief Executive Officer of Uncle Ben's Inc.
Terry R. Peets has been a director of the Debtors since July
1998. Mr. Peets served as Chairman of Bruno's Supermarkets, Inc. from 1999 to
2001. From 1995 to 1997, Mr. Peets served as President, Chief Executive
Officer and a director of PIA Merchandising Company, Inc. and Executive Vice
President of The Vons Companies ("Vons"). Prior to joining Vons, Mr. Peets
served in various sales, marketing and operation roles as Senior Vice
President, and in 1994, Executive Vice President of Ralphs Grocery Company.
Mr. Peets also serves as director of SuperMarkets Online, a division of
Catalina Marketing Corporation, a provider of in-store electronic marketing
services.
3. Executive Officers
------------------
The following is a list of the names and positions of the executive
officers of DBOC as of September 1, 2002:
Name Title
- ---- -----
Naresh K. Nakra Chief Executive Officer
William L. Olson Vice President of Finance
James M. Lincoln Vice President of Sales
Christopher A. Mathews Vice President of Operations
William L. Olson joined the Debtors in 1989 as Corporate
Accounting Manager. In October 2000, Mr. Olson was appointed Vice President of
Finance. Prior to joining the Debtors, Mr. Olson was the Controller of Best
Oil/Little Stores, Inc. from 1986 to 1989 and the Controller of Security Oil
from 1984 to 1986. Prior to 1984, Mr. Olson served as a certified public
accountant for various accounting firms.
8
James M. Lincoln joined the Debtors in 1998 as the Vice
President of Sales. Prior to joining the Debtors, Mr. Lincoln was the
President of Tool Division, Mid America Hydraulic Repair, Inc. from 1997 to
1998. and served as Vice President of Sales at Carlisle Plastics, Inc. from
1995 to 1997. Mr. Lincoln was employed by James River Corporation from 1981 to
1995.
Christopher A. Mathews joined the Debtors in 1986 as the
Plant Manager for the Debtors Cloquet, Minnesota facility. In June 1998, Mr.
Mathews was appointed Vice President of Operations for all of the Debtors'
facilities. Prior to joining the Debtors, Mr. Mathews served as the General
Manager of Northern Mining Equipment Corporation from 1981 to 1986 and as the
Mill Engineer of United States Steel from 1979 to 1981.
IV. EVENTS LEADING TO COMMENCEMENT OF THE CHAPTER 11 CASES
The Debtors' liabilities arise primarily from the 1998
Recapitalization of the Company, which resulted in a dramatic increase in the
Debtors' debt to revenue ratio. These liabilities were further increased by a
number of capital improvements and other restructuring events undertaken by
the Debtors subsequent to the Recapitalization. Under the Debtors' business
plan, these capital improvements were expected to lead to increased revenue,
which would, in turn, be used to fund increased operating expenses created by
the capital expenditures, as well as to service the debt that had been
incurred in connection with the Recapitalization.
Notwithstanding their projections, the Debtors were unable
to generate the anticipated operating revenue prior to the maturity of
numerous debt payment obligations. Specifically, the Debtors' annual revenues
for the year 2000 were significantly reduced by the increasing cost of raw
materials, primarily with respect to the Debtors' production of cutlery
products, which are primarily manufactured from polystyrene resin. Resin, a
commodity with high price volatility, has experienced notable price increases
brought on by a decrease in supply relative to demand and an increase in
global petroleum prices. Due to these increases, before the Petition Date the
Debtors were unable to purchase resin at normalized price levels. During 2001,
the average purchase price for resin was approximately $.46 per pound, as
compared to an average of approximately $.34 per pound for the previous four
calendar years. Unfortunately, due to increased competition in the Debtors'
core product markets, the Debtors have been unable to pass these costs along
to their customers.
These increased operational costs, combined with the
significant and numerous matured debt payment obligations, left the Debtors'
balance sheet in a significantly over-leveraged position relative to their
existing operations. Given these factors, the Debtors determined, in their
business judgement, that a financial restructuring or sale of the Company was
necessary and would best be achieved through the Chapter 11 process.
V. CHAPTER 11 CASES
A. Continuation of Business; Stay of Litigation
On May 22, 2001, the Debtors filed petitions for relief
under Chapter 11 of the Bankruptcy Code. Since the Petition Date, the Debtors
have continued to operate as debtors-in-possession subject to the supervision
of the Bankruptcy Court and in accordance with the Bankruptcy Code. Under the
Bankruptcy Code, the Debtors are required to comply with certain statutory
reporting requirements, including the filing of monthly operating reports. As
of the date hereof, the Debtors have complied with such requirements and with
which the Debtors will continue to comply. The Debtors are authorized to
operate their business in the ordinary course of business, with transactions
out of the ordinary course of business requiring Bankruptcy Court approval.
An immediate effect of the filing of the Debtors' bankruptcy
petitions is the imposition of the automatic stay under the Bankruptcy Code
which, with limited exceptions, enjoins the commencement or continuation of
all collection efforts by creditors, the enforcement of liens against property
of the Debtors and the continuation of litigation against the Debtors. This
relief provides the Debtors with the "breathing room" necessary to assess and
reorganize their business. The automatic stay remains in effect, unless
modified by the Bankruptcy Court, until consummation of a plan of
reorganization.
9
B. First Day Orders
On the first day hearing (the "First Day Hearing") held in
these Chapter 11 Cases, the Debtors filed several motions seeking certain
relief by virtue of so-called "first day orders." First day orders are
intended to facilitate the transition between a debtor's prepetition and
postpetition business operations by approving certain regular business
practices that may not be specifically authorized under the Bankruptcy Code or
as to which the Bankruptcy Code requires prior approval by the Bankruptcy
Court. Many of the first day orders obtained in these cases are typical for
large Chapter 11 cases.
The first day orders in the Chapter 11 Cases authorized,
among other things:
(a) the retention of Logan and Company, Inc. as claims and
noticing agent (the "Claims Agent") (Docket No. 25);
(b) the maintenance of the Debtors' bank accounts and
operation of their cash management systems substantially as such systems
existed prior to the Petition Date (Docket No. 34);
(c) payment of employees' accrued prepetition wages and
employee benefit claims (Docket No. 28);
(d) payment of prepetition shipping, warehouse,
distributor or broker charges and related possessory liens (Docket No. 32);
(e) continued utility services during the first months of
the Chapter 11 Cases (Docket No. 27);
(f) payment of certain prepetition tax claims
(Docket No. 29);
(g) confirmation that the Debtors' undisputed obligations
arising from postpetition delivery of goods will have administrative expense
priority status and that certain holders of valid reclamation claims will have
administrative expense treatment (Docket No. 31); and
(h) the maintenance of certain prepetition customer
programs and practices ( Docket No. 30).
Importantly, in connection with the requested first-day
relief, the Debtors obtained entry of an order (Docket No. 33) (the "Critical
Vendor Order") by the Bankruptcy Court authorizing them to continue to pay, in
the ordinary course of business, certain critical vendors, subcontractors and
other creditors (the "Critical Vendors") that provide goods and services for
ongoing projects of the Debtors, subject to a cap of $1.15 million. Absent the
ability to make such payments, the Debtors believed that their business would
suffer significant harm. By its terms, the Critical Vendor Order requires a
vendor or subcontractor whose prepetition claim is paid thereunder to continue
to provide goods and services to the Debtors on ordinary payment terms. This
mechanism ensured that the Debtors continued to receive trade credit support
from their Critical Vendors, which provided a significant liquidity benefit to
the Debtors' estates at the early stage of these Chapter 11 Cases.
Prior to the First Day Hearing, the Court entered an order
granting the Debtors' motion seeking joint administration and procedural
consolidation of these Chapter 11 Cases (Docket No. 7) and approved several
stipulations negotiated by the Debtors and the Office of the United States
Trustee, that provided the Debtors emergency interim relief with respect to
(i) payment of employees' accrued prepetition wages and employee benefit
claims, (ii) maintenance of the Debtors' bank accounts and operation of their
cash management systems as such systems existed prior to the Petition Date,
(iii) payment of certain critical vendors and service providers, (iv) payment
of certain critical distribution charges (v) confirmation that the Debtors'
undisputed obligations arising from postpetition delivery of goods will have
administrative expense priority status and that certain holders of valid
reclamation claims will have administrative expense treatment and prohibiting
third parties from reclaiming or interfering with the delivery of goods and
(vi) grating adequate protection and authorizing use of cash collateral,
pending the First Day Hearing (Docket Nos. 8-13).
10
C. Debtor in Possession Financing
1. The DIP Facility
----------------
To ensure that it would have sufficient liquidity to conduct
their business during the Chapter 11 Cases, the Debtors believed at the time
the Chapter 11 Cases were commenced, that it was in the best interests of the
Debtors and their creditors to obtain a commitment for debtor in possession
financing that would provide for additional borrowing capacity, and for the
ongoing use of cash received by the Company from its customers in the
operation of the businesses, which cash constitutes the Prepetition Lenders'
cash collateral, as discussed below. Such financing would ensure continued
access to sufficient working capital during the pendency of the Chapter 11
Cases and instill confidence in the Debtors' customers, critical vendors and
employees that the Debtors would continue as a going concern.
Accordingly, as discussed above, at the outset of these
cases, the Debtors sought and obtained interim authority to enter into the DIP
Facility with Wells Fargo NA, as administrative agent (the "Agent") and the
DIP Lenders. The DIP Lenders were comprised of the same group of financial
institutions that were the Prepetition Lenders. Final authority to enter into
the DIP Facility was granted by the Bankruptcy Court on July 13, 2001. The DIP
Facility refinanced or "rolled up" the Debtors' obligations under the
Prepetition Credit Agreement including a reserve for the obligations due under
the Interest Rate Swap Agreement and provided for secured postpetition
financing from the DIP Lenders under a loan facility in an aggregate principal
amount not to exceed $92,250,000 together with the amounts reserved for the
Interest Rate Swap Agreement. This provided approximately $8.2 million in
maximum incremental new borrowing capacity above the amount of obligations
under the Prepetition Credit Agreement that were refinanced by the DIP
Facility. The DIP Facility had a term of eleven (11) months, expiring on April
30, 2002.
Under the terms of the DIP Facility, to secure the repayment
of the borrowing and all other obligations arising under the DIP Facility, the
Debtors granted the DIP Lenders first priority liens on substantially all of
their assets, junior only to other valid liens existing on the Petition Date.
Obligations under the DIP Facility were also granted "superpriority" claim
status under Section 364(c)(1) of the Bankruptcy Code, meaning they have
priority over all other administrative expenses. The liens and claims granted
to the DIP Lenders are subject to the fees and expenses of the Office of the
United States Trustee under 28 U.S.C. ss. 1930 and the Clerk of the Bankruptcy
Court, as well as a $1 million carve-out for fees and disbursements of the
professionals of the Debtors and the Creditors' Committee incurred after an
event of default under the DIP Facility. The DIP Facility also contains
covenants, representations and warranties, events of default, and other terms
and conditions typical of credit facilities of a similar nature.
Because the results of operations during the Chapter 11
Cases materially exceeded projections made at the outset of the Chapter 11
Cases, the Debtors did not need to utilize the incremental additional funds
available under the DIP Facility. As set forth below, the Debtors have cash on
hand as of November 20, 2002 of approximately $16.3 million.
As discussed in the Overview, the DIP Facility expired by
its terms on April 30, 2002. Thereafter, the Debtors entered into a series of
forbearance agreements with the DIP Lenders culminating in the DIP Forbearance
currently in existence, which expired on October 31, 2002. While no further
forbearance has been obtained, the DIP Lenders have not initiated any action
to seek to foreclose on their liens; any such attempt would be objected to by
the Debtors and the Creditors' Committee. The Debtors continue to pay current
interest on outstanding obligations under the DIP Facility, at the default
rate of interest set forth in the DIP Facility, which is 200 basis points in
excess of the non-default rate.
11
2. Authorization to Use Cash Collateral
------------------------------------
The cash the Debtors had on hand as of the Petition Date,
and substantially all cash received by the Debtors during the Chapter 11
Cases, constitutes "Cash Collateral" of the Prepetition Lenders (and after the
repayment of the Prepetition Lenders' loans with the DIP Facility, the DIP
Lenders). Cash collateral is defined in Section 363 of the Bankruptcy Code and
includes, but is not limited to, "cash, negotiable instruments, documents of
title, securities, deposit accounts, . . . other cash equivalents . . . and .
.. . proceeds, products, offspring, rents or profits of property subject to a
security interest . . . ." 11 U.S.C. ss. 363(a). Under the Bankruptcy Code,
the Debtors are prohibited from using, selling, or leasing cash collateral
unless either the appropriate creditor(s) consent or the Bankruptcy Court,
after notice and a hearing, authorizes such action. Accordingly, in connection
with the DIP Facility, the Debtors obtained authority to use the Cash
Collateral to pay current operating expenses, including payroll and vendors,
to ensure the Debtors' ability to continue uninterrupted the operation of
their business. Upon the expiration of the DIP Facility, the Debtors entered
into a stipulation with the DIP Lenders allowing continued use of Cash
Collateral during the DIP Facility forbearance period.
D. Appointment of Creditors' Committee
On June 11, 2001, the United States Trustee for the District
of Delaware appointed, pursuant to Section 1102(a) of the Bankruptcy Code,
certain entities to the Official Committee of Unsecured Creditors of the
Debtors (the "Creditors' Committee"). Members of the Creditors' Committee have
included: Glennfinnan Investment Co.; Hawkeye Capital, L.P.; HSBC Bank, USA;
Ohio Valley Plastics, Inc.; State Street Bank & Trust Company; and Stone
Management Corporation. On August 20, 2002, Glennfinnan Investment Co. (which
is an affiliate of the Trump Group, one of the bidders that participated in
the auction process summarized in the Overview) resigned from the Creditors'
Committee. On or about June 11, 2002, the Creditors' Committee retained Blank,
Rome, Comisky McCauley LLP as its counsel and on or about May 6, 2002, the
Creditors' Committee retained Loeb Partners Corporation as its financial
advisor and investment banker.
E. Other Material Relief Obtained During the Chapter 11 Cases
In addition to the first day relief sought in these Chapter
11 Cases, the Debtors have sought or anticipate seeking authority with respect
to a multitude of matters designed to assist in the administration of the
Chapter 11 Cases, to maximize the value of the Debtors' estates and to provide
the foundation for the Debtors' emergence from Chapter 11. Set forth below is
a brief summary of certain of the principal motions the Debtors have filed
during the pendency of the Chapter 11 Cases.
1. Retention of Debtor' Professionals
----------------------------------
During these Chapter 11 Cases, the Bankruptcy Court has
authorized the retention of various professionals by the Debtors, including:
(i) the retention of Skadden, Arps, Slate, Meagher & Flom and its affiliated
law practice entities as counsel (Docket No. 141); (ii) the retention of
Jefferies & Company, Inc. as financial advisor (Docket No. 117); (iii) the
retention of Arthur Anderson LLP as auditors and tax consultants (Docket No.
124); (iv) the retention of Duane, Morris & Heckscher LLP as special counsel
(Docket No. 355); and (v) the retention of RSM McGladrey, Inc. as tax
consultants (replacing Arthur Andersen after the dissolution of its
Minneapolis office) (Docket No.464).
2. Employee Retention Program
-- --------------------------
On July 24, 2001 (Docket No. 118), the Bankruptcy Court
approved a retention program designed to retain key executives and employees.
The retention program includes two components. The first component is a
pay-to-stay bonus payable in four installments throughout these Chapter 11
Cases, calculated based on the employee's importance to the Debtors and the
Chapter 11 Cases, marketability of the employee's skills and likelihood of
departure and financial constraints faced by the Debtors. The second component
is a performance bonus based upon the Debtors' achieving certain EBITDA
targets, and payable upon confirmation of a plan of reorganization.
12
3. Extension of Time to Assume or Reject Leases
--------------------------------------------
Given the complexity of these Chapter 11 Cases, the Debtors
were unable to complete their analysis of all nonresidential real property
leases during the time limitation prescribed by Section 365(d)(4) of the
Bankruptcy Code. Upon motion of the Debtors, on August 15, 2001, the
Bankruptcy Court extended the time by which the Debtors must assume or reject
leases of nonresidential real property for five (5) months, through and
including December 20, 2001 (Docket No. 140). Thereafter, pursuant to orders
of the Bankruptcy Court dated January 14, 2002 (Docket No. 248), April 15,
2002 (Docket No. 327) and July 16, 2002 (Docket No. 414), the Bankruptcy Court
extended the Debtors' time to assume or reject by consecutive three month
periods. On October 11, 2002, the Bankruptcy Court entered an order (Docket
No. 509) further extending the Debtors time to assume or reject through
January 31, 2003 or confirmation of a plan of reorganization.
4. Extension of Exclusive Periods
------------------------------
Pursuant to orders of the Bankruptcy Court dated September
17, 2001 (Docket No. 172), January 16, 2002 (Docket No. 248) and April 22,
2002 (Docket No. 343), the Bankruptcy Court extended the Debtors' exclusive
period to propose a plan of reorganization (the "Plan Proposal Period") and to
solicit acceptances of such plan (the "Solicitation Period", and together with
the Plan Proposal Period, the "Exclusive Periods"). On September 17, 2001, the
Bankruptcy Court extended the Plan Proposal Period through December 19, 2001
and the Solicitation Period through February 17, 2002. On January 16, 2002 the
Bankruptcy Court further extended the Plan Proposal Period through March 19,
2002 and the Solicitation Period through May 17, 2002, and on April 22, 2002,
the Bankruptcy Court further extended the Plan Proposal Period through June
17, 2002 and the Solicitation Period through August 15, 2002. On June 14,
2002, the Debtors filed a motion seeking to further extend the Plan Proposal
and Solicitation Periods (Docket No. 381). As discussed in the Overview, at a
hearing held on August 29, 2002, the Debtors voluntarily agreed with the Court
that termination of the Exclusive Periods was appropriate given the procedural
posture of these cases, thus mooting the necessity of a decision on the
motion.
F. Summary of Claims Process and Bar Date
1. Schedules and Statements of Financial Affairs
---------------------------------------------
The Debtors filed Schedules of Assets and Liabilities and
Statements of Financial Affairs (collectively, the "Schedules and Statements")
with the Bankruptcy Court on July 6, 2001 (Docket Nos. 84-91). Among other
things, the Schedules and Statements set forth the Claims of known creditors
against the Debtors as of the Petition Date, based upon the Debtors' books and
records.
2. Claims Bar Date and Proofs of Claim
-----------------------------------
On, July 30, 2001, the Debtors filed a motion with the
Bankruptcy Court to establish the general deadline for filing proofs of claim
against the Debtors by those creditors required to do so (Docket No. 178) (the
"Bar Date"). On August 15, 2001 the Bankruptcy Court established the Bar Date
as October 1, 2001. The Bankruptcy Court's order establishing the Bar Date
(Docket No. 142) (the "Bar Date Order") requires that the Debtors' Claims
Agent provide notice of the Bar Date by mailing: (i) a notice of Bar Date;
(ii) a proof of claim form; and (iii) a notice of either unliquidated,
contingent and/or disputed claim or liquidated, non-contingent and undisputed
claim upon the requisite persons or entities. The Bar Date and the Debtors'
completion of their preliminary review of all Claims filed is anticipated to
be completed after the Confirmation Date.
Excluding proofs of claim filed relating to the Prepetition
Credit Agreement, approximately 160 proofs of claim asserting claims in excess
of $1 billion (in the aggregate) have been filed against the Debtors. A
significant amount of the proofs of claim filed are either duplicative, as
based upon guarantees, or are based upon intercompany relationships. In
addition, numerous Claims were asserted by various alleged creditors in
unliquidated amounts. The Debtors believe that numerous other claims that have
been asserted or threatened to be asserted are without merit and intent to
object to all such Claims. There can be no assurance that the Debtors will be
successful in contesting any of such Claims. Although the Debtors' completion
of their review of all Claims filed is anticipated
13
to be completed after the Confirmation Date, based upon the review of Claims
and reconciliation of Proofs of Claim conducted to date, the Debtors believe
that general unsecured trade claims are likely to become allowed claims in the
aggregate amount of $500,000. However, the Debtors do not anticipate having
reviewed and fully analyzed all Proofs of Claim filed in these cases by the
Confirmation Date. Accordingly, the actual amount of general unsecured trade
claims that ultimately become Allowed Claims could materially exceed $500,000,
and, if so, estimated percentage recoveries for holders of General Unsecured
Claims could be less than as estimated in this Disclosure Statement.
G. Summary of Material Litigation Matters
During the Chapter 11 Cases to date, the Debtors commenced
or were involved in a number of lawsuits. A summary of the significant actions
is set forth below. In addition, the Debtors are parties to certain other
litigation that has arisen in the ordinary course of business. The Debtors do
not believe that the ultimate resolution of these matters will have a material
adverse affect on the Debtors' financial condition, results of operations or
cash flow.
1. Misemer Action
--------------
On or about November 5, 1999, Plaintiffs Kent A. Misemer, an
individual, Kent A. Misemer, as Trustee under the Kent A. Misemer Revocable
Trust, and SMTM, Inc. f/k/a Empire Mfg. Company, (collectively, "Plaintiffs")
commenced an action in the District Court of Wyandotte County, Kansas (the
"Trial Court") seeking a temporary restraining order and a determination that
Empire Candle, Inc. (n/k/a Diamond Brands Kansas, Inc.) ("Empire") had
anticipatorily and partially breached provisions of the asset purchase
agreement (the "Sale Agreement") between Empire and Plaintiffs for the sale of
substantially all of the assets of Empire Manufacturing Company (n/k/a SMTM,
Inc.) related to the disposition of obsolete inventory. On or about November
1, 2000, the Trial Court issued a judgment (the "Judgment") in Plaintiffs'
favor for the amount of $1.2 million. Empire appealed this Judgment (the
"Appeal"), and, as part of the Appeal, on or about January 12, 2001, United
States Fire Insurance Company ("USFIC") issued a supersedeas bond in favor of
Plaintiffs in the amount of $1.6 million, which bond was secured by a $1.9
million letter of credit issued by the Prepetition Lenders. The Judgment was
affirmed on appeal, and, on or about May 17, 2002, pursuant to Plaintiffs'
demand, USFIC issued payment for the Judgment, interest and court costs in the
amount of $1,356,585.47. On or about August 23, 2002, Plaintiffs commenced an
adversary proceeding (Adv. Pro. No. 02-5304 (RJN)) seeking a determination, on
various legal grounds, confirming their entitlement to reimbursement for
attorneys' fees and expenses incurred while defending the Appeal. Plaintiffs
complaint is currently the subject of a motion to dismiss filed by DBI and DBK.
2. Wells Fargo Swap Agreement
--------------------------
The Prepetition Credit Agreement contained an affirmative
covenant that required DBOC to maintain one or more Interest Rate Agreements
with respect to the loans provided under the Credit Agreement. In compliance
with this covenant, on or about May 7, 1998, DBI entered into the Wells Fargo
Swap Agreement. The Wells Fargo Swap Agreement requires Wells Fargo, as the
"Floating Rate Payer," to pay DBI, as the "Fixed Rate Payer," the amount the
"Floating Rate Payment" exceeds the "Fixed Rate Payment" on certain defined
payment dates, and vice versa. DBI's obligation to pay under the Wells Fargo
Swap Agreement is secured by a security interest in all or substantially all
of its assets.
