MARTIN J. BRILL (State Bar No. 53220)
DOUGLAS D. KAPPLER (State Bar No. 48979)
ROBINSON, DIAMANT, BRILL & KLAUSNER
A Professional Corporation
1888 Century Park East, Suite 1500
Los Angeles, California 90067
Telephone: (310) 277-7400
Attorneys for Debtor
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
In re Bk. No. LA 94-17852-AA
GERANT INDUSTRIES, INC., a ) Chapter 11
Nevada corporation, ) DISCLOSURE STATEMENT FOR
) DEBTOR'S THIRD AMENDED PLAN
Debtor. ) OF REORGANIZATION;
) DECLARATION OF ALFRED JAY
) MORAN, JR.
)
) Date: May 8, 1996
) Time: 9:30 a.m.
) Place: Courtroom "1375"
) Roybal Federal
) Building
) 255 E. Temple Street
) Los Angeles, CA 90012
___________________________________)
TABLE OF CONTENTS
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PAGE
----
TABLE OF AUTHORITIES..........................................iii
I. INTRODUCTORY STATEMENT...................................1
II. DEFINITIONS..............................................3
III. BACKGROUND OF DEBTOR.....................................3
A. Turbo, Inc..........................................5
B. American Blood Institute, Inc.......................7
C. United Realty Group, Inc............................8
D. Enviro Trading, Inc.................................9
E. The Marutaka Litigation............................10
IV. UNITED REALTY GROUP TRANSACTIONS........................12
A. The Debtor's Original Purchase Of United
Realty Group And The Partnership Interests.........12
1. The Purchased Assets..........................12
2. The Consideration Paid By Debtor..............12
3. The Security For Notes A And B................13
4. The Amendments To The Purchase Agreement......13
5. The First Closing.............................14
B. The Foreclosure And Redemption Agreement...........15
1. The Management Agreement......................16
2. The Revised Management Agreement..............17
C. Default On The Revised Agreement...................18
D. The Debtor's Motion To Reject The Management
Agreement..........................................18
E. The Exchange Agreement.............................19
V. REASONS FOR FILING BANKRUPTCY CASE........................20
VI. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE............21
A. General............................................21
B. Retention Of Professionals.........................22
C. United Realty Group................................22
D. NASDAQ Delisting...................................23
E. Creditors Committee Appointment....................23
F. Resolution Of Ben-Shmuel Claim.....................24
G. De La Garza Negotiations...........................27
H. Miscellaneous......................................28
VII. SUMMARY OF PLAN.........................................28
A. Treatment Of Claims And Interests..................29
1. Administrative Claims.........................30
(a) General Administrative Claims...........30
(b) Special Administrative Claims...........30
2. Tax Claims....................................31
3. United States Trustee Quarterly
Fee Claims....................................31
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4. Retiree Benefits..............................31
5. Priority Claims, Class 1......................31
6. Claims Of