On or about October 30, 2001, the Creditors' Committee
initiated an adversary proceeding against Wells Fargo, as agent and in its
individual capacity, seeking to avoid the liens and security interests of
Wells Fargo and other Lenders in certain of the Debtors' assets and
declarations regarding the Wells Fargo Swap Agreement to the partial effect
that operating company Debtors were not liable to Wells Fargo in connection
with the Wells Fargo Swap Agreement. Simultaneously therewith, the Creditors'
Committee objected to certain Lender claims and filed a defensive motion (due
to the DIP Order) to confirm its standing to initiate the above-referenced
adversary proceeding. Subsequently, Wells Fargo timely answered this
complaint, responded to the claims objections and objected to the Creditors'
Committee standing. In November, 2001, the Court entered an Order confirming
the Committee's standing to sue Wells Fargo.
14
On or about December 4, 2001, Wells Fargo commenced an
adversary proceeding (Adv. Pro. No. 01-08981 (RJN)) seeking a declaratory
judgment that the designation of DBI as the "Fixed Rate Payor" was a clerical
error and that DBOC, not DBI, was intended to be the "Fixed Rate Payor" under
the terms of the Wells Fargo Swap Agreement (the "Reformation Action"). DBOC
does not object to the relief sought by Wells Fargo. On or about January 4,
2002, the Creditors' Committee filed a motion seeking to intervene in the
Reformation Action (Adv. Pro. Docket No. 4). On January 16, 2002, the
Bankruptcy Court entered a consent order (Adv. Pro. Docket No. 15) granting
the Creditors' Committee's motion. Thereafter, in connection with the parties
subsequent agreement to mediate their dispute, a mediation was held on March
11, 2002. Following the mediation, the parties agreed informally to stay the
Reformation Action pending further plan of reorganization discussions.
Pursuant to the Plan, all amounts owing pursuant to the
Wells Fargo Swap Agreement constitute Allowed DIP Facility Claims that will be
assumed by the Purchaser and paid in full on the Effective Date. In addition,
pursuant to the Plan, the Confirmation Order shall constitute a final,
non-appealable judgment in favor of Wells Fargo in the Reformation Action. The
Plan operates to dismiss with prejudice on the Effective Date all Claims,
complaints, objections, litigation and causes of action against Wells Fargo
and the other DIP Lenders arising out of or related to Wells Fargo Swap
Agreement.
3. DIP Lender Adversary Proceeding
-------------------------------
Under the Plan, as of the Effective Date, the Confirmation
Order shall constitute a non-appealable judgment in favor of the DIP Lenders
in the adversary proceeding commenced by the Creditors' Committee against the
DIP Lenders. The Plan operates to dismiss with prejudice such action on the
Effective Date.
H. Development and Summary of The Debtors' Business Plan
The Debtors' management team has created and implemented a
long-term business plan aimed at ensuring the continued success of the
businesses. This business plan may or may not be implemented by the Purchaser,
which will control management of the Company going forward. Because the Plan
provides for a sale of the Debtors' assets to Jarden and the subsequent
distribution of sale proceeds to creditors, whether Jarden operates the
Company's businesses consistent with the business plan currently in place
under existing management, will not materially impact the distributions to
creditors under the Plan.(5)
The Debtors' business plan consists of two components. The
first component is designed to enhance the Debtors' strong market position and
increase sales and EBITDA by focusing on five strategic elements. The second
component focuses on each of the particular categories of products
manufactured by the Debtors and the potential opportunities for the Debtors
with respect to such categories.
1. Strategic Elements
- ------------------
The Debtors have targeted five key elements in their plan to
strengthen their market positions and increase sales and EBITDA, as follows:
(a) Continue to Produce High Quality Products
-----------------------------------------
The Debtors believe that product quality has been a key
factor in their success and intend to continue manufacturing high quality
products in a cost-efficient manner in each of their product categories. The
Debtors believe that their products are of superior or equivalent quality
compared to those of their competitors, and that their brand names are "Made
in the USA" label distinguish the Debtors' products from those of its
competitors.
______________
(5) As set forth in the Overview, it is possible that the $6 million to
be paid to the Debtors six months after Closing as "Additional
Consideration" will be paid, at Jarden's election, in the form of
Jarden common stock rather than cash.
15
(b) Expand Category Management Strategy to
--------------------------------------
Increase Retail Shelf Space
---------------------------
The Debtors utilize a category management strategy to
maintain and increase shelf space for their products at retail outlets. A
central element of this strategy is their corporate rebate program, which
provides incentives to grocery retailers to buy multiple products from the
Company. The Debtors intend to expand their corporate rebate program to
include additional grocery retailers. The category management strategy also
includes consolidated invoicing and shipping across the Debtors' product
lines, which allows retailers to lower buying costs and reduce their number of
suppliers.
(c) Enter New Distribution Channels
-------------------------------
The Debtors' products are sold primarily through grocery
stores, drug stores, mass merchandisers and warehouse clubs in the United
States. While the Debtors' have been successful in these distribution
channels, management believes there is potential to increase sales and EBITDA
by: (i) penetrating additional retail outlets including gift stores and party
supply stores; (ii) increasing sales efforts in the food service industry; and
(iii) entering international markets. The Company intends to utilize their
strong brand names, diverse product portfolio and cost-efficient manufacturing
to facilitate their entry into new distribution channels.
(d) Capitalize on Strong Brand Names and National
---------------------------------------------
Distribution to Introduce New Products
--------------------------------------
The Debtors intend to continue developing new products and
product line extensions designed to capitalize on the Debtors' strong brand
names and existing distribution and manufacturing capabilities. The Debtors
intend to use their category management and strategy and existing
relationships with retailers to secure retail shelf space for these new
products.
(e) Pursue Attractive Acquisition Opportunities
-------------------------------------------
As set forth in more detail herein, the Debtors have
successfully completed and integrated three strategic acquisitions in the last
seven years. The Debtors believe there are additional opportunities to
generate incremental sales and EBITDA through strategic acquisitions. The
Debtors intend to continue to pursue strategic acquisitions that: (i) add to
or complement their product portfolio; (ii) leverage their existing
distribution and manufacturing capabilities; or (iii) provide access to new
distribution channels for their products.
2. Product Categories
------------------
The Debtors' operations are organized into six product
categories: Cutlery/Straws, Matches and Firestarters, Toothpicks, Clothespins
and Clotheslines, Consumer Wooden Crafts and Institutional/Industrial
products. In connection with implementing the strategies addressed by the
elements listed above, the Debtors' business plan is also specifically
tailored to each of the six product categories.
(a) Cutlery/Straws
--------------
The Debtors' strategy in the Cutlery segment focuses on: (i)
expanding the Debtors' current category management strategy in grocery stores
by emphasizing the corporate rebate program; (ii) increasing private label
sales to better utilize the Debtors' low cost manufacturing capabilities;
(iii) providing consumer promotions such as coupon inserts and
"buy-one-get-one-free" offers, etc.; and (iv) supporting straw products
through cross- promotion with plastic cutlery. In addition, the Debtors have
completed a consumer research study regarding its cutlery product lines. The
survey results indicated that consumers purchased cutlery products as an
impulse purchase. As a result, the Debtors have begun initiatives to have
retailers display Diamond Brands goods in several areas of their stores
including checkout counters, allowing consumers several opportunities to
decide to purchase
16
the Debtors' products. Moreover, the survey indicated that consumers desired
clear plastic cutlery and as a result, Diamond Brands has redesigned its
packaging of these products and started to market clear full-size cutlery. The
Debtors believe that through these strategic initiatives they can expand their
leadership position in cutlery and continue to grow at rates faster than the
overall market.
In addition to the strategy outlined above, the Debtors
believe that there are several opportunities to significantly expand the
business. For example, while the Debtors are the leading player in plastic
cutlery sold at retail, they have not focused on the institutional market,
which is four times as large as the retail market. The Debtors believe they
could leverage their strong brand name and low cost manufacturing capabilities
and become a significant player in the institutional channel. There are
additional opportunities to expand into plastic cups and plates and party
goods as well as the potential to sell plastic cutlery internationally.
(b) Matches and Firestarters
------------------------
The Debtors' strategy in Matches focuses on maintaining
shelf space to maximize sales and profitability. As part of this strategy, in
1999, the Debtors consolidated their match brands, which previously included
Ohio Blue Tip and Fire Chief, under the widely recognized Diamond(R) brand
name and have recently redesigned some of the packaging of these products. The
Debtors also use match sales to cross promote other products. For example, the
Debtors have run promotions in which inside a box of Diamond Brands kitchen
matches a consumer will find a $0.50 off coupon for Diamond plastic cutlery.
With respect to the fire starter products, the Debtors plan to continue heavy
trade promotions (29% of gross sales) in order to build distribution. The
Debtors consider fire starter products to be a growth segment.
As part of the implementation of this strategy, the Debtors
have recently developed several new product lines, including collectible
kitchen and penny matches, candle matches and grill matches, and have
redesigned its fireplace matches, which they believe will contribute to
increased sales in the near term. The Debtors new fireplace matches and
collectible kitchen matches are already in stores. The Debtors other new
product lines, however, have been introduced in some stores since early 2001.
These specialized products will be merchandised in appropriate retail
sections, such as the grill matches in the barbecue and outdoor sections and
the candle matches in the candle sections. In some cases, these new products
may be introduced next to the Debtors' existing products with additional shelf
space being allotted to the new products. While the Debtors believe a minor
degree of product cannibalization could result, sales of the Debtors' new
products will result in increased revenue and profitability due to their
better margins. Additionally, the Debtors believe that significant
opportunities exist for expansion of their advertising matches segment.
Additionally, opportunities exist for expansion through distribution in
camping/outdoor stores. The Debtors believe there are also opportunities to
increase distribution of their match products internationally.
(c) Toothpicks
----------
The Debtors consider Toothpicks to be a stable category with
substantial and maintainable margins. Their toothpick strategy focuses on
maintaining shelf space to maximize sales and profitability. The Debtors
believe that new products, such as handi picks, shake- a-picks, frill pick
clip strips, sword pick clip strips, and parasol pick clip strips, could
expand category growth. Clip strips are hanging packages that are placed in
multiple places in stores in order to encourage impulse purchases. The Debtors
also believe that there are opportunities to increase distribution of their
toothpick products internationally.
(d) Clothespins and Clotheslines
----------------------------
The Debtors' Laundry Care strategy focuses on controlling
shelf space to maximize sales and profitability. In addition, the Debtors
intend to aggressively pursue distribution of clothespins at key food store
accounts such as Albertson's and Kroger with a focus on the "Made in the USA"
product. The Debtors will also continue to aggressively cross-market their
clothespin and clothesline products.
17
(e) Consumer Wooden Crafts
----------------------
The strategy for Wooden Crafts is to capitalize on the
popularity of wooden crafts, particularly the Woodsies product line and to
increase sales through introduction of new products. The Debtors intend to
increase sales to its key customers with new wooden craft displays. The
Debtors utilize project sheets with craft ideas that are displayed in stores
to promote their products. The Debtors also use print advertising in craft
magazines and occasionally participate in television advertising on craft
television shows. The Debtors believe there are opportunities to increase
distribution of their wooden crafts products internationally.
(f) Institutional/Industrial Products
---------------------------------
Although the Debtors have the manufacturing expertise, to
date, they have chosen not to invest in the marketing support to develop
product lines to effectively compete in the institutional class of trade. The
Debtors are exploring a more marketing oriented approach, particularly with
respect to the food service industry, which could assist them in building
their presence in the institutional market. The Debtors' PermaWare product, an
indestructible, reusable line of plastic cutlery, has been well received in
prisons, hospitals and other institutions.
3. Projections
-----------
As described in the Overview and below, the Plan provides
for the Sale of substantially all of the Debtors' assets to Jarden, and the
distribution of proceeds from the Sale to creditors. Because the Plan provides
that holders of Allowed Claims will receive proceeds from the Sale, the Plan
Proponents and the Creditors' Committee do not believe that forward-looking
financial projections regarding the Reorganized Debtors are relevant to a
decision by creditors whether to accept or reject the Plan. Accordingly, this
Disclosure Statement does not include forward-looking financial projections
for the Company after its acquisition by Jarden.
VI. SUMMARY OF THE PLAN OF REORGANIZATION
THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE,
CLASSIFICATION, TREATMENT AND IMPLEMENTATION OF THE PLAN AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE PLAN, WHICH ACCOMPANIES THIS DISCLOSURE
STATEMENT, AND TO THE EXHIBITS ATTACHED THERETO.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN WILL
CONTROL THE TREATMENT OF CREDITORS AND EQUITY SECURITY HOLDERS UNDER THE PLAN
AND WILL, UPON THE EFFECTIVE DATE, BE BINDING UPON HOLDERS OF CLAIMS AGAINST,
OR INTERESTS IN, THE DEBTORS, THE REORGANIZED DEBTORS AND OTHER PARTIES IN
INTEREST.
A. Purpose and Effect of the Plan
Chapter 11 is the principal business reorganization chapter
of the Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize
its business for the benefit of its creditors and shareholders. Upon the
filing of a petition for relief under Chapter 11, section 362 of the
Bankruptcy Code provides for an automatic stay of substantially all acts and
proceedings against the debtor and its property, including all attempts to
collect claims or enforce liens that arose prior to the commencement of the
Chapter 11 case.
The consummation of a plan of reorganization is the
principal objective of a Chapter 11 case. A plan of reorganization sets forth
the means for satisfying claims against and interests in a debtor.
Confirmation of a plan of reorganization by the Bankruptcy Court makes the
plan binding upon the debtor, any issuer of securities under the plan, any
person or entity acquiring property under the plan, and any creditor of or
equity security holder in the debtor, whether or not such creditor or equity
security holder (i) is impaired under or has accepted the plan or (ii)
receives or retains any property under the plan. Subject to certain limited
exceptions and other than as
18
provided in the plan itself or the confirmation order, the confirmation order
discharges the debtor from any debt that arose prior to the date of
confirmation of the plan and substitutes therefor the obligations specified
under the confirmed plan, and terminates all rights and interests of equity
security holders.
The Plan provides for the Sale of substantially all of the
assets of the Debtors to Jarden, and for the Debtors (via a Plan Administrator
to be selected by the Debtors with the consent of the Creditors' Committee) to
distribute the proceeds of such Sale to various creditors as contemplated
under the Plan and subsequently wind up the Debtors' corporate affairs. Under
the Plan, Claims against, and Interests in, the Debtors are divided into
Classes according to their relative seniority and other criteria.
If the Plan is confirmed by the Bankruptcy Court and
consummated, the Claims of the various Classes will be treated in accordance
with the Plan provisions in such Plan for each such Class. On the Effective
Date and at certain times thereafter, the Reorganized Debtors will make
distributions to certain Classes of Claims as provided in such Plan. A general
description of the Classes of Claims against the Debtors created under the
Plan, the treatment of those Classes under the Plan and the securities and
other property to be distributed under the Plan are described below.
B. The Purchase Agreement
The Purchase Agreement pursuant to which the Debtors will
sell their assets to Jarden is attached to the Plan as Exhibit 1. The
following summary is qualified in its entirety by the actual Purchase
Agreement itself.
1. Consummation of Transactions Contemplated by
--------------------------------------------
Purchase Agreement
------------------
Under the Plan, on the Effective Date, the Debtors shall
consummate the transactions contemplated by the Purchase Agreement, attached
to the Plan as Exhibit 1, pursuant to the terms of the Purchase Agreement, in
exchange for the Total Consideration; provided that the conditions precedent
set forth in the Purchase Agreement have been satisfied in accordance with the
terms of the Purchase Agreement (or waived by the Purchaser or the Debtors, as
the case may be, in accordance with the terms of the Purchase Agreement), and
provided that the representations and warranties of the parties are materially
true as of such date. The Total Consideration is summarized in the Overview.
(a) Transfer of Acquired Assets
---------------------------
Under the Plan, on the Effective Date, the Debtors shall
tender to the Purchaser duly executed bills of sale and assignment or other
appropriate instruments and documents transferring title to and interest in
those Acquired Assets and Acquired Product Lines, subject to Permitted Liens,
conveyed to the Purchaser pursuant to the Purchase Agreement free and clear of
all Liens and interests.
(b) Unassumed Liabilities
---------------------
Under the Plan, the Purchaser shall acquire the Acquired
Assets and the Acquired Products Lines free and clear of the Unassumed
Liabilities (as defined in section 2.4 of the Purchase Agreement).
Confirmation of the Plan shall be deemed a release of all Liens and all
Unassumed Liabilities, in each case, as to the Acquired Assets and the
Acquired Product Lines.
(c) Assumed Obligations
-------------------
Under the Plan, subject to the terms and conditions set
forth in the Purchase Agreement, at the Closing, Jarden will assume from
the Debtors and thereafter be responsible for the payment and/or
performance of, in accordance with their terms, the Assumed Obligations.
The Assumed Obligations consist of the following: (i) obligations under
Assumed Contracts first arising after the Closing, (ii) the "Pay to Stay
Bonus" and "Performance Bonus" payments under the Debtors' Key Employee
Retention Program in an amount not to exceed $1,200,000,
19
(iii) obligations associated with the Assumed Plans, (iv) obligations with
respect to any unused vacation or sick leave earned and accrued (to the extent
not paid) by Rehired Employees as of the Closing Date; (v) obligations with
respect to Rehired Employees' wages and salary earned and accrued (to the
extent not paid) as of the Closing Date and (vi) the Liabilities set forth on
Schedule 2.2.1(vi) of the Purchase Agreement; provided, that such section does
not limit any claims or defenses Jarden may have in respect of the Assumed
Obligations against any Person other than the Debtors.
(d) Other Documents and Actions
---------------------------
Under the Plan, on the Effective Date, the Debtors shall
deliver, or cause to be delivered, to the Purchaser all other certificates and
documents required to be delivered by the Debtors under the Purchase
Agreement, in such form and executed in such manner as required by the
Purchase Agreement.
2. Funding of the Purchase Price
-----------------------------
Under the Plan, the Purchase Price will be distributed as
follows:
(a) Cash Consideration
------------------
On the Effective Date, the Cash Consideration shall be paid
directly to the DIP Lenders to the extent of the Debtors' outstanding
indebtedness obligations, including all fees, expenses, and charges as set
forth in the DIP Loan Agreement, but excluding all accrued interest (which
interest will be paid from the Debtors' Cash). Any remaining Cash
Consideration will be paid to the Debtors, who will make all payments
(including the setting aside of reserves to pay Disputed Claims and Allowed
Claims which are to be paid after the Effective Date) required to be made
under this Plan by the Debtors or the Disbursing Agent, including payments due
under the KERP program, which payments will not reduce the Cash Consideration.
On the Effective Date, the Interest Rate Swap Agreement shall be terminated as
of the close of the market on the Effective Date, and the Purchaser shall pay
all amounts owing under and in connection with the Interest Rate Swap
Agreement (provided that the Termination Amount as defined in the Interest
Rate Swap Agreement shall be determined as follows: (i) prior to the
Confirmation Date, the Purchaser and Wells Fargo Bank, National Association
shall select five (5) national leading commercial banks (the "Confirmation
Banks") which each shall be directed to provide the parties with the
Termination Amount as of the close of the market (12:00 noon, Pacific Standard
Time) on the Effective Date, (ii) the highest and lowest figures provided by
the Confirmation Banks shall be disregarded, and the remaining three figures
shall be averaged, (iii) the average of the three remaining figures provided
by the Confirmation Banks as provided in (ii) herein shall be conclusively
accepted by the parties as the Termination Amount to be paid by Purchaser),
including fees, expenses and charges, including legal expenses.
(b) Additional Consideration
------------------------
No later than six (6) months following the Closing Date,
the Purchaser shall deliver pursuant to the Purchase Agreement either (i)
$6,000,000 in cash payable by wire transfer of immediately available funds or
(ii) shares of the Purchaser's common stock with an aggregate fair market
value of $6,000,000 as of the date of delivery of such shares (the amount
referred to in either (i) or (ii) above is referred to as the "Additional
Consideration"). The Purchaser shall have the sole election to decide whether
to deliver cash or shares of its common stock as the Additional
Consideration. At least 10 Business Days prior to the Closing, the Purchaser
shall deliver the Letter of Credit in the amount of the Additional
Consideration. In the event the Purchaser elects to deliver shares of its
common stock as the Additional Consideration, such shares shall be freely
tradeable, registered and qualified for listing prior to their issuance. For
purposes of determining the fair market value of the Purchaser's common
stock, the average of the closing prices of the sales of the Purchaser's
Common Stock on all securities exchanges on which the Purchaser's Common
Stock may at the time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day the
Purchaser's Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York
time, or, if on any day the Purchaser's Common Stock is not quoted in the
NASDAQ System, the average of the highest bid and lowest asked prices on
20
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period consisting of the twenty (20) consecutive
Business Days immediately preceding the fifth Business Day preceding the date
of issuance.
3. Sources for Plan Distributions
------------------------------
Under the Plan, all Cash necessary for the Debtors or the
Disbursing Agent to make payments of Cash pursuant to the Plan shall be
obtained from the Cash Consideration and the Additional Consideration obtained
from the consummation of the transactions contemplated by the Purchase
Agreement, and Cash or other assets, if any, excluded from the Acquired Assets
which is property of one or more Estates.
4. Other Provisions
----------------
The Purchase Agreement contains additional provisions
regarding (a) the assumption of certain other liabilities, including
designated contracts and leases, (b) conditions to closing, (c)
representations and warranties and (d) covenants by the parties. The Debtors
and the Creditors' Committee believe that these provisions are reasonable and
customary for similar transactions.
C. Substantive Consolidation
The Plan is premised on the substantive consolidation of the
Estates that comprise the DBOC Debtors only for purposes of voting on,
distributions under, and Confirmation of the Plan. The Plan does not provide
for the substantive consolidation of DBI and the DBOC Debtors for any purpose,
and thus this Plan constitutes separate plans for each of DBI and the DBOC
Debtors.
On the Effective Date, (a) all assets and liabilities of
the DBOC Debtors shall be treated as though they were consolidated for Plan
purposes into the assets and liabilities of DBOC; (b) no distributions shall
made under the Plan on account of Intercompany Claims; (c) no distributions
shall be made under the Plan on account of DBOC Interests; and (d) all
guarantees of the Debtors of the obligations of any other Debtor shall be
deemed eliminated so that any claim against any Debtor and any guarantee
thereof executed by any other Debtor and any joint or several liability of any
of the Debtors shall be deemed to be one obligation of the consolidated
Debtors. Such substantive consolidation (other than for purposes related to
the Plan) shall not affect (i) the legal and corporate structures of the
Reorganized Debtors, subject to the right of the Debtors or Reorganized DBOC
to effect Restructuring Transactions as provided in Section 4.7 of the Plan,
(ii) Intercompany Claims, (iii) DBOC Interests, and (iv) pre and post
Commencement Date guarantees that are required to be maintained (x) in
connection with executory contracts or unexpired leases that were entered into
during the Chapter 11 Cases or that have been or will be assumed, or (y)
pursuant to the Plan.
The propriety of substantive consolidation must be evaluated
on a case-by-case basis. Earlier cases relied on the presence or absence of
certain elements that are similar to factors relevant to piercing the
corporate veil under applicable state law. More recent cases, however, while
not ignoring these elements, have applied a less mechanical approach. The
extensive list of elements and factors frequently cited and relied upon by
other courts in determining the propriety of substantive consolidation are may
be viewed as variants on two critical factors, namely, (i) whether creditors
dealt with the entities as a single economic unit and did not rely on their
separate identity in extending credit or (ii) whether the affairs of the
debtors are so entangled that consolidation will benefit all creditors. Some
courts have viewed those elements and factors as examples of information that
may be useful to courts charged with deciding whether there is substantial
identity between the entities to be consolidated and whether consolidation is
necessary to avoid some harm or to realize some benefit.
Among the factors or elements looked to by courts are the
courts are the following:
o the degree of difficulty in segregating and
ascertaining the individual assets and liabilities of
the entities to be consolidated;
21
o the presence or absence of consolidated financial
statements among the entities to be consolidated;
o the commingling of assets and business functions
among the entities to be consolidated;
o the unity of interests and ownership among the
various entities;
o the existence of parent and intercorporate guarantees
on loans to the various entities; and
o the transfer of assets to and from the various
entities without formal observance of corporate
formalities.
The Debtors believe that the facts and circumstances
surrounding the historical business operations of the Debtors support
substantive consolidation in these Chapter 11 Cases with respect to the DBOC
Debtors. The DBOC Debtors, together, are the operating entities of the
Debtors, and together own the Debtors' material operating assets. The DBOC
Notes, which are DBOC's principal outstanding prepetition debt obligation, are
guaranteed by the DBOC subsidiaries. In addition, the DBOC Debtors have shared
a centralized cash management system. As an outgrowth of this consolidated
cash management system, intercompany loans routinely were made by and between
DBOC and Forster in the ordinary course of the Debtors' business. Due to the
volume of transactions between the DBOC Debtors, it would be extraordinarily
time consuming and prohibitively expensive for the Debtors to determine on an
Estate by Estate basis the adjustments needed to approximate intercompany
balances reasonably. Even then, there can be no assurance that the end product
would be a fair approximation of such balances due to (a) numerous
uncertainties with respect to available historical knowledge and support
documentation and (b) complexities such as extensive acquisition and
disposition activity by the DBOC Debtors.
These factors are not the same as between DBI and the DBOC
Debtors. The DBI Notes are not guaranteed by any DBOC Debtor. The DBOC Notes
are not guaranteed by DBI. DBI has been a holding company since the 1998
Recapitalization, owning no material operating assets and conducting no
operations.
Substantive consolidation is an equitable remedy that a
bankruptcy court may be asked to apply in chapter 11 cases involving
affiliated debtors. Substantive consolidation for plan purposes can involve
the pooling of the assets and liabilities of the affected debtors. In
substantive consolidation for plan purposes, for such purposes only, multiple
debtors are treated as if they are a single corporate economic entity for
purposes defined in a plan.
The Debtors believe substantive consolidation with respect
to the DBOC Debtors is warranted in light of the criteria established by the
courts in ruling on the propriety of substantive consolidation in other cases,
but that it is not appropriate with respect to DBI. A DBI creditor, Stephen
Compagni Portis ("Portis"), filed a motion with the Bankruptcy Court
requesting substantive consolidation (the "Portis Motion") of DBI and all
other Debtors. That motion has been continued by the Bankruptcy Court, and is
essentially resolved under the terms of the Plan. Based on discussions with
counsel for Portis, the Debtors and the Creditors' Committee expect that the
Portis Motion will be withdrawn, and that counsel for Portis will file a
motion seeking reimbursement of its fees and expenses with respect to the
Portis Motion. The Debtor and the Creditors' Committee believe that allowance
of an administrative claim for Portis' reasonable fees and expenses as
determined by the Bankruptcy Court is appropriate and will not object to such
motion for reimbursement as an administrative expense, to the extent such
request does not exceed $75,000.
While the Debtors do not believe that substantive
consolidation of DBI and the DBOC Debtors is appropriate, the Debtors
recognize that (1) DBI owns certain intellectual property, (2) there are
certain claims that could be asserted between DBI and DBOC, (3) there are
certain tax benefits available to the Estates related to the stock of DBOC,
which is owned by DBI, and (4) the Debtors' views on substantive consolidation
differ from those of the DBI creditor that has requested substantive
consolidation, and the Bankruptcy Court is ultimate arbiter of such dispute.
Accordingly, while the Plan does not propose to substantively consolidate DBI
and the DBOC Debtors, the Plan does propose to allocate to DBI for
distribution to DBI creditors a portion of the proceeds of the Sale, as
determined pursuant to a formula contained in the Plan. See Section VI.E below
for a summary of the formula.
22
D. Classification and Treatment of Claims and Interests
Section 1122 of the Bankruptcy Code provides that a plan of
reorganization must classify the claims and interests of a debtor's creditors
and equity interest holders. In accordance with Section 1122, the Plan divides
Claims and Interests into Classes and sets forth the treatment for each Class
(other than DIP Facility Claims, Administrative Claims and Priority Tax Claims
which, pursuant to Section 1123(a)(1), do not need to be classified). The Plan
Proponents also are required, under Section 1122 of the Bankruptcy Code, to
classify Claims against and Interests in the Debtors into Classes that contain
Claims and Interests that are substantially similar to the other Claims and
Interests in such Class.
The Plan Proponents believe that the Plan has classified all
Claims and Interests in compliance with the provisions of Section 1122 and
applicable case law, but it is possible that a holder of a Claim or Interest
may challenge the classification of Claims and Interests and that the
Bankruptcy Court may find that a different classification is required for the
Plan to be confirmed. In that event, the Plan Proponent may, to the extent
permitted by the Bankruptcy Code, the Plan and the Bankruptcy Court, make such
reasonable modifications of the classifications under the Plan to permit
confirmation and to use the Plan acceptances received in this Solicitation for
purposes of obtaining the approval of the reconstituted Class or Classes of
which each accepting holder ultimately is deemed to be a member. Any such
reclassification could adversely affect the Class in which such holder
initially was a member, or any other Class under the Plan, by changing the
composition of such Class and the vote required of that Class for approval of
the Plan.
The amount of Sale proceeds remaining after payment of
Allowed Administrative and Priority Claims that are not classified, and the
amount of any Impaired Claim that is classified or the aggregate amount of
Impaired Claims in a class that ultimately are allowed by the Bankruptcy
Court, may vary from any estimated remaining Sale proceeds or allowed amount
of such Claim or Claims. Thus, the value of the property that ultimately will
be received by a particular holder of an Allowed Claim under the Plan may be
adversely or favorably affected by the actual amount in which any Claim is
ultimately allowed.
The classification of Claims and Interests and the nature of
distributions to members of each Class are summarized below. The Plan
Proponents believe that the consideration, if any, provided under the Plan to
holders of Claims and Interests reflects an appropriate resolution of their
Claims and Interests, taking into account the differing nature and priority
(including applicable contractual and statutory subordination) of such Claims
and Interests and the fair value of the Debtors' assets. In view of the deemed
rejection by Class H-4, however, as set forth below, the Debtors will seek
confirmation of the Plan pursuant to the "cramdown" provisions of the
Bankruptcy Code. Specifically, section 1129(b) of the Bankruptcy Code permits
confirmation of a Chapter 11 plan in certain circumstances even if the plan
has not been accepted by all impaired classes of claims and interests. See
Section IX. Although the Debtors believe that the Plan can be confirmed under
section 1129(b), there can be no assurance that the Bankruptcy Court will find
that the requirements to do so have been satisfied.
1. Treatment of Unclassified Claims Under the Plan
-----------------------------------------------
(a) DIP Facility Claims
-------------------
DIP Facility Claims are Claims arising under or as a result
of the DIP Facility, including without limitation the Interest Rate Swap
Agreement.
Under the Plan, on the Effective Date, each holder of an
Allowed DIP Facility Claim shall receive in full satisfaction, settlement,
release, and discharge of and in exchange for such Allowed DIP Facility Claim
(i) Cash equal to the principal amount of the DIP Loans, and without
duplication, amounts owing pursuant to early termination provision of the
Interest Rate Swap Agreement (provided that the Termination Amount as defined
in the Interest Rate Swap Agreement shall be determined as follows: (x) prior
to the Confirmation Date, the Purchaser and Wells Fargo Bank, National
Association shall select five (5) national leading commercial banks (the
"Confirmation Banks") which each shall be directed to provide the parties
with the Termination Amount as of the
23
close of the market (12:00 noon, Pacific Standard Time) on the Effective Date,
(y) the highest and lowest figures provided by the Confirmation Banks shall be
disregarded, and the remaining three figures shall be averaged, (z) the
average of the three remaining figures provided by the Confirmation Banks as
provided in (y) herein shall be conclusively accepted by the parties as the
Termination Amount to be paid by Purchaser), together with all accrued and
unpaid interest, fees, expenses and charges as set forth in the DIP Facility
or as incurred in connection with the Interest Rate Swap Agreement or (ii)
such other treatment as to which DBOC and such holder shall have agreed upon
in writing. The DIP Facility Claims shall be deemed Allowed in the amounts
reflected in the books and records of Wells Fargo Bank, National Association,
as Administrative Agent in connection with the DIP Facility and as Floating
Rate Payer to the Interest Rate Swap Agreement, as of the Effective Date
together with all accrued and unpaid fees, expenses and charges, including
legal expenses.
(b) Administrative Claims
---------------------
The Plan provides that Allowed Administrative Claims will be
paid in full. Administrative Claims are Claims for payment of an
administrative expense of a kind specified in section 503(b) or 1114(e)(2) of
the Bankruptcy Code and entitled to priority pursuant to section 507(a)(1) of
the Bankruptcy Code, including, but not limited to, (a) the actual, necessary
costs and expenses, incurred after the Petition Date, of preserving the
Estates and operating the businesses of the Debtors, including wages,
salaries, or commissions for services rendered after the commencement of the
Chapter 11 Case, (b) Professional Fee Claims, (c) all fees and charges
properly assessed against the Estates under 28 U.S.C. ss. 1930, (d) all
Allowed Claims that are entitled to be treated as Administrative Claims
pursuant to a Final Order of the Bankruptcy Court under section 546(c)(2)(A)
of the Bankruptcy Code and (e) fees and expenses payable to the Indenture
Trustees pursuant to Section 7.3(c) of the Plan.
Except as otherwise provided in and subject to the
requirements of the Plan, the Plan provides that on, or as soon as reasonably
practicable after, the latest of (i) the Distribution Date, (ii) the date such
Administrative Claim becomes an Allowed Administrative Claim, or (iii) the
date such Administrative Claim becomes payable pursuant to any agreement
between a Debtor and the holder of such Administrative Claim, each holder of
an Allowed Administrative Claim shall receive in full satisfaction,
settlement, release, and discharge of and in exchange for such Allowed
Administrative Claim (x) Cash equal to the unpaid portion of such Allowed
Administrative Claim or (y) such other treatment as to which the applicable
Debtor, and such holder shall have agreed upon in writing; provided, however,
that Allowed Administrative Claims with respect to liabilities incurred by a
Debtor in the ordinary course of business during the Chapter 11 Case shall be
paid in the ordinary course of business in accordance with the terms and
conditions of any agreements relating thereto. Allowed Administrative Claims
(other than with respect to taxes after $3 million) are estimated to be $3
million. Should such Allowed Administrative Claims exceed $3 million, the
Purchaser shall pay to or on behalf of the Debtors Cash equal to 50% (the
"Sharing Percentage") of any such Allowed Administrative Claims paid by the
Debtors in excess of $3 million up to $4.7 million. In accordance with the
Sharing Percentage, the Purchaser's liability is capped at a maximum of 50% of
$1.7 million (or $850,000).
(c) Priority Tax Claims
-------------------
Priority Tax Claims are Unsecured Claims asserted by federal
and state governmental authorities for taxes specified in section 507(a)(8) of
the Bankruptcy Code, such as certain income taxes, property taxes, excise
taxes, and employment and withholding taxes. These Unsecured Claims are given
a statutory priority in right of payment.
Under the Plan, except to the extent that a holder of an
Allowed Priority Tax Claim has been paid by the Debtors prior to the
Distribution Date or has agreed in writing to a different treatment, each
holder of an Allowed Priority Tax Claim will be paid, at the sole discretion
of the Debtors, (i) equal Cash payments made on the last Business Day of every
three-month period following the Effective Date, over a period not exceeding
six years after the assessment of the tax on which such Claim is based,
totaling the principal amount of such Claim plus simple interest on any
outstanding balance from the Effective Date calculated at the interest rate
available on ninety (90) day United States Treasuries on the Effective Date,
or (ii) such other treatment as to which a Debtor and such holder shall have
agreed upon in writing.
24
2. Treatment of Classified DBI Claims and Interests
------------------------------------------------
Under the Plan
--------------
(a) Unimpaired Classes of DBI Claims and Interests
----------------------------------------------
Under the Plan
--------------
(i) Class H-1 - Secured Claims against DBI
Class H-1consists of separate subclasses of claims that are
secured by a Lien upon property in which the Estate has an interest, to the
extent of the value of the Claim holders' interest in the Estate's interest in
such property, as determined pursuant to section 506(a) of the Bankruptcy Code
against the Debtors other than the DIP Facility Claims. Each subclass is
deemed to be a separate Class for all purposes under the Bankruptcy Code.
Under the Plan, on, or as soon as reasonably practicable
after, the latest of (i) the Distribution Date, (ii) the date such Claim
becomes an Allowed Class H-1 Claim, or (iii) the date such Class H-1 Claim
becomes payable pursuant to any agreement between DBI and the holder of such
Class H-1 Claim, each holder of any Allowed Class H-1 Claim shall receive, in
full satisfaction, settlement, release, and discharge of and in exchange for
such Allowed Class H-1 Claim, (x) Cash equal to the unpaid portion of such
Allowed Class H-1 Claim or (y) such other treatment as to which DBI and such
holder shall have agreed upon in writing. Class H-1 Claims are Unimpaired and
therefore are not entitled to vote on the Plan.
(ii) Class H-2 - Other Priority Claims against DBI
Class H-2 consists of all Claims against DBI entitled to
priority pursuant to section 507(a) of the Bankruptcy Code other than DIP
Facility Claims, Priority Tax Claims or Administrative Claims.
Under the Plan, on, or as soon as reasonably practicable
after, the latest of (i) the Distribution Date, (ii) the date such Claim
becomes an Allowed Class H-2 Claim, or (iii) the date such Class H-2 Claim
becomes payable pursuant to any agreement between DBI and the holder of such
Class H-2 Claim, each holder of any Allowed Class H-2 Claim shall receive, in
full satisfaction, settlement, release, and discharge of and in exchange for
such Allowed Class H-2 Claim, (x) Cash equal to the unpaid portion of such
Allowed Class H-2 Claim or (y) such other treatment as to which DBI and such
holder shall have agreed upon in writing. Class H-2 Claims are Unimpaired and
therefore are not entitled to vote on the Plan.
(b) Impaired Classes of DBI Claims and Interests
--------------------------------------------
Under the Plan
--------------
(i) Class H-3 - General Unsecured Claims
against DBI
Claims in Class H-3 are those Claims against DBI that are
not DIP Facility Claims, Administrative Claims, Priority Tax Claims, Other
Priority Claims, Secured Claims, or Subordinated Claims, including Old Note
Claims.
Under the Plan, on or as soon as reasonably practicable
after the Distribution Date, each holder of an Allowed Class H-3 Claim, shall
receive, in full satisfaction, settlement, release and discharge of and in
exchange for such Allowed Class H-3 Claim, its Pro Rata share of 100% of the
DBI Recovery Pool, received by the DBI Estate pursuant to Section 2.4 of the
Plan. See Section VI.E below. Class H-3 Claims are Impaired and entitled to
vote on the Plan.
(ii) Class H-4 - DBI Interests and
Subordinated Claims
Class H-4 consists of all DBI Interests and any Claim
subordinated pursuant to section 510(b) or (c) of the Bankruptcy Code against
DBI. Under the Plan, the holders of DBI Interests and Subordinated Claims
shall not receive or retain any property under the Plan on account of such
Interests or Claims. On the Effective Date, all of the DBI Interests shall be
deemed cancelled and extinguished. Class H-4 Claims and Interests are Impaired
and are presumed to receive no distribution under the Plan and are therefore
deemed to reject the Plan and are not entitled to vote on the Plan.
25
3. Treatment of Classified DBOC Debtors Claims and Interests
----------------------------------------------------------
Under the Plan
--------------
(a) Unimpaired Classes of DBOC Debtors Claims and
--------------------------------------------
Interests Under the Plan
------------------------
(i) Class O-1 - Secured Claims against the
DBOC Debtors
Class O-1consists of separate subclasses of claims that are
secured by a Lien upon property in which the Estate has an interest, to the
extent of the value of the Claim holders' interest in the Estate's interest in
such property, as determined pursuant to section 506(a) of the Bankruptcy Code
against the Debtors other than the DIP Facility Claims. Each subclass is
deemed to be a separate Class for all purposes under the Bankruptcy Code.
Under the Plan, on, or as soon as reasonably practicable
after, the latest of (i) the Distribution Date, (ii) the date such Claim
becomes an Allowed Class O-1 Claim, or (iii) the date such Class O-1 Claim
becomes payable pursuant to any agreement between a DBOC Debtor and the holder
of such Class O-1 Claim, each holder of any Allowed Class O-1 Claim shall
receive, in full satisfaction, settlement, release, and discharge of and in
exchange for such Allowed Class O-1 Claim, (x) Cash equal to the unpaid
portion of such Allowed Class O-1 Claim or (y) such other treatment as to
which a DBOC Debtor and such holder shall have agreed upon in writing. Class
O-1 Claims are Unimpaired and therefore are not entitled to vote on the Plan.
(ii) Class O-2 Other Priority Claims
against the DBOC Debtors
Class O-2 consists of all Claims against the DBOC Debtors
entitled to priority pursuant to section 507(a) of the Bankruptcy Code other
than DIP Facility Claims, Priority Tax Claims or Administrative Claims.
Under the Plan, on, or as soon as reasonably practicable
after, the latest of (i) the Distribution Date, (ii) the date such Claim
becomes an Allowed Class O-2 Claim, or (iii) the date such Class O-2 Claim
becomes payable pursuant to any agreement between a DBOC Debtor and the holder
of such Class O-2 Claim, each holder of any Allowed Class O-2 Claim shall
receive, in full satisfaction, settlement, release, and discharge of and in
exchange for such Allowed Class O-2 Claim, (x) Cash equal to the unpaid
portion of such Allowed Class O-2 Claim or (y) such other treatment as to
which a DBOC and such holder shall have agreed upon in writing. Class O-2
Claims are Unimpaired and therefore are not entitled to vote on the Plan.
(b) Impaired Classes of DBOC Debtors Claims and
-------------------------------------------
Interests Under the Plan
------------------------
(i) Class O-3 - General Unsecured Claims
against the DBOC Debtors
Claims in Class O-3 are those Claims against the DBOC
Debtors that not DIP Facility Claims, Administrative Claims, Priority Tax
Claims, Other Priority Claims, Secured Claims, or Subordinated Claims,
including all Old Note Claims.
Under the Plan, on or as reasonably practicable after the
Distribution Date, each holder of an Allowed Class O-3 Claim, shall receive,
in full satisfaction, settlement, release and discharge of and in exchange for
such Allowed Class O-3 Claim, its Pro Rata share of 100% of the DBOC Unsecured
Creditor Distribution Pool. See Section VI.E below. Class O-3 Claims are
Impaired and entitled to vote on the Plan.
26
(ii) Class O-4 - DBOC Interests
--------------------------
Class O-4 consists of all Interests against the DBOC
Debtors, including the common stock of Diamond Brands Operating Corp. Under
the Plan, the holders of DBOC Interests shall receive the DBI Recovery Pool,
which shall be distributed to the DBI Estate on account of such Interests. See
Section VI.E below. After such distribution to the DBI Estate, all of the DBOC
Interests shall be deemed cancelled or extinguished. Class O-4 Claims are
Impaired and entitled to vote on the Plan.
4. Reservation of Rights Regarding Claims
--------------------------------------
Except as otherwise explicitly provided in the Plan, nothing
shall affect the Debtors' or the Reorganized Debtors' rights and defenses,
both legal and equitable, with respect to any Claims, including, but not
limited to, all rights with respect to legal and equitable defenses to alleged
rights of setoff or recoupment.
E. Net Recovery Allocation Mechanics and Intercompany Settlement
Under the Plan, Net Available Unsecured Creditor Proceeds
are defined as all proceeds derived from the sale or other liquidation of the
assets of the Debtors' Estates, pursuant to the Plan or otherwise, remaining
after payment in full of all Allowed Administrative Claims, Allowed DIP
Facility Claims, Allowed Tax Claims, Allowed Other Priority Claims, Allowed
Secured Claims, Cure payments, and any other costs and expenses related to the
consummation and implementation of the Plan.
Under the Plan, on and after the Effective Date, the Net
Available Unsecured Creditor Proceeds shall be allocated in two (2) pools: the
DBOC Unsecured Creditor Distribution Pool and the DBI Recovery Pool. The DBOC
Unsecured Creditor Distribution Pool shall be distributed to holders of
Allowed Class O-3 Claims, as set forth in the Plan. The DBI Recovery Pool
shall be distributed on account of the DBOC Interests to the DBI Estate, and
then distributed by the DBI Estate to the holders of Allowed Class H-3 Claims,
as set forth in the Plan.
On or after the Effective Date, the amount of the Indenture
Trustee Fees incurred by the respective Indenture Trustees shall initially be
allocated to the DBI Recovery Pool and the DBOC Unsecured Creditor
Distribution Pool, respectively, for distribution to the appropriate Indenture
Trustee prior to the distribution set forth in Section 4.16 and Section 2.2 of
the Plan. The aggregate amount of the Net Available Unsecured Creditor
Proceeds allocated to the DBOC Unsecured Creditor Distribution Pool and the
DBI Recovery Pool, respectively, shall be calculated so that (a) with respect
to the first remaining $6 million of Net Available Unsecured Creditor
Proceeds, holders of Allowed Claims in Class O-3 shall receive a percentage
recovery on their Allowed Claims that is two (2) times the percentage recovery
received by holders of Allowed Claims in Class H-3, (b) with respect to the
next $3 million of Net Available Unsecured Creditor Proceeds, holders of
Allowed Claims in Class O-3 shall receive a percentage recovery on their
Allowed Claims that is four (4) times the percentage recovery received by
holders of Allowed Claims in Class H-3, and (c) with respect to all Net
Available Unsecured Creditor Proceeds in excess of $9 million, holders of
Allowed Claims in Class O-3 shall receive a percentage recovery on their
Allowed Claims that is six (6) times the percentage recovery received by
holders of Allowed Claims in Class H-3. The following table illustrates this
formula:
Percentage Recovery Monetary Recovery Percentage Recovery
Ratio
Net Available
Unsecured Class O-3 Class H-3 Class O-3 Class H-3 Class O-3 Class H-3
Creditor Proceeds
First $6.0 million 4.7% 2.35% $5.022 $.978 2 1
Second $3.0 million 2.56% .640% $2.734 $.266 4 1
Remaining Amounts 1.536% .256% $1.644 $.106 6 1
- --------------------- --------------- -------------- --------------- -------------- --------------- --------------
8.796% 3.246% $9.4 $1.35
27
Based upon the Debtors' estimates, it is anticipated that
Net Available Unsecured Creditor Proceeds will be in the amount of
approximately $10.75 million. Pursuant to the formula described above, based
upon this estimated amount (and without taking into account Indenture Trustee
Fees), the DBOC Unsecured Creditor Distribution Pool is estimated to be $9.40
million and the DBI Recovery Pool is estimated to be $1.35 million. See
Overview. There can be no assurance that these amounts will not be impacted by
the actual amount of Administrative Claims that ultimately become Allowed,
including taxes payable. If Administrative Claims become Allowed in amounts
greater than anticipated, the Net Available Unsecured Creditor Proceeds, and
each of the DBI Recovery Pool and the DBOC Unsecured Creditor Distribution
Pool, would be reduced. See Section VIII.
The Plan proposes that the allocation described above be
approved, pursuant to Bankruptcy Rule 9019 and section 1123(b)(3) of the
Bankruptcy Code, and in consideration for the distributions and other benefits
provided under the Plan, as a good faith compromise and settlement of all
claims and controversies related to intercompany and intercreditor issues
between the DBOC Debtors and DBI, including, without limitation, potential
disputes relating to (a) the relative valuation of the respective assets of
the DBOC Debtors and DBI being acquired by the Purchaser, (b) requests for
substantive consolidation made by certain creditors of DBI, (c) any other
Intercompany Claims and issues between DBI and the DBOC Debtors, and (d)
certain tax benefits available to the Estates through DBI's recovery with
respect to Class O-4. Such settlement, which is effectuated in Section 4.16 of
the Plan, shall be binding on all holders of Claims or Interests and all other
parties in interest. The Debtors and the Creditors' Committee believe that
this compromise and settlement is fair, reasonable and appropriate, and is
within the range of reasonableness in light of the facts and issues involved.
F. Distributions Under the Plan
Except as otherwise provided in the Plan or as ordered by
the Bankruptcy Court, all distributions to holders of Allowed Claims as of the
Effective Date shall be made on the Distribution Date. The Distribution Date
is conditioned upon the occurrence of the Effective Date, which is conditioned
upon the occurrence of those events set forth in Section IX of the Plan,
including the closing of the transactions contemplated by the Purchase
Agreement, which is anticipated to occur on or about February 7, 2003. The
Debtors anticipate that distributions contemplated by the Plan will occur as
soon as reasonably practicable after the Effective Date. Except as set forth
in the Plan, the Disbursing Agent shall make all distributions required under
this Plan after the Effective Date.
If the Disbursing Agent is an independent third party
designated by the Reorganized Debtors to serve in such capacity, such
Disbursing Agent shall receive, without further Bankruptcy Court approval,
reasonable compensation for distribution services rendered pursuant to the
Plan and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services from the Reorganized Debtors on terms acceptable
to the Reorganized Debtors. No Disbursing Agent shall be required to give any
bond or surety or other security for the performance of its duties unless
otherwise ordered by the Bankruptcy Court.
Under the Plan, on the Effective Date, the distributions to
be made under the Plan to holders of Old Note Claims shall be made to the
appropriate Indenture Trustee. Distributions to holders of Old Note Claims
shall be made by the respective Indenture Trustees, subject to the right of
each Indenture Trustee to assert its Charging Lien against such distributions.
All payments to holders of Old Note Claims shall only be made to such holders
after the surrender by each such holder of the Old Note certificates
representing such Old Note Claim, or in the event that such certificate is
lost, stolen, mutilated or destroyed, upon the holder's compliance with the
requirements set forth in Section 7.7(b) of the Plan. Upon surrender of such
Old Note certificates, the respective Indenture Trustees shall cancel and
destroy the pertinent Old Notes. As soon as practicable after surrender of the
Old Note certificates evidencing Old Note Claims, each of the Indenture
Trustees shall distribute to the holder thereof such holder's Pro Rata share
of the distribution, but subject to the rights of the appropriate Indenture
Trustee to assert its Charging Lien against such distribution. Upon full
satisfaction of each of the respective Indenture Trustee's Fee, the pertinent
Indenture Trustee's Charging Lien
28
shall be released. Nothing herein shall be deemed to impair, waive or
discharge either Indenture Trustee's Charging Lien for any unpaid fees and
expenses. The United States Trustee has indicated that it may object to this
provision at the Confirmation Hearing.
Cash payments made pursuant to the Plan shall be in U.S.
funds, by the means agreed to by the payor and the payee, including by check
or wire transfer, or, in the absence of an agreement, such commercially
reasonable manner as the payor shall determine in its sole discretion.
1. Distributions for Claims Allowed as of the Effective Date
---------------------------------------------------------
(a) Record Date for Distributions to Holders of
-------------------------------------------
Lender Claims and Old Notes
---------------------------
Under the Plan, at the close of business on the Distribution
Record Date, the transfer records for the Old Notes and Lender Claims shall be
closed, and there shall be no further changes in the record holders of the Old
Notes or Lender Claims. None of the Reorganized Debtor, the Disbursing Agent,
the Indenture Trustees, nor the administrative agent for the Lenders shall
have any obligation to recognize any transfer of such Old Notes or Lender
Claims occurring after the Distribution Record Date and shall be entitled
instead to recognize and deal for all purposes hereunder with only those
record holders as of the close of business on the Distribution Record Date.
(b) Delivery of Distributions
-------------------------
Distributions to holders of Allowed Claims shall be made by
the Disbursing Agent (or the respective Indenture Trustees) (a) at the
addresses set forth on the Proofs of Claim filed by such holders (or at the
last known addresses of such holders if no Proof of Claim is filed or if the
Debtors have been notified of a change of address), (b) at the addresses set
forth in any written notices of address changes delivered to the Disbursing
Agent after the date of any related Proof of Claim, (c) at the addresses
reflected in the Schedules if no Proof of Claim has been filed and the
Disbursing Agent has not received a written notice of a change of address, or
(d) in the case of the holder of an Allowed Old Note Claim, at the addresses
contained in the official records of the indenture trustee under the Old
Indenture, or (e) at the addresses set forth in a properly completed letter of
transmittal accompanying securities properly remitted to the Debtors. If any
holder's distribution is returned as undeliverable, no further distributions
to such holder shall be made unless and until the Disbursing Agent is notified
of such holder's then current address, at which time all missed distributions
shall be made to such holder without interest. Amounts in respect of
undeliverable distributions made by the Disbursing Agent, shall be returned to
the Reorganized Debtors until such distributions are claimed. All claims for
undeliverable distributions made by the Disbursing Agent must be made on or
before the first (1st) anniversary of the Effective Date, after which date all
unclaimed property shall revert to the Reorganized Debtors free of any
restrictions thereon and the claims of any holder or successor to such holder
with respect to such property shall be discharged and forever barred,
notwithstanding any federal or state escheat laws to the contrary. Nothing
contained in the Plan shall require the Debtors, the Reorganized Debtors, any
Disbursing Agent or the respective Indenture Trustee to attempt to locate any
holder of an Allowed Claim.
Consistent with Bankruptcy Rule 3003(c), the Reorganized
Debtors shall recognize a Proof of Claim filed by each of the Indenture
Trustees in respect of the Old Note Claims. Accordingly, any Old Note Claim,
proof of which is filed by the registered or beneficial holder of an Old Note
Claim, respectively, may be disallowed as duplicative of the Claim of the
pertinent Indenture Trustee, without need for any further action or Bankruptcy
Court order.
(c) Old Notes
---------
Except as provided in Section 7.7(b) of the Plan for lost,
stolen, mutilated or destroyed Old Notes, each holder of an Allowed Claim
evidenced by an Old Note shall tender such Old Note to the respective
29
Indenture Trustee in accordance with written instructions to be provided in a
letter of transmittal to such holders by the Indenture Trustee as promptly as
practicable following the Effective Date. Such letter of transmittal shall
specify that delivery of such Old Notes will be effected, and risk of loss and
title thereto will pass, only upon the proper delivery of such Old Notes with
the letter of transmittal in accordance with such instructions. Such letter of
transmittal shall also include, among other provisions, customary provisions
with respect to the authority of the holder of the applicable Old Note to act
and the authenticity of any signatures required on the letter of transmittal.
All surrendered notes and Old Notes shall be marked as canceled and delivered
by the respective Indenture Trustee to Reorganized Debtor.
(d) Lost, Stolen, Mutilated or Destroyed Old Notes
----------------------------------------------
In addition to any requirements under the applicable
certificate or articles of incorporation or by-laws of the applicable Debtor,
any holder of a Claim evidenced by an Old Note that has been lost, stolen,
mutilated or destroyed shall, in lieu of surrendering such Old Note, deliver
to the Indenture Trustee: (i) evidence satisfactory to the respective
Indenture Trustee of the loss, theft, mutilation or destruction; and (ii) such
indemnity as may be required by the respective Indenture Trustee to hold the
Indenture Trustee harmless from any damages, liabilities or costs incurred in
treating such individual as a holder of an Old Note that has been lost,
stolen, mutilated or destroyed. Upon compliance with this Section 7.7(b) by a
holder of a Claim evidenced by an Old Note, such holder shall, for all
purposes under the Plan, be deemed to have surrendered its Old Note, as
applicable.
(e) Failure to Surrender Canceled Old Notes
---------------------------------------
Any holder of an Old Note that fails to surrender or be
deemed to have surrendered such note or Old Note before the first (1st)
anniversary of the Effective Date shall have its claim for a distribution on
account of such Old Note discharged and shall be forever barred from asserting
any such claim against any Reorganized Debtor or their respective property, or
the Indenture Trustee, and shall not participate in any distribution
hereunder, and the distribution that would otherwise have been made to such
holder shall be distributed by the pertinent Indenture Trustee to all holders
who have surrendered their Note certificates or satisfactorily explained their
non-availability to the Indenture Trustee within first (1st) anniversary of
the Effective Date.
(f) Shares
------
In the event that Jarden elects to pay the Additional
Consideration in shares of Jarden Common Stock, the Reorganized Debtors, the
Plan Committee, and the Plan Administrator may enter into an agreement to
provide for the liquidation of any fractional shares that would otherwise be
distributed to creditors, and to distribute to them instead the net cash
proceeds derived therefrom.
2. Resolution and Treatment of Disputed, Contingent, and
-----------------------------------------------------
Unliquidated Claims and Disputed Interests
------------------------------------------
(a) Objections to Claims
--------------------
All objections to Claims must be filed and served on the
holders of such Claims by the Claims Objection Deadline, which is ninety (90)
days after the Effective Date, unless such date is extended by the Bankruptcy
Court upon request by the Debtors or the Reorganized Debtors. If an objection
has not been filed to a Proof of Claim or a scheduled Claim by the Claims
Objection Deadline, the Claim to which the Proof of Claim or scheduled Claim
relates will be treated as an Allowed Claim if such Claim has not been allowed
earlier.
(b) Authority to Prosecute Objections
---------------------------------
After the Confirmation Date, the Debtors, the Reorganized
Debtors, the Creditors' Committee,
30
and the Plan Committee, as the case may be, will have the authority to file
objections, settle, compromise, withdraw or litigate to judgment objections to
Claims, including Claims for reclamation under section 546(c) of the
Bankruptcy Code. Except as provided below, from and after the Effective Date,
the Reorganized Debtors may settle or compromise any Disputed Claim without
approval of the Bankruptcy Court.
(c) Treatment of Disputed Claims
----------------------------
Notwithstanding any other provisions of the Plan, no
payments or distributions will be made on account of a Disputed Claim, or, if
less than the entire Claim is a Disputed Claim, the portion of a Claim that is
disputed, until such Claim becomes an Allowed Claim.
(d) Disputed Claims Reserves
------------------------
Prior to making any distributions to holders of Allowed
Claims in Classes H-3 and O-3, the Disbursing Agent shall establish
appropriate reserves for Disputed Claims in such Classes, respectively, to
withhold from any such distributions 100% of distributions to which holders of
Disputed Claims in such Classes would be entitled under the Plan as of such
date if such Disputed Claims were Allowed Claims in their Disputed Claim
Amount. The Disbursing Agent shall also establish appropriate reserves for
Disputed Claims in other Classes, as it determines necessary and appropriate.
Absent being directed to the contrary by the Bankruptcy Court, the Debtors do
not anticipate that any reserve for Disputed Administrative Claims for taxes,
in excess of the estimated amounts set forth in the Overview, will be
established. In light of the federal income tax contingencies described in
Section VIII.A of this Disclosure Statement, the Internal Revenue Service has
not consented to the limitation of any reserve to be established for Disputed
Administrative Claims for federal income taxes to the estimated amounts set
forth in the Overview.
(e) Distributions on Account of Disputed Claims Once
-------------------------------------------------
They Are Allowed and Additional Distributions on Account of Previously Allowed
- ------------------------------------------------------------------------------
Claims
- ------
Under the Plan, on each Quarterly Distribution Date, the
Reorganized Debtors will make distributions from the Disputed Claims reserves
(a) on account of any Disputed Claim that has become an Allowed Claim during
the preceding calendar quarter and (b) on account of previously Allowed
Claims, of property that would have been distributed to such Claim holders on
the dates distributions previously were made to holders of Allowed Claims had
the Disputed Claims that have become Allowed Claims been Allowed on such
dates. Such distributions will be made pursuant to the provisions of the Plan
governing the applicable Class.
G. The Plan Administrator
Under the Plan, from and after the Effective Date, an entity
to be designated by the Debtors (and approved by the Creditors' Committee)
prior to the Confirmation Date shall serve as the Plan Administrator pursuant
to the Plan Administrator Agreement and the Plan, until death, resignation or
discharge and the appointment of a successor Plan Administrator in accordance
with the Plan Administrator Agreement. On the Effective Date, the Plan
Administrator shall become the sole officer and director of the Reorganized
Debtors.
1. Rights, Powers and Duties of the Reorganized Debtors and
--------------------------------------------------------
the Plan Administrator
----------------------
The Reorganized Debtors shall retain and have all the
rights, powers and duties necessary to carry out their responsibilities under
the Plan. Such rights, powers and duties, which shall be exercisable by the
Plan Administrator on behalf of a Reorganized Debtor are described in Section
4.10 of the Plan and the Plan Administrator Agreement.
31
2. Compensation of the Plan Administrator
--------------------------------------
The Plan Administrator shall be compensated from the
Operating Reserve pursuant to the terms of the Plan Administrator Agreement.
Any professionals retained by the Plan Administrator shall be entitled to
reasonable compensation for services rendered and reimbursement of expenses
incurred from the Operating Reserve. The payment of the fees and expenses of
the Plan Administrator and its retained professionals shall be made in the
ordinary course of business and shall not be subject to the approval of the
Bankruptcy Court but shall be subject to review by the Plan Committee.
3. Indemnification
---------------
Under the Plan, the Reorganized Debtors shall indemnify and
hold harmless the Plan Administrator and its professionals, or any duly
designated agent or representative thereof (in its capacity as such), from and
against and with respect to any and all liabilities, losses, damages, claims,
costs and expenses, including but not limited to attorneys' fees arising out
of or due to their actions or omissions, or consequences of such actions or
omissions, with respect to the Reorganized Debtors or the implementation or
administration of the Plan, other than acts or omissions resulting from the
willful misconduct or gross negligence of the Plan Administrator and its
professionals, or any duly designated agent or representative thereof (in its
capacity as such). To the extent the Reorganized Debtors indemnify and hold
harmless the Plan Administrator and its professionals, or any duly designated
agent or representative thereof (in its capacity as such), as provided above,
the legal fees and related costs incurred by counsel to the Plan Administrator
in monitoring and participating in the defense of such claims giving rise to
the right of indemnification shall be paid out of the Operating Reserve.
The Reorganized Debtors and the Estates shall, to the
fullest extent permitted by the laws of the State of Delaware, indemnify and
hold harmless the Plan Administrator (in its capacity as such and as officer
and director of Reorganized Debtor) and the Plan Administrator's and the
Reorganized Debtors' agents, representatives, professionals and employees
(collectively the "Indemnified Parties") from and against and with respect to
any and all liabilities, losses, damages, claims, costs and expenses,
including but not limited to attorneys' fees arising out of or due to their
actions or omissions, or consequences of such actions or omissions, with
respect to the Reorganized Debtors and the Estates or the implementation or
administration of the Plan and the Plan Administrator Agreement other than
acts or omissions resulting from such Indemnified Party's willful misconduct
or gross negligence. To the extent Reorganized Debtor and the Estates
indemnify and hold harmless the Indemnified Parties as provided above, the
legal fees and related costs incurred by counsel to the Plan Administrator in
monitoring and participating in the defense of such claims giving rise to the
right of indemnification shall be paid out of the Operating Reserve.
4. Authority to Object to Claims and Interests and to Settle
---------------------------------------------------------
Disputed Claims
- ---------------
Under the Plan, from and after the Effective Date,
Reorganized Debtor and the Plan Administrator shall be authorized (i) to
object to any Claims or Interests filed against any of the Debtors' Estates
which are not deemed as Allowed Claims under the Plan and (ii) pursuant to
Fed. R. Bankr. P. 9019(b) and section 105(a) of the Bankruptcy Code, to
compromise and settle Disputed Claims, in accordance with the procedures set
forth in Section 4.10 of the Plan.
H. Dissolution of the Creditors' Committee
1. Creditors' Committee and Plan Committee
---------------------------------------
(a) Dissolution of Creditors' Committee
-----------------------------------
Under the Plan, the Creditors' Committee shall continue in
existence until the Effective Date to exercise those powers and perform those
duties specified in section 1103 of the Bankruptcy Code and shall perform such
other duties as it may have been assigned by the Bankruptcy Court prior to the
Effective Date. On the Effective Date, the Creditors' Committee shall be
dissolved and its members shall be deemed released of all their duties,
responsibilities and obligations in connection with the Chapter 11 Cases or
the Plan and its
32
implementation, and the retention or employment of the Creditors' Committee's
attorneys, accountants and other agents shall terminate. All expenses of
Creditors' Committee members and the fees and expenses of their professionals
through the Effective Date shall be paid in accordance with the terms and
conditions of a Final Order concerning such fees.
(b) Plan Committee
--------------
On the Effective Date, the Plan Committee shall be formed
and constituted. The Plan Committee shall consist of no more than three (3)
Creditors' Committee members who shall be appointed by the Creditors'
Committee and whose identities shall be disclosed to the Bankruptcy Court at
or before the Confirmation Hearing. In the event that no one is willing to
serve on the Plan Committee or there shall have been no Plan Committee members
for a period of thirty (30) consecutive days, then the Plan Administrator may,
during such vacancy and thereafter, ignore any reference in the Plan, the Plan
Administrator Agreement or the Confirmation Order to a Plan Committee, and all
references to the Plan Committee's ongoing duties and rights in the Plan, the
Plan Administrator Agreement and the Confirmation Order shall be null and void.
The Plan Committee (i) shall be responsible for (A)
instructing and supervising the Reorganized Debtors and the Plan Administrator
with respect to their responsibilities under the Plan and the Plan
Administrator Agreement, (B) reviewing the prosecution of adversary and other
proceedings, if any, including proposed settlements thereof, (C) reviewing
objections to and proposed settlements of Disputed Claims, (D) performing such
other duties that may be necessary and proper to assist the Plan Administrator
and its retained professionals, and (ii) shall remain in existence until such
time as the final distributions under the Plan have been made by the
Reorganized Debtors. The members of the Plan Committee shall serve without
compensation for their performance of services as members of the Plan
Committee, except that they shall be entitled to reimbursement of reasonable
expenses by the Reorganized Debtors, including reasonable attorneys fees and
expenses.
Neither the Plan Committee, nor any of its members or
designees, nor any duly designated agent or representative of the Plan
Committee, or their respective employees, shall be liable for the act or
omission of any other member, designee, agent or representative of the Plan
Committee, nor shall any member be liable for any act or omission taken or
omitted to be taken in its capacity as a member of the Plan Committee, other
than acts or omissions resulting from such member's willful misconduct or
gross negligence. The Reorganized Debtors shall indemnify and hold harmless
the Plan Committee and its members and designee, and any duly designated agent
or representative thereof (in their capacity as such), from and against and
with respect to any and all liabilities, losses, damages, claims, costs and
expenses, including but not limited to attorneys' fees arising out of or due
to their actions or omissions, or consequences of such actions or omissions,
other than as a result of their willful misconduct or gross negligence, with
respect to the Reorganized Debtors or the implementation or administration of
the Plan. To the extent a Reorganized Debtor indemnifies and holds harmless
the Plan Committee and its members and designees, or any duly designated agent
or representative thereof (in their capacity as such), as provided above, the
legal fees and related costs incurred by counsel to the Plan Committee in
monitoring and participating in the defense of such claims giving rise to the
right of indemnification shall be paid out of the Operating Reserve.
I. Post-Consummation Operations of the Debtors
1. Continued Corporate Existence
-----------------------------
Under the Plan, subject to the provisions of Section 4.1 of
the Plan, and the Restructuring Transactions contemplated in Section 4.7 of
the Plan, the Reorganized Debtors shall continue to exist after the Effective
Date as separate corporate entities, in accordance with the applicable law in
the respective jurisdictions in which they are incorporated and pursuant to
their respective certificates or articles of incorporation and by-laws in
effect prior to the Effective Date, except to the extent such certificates or
articles of incorporation and by-laws are amended by the Plan or the Purchase
Agreement, for the limited purposes of (a) distributing all of the assets of
the Debtors' Estates that are not Acquired Assets or Acquired Product Lines
33
and (b) providing the Purchaser with transition service pursuant to section
8.7 of the Purchase Agreement. As soon as practicable after the Plan
Administrator exhausts the assets of the Debtors' Estates by making the final
distribution of Cash under this Plan and the Plan Administrator Agreement,
the Plan Administrator shall (a) effectuate the dissolution of each
Reorganized Debtor in accordance with the laws of the state of its
incorporation and (b) resign as the sole officer and sole director of each
Reorganized Debtor. Notwithstanding the foregoing, the Plan Administrator
shall not effectuate such dissolution of the Reorganized Debtors before the
earlier of (a) such time the Reorganized Debtors satisfy any obligations
under section 8.7 of the Purchase Agreement to provide the Purchaser with
transition services and (b) one year after the Closing. Notwithstanding this
provision, nothing herein shall affect the obligation of each and every
Debtor to pay quarterly fees to the Office of the United States Trustee in
accordance with 28 U.S.C. ss. 1930(a)(6).
2. Cancellation of Old Securities and Agreements
---------------------------------------------
Under the Plan, on the Effective Date, the Old Securities,
the Old Indentures, and any other note, bond, indenture, or other instrument
or document evidencing or creating any indebtedness or obligation of a Debtor,
shall be automatically canceled and discharged provided, however, that the Old
Indentures and Old Notes shall continue in effect solely for the purposes of
(i) allowing the holders of Claims in Classes H-3 and O- 3 to receive their
distributions hereunder, (ii) allowing the Indenture Trustees to make the
distributions to be made on account of the Note Claims and (iii) permitting
the Indenture Trustees to assert the Charging Lien against such distributions
for payment of the Indenture Trustee Fees. Immediately following the
completion of distributions to holders of Claims in Classes H-3 and O-3, the
Indenture Trustees shall be released from all duties, without any further
action on the part of the Debtors or Reorganized Debtors. Nothing herein
affects the Indenture Trustees' rights pursuant to their respective Indentures
and applicable non-bankruptcy law to assert the Charging Lien, issued pursuant
to the pertinent Indenture to secure payment of the Indenture Trustee's fees
and expenses, on any distributions hereunder to holders of Claims in Classes
H-3 and O-3. If any Indenture Trustee does not serve as disbursing agent with
respect to distributions to its respective holders, then the funds distributed
to any such disbursing agent shall be subject to the Charging Lien of the
Indenture Trustee under the pertinent Indentures.
3. Certificates of Incorporation and By-laws
-----------------------------------------
The certificate or articles of incorporation and by-laws of
each Debtor shall be amended as necessary to satisfy the provisions of the
Plan and the Bankruptcy Code and shall include, among other things, pursuant
to section 1123(a)(6) of the Bankruptcy Code, a provision prohibiting the
issuance of non-voting equity securities, but only to the extent required by
section 1123(a)(6) of the Bankruptcy Code.
4. Restructuring Transactions
--------------------------
(a) Under the Plan, on or after the Effective Date, the
applicable Reorganized Debtors may enter into such transactions and may take
such actions as may be necessary or appropriate to effect a corporate
restructuring of their respective businesses, to otherwise simplify the
overall corporate structure of the Reorganized Debtors, or to reincorporate
certain subsidiary Debtors under the laws of jurisdictions other than the laws
of which the applicable subsidiary Debtors are presently incorporated. Such
restructuring may include one or more mergers, consolidations, restructures,
dispositions, liquidations, or dissolutions, as may be determined by the
Debtors or the Reorganized Debtors to be necessary or appropriate
(collectively, the "Restructuring Transactions"). The actions to effect the
Restructuring Transactions may include: (a) the execution and delivery of
appropriate agreements or other documents of merger, consolidation,
restructuring, disposition, liquidation, or dissolution containing terms that
are consistent with the terms of the Plan and that satisfy the applicable
requirements of applicable state law and such other terms to which the
applicable entities may agree; (b) the execution and delivery of appropriate
instruments of transfer, assignment, assumption, or delegation of any asset,
property, right, liability, duty, or obligation on terms consistent with the
terms of the Plan and having such other terms to which the applicable entities
may agree; (c) the filing of appropriate certificates or articles of merger,
consolidation, or dissolution pursuant to applicable state law; and (d) all
other actions that the applicable entities determine to be necessary or
appropriate, including making filings or
34
recordings that may be required by applicable state law in connection with
such transactions. The Restructuring Transactions may include one or more
mergers, consolidations, restructures, dispositions, liquidations, or
dissolutions, as may be determined by the Reorganized Debtors to be necessary
or appropriate to result in substantially all of the respective assets,
properties, rights, liabilities, duties, and obligations of certain of the
Reorganized Debtors vesting in one or more surviving, resulting, or acquiring
corporations. In each case in which the surviving, resulting, or acquiring
corporation in any such transaction is a successor to a Reorganized Debtor,
such surviving, resulting, or acquiring corporation will perform the
obligations of the applicable Reorganized Debtor pursuant to the Plan to pay
or otherwise satisfy the Allowed Claims against such Reorganized Debtor,
except as provided in any contract, instrument, or other agreement or document
effecting a disposition to such surviving, resulting, or acquiring
corporation, which may provide that another Reorganized Debtor will perform
such obligations.
(b) The Restructuring Transactions shall include the
election by DBOC, in accordance with applicable provisions of Delaware
corporate law, to become a limited liability company. The Confirmation Order
shall authorize DBOC to become a limited liability company in accordance with
Delaware law after Confirmation and prior to the Effective Date. Upon DBOC
becoming a limited liability company, such limited liability company shall
continue to be a Debtor in these Chapter 11 Cases and shall be deemed to be a
successor in interest to DBOC as a corporation in all respects.
J. Summary of Releases Under the Plan
Under the Plan, as of the Effective Date, for good and
valuable consideration, the adequacy of which is hereby confirmed, the Debtors
and the Reorganized Debtors will be deemed to forever release, waive and
discharge all claims, obligations, suits, judgments, damages, demands, debts,
rights, causes of action and liabilities whatsoever in connection with or
related to the Debtors, the Chapter 11 Case or the Plan (other than the rights
of the Debtors or the Reorganized Debtors to enforce the Plan and the
contracts, instruments, releases, indentures, and other agreements or
documents delivered thereunder) whether liquidated or unliquidated, fixed or
contingent, matured or unmatured, known or unknown, foreseen or unforseen,
then existing or thereafter arising, in law, equity or otherwise that are
based in whole or part on any act, omission, transaction, event or other
occurrence taking place on or prior to the Effective Date in any way relating
to the Debtors or the Reorganized Debtors, the Chapter 11 Case or the Plan,
and that may be asserted by or on behalf of the Debtors or their Estates or
the Reorganized Debtors against (i) the Debtors' directors, officers,
employees, agents and professionals as of the Petition Date or thereafter,
(ii) the Creditors' Committee and the Plan Committee, and their respective
members, agents and professionals, (iii) the Plan Administrator, (iv) the
Lenders, the agents under the DIP Facility, and their respective agents and
professionals, (v) Wells Fargo, National Association, as Floating Rate Payer
under the interest rate agreements with the Debtors, and (vi) the Purchaser,
except for the Purchaser's obligations under the Purchase Agreement. Each of
the identified parties has made a substantial contribution to the Chapter 11
Case and thus has provided good and valuable consideration to the Debtors
sufficient to entitle them to the releases set forth in the Plan.
K. Compensation and Benefit Programs
Under the Plan, the Purchaser shall assume only those
employee compensation and benefit programs as expressly provide by schedule
2.1.1.22 of the Purchase Agreement. To the extent that an employee
compensation or benefit plan is not listed on schedule 2.1.1.22 of the
Purchase Agreement, such employee compensation or benefit plan shall be deemed
rejected. All defined benefit pension plans maintained by the Debtors shall be
assumed by the Purchaser.
Under the Plan, on the Effective Date, the Purchaser will
become the contributing sponsor of the Diamond Brands, Inc. Retirement Plan
for Hourly Paid Employees and the Forster, Inc. Employees Pension Plan
("Pension Plans"), as defined under 29 U.S.C. ss. 1301(a)(13) and 29 C.F.R.
ss. 4001.2, or member of the contributing sponsor's controlled group, as
defined under 29 U.S.C. ss. 1302(a)(14) and 29 C.F.R. ss. 4001.2. The Debtors
do not believe that they are the sponsor of any other employee pension plan.
As a contributing sponsor (or member of the controlled group) of the Pension
Plans, the Purchaser will fund the Pension Plans in
35
accordance with the minimum funding standards under ERISA, 29 U.S.C. ss. 1082,
pay all required PBGC insurance premiums, 29 U.S.C. ss.1307, and comply with
all requirements of the Pension Plans and ERISA. The Pension Plans are defined
benefit pension plans insured by the Pension Benefit Guaranty Corporation
under Title IV of ERISA, 29 U.S.C. ss.ss. 1301-1461. The Pension Plans are
subject to the minimum funding requirements of ERISA, 29 U.S.C. ss. 1084, and
section 412 of the Internal Revenue Code, 26 U.S.C. ss. 412. No provision of
or proceeding within the Debtors' reorganization proceedings, the Plan, nor
the Confirmation Order shall in any way be construed as discharging, releasing
or relieving the Debtors, Reorganized Debtors or any other party (other than
the Purchaser) in any capacity, from any liability with respect to the Pension
Plans or any other defined benefit pension plan under any law, governmental
policy or regulatory provision. With respect to the Purchaser, no provision of
or proceeding within the Debtors' reorganization proceedings, the Plan, nor
the Confirmation Order shall in any way be construed as discharging, releasing
or relieving the Purchaser from any liability that it has by operation of law
with respect to the Pension Plans under any law, governmental policy or
regulatory provision. PBGC and the Pension Plans shall not be enjoined or
precluded from enforcing liability resulting from any of the provisions of the
Plan or the Plan's Confirmation.
L. Directors and Officers of Reorganized Debtors
On the Effective Date, the Plan Administrator shall become
the sole officer and director of the Debtors. The Plan Administrator shall be
authorized to execute, deliver, file or record such documents, instruments,
releases and other agreements and to take such actions as may be necessary or
appropriate to effectuate and further evidence the terms and conditions of the
Plan.
M. No Revesting of Assets
Under the Plan, the property of the Debtors' Estates after
giving effect to the transactions set forth in sections 4.1 and 4.7 of the
Plan shall not be vested in the Debtors on or following the Confirmation Date
or the Effective Date but shall remain property of the Estate(s) and continue
to be subject to the jurisdiction of the Bankruptcy Court following
confirmation of the Plan until distributed to holders of Allowed Claims in
accordance with the provisions of the Plan, Plan Administrator Agreement and
Confirmation Order. From and after the Effective Date, all such property shall
be distributed in accordance with the provisions of the Plan, the Plan
Administrator Agreement and the Confirmation Order.
N. Preservation of Rights of Action
Except as otherwise provided in this Plan or the
Confirmation Order, or in any contract, instrument, release, indenture or
other agreement entered into in connection with the Plan, in accordance with
section 1123(b) of the Bankruptcy Code, the Reorganized Debtors shall retain
and may enforce, sue on, settle, or compromise (or decline to do any of the
foregoing) all Litigation Claims that the Debtors or the Estates may hold
against any Person or entity that is not transferred to Purchaser pursuant to
Section 4.1 of the Plan. Each Debtor or its successor(s), in consultation with
the Plan Committee, may pursue such retained Litigation Claims as appropriate,
in accordance with the best interests of the Reorganized Debtor or its
successor(s) who hold such rights.
O. Other Matters
1. Treatment of Executory Contracts and Unexpired Leases
-----------------------------------------------------
(a) Assumed Contracts and Leases
----------------------------
36
Under the Plan, as of the Effective Date, each Debtor shall
be deemed to have assumed and assigned to the Purchaser, each executory
contract and unexpired lease designated by the Purchaser on schedule 2.1.1.5
of the Purchase Agreement which is to be filed and served on each non-Debtor
party listed thereon not later than 30 days prior to the Confirmation
Hearing, and which schedule shall specify any amounts that the Debtors
believe must be paid as Cure. The Confirmation Order shall constitute an
order of the Bankruptcy Court pursuant to section 365 of the Bankruptcy Code
approving the assumption and assignment of such contracts and leases. Until
the date the Debtors commence the solicitation of votes on the Plan, the
Purchaser, in its sole discretion, shall have the ability to amend schedule
2.1.1.5 to include executory contracts and unexpired leases or remove
executory contracts and unexpired leases from the such schedule. To the
extent that an executory contract or unexpired lease is not listed on
schedule 2.1.1.5 of the Purchase Agreement as of the Effective Date, such
executory contract or unexpired lease shall be deemed rejected pursuant to
section 365 of the Bankruptcy Code.
Each executory contract and unexpired lease that is assumed
and relates to the use, ability to acquire, or occupancy of real property
shall include (i) all modifications, amendments, supplements, restatements, or
other agreements made directly or indirectly by any agreement, instrument, or
other document that in any manner affects such executory contract or unexpired
lease and (ii) all executory contracts or unexpired leases appurtenant to the
premises, including all easements, licenses, permits, rights, privileges,
immunities, options, rights of first refusal, powers, uses, usufructs,
reciprocal easement agreements, vaults, tunnel or bridge agreements or
franchises, and any other interests in real estate or rights in rem related to
such premises, unless any of the foregoing agreements has been rejected
pursuant to an order of the Bankruptcy Court.
(b) Payments Related to Assumptions of
-----------------------------------
Contracts and Leases
--------------------
Any monetary amounts by which each executory contract and
unexpired lease to be assumed and assigned pursuant to the Plan is in default
shall be satisfied, under section 365(b)(1) of the Bankruptcy Code, by Cure
on the Effective Date by (a) the Debtor party to the contract or lease or (b)
the assignee of such Debtor party assuming such contract or lease. If there
is a dispute regarding (a) the nature or amount of any Cure, (b) the ability
of any Reorganized Debtor or any assignee to provide "adequate assurance of
future performance" (within the meaning of section 365 of the Bankruptcy
Code) under the contract or lease to be assumed, or (c) any other matter
pertaining to assumption, Cure shall occur following the entry of a Final
Order resolving the dispute and approving the assumption or assumption and
assignment, as the case may be; provided that, if there is a dispute as to
the amount of Cure or any requirement for adequate assurance of future
performance that cannot be resolved consensually among the parties, the
Purchaser, subject to the terms of the Purchase Agreement, shall have the
right to direct the Debtors to reject the contract or lease for a period of
five (5) days after entry of a Final Order establishing a Cure amount in
excess of that provided by the Purchase Agreement or any requirement for
adequate assurance of future performance that is not acceptable to the
Purchaser. The provisions providing for notices of proposed assumptions and
proposed Cure amounts to be sent to applicable third parties and for
procedures for objecting thereto will be set forth in a motion to be filed by
the Debtors not later than 30 days prior to the Confirmation Hearing.
(c) Rejected Contracts and Leases
-----------------------------
Under the Plan, as of the Effective Date, each executory
contract and unexpired lease not listed on schedule 2.1.1.5 of the Purchase
Agreement shall be rejected pursuant to section 365 of the Bankruptcy Code. To
the extent an executory contract or unexpired lease is not listed on schedule
2.1.1.5, such executory contract or unexpired lease shall be deemed rejected.
Each contract or lease that is rejected shall be rejected only to the extent
that any such contract or lease constitutes an executory contract or unexpired
lease. Listing a contract or lease on any schedule shall not constitute an
admission by a Debtor that such contract or lease is an executory contract or
unexpired lease or that any Debtor has any liability thereunder. The
Confirmation Order shall constitute an order of the Bankruptcy Court approving
such rejections, pursuant to section 365 of the Bankruptcy Code, as
applicable, as of the Effective Date.
37
(d) Rejection Damages Bar Date
--------------------------
If the rejection by a Debtor, pursuant to the Plan or
otherwise, of an executory contract or unexpired lease results in a Claim,
then such Claim shall be forever barred and shall not be enforceable against
any Debtor or Reorganized Debtor or the properties of any of them unless a
Proof of Claim is filed with the clerk of the Bankruptcy Court and served upon
counsel to the Debtors, and counsel to the Plan Committee, on or before thirty
(30) days after service of notice of the rejection of such executory contract
or unexpired lease.
2. Administrative Claims
---------------------
Under the Plan, all requests for payment of an
Administrative Claim (other than as set forth in Section 2.1 of the Plan) must
be filed with the Bankruptcy Court and served on counsel for the Debtors and
counsel for the Creditors' Committee no later than thirty (30) days after the
Effective Date. Unless the Debtors object to an Administrative Claim within
forty-five (45) Business Days after receipt, such Administrative Claim shall
be deemed allowed in the amount requested. In the event that the Debtors
object to an Administrative Claim, the Bankruptcy Court shall determine the
Allowed amount of such Administrative Claim. Notwithstanding the foregoing, no
request for payment of an Administrative Claim need be filed with respect to
an Administrative Claim which is paid or payable by a Debtor in the ordinary
course of business.
3. Professional Fee Claims
-----------------------
All final requests for compensation or reimbursement of
Professional Fees pursuant to sections 327, 328, 330, 331, 503(b) or 1103 of
the Bankruptcy Code for services rendered prior to the Effective Date and
Substantial Contribution Claims under section 503(b)(4) of the Bankruptcy Code
must be filed and served on the Reorganized Debtors and their counsel no later
than forty-five (45) days after the Effective Date, unless otherwise ordered
by the Bankruptcy Court. Objections to applications of such Professionals or
other entities for compensation or reimbursement of expenses must be filed and
served on the Reorganized Debtors and their counsel and the requesting
Professional or other entity no later than thirty (30) days (or such longer
period as may be allowed by order of the Bankruptcy Court) after the date on
which the applicable application for compensation or reimbursement was served.
4. Withholding and Reporting Requirements
In connection with the Plan and all distributions hereunder,
the Disbursing Agent shall, to the extent applicable, comply with all tax
withholding and reporting requirements imposed by any federal, state,
provincial, local, or foreign taxing authority, and all distributions
hereunder shall be subject to any such withholding and reporting requirements.
The Disbursing Agent shall be authorized to take any and all actions that may
be necessary or appropriate to comply with such withholding and reporting
requirements. Notwithstanding any other provision of the Plan: (a) each holder
of an Allowed Claim that is to receive a distribution pursuant to the Plan
shall have sole and exclusive responsibility for the satisfaction and payment
of any tax obligations imposed by any governmental unit, including income,
withholding and other tax obligations, on account of such distribution, and
(b) no distribution shall be made to or on behalf of such holder pursuant to
the Plan unless and until such holder has made arrangements satisfactory to
the Disbursing Agent for the payment and satisfaction of such tax obligations.
5. Setoffs
-------
The Reorganized Debtors may, but shall not be required to,
set off against any Claim not deemed an Allowed Claim under the Plan, and the
payments or other distributions to be made pursuant to the Plan in respect of
such Claim, claims of any nature whatsoever that the Debtors or the
Reorganized Debtors may have against the holder of such Claim; provided,
however, that neither the failure to do so nor the allowance of any Claim not
deemed an Allowed Claim hereunder shall constitute a waiver or release by the
Reorganized Debtors of any such claim that the Debtors or the Reorganized
Debtors may have against such holder.
38
P. Confirmation and/or Consummation
Described below are certain important considerations under
the Bankruptcy Code in connection with confirmation of the Plan.
1. Requirements for Confirmation of the Plan
-----------------------------------------
The Bankruptcy Court will determine at the hearing on
confirmation of the Plan (the "Confirmation Hearing") whether the following
requirements for confirmation, set forth in Section 1129 of the Bankruptcy
Code, have been satisfied, with respect to the Plan:
(a) The Plan complies with the applicable
provisions of the Bankruptcy Code.
(b) The Debtors have complied with the applicable
provisions of the Bankruptcy Code.
(c) The Plan has been proposed in good faith and
not by any means forbidden by law.
(d) Any payment made or promised by the Debtors or
by a person issuing securities or acquiring property under the Plan for services
or for costs and expenses in, or in connection with, the Chapter 11 Cases, or
in connection with the Plan and incident to the Chapter 11 Cases, has been
disclosed to the Bankruptcy Court, and any such payment made before
confirmation of the Plan is reasonable, or if such payment is to be fixed
after confirmation of the Plan, such payment is subject to the approval of
the Bankruptcy Court as reasonable.
(e) The Debtors have disclosed (i) the identity and
affiliations of (x) any individual proposed to serve, after confirmation of the
Plan, as a director, officer, or voting trustee of the Reorganized Debtors,
(y) any affiliate of the Debtors participating in a joint plan with the
Debtors, or (z) any successor to the Debtors under the Plan (and the
appointment to, or continuance in, such office of such individual(s) is
consistent with the interests of Creditors and Interest holders and with
public policy), and (ii) the identity of any insider that will be employed or
retained by the Debtors and the nature of any compensation for such insider.
(f) With respect to each Class of Claims or
Interests, each Impaired Creditor and Impaired Interest holder either has
accepted the Plan or will receive or retain under the Plan on account of the
Claims or Interests held by such entity, property of a value, as of the
Effective Date, that is not less than the amount that such entity would
receive or retain if the Debtors were liquidated on such date under Chapter 7
of the Bankruptcy Code. See Section IX.
(g) The Plan provides that Administrative Claims
and Priority Claims other than Priority Tax Claims will be paid in full on the
Effective Date and that Priority Tax Claims will receive on account of such
Claims deferred cash payments, over a period not exceeding six years after
the date of assessment of such Claims, of a value, as of the Effective Date,
equal to the Allowed Amount of such Claims, except to the extent that the
holder of any such Claim has agreed to a different treatment. See Secion VI.
(h) If a Class of Claims is Impaired under the
Plan, at least one Class of Impaired Claims has accepted the Plan, determined
without including any acceptance of the Plan by insiders holding Claims in
such Class.
(i) Confirmation of the Plan is not likely to be
followed by the liquidation, or the need for further financial
reorganization, of the Debtors or any successor to the Debtors under the
Plan, unless such liquidation or reorganization is proposed in the Plan. See
Section IX.
39
(j) The Plan provides for the continuation after
the Effective Date of all retiree benefits, if any, at the level established
pursuant to Section 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at any
time prior to confirmation of the Plan, for the duration of the period the
Debtors have obligated themselves to provide such benefits.
As set forth in this Disclosure Statement, the Plan
Proponents believe that, upon receipt of the votes required to confirm the
Plan, the Plan will satisfy all the statutory requirements of Chapter 11 of
the Bankruptcy Code, that the Debtors and the Plan Proponents have complied or
will have complied with all of the requirements of Chapter 11, and that the
Plan has been proposed and submitted to the Bankruptcy Court in good faith.
There can be no assurance that the Bankruptcy Court will agree with the
Debtors or the Plan Proponents.
2. Conditions to Confirmation
--------------------------
The following are conditions precedent to the occurrence of
the Confirmation Date:
(a) the entry of an Final Order finding that the
Disclosure Statement contains adequate information pursuant to section 1125
of the Bankruptcy Code;
(b) the proposed Confirmation Order shall be in
form and substance reasonably acceptable to the Plan Proponents and to the
Creditors' Committee;
(c) all provisions, terms and conditions hereof and
of the Purchase Agreement are approved in the Confirmation Order;
(d) the entry of the Confirmation Order shall be
deemed an approval of all of the transactions contemplated by the Purchase
Agreement;
(e) in the event that the DBI Plan is not confirmed
simultaneously with the DBOC Debtors' Plan, entry of the Alternative
Transaction Order, in form and substance reasonably acceptable to the
Purchaser, DBI and the Creditors' Committee; and
(f) in the event that the DBOC Debtors' Plan is not
confirmed simultaneously with the DBI Plan, entry of the Alternative
Transaction Order, in form and substance reasonably acceptable to the
Purchaser, DBOC and the Creditors' Committee.
3. Conditions to Effective Date
----------------------------
The following are conditions precedent to the occurrence of
the Effective Date, each of which must be satisfied or waived in writing
accordance with Section 9.2 of the Plan:
(a) The Confirmation Order shall have been entered
and become a Final Order, in form and substance reasonably satisfactory to
the Plan Proponents and to the Creditors' Committee, and shall provide that
the Purchaser is authorized, and that the Debtors and the Reorganized Debtors
are authorized and directed, to take all actions necessary or appropriate to
enter into, implement and consummate the contracts, instruments, releases,
leases, indentures and other agreements or documents created in connection
with the Plan or the Restructuring Transactions;
(b) the Debtors shall have entered into the
Purchase Agreement;
(c) the transactions contemplated by the Purchase
Agreement have been consummated in accordance with all aspects of the
Purchase Agreement as reasonably determined by the Purchaser, and, as may be
appropriate, the Debtors or Reorganized Debtors, the Creditors' Committee or
the Plan Committee, and the Plan Administrator;
40
(d) all Plan Exhibits shall be in form and
substance reasonably acceptable to the Plan Proponents and the Creditors'
Committee, and shall have been executed and delivered by all parties'
signatory thereto;
(e) the Debtors shall be authorized and directed to
take all actions necessary or appropriate to enter into, implement and
consummate the contracts, instruments, releases, leases, indentures and the
agreements or documents created in connection with the Plan;
(f) all actions, documents and agreements necessary
to implement the Plan shall have been effected or executed;
(g) in the event that the DBI Plan is not confirmed
simultaneously with the DBOC Debtors' Plan, the Alternative Transaction Order
shall have become a Final Order; and
(h) in the event that the DBOC Debtors' Plan is not
confirmed simultaneously with the DBI Plan, the Alternative Transaction Order
shall have become a Final Order.
4. Waiver of Conditions
--------------------
Each of the conditions set forth in Section 9.1 and 9.2 of
the Plan may be waived in whole or in part by the Purchaser, but only with the
written consent of the Debtors and the Creditors' Committee (except as
specifically designated in the Plan), which consent shall not be unreasonably
withheld. The failure of a party to exercise any of the foregoing rights shall
not be deemed a waiver of any other rights, and each such right shall be
deemed an ongoing right that may be asserted at any time.
Q. Effects of Confirmation
With respect to the Plan that is ultimately confirmed by the
Bankruptcy Court, the following effects will take place:
1. Binding Effect
--------------
The Plan shall be binding upon and inure to the benefit of
the Purchaser, the Debtors, all present and former holders of Claims against
and Interests in the Debtors, their respective successors and assigns,
including, but not limited to, the Reorganized Debtors, and all other
parties-in-interest in this Chapter 11 Case.
2. Discharge of the Debtors
------------------------
Pursuant to section 1141(d)(3) of the Bankruptcy Code,
Confirmation will not discharge Claims against the Debtors; provided, however,
that no holder of a Claim against any Debtor may, on account of such Claim,
seek or receive any payment or other distribution from, or seek recourse
against, any Debtor, Reorganized Debtor, their respective successors or their
respective property, except as expressly provided herein.
3. Permanent Injunction
--------------------
Except as otherwise provided in the Plan, the Confirmation
Order shall provide, among other things, that from and after the Confirmation
Date all Persons who have held, hold or may hold Claims against or Interests
in the Debtors are permanently enjoined from taking any of the following
actions against the Estate(s), the Plan Administrator, the Plan Committee, or
any of their property on account of any such Claims or Interests: (A)
commencing or continuing, in any manner or in any place, any action or other
proceeding; (B) enforcing attaching, collecting or recovering in any manner
any judgment, award, decree or order; (C) creating, perfecting or enforcing
any lien or encumbrance; (D) asserting a
41
setoff, right of subrogation or recoupment of any kind against any debt,
liability or obligation due to the Debtors; and (E) commencing or continuing,
in any manner or in any place, any action that does not comply with or is
inconsistent with the provisions of the Plan.
By accepting distributions pursuant to the Plan, each holder
of an Allowed Claim receiving distributions pursuant to the Plan will be
deemed to have specifically consented to the injunctions set forth in Section
11.12 of the Plan.
4. Exculpation and Limitation on Liability; Indemnity
--------------------------------------------------
(a) Under the Plan, none of the Debtors, the Reorganized
Debtors, the Creditors Committee, the Plan Committee, the Plan Administrator,
the Indenture Trustees, the Lenders, the Purchaser, nor any of their
respective present or former members, officers, directors, employees,
advisors, or attorneys shall have or incur any liability to any holder of a
Claim or an Interest, or any other party in interest, or any of their
respective agents, employees, representatives, financial advisors, attorneys,
or affiliates, or any of their successors or assigns, for any act or omission
in connection with, relating to, or arising out of, the Chapter 11 Case,
formulating, negotiating or implementing the Plan, the solicitation of
acceptances of the Plan, the pursuit of confirmation of the Plan, 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 their
gross negligence or willful misconduct, and in all respects shall be entitled
to reasonably rely upon the advice of counsel with respect to their duties and
responsibilities under the Plan.
(b) Notwithstanding any other provision of the Plan, no
holder of a Claim or Interest, no other party in interest, none of their
respective agents, employees, representatives, financial advisors, attorneys,
or affiliates, and no successors or assigns of the foregoing, shall have any
right of action against any Debtor or Reorganized Debtor, the Purchaser, the
Plan Administrator, the Indenture Trustees, the Plan Committee, nor any
statutory committee, nor any of their respective present or former members,
officers, directors, employees, advisors or attorneys, for any act or omission
in connection with, relating to, or arising out of, the Chapter 11 Case,
formulating, negotiating or implementing the Plan, solicitation of acceptances
of the Plan, the pursuit of confirmation of the Plan, the consummation of the
Plan, the confirmation of the Plan, or the administration of the Plan or the
property to be distributed under the Plan, except for their gross negligence
or willful misconduct.
(c) The exculpation and limitation on liability provided for
in the Plan shall not, however, limit, abridge, or otherwise affect the
rights, if any, of the Reorganized Debtors to enforce, sue on, settle, or
compromise the Litigation Claims retained pursuant to Section 4.12 of the
Plan.
R. Retention of Jurisdiction
Pursuant to sections 105(a) and 1142 of the Bankruptcy Code,
and notwithstanding entry of the Confirmation Order and occurrence of the
Effective Date, the Bankruptcy Court will retain exclusive jurisdiction over
all matters arising out of, and related to, the Chapter 11 Cases and the Plan,
including, among other things, jurisdiction to:
(a) Allow, disallow, determine, liquidate,
classify, estimate or establish the priority or secured or unsecured status
of any Claim or Interest not otherwise allowed under the Plan, including the
resolution of any request for payment of any Administrative Claim and the
resolution of any objections to the allowance or priority of Claims or
Interests;
(b) Hear and determine all applications for
compensation and reimbursement of expenses of Professionals under the Plan or
under sections 330, 331, 503(b), 1103 and 1129(a)(4) of the Bankruptcy Code;
provided, however, that from and after the Effective Date, the payment of the
fees and expenses of the retained Professionals of the Reorganized Debtors,
the Plan Committee, and the Plan Administrator shall be made in the ordinary
course of business and shall not be subject to the approval of the Bankruptcy
Court;
42
(c) Hear and determine all matters with respect to
the assumption or rejection of any executory contract or unexpired lease to
which a Debtor is a party or with respect to which a Debtor may be liable,
including, if necessary, the nature or amount of any required Cure or the
liquidation or allowance of any Claims arising therefrom;
(d) Effectuate performance of and payments under
the provisions of the Plan;
(e) Hear and determine any and all adversary
proceedings, motions, applications, and contested or litigated matters
arising out of, under, or related to, the Chapter 11 Cases;
(f) Enter such orders as may be necessary or
appropriate to execute, implement, or consummate the provisions of the Plan
and all contracts, instruments, releases, and other agreements or documents
created in connection with the Plan, the Disclosure Statement or the
Confirmation Order; (g) Hear and determine disputes arising in connection
with the interpretation, implementation, consummation, or enforcement of the
Plan, including disputes arising under agreements, documents or instruments
executed in connection with the Plan;
(h) Consider any modifications of the Plan, cure
any defect or omission, or reconcile any inconsistency in any order of the
Bankruptcy Court, including, without limitation, the Confirmation Order;
(i) 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 implementation, consummation, or
enforcement of the Plan or the Confirmation Order;
(j) Enter and implement such orders as may be
necessary or appropriate if the Confirmation Order is for any reason
reversed, stayed, revoked, modified, or vacated;
(k) Hear and determine any matters arising in
connection with or relating to the Plan, the Disclosure Statement, the
Confirmation Order, or any contract, instrument, release, or other agreement
or document created in connection with the Plan, the Disclosure Statement or
the Confirmation Order;
(l) Enforce all orders, judgments, injunctions,
releases, exculpations, indemnifications and rulings entered in connection
with the Chapter 11 Cases;
(m) Except as otherwise limited herein, recover all
assets of the Debtors and property of the Debtors' Estates, wherever located;
(n) Hear and determine matters concerning state,
local, and federal taxes in accordance with sections 346, 505, and 1146 of
the Bankruptcy Code;
(o) Hear and determine all disputes involving the
existence, nature, or scope of the Debtors' discharge;
(p) Hear and determine such other matters as may be
provided in the Confirmation Order or as may be authorized under, or not
inconsistent with, provisions of the Bankruptcy Code;
(q) Hear and determine matters concerning the
filing of any necessary post- confirmation reports with the Bankruptcy Court,
the payment of quarterly fees pursuant to 28 U.S.C. ss. 1930(a)(6) for each
of the Debtors until the entry of a final decree for the respective Debtor,
and the filing a final report pursuant to Rule 5009-1(c) of the Local Rules
prior to the entry of a final decree for any respective Debtor; and
(r) Enter a final decree closing the Chapter 11
Cases.
43
S. Payment of Statutory Fees
Under the Plan, all fees payable pursuant to Section 1930 of
title 28 of the United States Code, as determined by the Bankruptcy Court at
the Confirmation Hearing will be paid on or before the Effective Date, and
shall be paid on or before the Effective Date and shall thereafter be paid by
the Reorganized Debtor until the Chapter 11 Case is Closed.
T. Conversion of Cases if Plan Not Confirmed
In the event that Class H-3 votes against the Plan, or if
the Plan as to DBI is not confirmed for any other reason after the Debtors and
the Creditors' Committee have used their reasonable best efforts to confirm
the Plan, notwithstanding anything set forth to the contrary in the Plan, at
the Confirmation Hearing the Debtors shall request pursuant to a separately
filed motion (timely filed and duly served such that it may be considered at
the Confirmation Hearing) that the Bankruptcy Court (i) authorize the sale of
DBI Assets as described in the Purchase Agreement to the Purchaser pursuant to
the Alternative Transaction, and approve the allocation of value received
pursuant to the Purchase Agreement between the DBI Estate and the DBOC Estates
equivalent to the allocation determined pursuant to Section 4.16 of the Plan
(and described in Section VI.E above) pursuant to sections 363 and 105 of the
Bankruptcy Code and Bankruptcy Rule 9019, and (ii) subsequently convert the
DBI Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code.
In the event that Class O-3 votes against the Plan, or if
the Plan as to the DBOC Debtors is not confirmed for any other reason after
the Debtors and the Creditors' Committee have used their reasonable best
efforts to confirm the Plan, notwithstanding anything set forth to the
contrary in the Plan, at the Confirmation Hearing the Debtors shall request
pursuant to a separately filed motion (timely filed and duly served such that
it may be considered at the Confirmation Hearing) that the Bankruptcy Court
(i) authorize the sale of the DBOC Debtors' Assets as described in the
Purchase Agreement to the Purchaser pursuant to the Alternative Transaction,
and approve the allocation of value received pursuant to the Purchase
Agreement between the DBI Estate and the DBOC Estates equivalent to the
allocation determined pursuant to Section 4.16 of the Plan (and described in
Section VI.E above) pursuant to sections 363 and 105 of the Bankruptcy Code
and Bankruptcy Rule 9019, and (ii) subsequently convert the DBOC Debtors'
Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code.
The Debtors and the Creditors' Committee believe that, in
the event the Plan is not confirmed as to either DBI or the DBOC Debtors, that
it is in the best interests of the Estates to consummate the sale of the
Debtors' assets to Jarden under section 363 of the Bankruptcy Code. Absent
doing so, the Debtors believe that any subsequent attempt to sell or
restructure the Debtors would likely result in lesser (and potentially no)
recovery to holders of General Unsecured Claims. See Section X.B.
VII. CERTAIN FACTORS TO BE CONSIDERED
The holder of a Claim against a Debtor should read and
carefully consider the following factors, as well as the other information set
forth in this Disclosure Statement (and the documents delivered together
herewith and/or incorporated by reference herein), before deciding whether to
vote to accept or to reject the Plan.
A. General Considerations
The Plan sets forth the means for satisfying the Claims
against each of the Debtors. Certain Claims and Interests receive no
distributions pursuant to the Plan. The sale of the Debtors' businesses and
operations as a going concern under the proposed Plan avoids the potentially
adverse impact of a liquidation on the Debtors' employees and other
stakeholders.
44
B. Certain Bankruptcy Considerations
1. Failure to Confirm or Consummate the Plan
-----------------------------------------
Even if all Impaired voting classes vote in favor of the
Plan, and with respect to any Impaired Class deemed to have rejected the Plan
the requirements for "cramdown" are met, the Bankruptcy Court, which, as a
court of equity, may exercise substantial discretion, may choose not to
confirm the Plan. Section 1129 of the Bankruptcy Code requires, among other
things, a showing that confirmation of a plan will not be followed by
liquidation or the need for further financial reorganization of the Debtors
(see Section IX), and that the value of distributions to dissenting holders of
Claims and Interest may not be less than the value such holders would receive
if the Debtors were liquidated under Chapter 7 of the Bankruptcy Code. See
Section X. Although the Plan Proponents believe that the Plan will meet such
tests, there can be no assurance that the Bankruptcy Court will reach the same
conclusion. See Section IX.D for a liquidation analysis of the Debtors.
The Plan provides for certain conditions that must be
fulfilled prior to confirmation of the Plan and the Effective Date. As of the
date of this Disclosure Statement, there can be no assurance that any or all
of the conditions in the Plan will be met (or waived) or that the other
conditions to consummation, if any, will be satisfied. Accordingly, even if
the Plan is confirmed by the Bankruptcy Court, there can be no assurance that
the Plan will be consummated and the restructuring completed. If a liquidation
or protracted reorganization were to occur, there is a substantial risk that
the value of the Debtors' enterprise would be substantially eroded to the
detriment of all stakeholders.
In addition, the Purchase Agreement contains a number of
conditions that must be satisfied before Jarden is obligated to close. There
can be no assurance that any or all of such conditions will be met (or
waived). If not, consummation of the Plan will not occur.
2. Disruption of Operations Due to the Filing of the
-------------------------------------------------
Chapter 11 Cases
----------------
As part of the first day relief requested in the Chapter 11
Cases, the Bankruptcy Court entered orders allowing the Debtors to pay
prepetition employee obligations and certain prepetition key vendor trade
claims in the ordinary course of business. See Section V. The Debtors,
therefore, believe that the solicitation with respect to the Plan will not
have a material adverse affect on the Debtors' relationships with customers,
employees, and suppliers, provided that the Debtors demonstrate sufficient
liquidity to continue to operate their businesses.
The Debtors believe that relationships with their customers,
suppliers and employees will be maintained, and the going concern value of the
business will be preserved. However, if there is a protracted Chapter 11
process, the Debtors' operations could be materially adversely affected.
C. Administrative Claims
As set forth in detail below under the heading "Certain
Material United States Federal Income Tax Consequences of the Plan" and based
on the conclusions therein, the Debtors do not believe that the consummation
of the Plan will result in the Debtors being obligated to make an
administrative priority tax payment in excess of $6.0 million. However, it is
possible that the Internal Revenue Service ("IRS") will disagree with the
conclusions and position of the Debtors and assert that the consummation of
the Plan results in significant additional administrative priority tax
obligations for the Debtors. Were such a position to be taken by the IRS, and
were such position to be upheld, it is possible that the amount of funds
available for the payment of General Unsecured Claims would be significantly
reduced, and it is possible that there would be no funds available for payment
of any General Unsecured Claims, contrary to the estimated recoveries to
holders of General Unsecured Claims against DBI and the DBOC Debtors, as set
forth in the Overview.
Moreover, it is possible if there is a dispute with the IRS
regarding the amount of administrative priority tax Claims owing to the IRS,
that the Debtors and the Creditors' Committee would
45
attempt to settle such dispute and that such a settlement could result in
there being less funds available for distribution to holders of General
Unsecured Claims than estimated based upon the Debtors' estimate that there
will be only $6.0 million tax due the IRS as a result of the consummation of
the Plan. If a settlement with the IRS is necessary, and it is approved by the
Bankruptcy Court, holders of General Unsecured Claims may receive lesser
recoveries than as estimated herein, without there being a resolicitation of
votes on the Plan.
D. Environmental Matters
The Company will be subject to a variety of environmental
laws and regulations governing, among other things, discharges to air and
water, the handling, storage, and disposal of hazardous or solid waste
materials and the remediation of contamination associated with releases of
hazardous substances. Such laws and regulations and the risk of attendant
litigation can cause significant delays to a project and add significantly to
its cost. Violations of these environmental laws and regulations could subject
the Company and its management to civil and criminal penalties and other
liabilities. There can be no assurance that such laws and regulations will not
become more stringent, or more stringently implemented, in the future.
Various federal, state and local environmental laws and
regulations, as well as common law, may impose liability for property damage
and costs of investigation and cleanup of hazardous or toxic substances on
property currently or previously owned by the Debtors or arising out of the
Debtors' waste management activities. Such laws may impose responsibility and
liability without regard to knowledge of or causation of the presence of the
contaminants, and the liability under such laws is joint and several. The
Debtors have potential liabilities associated with their past waste disposal
activities and with their current and prior ownership of certain property. In
general, the Debtors believe that the likely amount of such liabilities will
not be material, because the Debtors may have a valid defense to liability
with respect to a given site or the Debtors should only be responsible for a
small percentage of the total cleanup costs with respect to a given site.
However, because liability under such laws is joint and several, no assurances
can be given that the Company will not eventually be responsible for all or a
substantial portion of the liabilities associated with one or more of these
sites, which liabilities could be material either individually or in the
aggregate.
E. Unimpaired and Unknown Claims
Certain claims against the Debtors are being left Unimpaired
under the Plan. To the extent that such claims are required to be reflected on
financial statements, the Debtors believe that their financial statements and
projected financial statements properly reflect these claims in accordance
with generally accepted accounting principles. However, the actual amount of
such claims may materially differ from those set forth in the financial
statements. Further, there are likely to be Claims that exist which the
Debtors are not aware of at this time. Some of such Claims may not be
discharged under the Plan. The Debtors are taking no action in the Chapter 11
Cases to disallow, liquidate or otherwise cap any Unimpaired Claims. The
liability of the Debtors as to Unimpaired Claims, and certain types of unknown
claims that, under applicable law, may not be discharged after their emergence
from Chapter 11 will not have been reduced or otherwise affected by the
Chapter 11 Cases or the Plan. There can be no assurance that the Debtors'
financial position and results of operations after emergence from Chapter 11
pursuant to the Plan could not be materially and adversely affected by the
Unimpaired Claims or unknown Claims.
F. Industry Cyclicality
Demand for the services to be offered by the Company has
been, and is expected to continue to be, subject to significant fluctuations
due to a variety of factors beyond the control of the Company, including
economic conditions.
46
G. Business and Competition
1. Commodity Risk
--------------
The primary raw materials used by the Debtors are generally
available from multiple suppliers, and the Debtors have not experienced any
significant interruption in the availability of such materials. However, the
price of polystyrene resin, the key raw material from which the Debtors'
Cutlery products are produced, can be volatile. The polystyrene resin used by
the Debtors is produced from petrochemical intermediaries that are, in turn,
derived from petroleum. Polystyrene resin prices may fluctuate as a result of,
among other things, worldwide changes in natural gas and crude oil prices and
supply, as well as changes in supply and demand for polystyrene resin and
petrochemical intermediaries from which it is produced. Among other
industries, the automotive and housing industries are significant users of
polystyrene resin. As a result, significant changes in worldwide capacity and
demand in these and other industries may cause significant fluctuations in the
prices of polystyrene resin. Although the Company has a long term supply
contract with a major polystyrene resin supplier which the Company believes
believe gives them the lowest price available to any customer purchasing
similar volume and short-term price protection during periods of rising
prices, there can be no assurance this transaction would reduce the impact on
the Company from polystyrene resin price changes. As set forth herein, notable
recent price increases for resin, brought on by a decrease in supply relative
to demand and an increase in global petroleum prices contributed to the
Debtors' decision to commence these Chapter 11 Cases and may continue to
affect the Company's profitability following the Reorganization.
2. Competition
-----------
The markets for certain of the Debtors' products are highly
competitive. The Debtors compete, particularly with respect to its Cutlery
products, with several domestic manufacturers, some of which are larger and
have significantly greater resources than the Debtors. In addition, the
Debtors compete with foreign manufacturers, particularly those located in
China, Sweden, Brazil, Chile, Japan and Korea. Although the barriers to entry
into the Debtors' businesses are relatively low, the Debtors believe that they
have a number of competitive advantages over potential new market entrants
(including strong name brands, established national distribution and existing
cost-efficient manufacturing operations) and that the relatively small market
size for certain of the Debtors' products may make those markets economically
less attractive to the potential competitors.
H. Certain Litigation
1. Legal Proceedings and Environmental Matters
-------------------------------------------
The Debtors are a defendant(s) in several lawsuits,
including product liability lawsuits, arising in the ordinary course of
business. Although the amount of any liability that could arise with respect
to any such lawsuit cannot be accurately predicted, in the opinion of
management, the resolution of these matters is not expected to have a material
adverse effect on the financial position or results of operations of the
Company. A predecessor to the Debtors and certain other match producers are
parties to a 1946 consent decree under which the parties thereto are
prohibited from engaging in anticompetitive acts or participating in specified
commercial relationships with one another.
The Debtors' operations are subject to a wide range of
general and industry specific federal, state and local environmental laws and
regulations which impose limitations on the discharge of pollutants into the
air and water and establish standards for the treatment, storage and disposal
of solid and hazardous waste. Under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs
of removal or remediation of certain hazardous substances on such property.
Although management believes that the Debtors are in substantial compliance
with all applicable environmental laws and regulations, unforeseen
expenditures to remain in such compliance, or unforeseen environmental
liabilities, could have a material adverse affect on their business and
financial positions. Additionally, there can be no assurance that changes in
environmental laws and regulations or their application will not require
further expenditures by the Company.
47
VIII. CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
A summary description of certain material United States
federal income tax consequences of the Plan is provided below. This
description is for informational purposes only and, due to a lack of
definitive judicial or administrative authority or interpretation, substantial
uncertainties exist with respect to various tax consequences of the Plan as
discussed herein. Only the principal United States federal income tax
consequences of the Plan to the Company and to holders of Claims who are
entitled to vote to accept or reject the Plan are described below. No opinion
of counsel has been or will be sought or obtained with respect to any tax
consequences of the Plan. No rulings or determinations of the IRS or any other
tax authorities have been or will be sought or obtained with respect to any
tax consequences of the Plan, and the discussion below is not binding upon the
IRS or such other authorities. No representations are being made regarding the
particular tax consequences of the confirmation or implementation of the Plan
to the Debtors or any holder of a Claim. No assurance can be given that the
IRS or other authority would not assert, or that a court would not sustain, a
different position from any discussed herein.
The discussion of United States federal income tax
consequences below is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations promulgated thereunder, judicial
authorities, published positions of the IRS, and other applicable authorities,
all as in effect on the date hereof and all of which are subject to differing
interpretations or change (possibly with retroactive effect).
The following discussion does not address foreign, state or
local tax consequences of the Plan, which may be significant, nor does it
purport to address the United States federal income tax consequences of the
Plan to special classes of taxpayers (e.g., banks and certain other financial
institutions, insurance companies, tax-exempt organizations, holders of Claims
that are, or hold their Claims through, pass-through entities, persons whose
functional currency is not the United States dollar, foreign persons, dealers
in securities or foreign currency and persons holding Claims that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle, constructive sale or conversion transaction). Furthermore, the
following discussion does not address United States federal taxes other than
income taxes. EACH HOLDER OF A CLAIM IS STRONGLY URGED TO CONSULT ITS OWN TAX
ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND ANY FOREIGN TAX
CONSEQUENCES OF THE TRANSACTIONS DESCRIBED HEREIN OR IN THE PLAN.
A. Federal Income Tax Consequences to the Debtors
1. The Restructuring
-----------------
The Debtors file a consolidated federal income tax return.
DBI believes, and intends to take the position that, unless DBI and DBOC
engage in the restructuring described below, DBI will have an excess loss
account ("ELA") in the stock of DBOC totaling approximately $114 million as of
the end of 2002. An excess loss account, under the consolidated return
regulations, is similar to negative tax basis of the same amount. Any ELA in
the DBOC stock that is not eliminated prior to the consummation of the Sale
and the restructuring of DBOC's debts pursuant to the Plan may result in DBI
recognizing taxable income in the amount of the ELA for federal income tax
purposes.
As part of the Plan, DBI and DBOC first will engage in a
restructuring transaction (the "Restructuring") prior to the sale of DBOC's
assets. Pursuant to the Restructuring, DBOC will convert into a limited
liability company under section 266 of the Delaware General Corporation Law
and then will be treated as a disregarded entity for federal income tax
purposes. As a result of its conversion to a disregarded entity, DBOC will be
treated as liquidating into DBI for federal income tax purposes. In connection
with its conversion to a disregarded entity and pursuant to the Plan, DBOC
will distribute the DBI Recovery Pool to
48
DBI with respect to the class O-4 Interests, which will be treated as part of
the liquidation. As a result of the deemed liquidation, all of the assets of
DBOC will become assets of DBI, and DBOC will cease to exist as an entity
separate from DBI for federal income tax purposes. However, since DBOC will
remain as a separate legal entity following the deemed liquidation,
notwithstanding that it will be disregarded for federal income tax purposes,
the outstanding debt of DBOC will be limited in recourse to the assets of the
legal entity, DBOC. It is expected that the deemed liquidation will be a
tax-free transaction for federal income tax purposes, and that DBI will have a
tax basis in the DBOC assets it will receive or be deemed to receive in the
deemed liquidation equal to DBOC's tax basis in such assets immediately prior
to the transaction.
The Company believes and intends to take the position that,
the liquidation should cause the ELA to be eliminated for federal income tax
purposes, and not be included in DBI's income as a result of the Sale and the
restructuring of DBOC's debts pursuant to the Plan. However, neither the
Company nor the Creditors' Committee has sought or received an opinion of tax
counsel to this effect. Neither has the Company sought or received a ruling
from the IRS, and, accordingly, no assurance can be given that the IRS or a
court would agree with the conclusion stated above. The IRS could challenge
the federal income tax treatment outlined above. If the IRS were to
successfully assert that the ELA was not eliminated as a result of the
liquidation, the tax consequences to the Debtors would differ significantly
from the tax consequences described above.
If the IRS were to successfully assert that the ELA was not
eliminated, the amount of the ELA would be recognized as income to DBI
pursuant to the Plan. The amount of the resulting federal income tax liability
would be approximately $26 million, assuming that approximately $40 million of
DBI's net operating losses ("NOLs) could be utilized to offset the income
recognized by reason of the ELA (this assumption is subject to the discussion
regarding the possible IRS challenge as to the amount of DBI's NOLs, set forth
below). This liability, under the consolidated return regulations, is a
several obligation of each of the Debtors. Moreover, because the resulting tax
liability would arise during the pendency of the bankruptcy and as a result of
the Plan, the tax liability would be classified as an Administrative Claim
under section 503(b) of the Bankruptcy Code. In such an event, based upon the
amount of proceeds to be received by the Debtors from the Sale, there would
not be sufficient proceeds to make any of the distributions to holders of
General Unsecured Claims estimated herein to be available under the Plan.
2. The Sale
--------
For federal income tax purposes, the Sale will constitute a
taxable transaction that will result in the Debtors generally recognizing
taxable gain or loss on each of its assets, including the stock of FI and DBK.
Generally, the net amount of such gain or loss will be equal to the
difference, if any, between (i) the sum of the amount of cash, the fair market
value of any property received by DBI and DBOC in exchange for the assets, and
the fair market value of the liabilities assumed by the Purchaser, and (ii)
DBI's and DBOC's adjusted tax basis in the assets. Under the Plan, based on
proceeds of approximately $114 million, it is estimated that the Debtors will
recognize a net gain on the Sale in the amount of approximately $57 million.
It is estimated that the Debtors will have NOLs and NOL carryforwards totaling
approximately $40 million that will be available to offset the gain recognized
on the Sale, (subject to the discussion below regarding possible IRS
challenge). The Company thus expects that the Debtors will incur federal
income tax liability in the amount of approximately $6.0 million as a result
of the Sale under the Plan, for which each Debtor will be severally liable. Of
the approximately $40 million of NOLs and NOL carryforwards that are estimated
to be available, approximately $20 million are attributable to interest that
has accrued since the filing of the bankruptcy petition with respect to debt
that was incurred prior to the bankruptcy filing. The Company believes, and
intends to take the position that, such interest should be included in the
NOLs available to offset the gain arising from the sale of the Debtors' assets
under the Plan. However, neither the Company nor the Creditors' Committee has
sought or received an opinion of tax counsel to this effect. Neither has the
Company sought or received a ruling from the IRS, and, accordingly, no
assurance can be given that the IRS or a court would agree with the conclusion
stated above.
49
If the IRS were to successfully assert that the NOLs
available to offset the gain arising from the sale of the Debtors' assets do
not include amounts attributable to post-petition interest deductions, the
federal income tax on the sale of the assets would be approximately $13
million under the Plan. Moreover, because the resulting tax liability would
arise during the pendency of the bankruptcy case and as a result of the Plan,
the tax liability would be classified as an Administrative Claim under section
503(b) of the Bankruptcy Code. In such an event, based upon the amount of
proceeds to be received by the Debtors from the Sale, there may not be
sufficient proceeds to make any of the distributions to holders of General
Unsecured Claims estimated herein to be available under the Plan.
B. Federal Income Tax Consequences to Holders of Claims
The United States federal income tax consequences of the
transactions contemplated by the Plan to holders of Allowed Claims and
Interests in DBOC (including the character, timing and amount of income, gain
or loss recognized) will depend upon, among other things, (1) the manner in
which a holder acquired a Claim; (2) the length of time the Claim has been
held; (3) whether the Claim was acquired at a discount; (4) whether the holder
has taken a bad debt deduction with respect to the Claim(or any portion
thereof) in the current or prior years; (5) whether the holder has previously
included in its taxable income accrued but unpaid interest with respect to the
Claim; (6) the holder's method of tax accounting; and (7) whether the Claim is
an installment obligation for federal income tax purposes. Therefore, holders
of Claims should consult their own tax advisors for information that may be
relevant to their particular situations and circumstances and the particular
tax consequences to them of the transactions contemplated by the Plan. This
discussion assumes that the holder has not taken a bad debt deduction with
respect to a Claim (or any portion thereof) in the current or any prior year
and such Claim did not become completely or partially worthless in a prior
taxable year.
For purposes of the following discussion, a "United States
holder" is a holder of an Allowed Claim that is (1) a citizen or individual
resident of the United States, (2) a corporation (or other entity taxable as a
corporation) created or organized in the United States or under the laws of
the United States or any political subdivision thereof, (3) an estate the
income of which is subject to United States federal income taxation regardless
of its source, or (4) a trust if (i) a court within the United States is able
to exercise primary supervision over the administration of the trust and one
or more United States fiduciaries have the authority to control all
substantial decisions of the trust or (ii) the trust was in existence on
August 20, 1996 and properly elected to be treated as a United States person.
A "Non-United States holder" is a holder of an Allowed Claim that is not a
United States holder.
1. Allocation of Payments Between Principal and Interest
-----------------------------------------------------
To the extent that any Allowed Claim entitled to a
distribution under the Plan is composed of indebtedness and accrued but unpaid
interest thereon, the Debtors intend to take the position that, for income tax
purposes, such distribution shall be allocated to the principal amount of the
Allowed Claim first and then, to the extent the consideration exceeds the
principal amount of the Allowed Claim, to the portion of such Allowed Claim
representing accrued but unpaid interest. No assurances can be made in this
regard. If, contrary to the Debtors' intended position, such a distribution
were treated as being allocated first to accrued but unpaid interest, a holder
of such an Allowed Claim would realize ordinary income with respect to the
distribution in an amount equal to the accrued but unpaid interest not already
taken into income under the holder's method of accounting, regardless of
whether the holder otherwise realizes a loss as a result of the Plan. A holder
of an Allowed Claim should also recognize ordinary income on the exchange (but
not in excess of the amount of gain recognized, as described below) to the
extent a distribution is received in exchange for market discount not
previously taken into account under the holder's method of accounting.
2. Holders of Allowed Claims
-------------------------
The receipt of cash or other property in respect of an
Allowed Claim pursuant to the Plan should be treated as a taxable exchange
for federal income tax purposes. Accordingly, a holder of an Allowed Claim
should, except as described in the next sentence, generally recognize capital
gain or loss for United States
50
federal income tax purposes in an amount equal to the difference, if any,
between (1) cash (plus the fair market value of any property in the case of
holders of unsecured claims) received in respect of its Allowed Claim and (2)
the holder's adjusted tax basis in its Allowed Claim. A holder should,
however, recognize interest income to the extent it receives cash in respect
of accrued interest or accrued market discount that has not already been
included in income under the holder's method of accounting (as described above
under the heading "Allocation of Payments Between Principal and Interest").
Conversely, a holder would generally recognize a deductible loss to the extent
any accrued interest or accrued market discount was previously included under
such holder's method of accounting and is not paid in full. A holder who
receives property other than cash in respect of an Allowed Claim will
generally have a tax basis in such property equal to its fair market value at
the time such property is received.
3. Impaired Other Unsecured Claims
-------------------------------
Depending on the nature of the Impaired Other Unsecured
Claim and its character in the hands of the holder, any gain or loss with
respect to the receipt of cash in respect of such Claim pursuant to the Plan
will generally be treated as capital gain or loss or ordinary income or
deduction. Capital losses may generally offset only capital gains, although
individuals may, to a limited extent, offset ordinary income with capital
losses. In addition, holders may be subject to other special tax rules that
affect the character, timing and amount of any income, gain, loss or
deduction. Accordingly, holders of Impaired Other Unsecured Claims are urged
to consult their own tax advisors regarding the tax consequences of the Plan
to them.
4. Non-United States Holders
-------------------------
The United States federal income tax consequences of the
Plan for a Non-United States holder generally depend on the nature and origin
of the holder's Claim. Except as discussed below, a Non-United States holder
that holds its Claim as a capital asset should generally not be subject to
United States federal income tax with respect to any cash received in respect
of its Claim pursuant to the Plan unless, among other things, (a) such holder
is engaged in a trade or business in the United States to which income, gain
or loss from the exchange is "effectively connected" for United States federal
income tax purposes, (b) in the case of an individual, such holder is present
in the United States for 183 days or more during the taxable year of the
Effective Date or otherwise has a "tax home" in the United States, or (c) such
holder is a former citizen or resident of the U.S. Payments made to a
Non-United States holder may, however, be subject to United States federal
withholding tax and a Non-United States holder may be subject to information
reporting with respect to consideration received in respect of accrued
interest or market discount.
5. Information Reporting and Backup Withholding
--------------------------------------------
Certain payments, including payments in respect of accrued
interest or market discount, are generally subject to information reporting by
the payor to the IRS. Moreover, such reportable payments are subject to backup
withholding under certain circumstances. Under the IRC's backup withholding
rules, a United States holder may be subject to backup withholding at the
applicable rate with respect to certain distributions or payments pursuant to
the Plan, unless the holder (a) comes within certain exempt categories (which
generally include corporations) and, when required, demonstrates this fact or
(b) provides a correct United States taxpayer identification number and
certifies under penalty of perjury that the holder is a U.S. person, the
taxpayer identification number is correct and that the holder is not subject
to backup withholding because of a failure to report all dividend and interest
income.
51
A Non-United States holder that receives payments pursuant
to the Plan will generally not be subject to backup withholding, provided
that such holder furnishes certification of its status as a Non-United States
holder (and any other required certifications), or is otherwise exempt from
backup withholding. Generally, such certification is provided on IRS Form
W-8BEN. Information reporting may apply to amounts received by a Non-United
States holder. Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules may be credited against a holder's United
States federal income tax liability, and a holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing an
appropriate claim for refund with the IRS.
IX. FEASIBILITY OF THE PLAN AND BEST INTERESTS OF CREDITORS
A. Feasibility of the Plan
In connection with confirmation of the Plan, the Bankruptcy
Court will have to determine that the Plan is feasible pursuant to section
1129(a)(11) of the Bankruptcy Code, which means that the confirmation of the
Plan is not likely to be followed by the liquidation or the need for further
financial reorganization of the Debtors, unless such liquidation or
reorganization is proposed in the Plan.
The Plan provides for the sale of substantially all of the
Debtors' estates. The Purchase Agreement has been fully negotiated. The
Debtors believe that the amount of proceeds from the Sale will be sufficient
to pay all Administrative and Priority Claims that become Allowed, based upon
the Debtors' estimates. Accordingly, the Debtors believe that the Plan is
feasible.
Diamond Brands is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and in accordance
therewith files periodic reports and other information with the SEC relating
to its business, financial statements and other matters. Such filings will not
include projected financial information.
B. Acceptance of the Plan
As a condition to confirmation of any Plan, the Bankruptcy
Code requires that each Class of Impaired Claims vote to accept that Plan,
except under certain circumstances.
Section 1126(c) of the Bankruptcy Code defines acceptance of
a plan by a class of impaired claims as acceptance by holders of at least
two-thirds (2/3) in dollar amount and more than one-half (1/2) in number of
claims in that class, but for that purpose counts only those who actually vote
to accept or to reject a Plan. Thus, Impaired Classes under the Plan will have
voted to accept such Plan only if two-thirds (2/3) in amount and a majority in
number actually voting in each Class cast their Ballots in favor of
acceptance. Holders of Claims who fail to vote for the Plan are not counted as
either accepting or rejecting that Plan.
C. Best Interests Test
As noted above, even if the Plan is accepted by the holders
of each class of claims and interests, the Bankruptcy Code requires a
bankruptcy court to determine that such Plan is in the best interests of
52
all holders of claims or interests that are impaired by that Plan and that
have not accepted that Plan. The "best interests" test, as set forth in
Section 1129(a)(7) of the Bankruptcy Code, requires a bankruptcy court to find
either that all members of an impaired class of claims or interests have
accepted the plan or that the plan will provide a member who has not accepted
the plan with a recovery of property of a value, as of the effective date of
the plan, that is not less than the amount that such holder would recover if
the debtor were liquidated under Chapter 7 of the Bankruptcy Code.
To calculate the probable distribution to holders of each
impaired class of claims and interests if the Debtors were liquidated under
Chapter 7, a bankruptcy court must first determine the aggregate dollar amount
that would be generated from a debtor's assets if its Chapter 11 cases were
converted to Chapter 7 cases under the Bankruptcy Code. This "liquidation
value" would consist primarily of the proceeds from a forced sale of the
debtor's assets by a Chapter 7 trustee.
The amount of liquidation value available to unsecured
creditors would be reduced by, first, the claims of secured creditors to the
extent of the value of their collateral, and, second, by the costs and
expenses of liquidation, as well as by other administrative expenses and costs
of both the Chapter 7 cases and the Chapter 11 cases. Costs of liquidation
under Chapter 7 of the Bankruptcy Code would include the compensation of a
trustee, as well as of counsel and other professionals retained by the
trustee, asset disposition expenses, all unpaid expenses incurred by the
debtor in its Chapter 11 cases (such as compensation of attorneys, financial
advisors and accountants) that are allowed in the Chapter 7 cases, litigation
costs, and claims arising from the operations of the debtor during the
pendency of the Chapter 11 cases. The liquidation itself would trigger certain
priority payments that otherwise would be due in the ordinary course of
business. Those priority claims would be paid in full from the liquidation
proceeds before the balance would be made available to pay general claims or
to make any distribution in respect of equity interests. The liquidation would
also prompt the rejection of a large number of executory contracts and
unexpired leases and thereby significantly enlarge the total pool of unsecured
claims by reason of resulting rejection claims.
Once the court ascertains the recoveries in liquidation of
secured creditors and priority claimants, it must determine the probable
distribution to general unsecured creditors and equity security holders from
the remaining available proceeds in liquidation. If such probable distribution
has a value greater than the distributions to be received by such creditors
and equity security holders under the plan, then the plan is not in the best
interests of creditors and equity security holders.
D. Liquidation Analysis
In order to determine the amount of liquidation value
available to creditors, the Debtors, with the assistance of their financial
advisor, Jefferies, prepared a liquidation analysis (the "Liquidation
Analysis"), which concludes that in a Chapter 7 liquidation (assuming that the
Sale does not occur), holders of secured Claims against the Debtors, would
receive less of a recovery compared to the recovery under the Plan.
Additionally, the Liquidation Analysis concludes that the holders of
Administrative and Priority Claims, as well as General Unsecured Claims, would
likely receive no recovery whatsoever. These conclusions are premised upon the
assumptions set forth below, which the Debtors and Jefferies believe are
reasonable.
53
1. Hypothetical Orderly Liquidation Analysis of Diamond
----------------------------------------------------
Brands Incorporated As of January 31, 2003
------------------------------------------
Set forth below is a liquidation analysis of DBI, assuming a
hypothetical Chapter 7 liquidation in which a court-appointed trustee would
liquidate the assets of DBI. The liquidation analysis has been prepared solely
for purposes of estimating the proceeds available in a Chapter 7 liquidation
of DBI to illustrate that the Plan meets the "Best Interest" test and provides
at least equal or greater value to all impaired classes of creditors and
equity interest holders than would be provided in a hypothetical conversion to
a Chapter 7 liquidation. Nothing contained in these valuations is intended to
or may constitute a concession by, or admission of, DBI for any other
purposes. This analysis is based on an assumed Effective Date of January 31,
2003, and is based upon information available to and analyses undertaken by
the Debtors, with the assistance of Jefferies, as of October 31, 2002.
Underlying these analyses are a number of estimates and
assumptions that are inherently subject to significant uncertainties and
contingencies, many of which would be beyond the control of DBI and any
Chapter 7 trustee. Accordingly, there can be no assurance that the values
assumed in the following analyses would be realized if DBI were in fact
liquidated. In addition, any liquidation that would be undertaken would
necessarily take place in future circumstances that cannot presently be
predicted.
The principal assumptions used in these liquidation analyses
are set forth in the Summary of Significant Liquidation Analysis Notes and
Assumptions that follow the analyses below.
% Recovery $ Recovery
----------------------- -----------------------
Book
Value Low High Low High
($ in thousands) 10/31/02 Estimate Estimate Estimate Estimate
----------- ---------- ---------- ------------- ---------
Current Assets
Cash and cash equivalents $ -- 100.0% 100.0% $ -- $ --
Accounts receivable -- 70.0% 80.0% -- --
Inventories -- 50.0% 60.0% -- --
Other current assets:
Prepaid expenses -- 10.0% 20.0% -- --
Inter Company Balance 287 0.0% 0.0% -- --
Non-Current Assets
Goodwill -- 0.0% 0.0% -- --
Deferred financing 575 0.0% 0.0% -- --
Deferred taxes 40 0.0% 0.0% -- --
PP&E
Land -- 10.0% 20.0% -- --
Buildings -- 10.0% 20.0% -- --
Machinery & Equipment -- 25.0% 40.0% -- --
Accumulated Depreciation -- 0.0% 0.0% -- --
----------- ------------- ---------
Total assets $ 902 -- --
Total Recovery $ -- $ --
Liquidation Expenses -- --
------------- ----------
Available to Secured Bank Debt -- --
Bank debt $ 84,050 0.0% 0.0% -- --
------------- ----------
Available to Administrative Claims -- --
54
% Recovery $ Recovery
----------------------- -----------------------
Book
Value Low High Low High
($ in thousands) 10/31/02 Estimate Estimate Estimate Estimate
----------- ---------- ---------- ------------- ---------
Administrative Claims 4,079 0.0% 0.0% -- --
Available to unsecured -- --
Unsecured Claims
12.875% Sr. Discount Debentures, $ 30,790 0.0% 0.0% -- --
net of discount
12.875% Convertible Debt 10,786 0.0% 0.0% -- --
----------- ------------- ---------
Total unsecured $ 41,576 0.0% 0.0% -- --
Interest Holders
Common Stock, Preferred Stock & Warrant $ 63,071 0.0% 0.0% $ -- $ --
---------------------------------------------------------------------------------------------------------------------
| Secured Recovery 0.0% 0.0% |
| Unsecured Recovery 0.0% 0.0% |
---------------------------------------------------------------------------------------------------------------------
The Liquidation Analysis represents DBI's best estimates of
liquidation values based upon conversion of the Reorganization Cases to
Chapter 7 liquidation cases. Such estimates are predicated upon
circumstances which may result in values being greater or less than those
realized in a liquidation. Variance from the estimates may be caused by the
following:
(a) DBI developed their estimates of recovery
percentage assuming two scenarios. The first, a lower recovery scenario,
assumes a quick sale of assets. The second, a higher recovery scenario,
assumes an orderly liquidation of assets over a longer period. There can be
no assurance, however, that the liquidation could be completed in either of
the time periods assumed or that the recoveries assigned to the assets would
in fact be realized.
(b) Nature and timing of sales prices - Under Section
704 of the Bankruptcy Code, an appointed trustee must, among other duties,
collect and convert the property of the estate as expeditiously as is
compatible with the best interests of the parties-in-interest. The
liquidation analyses assume that there would be pressure to complete the
sales process within a relatively quick period. The need to convert property
to cash so rapidly may have an adverse impact on the proceeds realized from
the sale of DBI's assets.
(c) Discount factor applied to assets - The precise
discount to attribute to assets in a Chapter 7 case proceeding cannot be
computed on the basis of any known empirical data. Accordingly, for purposes
of these liquidation analyses, assets were valued based on DBI's best
estimates, which would vary on an asset to asset basis.
(d) It is possible that a conversion to a Chapter 7
proceeding could result in liquidation expenses being greater or less than
the estimated amount. Such expenses are in part dependent on the length of
time of the liquidation.
(e) Estimated claims - This analysis was prepared to
show estimated net proceeds available to all classes of creditors identified
and defined in the Disclosure Statement. No analysis has been performed
regarding the validity of the remaining creditors of the Debtors, and no
opinion regarding the validity of these creditors should be inferred.
55
(f) The liquidation analysis assumes that proceeds of
a liquidation are used first to repay secured indebtedness outstanding as of
January 31, 2003, with the remainder being used to pay general unsecured
creditors.
(g) It is assumed that there will not be any income or
transfer tax liabilities resulting from a Chapter 7 proceeding.
(h) Cost to Liquidate - Assumes that liquidation will
occur for between six and nine months. Liquidation expenses will be
approximately 15% of non-cash assets. This includes fees and expenses to the
trustee, counsel, investment bankers, accountants, brokers, auctioneers and
committee professionals.
(i) Claims - As of January 31, 2003, it is assumed
that secured debt consists of a $11.8 million Revolving Line of Credit, $23.6
million Tranche A Term Debt and $48.6 million Tranche B Term Debt. It is
assumed that the claimants have valid security interests in all the assets of
the Company.
(j) The estimated book value of administrative claims
as of January 31, 2003 are:
Key Employee Retention Program $ 1,200,000
Professional Expenses 2,128,572
Wind-Down Expenses 750,000
------------------ -------------
Total: 4,078,572
(k) Priority Tax Claims - It is assumed that there
will be no priority tax claims in connection with the liquidation.
(l) Priority Claims - DBI does not anticipate
allowance of any Priority Claims.
2. Hypothetical Orderly Liquidation Analysis of Diamond
----------------------------------------------------
Brands Operating Corp. As of January 31, 2003
---------------------------------------------
Set forth below is a liquidation analysis of DBOC, assuming
a hypothetical Chapter 7 liquidation in which a court-appointed trustee would
liquidate the assets of DBOC. The liquidation analysis has been prepared
solely for purposes of estimating the proceeds available in a Chapter 7
liquidation of DBOC to illustrate that the Plan meets the "Best Interest"
test and provides at least equal or greater value to all impaired classes of
creditors and equity interest holders than would be provided in a
hypothetical conversion to a Chapter 7 liquidation. Nothing contained in
these valuations is intended to or may constitute a concession by, or
admission of, DBOC for any other purposes. This analysis is based on an
assumed Effective Date of January 31, 2003, and is based upon information
available to and analyses undertaken by the Debtors, with the assistance of
Jefferies, as of October 31, 2002.
Underlying these analyses are a number of estimates and
assumptions that are inherently subject to significant uncertainties and
contingencies, many of which would be beyond the control of DBOC and any
Chapter 7 trustee. Accordingly, there can be no assurance that the values
assumed in the following analyses would be realized if DBOC were in fact
liquidated. In addition, any liquidation that would be undertaken would
necessarily take place in future circumstances that cannot presently be
predicted.
56
The principal assumptions used in these liquidation
analyses are set forth in the Summary of Significant Liquidation Analysis
Notes and Assumptions that follow the analyses below.
% Recovery $ Recovery
----------------------- ------------------------
Book
Value Low High Low High
($ in thousands) 10/31/02 Estimate Estimate Estimate Estimate
-------- -------- -------- -------- --------
Current Assets
Cash and cash equivalents $ 15,571 100.0% 100.0% $ 15,571 $ 15,571
Accounts receivable 13,035 70.0% 80.0% 9,125 10,428
Inventories 14,452 50.0% 60.0% 7,226 8,671
Other current assets:
Prepaid expenses 1,157 10.0% 20.0% 116 231
Inter Company Balance (287) 0.0% 0.0% -- --
Non-Current Assets
Goodwill 22,941 0.0% 0.0% -- --
Deferred financing 3,645 0.0% 0.0% -- --
Deferred taxes -- 0.0% 0.0% -- --
PP&E
Land 559 10.0% 20.0% 56 112
Buildings 8,650 10.0% 20.0% 865 1,730
Machinery & Equipment 36,785 25.0% 40.0% 9,196 14,714
Accumulated Depreciation (29,086) 0.0% 0.0% -- --
-------- -------- --------
Total assets $ 87,422 $ 42,154 $ 51,457
Total Recovery 42,154 51,457
Liquidation Expenses* 3,988 5,383
-------- --------
Available to Creditors 38,167 46,074
Bank debt $ 84,050 45.4% 54.8% 38,167 46,074
-------- --------
Available to Administrative Claims -- --
Administrative Claims 4,079 0.0% 0.0% -- --
-------- --------
Available to unsecured -- --
Unsecured Claims
Accounts payable $ 3,013 0.0% 0.0% $ -- $ --
Accrued expenses 7,178 0.0% 0.0% -- --
Accrued taxes 314 0.0% 0.0% -- --
Accrued interest 7,107 0.0% 0.0% -- --
10.125% Senior Subordinated Notes 100,000 0.0% 0.0% -- --
Postretirement benefit obligations 1,463 0.0% 0.0% -- --
Deferred income taxes 2,248 0.0% 0.0% -- --
-------- -------- --------
Total unsecured $ 121,323 0.0% 0.0% -- --
Interest Holders
Common Stock, Preferred Stock & $ 1 0.0% 0.0% $ -- $ --
Warrants
--------------------------------------------------------------------------------------------------------------------------
| Secured Recovery 45.4% 54.8% |
| Unsecured Recovery 0.0% 0.0% |
--------------------------------------------------------------------------------------------------------------------------
This analysis assumes the completion of a Chapter 7 liquidation as of January
31, 2003. *Assumed liquidation cost of 15% of total recovery on non-cash assets.
57
The Liquidation Analysis represents DBOC's best estimates of
liquidation values based upon conversion of the Reorganization Cases to
Chapter 7 liquidation cases. Such estimates are predicated upon circumstances
which may result in values being greater or less than those realized in a
liquidation. Variance from the estimates may be caused by the following:
(a) DBOC developed their estimates of recovery
percentage assuming two scenarios. The first, a lower recovery scenario,
assumes a quick sale of assets. The second, a higher recovery scenario,
assumes an orderly liquidation of assets over a longer period. There can be
no assurance, however, that the liquidation could be completed in either of
the time periods assumed or that the recoveries assigned to the assets would
in fact be realized.
(b) Nature and timing of sales prices - Under Section
704 of the Bankruptcy Code, an appointed trustee must, among other duties,
collect and convert the property of the estate as expeditiously as is
compatible with the best interests of the parties-in-interest. The
liquidation analyses assume that there would be pressure to complete the
sales process within a relatively quick period. The need to convert property
to cash so rapidly may have an adverse impact on the proceeds realized from
the sale of DBOC's assets.
(c) Discount factor applied to assets - The precise
discount to attribute to assets in a Chapter 7 case proceeding cannot be
computed on the basis of any known empirical data. Accordingly, for purposes
of these liquidation analyses, assets were valued based on DBOC's best
estimates, which would vary on an asset to asset basis.
(d) It is possible that a conversion to a Chapter 7
proceeding could result in liquidation expenses being greater or less than
the estimated amount. Such expenses are in part dependent on the length of
time of the liquidation.
(e) Estimated claims - This analysis was prepared to
show estimated net proceeds available to all classes of creditors identified
and defined in the Disclosure Statement. No analysis has been performed
regarding the validity of the remaining creditors of DBOC, and no opinion
regarding the validity of these creditors should be inferred.
(f) The liquidation analysis assumes that proceeds
of a liquidation are used first
to repay secured indebtedness outstanding as of January 31, 2003, with the
remainder being used to pay general unsecured creditors.
(g) It is assumed that there will not be any income or
transfer tax liabilities resulting from a Chapter 7 proceeding.
(h) Cash - Includes $15.6 million of cash and
equivalents assumed on hand at January 31, 2003.
58
(i) Accounts Receivable - Management assumes that
Trade Receivables would be collected in cash at between approximately 70% and
80% of book value, net of amounts previously reserved.
(j) Inventories - Management assumes that Inventories
would be collected at between 50% and 60% of book value, which is net of
amounts previously reserved.
(k) Other Current Assets - Recovery values assume: an
estimate of 10% to 20% for prepaid expenses, based upon Management's
estimates;
(l) P, P & E - Recovery values assume: (i) an estimate
of 10% to 20% for the Company's owned properties, based upon DBOC's best
estimates; (ii) 10% to 20% for the Company's buildings; and (iii) 25% to 40%
for the Company's machinery and equipment, based on Management's estimates.
(m) All other assets are assumed to be unrecoverable.
The assumed approximate book values of all other assets as of January 31,
2003 are:
Goodwill $ 22,941,000
Deferred financing 3,645,000
------------------ ----------------
Total $ 26,586,000
(n) Cost to Liquidate - Assumes that liquidation will
occur for between six and nine months. Liquidation expenses will be
approximately 15% of non-cash assets. This includes fees and expenses to the
trustee, counsel, investment bankers, accountants, brokers, auctioneers and
committee professionals.
(o) Claims - As of January 31, 2003, it is assumed
that secured debt consists of a $11.8 million Revolving Line of Credit, $23.6
million Tranche A Term Debt and $48.6 million Tranche B Term Debt. It is
assumed that the claimants have valid security interests in all the assets of
the Company.
(p) The estimated book value of administrative claims
as of January 31, 2003 are:
Key Employee Retention Program $ 1,200,000
Professional Expenses 2,128,572
Wind-Down Expenses 750,000
------------------ --------------
Total $ 4,078,572
(q) Priority Tax Claims - It is assumed that there
will be no priority tax claims in connection with the liquidation.
(r) Priority Claims - DBOC does not anticipate
allowance of any Priority Claims.
(s) Unsecured Claims - Consists of all known senior
subordinated note holders, general unsecured trade, postretirement benefit
obligations, accrued interest, deferred income taxes, service and other
vendors of DBOC.
Notwithstanding the foregoing, the Debtors believe that any
liquidation analysis with respect to the Debtors is inherently speculative.
59
The liquidation analysis for the Debtors necessarily contains estimates of
the net proceeds that would be received from a forced sale of assets and\or
business units, as well as the amount of Claims that will ultimately become
Allowed Claims. Claims estimates are based solely upon the Debtors'
incomplete review of any Claims filed and the Debtors' books and records. No
Order or finding has been entered by the Bankruptcy Court estimating or
otherwise fixing the amount of Claims at the projected amounts of Allowed
Claims set forth in the liquidation analysis. In preparing the liquidation
analysis, the Debtors have projected an amount of Allowed Claims that is at
the lowest end of a range of reasonableness such that, for purposes of the
liquidation analysis, the largest possible Chapter 7 liquidation dividend to
holders of Allowed Claims can be assessed. The estimate of the amount of
Allowed Claims set forth in the liquidation analysis should not be relied on
for any other purpose, including, without limitation, any determination of
the value of any distribution to be made on account of Allowed Claims under
the Plan.
E. Application of the "Best Interests" of Creditors Test to the Liquidation
Analysis and the Plan
It is impossible for the Plan Proponents to determine with
any specificity the value each creditor will receive as a percentage of its
Allowed Claim. This difficulty in estimating the value of recoveries is due
to, among other things, the inherent uncertainty in estimating the amount of
Administrative Claims that will ultimately become Allowed, as well as to a
lesser degree, the ultimate amount of Allowed Claims in any Impaired Class.
Notwithstanding the difficulty in quantifying recoveries to
holders of Allowed Claims with precision, the Plan Proponents believe that the
financial disclosures and proposed recoveries to each Class of Impaired Claims
under the Plans imply a greater or equal recovery to holders of Claims in
Impaired Classes than the recovery available in a Chapter 7 liquidation.
Accordingly, the Debtors and the Plan Proponents believe that the "best
interests" test of Section 1129 of the Bankruptcy Code is satisfied.
F. Confirmation Without Acceptance of All Impaired Classes:
The "Cramdown" Alternative
Under the Plan, Class H-4 is deemed to have rejected the
Plan. In view of the deemed rejection by such holders, the Plan Proponents
will seek confirmation of the Plan pursuant to the "cramdown" provisions of
the Bankruptcy Code. The Plan Proponents further reserve the right to seek
confirmation of the Plan with respect to the holders of other Claims in the
event such holders vote to reject the Plan. Specifically, Section 1129(b) of
the Bankruptcy Code provides that a plan can be confirmed even if the plan is
not accepted by all impaired classes, as long as at least one impaired class
of claims has accepted it. The Bankruptcy Court may confirm a plan at the
request of the debtors if the plan "does not discriminate unfairly" and is
"fair and equitable" as to each impaired class that has not accepted the plan.
A plan does not discriminate unfairly within the meaning of the Bankruptcy
Code if a dissenting class is treated equally with respect to other classes of
equal rank.
A plan is fair and equitable as to a class of unsecured
claims which rejects a plan if the plan provides (a) for each holder of a
claim included in the rejecting class to receive or retain on account of that
claim property that has a value, as of the effective date of the plan, equal
to the allowed amount of such claim; or (b) that the holder of any claim or
interest that is junior to the claims of such class will not receive or retain
on account of such junior claim or interest any property at all.
A plan is fair and equitable as to a class of equity
interests that rejects a plan if the plan provides (a) that each holder of an
interest included in the rejecting class receive or retain on account of that
interest property that has a value, as of the effective date of the plan,
equal to the greatest of the allowed amount of any fixed liquidation
preference to which such holder is entitled, any fixed redemption price to
which such holder is entitled, or the value of such interest; or (b) that the
holder of any interest that is junior to the interests of such class will not
receive or retain under the plan on account of such junior interest any
property at all.
60
Under the Plan, Classes H-3 and O-3 are impaired. Should
either or both of Classes H-3 or O- 3 vote to reject the Plan, the DBI Plan
and/or the DBOC Debtors' Plan, as appropriate, may not be confirmable.
X. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
The Debtors believe that the Plan affords holders of Claims
the potential for a better realization on the Debtors' assets than a
liquidation, and, therefore, is in the best interests of such holders.
If, however, the requisite acceptances of voting classes of
Claims are not received, or no Plan is confirmed and consummated, the
theoretical alternatives include: (a) formulation of an alternative plan or
plans of reorganization, or (b) liquidation of the Debtors under Chapter 7 or
11 of the Bankruptcy Code.
A. Alternative Plan(s) of Reorganization
If the requisite acceptances are not received or if the Plan
is not confirmed, the Debtors or any other party in interest could attempt to
formulate and propose a different plan or plans of reorganization. Such a plan
or plan(s) might involve either a reorganization and continuation of the
Debtors' businesses or an orderly liquidation of assets.
With respect to an alternative plan, the Debtors have
explored various other alternatives in connection with the extensive
negotiation process involved in the formulation and development of the Plan.
The Debtors believe that the Plan enables creditors to realize the greatest
possible value under the circumstances, and, that as compared to any
alternative plan of reorganization, has the greatest chance to be confirmed
and consummated.
B. Liquidation under Chapter 7
If no Plan is confirmed, the Chapter 11 Cases may be
converted to cases under Chapter 7 of the Bankruptcy Code, pursuant to which a
trustee would be elected or appointed to liquidate the Debtors' assets for
distribution to Creditors in accordance with the priorities established by the
Bankruptcy Code. It is impossible to predict precisely how the proceeds of the
liquidation would be distributed to the respective holders of Claims against
or Interests in the Debtors.
The Debtors believe that in a liquidation under Chapter 7,
additional administrative expenses involved in the appointment of a trustee or
trustees and attorneys, accountants and other professionals to assist such
trustees would cause a substantial diminution in the value of the Debtors'
Estates. The assets available for distribution to creditors would be reduced
by such additional expenses and by Claims, some of which would be entitled to
priority.
Under the Plan, Classes H-3 and O-3 are impaired. Should
either or both of Classes H-3 or O-3 vote to reject the Plan, the DBI Plan
and/or the DBOC Debtors' Plan, as appropriate, may not be confirmable. As
discussed in Section VI.T above, in the event that the Plan as to DBI and/or
the DBOC Debtors is not confirmed, the Debtors will request that at the
Confirmation Hearing, the Court approve the Sale to Jarden pursuant to
sections 363 and 105 of the Bankruptcy Code, and subsequently convert the
Chapter 11 Case or Cases of the non-confirming Debtors to cases under chapter
7 of the Bankruptcy Code. If such relief is granted, the proceeds of Sale
would be distributed by the Chapter 7 trustee in accordance with Chapter 7.
The Debtors believe that such a result would reduce distributions to holders
of General Unsecured Claims compared to those under the Plan, because, among
other things, additional administrative expenses for the Chapter 7 trustee and
professionals retained by it would have to be paid from Sale proceeds. If the
Chapter 11 Cases were to be converted before the Sale is consummated, there is
no assurance that the Debtors could sell their assets for anything other than
a materially reduced price, if at all,
61
reducing recoveries to holders of General Unsecured Claims, and potentially
eliminating recovery on Administrative and Priority Claims.
XI. THE SOLICITATION; VOTING PROCEDURE
A. Parties in Interest Entitled to Vote
Under Section 1124 of the Bankruptcy Code, a class of claims
or interests is deemed to be "impaired" under a plan unless (i) the plan
leaves unaltered the legal, equitable, and contractual rights to which such
claim or interest entitles the holder thereof or (ii) notwithstanding any
legal right to an accelerated payment of such claim or interest, the plan
cures all existing defaults (other than defaults resulting from the occurrence
of events of bankruptcy) and reinstates the maturity of such claim or interest
as it existed before the default.
In general, a holder of a claim or interest may vote to
accept or to reject a plan if (i) the claim or interest is "allowed," which
means generally that no party in interest has objected to such claim or
interest, and (ii) the claim or interest is impaired by the plan. If, however,
the holder of an impaired claim or interest will not receive or retain any
distribution under the plan on account of such claim or interest, the
Bankruptcy Code deems such holder to have rejected the plan, and, accordingly,
holders of such claims and interests do not actually vote on the plan. If a
claim or interest is not impaired by the plan, the Bankruptcy Code deems the
holder of such claim or interest to have accepted the plan and, accordingly,
holders of such claims and interests are not entitled to vote on the plan.
B. Classes Impaired under the Plan
Classes H-3, O-3, and O-4 are entitled to vote to accept or
reject such Plan. By operation of law, each Unimpaired Class of Claims is
deemed to have accepted the Plan and, therefore, is not entitled to vote to
accept or reject that Plan. By operation of law, Class H-4 is deemed to have
rejected that Plan and therefore is not entitled to vote to accept or reject
such Plan.
C. Waivers of Defects, Irregularities, Etc.
Unless otherwise directed by the Bankruptcy Court, all
questions as to the validity, form, eligibility (including time of receipt),
acceptance, and revocation or withdrawal of Ballots will be determined by the
Voting Agent and the Plan Proponents, in their sole discretion, which
determination will be final and binding. As indicated below under "Withdrawal
of Ballots; Revocation," effective withdrawals of Ballots must be delivered to
the Voting Agent prior to the Voting Deadline. The Plan Proponents reserve the
absolute right to contest the validity of any such withdrawal. The Plan
Proponents also reserve the right to seek to reject any and all Ballots not in
proper form, the acceptance of which would, in the opinion of the Debtors or
their counsel, be unlawful. The Plan Proponent further reserve the right to
waive any defects or irregularities or conditions of delivery as to any
particular Ballot. The interpretation (including the Ballot and the respective
instructions thereto) by the Plan Proponents, unless otherwise directed by the
Bankruptcy Court, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with deliveries of Ballots must be
cured within such time as the Plan Proponents (or the Bankruptcy Court)
determine. Neither the Plan Proponents nor any other person will be under any
duty to provide notification of defects or irregularities with respect to
deliveries of Ballots nor will any of them incur any liabilities for failure
to provide such notification. Unless otherwise directed by the Bankruptcy
Court, delivery of such Ballots will not be deemed to have been made until
such irregularities have been cured or waived. Ballots previously furnished
(and as to which any irregularities have not theretofore been cured or waived)
will be invalidated.
62
D. Withdrawal of Ballots; Revocation
Any party who has delivered a valid Ballot for the
acceptance or rejection of the Plan may withdraw such acceptance or rejection
by delivering a written notice of withdrawal to the Voting Agent at any time
prior to the Voting Deadline. A notice of withdrawal, to be valid, must (i)
contain the description of the Claim(s) to which it relates and the aggregate
principal amount represented by such Claim(s), (ii) be signed by the
withdrawing party in the same manner as the Ballot being withdrawn, (iii)
contain a certification that the withdrawing party owns the Claim(s) and
possesses the right to withdraw the vote sought to be withdrawn and (iv) be
received by the Voting Agent in a timely manner at the address set forth
below. The Debtors intend to consult with the Voting Agent to determine
whether any withdrawals of Ballots were received and whether the Requisite
Acceptances of the Plan have been received. As stated above, the Plan
Proponents expressly reserve the absolute right to contest the validity of any
such withdrawals of Ballots.
Unless otherwise directed by the Bankruptcy Court, a
purported notice of withdrawal of Ballots which is not received in a timely
manner by the Voting Agent will not be effective to withdraw a previously cast
Ballot.
Any party who has previously submitted to the Voting Agent
prior to the Voting Deadline a properly completed Ballot may revoke such
Ballot and change his or its vote by submitting to the Voting Agent prior to
the Voting Deadline a subsequent properly completed Ballot for acceptance or
rejection of the Plan. In the case where more than one timely, properly
completed Ballot is received, only the Ballot which bears the latest date will
be counted for purposes of determining whether the Requisite Acceptances have
been received.
E. Further Information; Additional Copies
If you have any questions or require further information
about the voting procedure for voting your Claim or about the packet of
material you received, or if you wish to obtain an additional copy of the
Plan, the Disclosure Statement, or any exhibits or appendices to such
documents (at your own expense, unless otherwise specifically required by
Bankruptcy Rule 3017(d)), please contact the Voting Agent:
Diamond Brands Operating Corp.
c/o Logan and Company
546 Upper Valley Road
Upper Montclair, NJ 07043
(973) 509-3190 (telephone)
(973) 509-3191 (facsimile)
F. Internet Access to Bankruptcy Court Documents
Bankruptcy Court documents filed in these Chapter 11 Cases
as well as the Bankruptcy Court's calendar and other administrative matters
may be found, downloaded and printed from the Bankruptcy Court's website found
at http//www.deb.uscourts.gov.
63
XII. RECOMMENDATION AND CONCLUSION
For all of the reasons set forth in this Disclosure
Statement, the Plan Proponents and the Creditors' Committee believe that
confirmation and consummation of the Plan is preferable to all other
alternatives. Consequently, the Debtors and the Creditors' Committee urge all
holders of Class H-3, O-3, and O-4 Claims to vote to ACCEPT the Plan, and to
complete and return their ballots so that they will be RECEIVED by the Voting
Agent on or before January 22, 2002 prevailing Eastern Time on the Voting
Deadline.
Dated as of: December 13, 2002
Minneapolis, Minnesota
DIAMOND BRANDS OPERATING CORP.
(for itself and on behalf of the Debtors)
By: /s/ Naresh K. Nakra
---------------------------------
Name: Naresh K. Nakra
Title: Chairman and Chief Executive Officer
APPENDIX A
JOINT PLAN OF REORGANIZATION OF
DIAMOND BRANDS OPERATING CORP. AND ITS DEBTOR AFFILIATES
PROPOSED BY THE DEBTORS AND JARDEN CORPORATION
APPENDIX B
PREPETITION FINANCIAL RESULTS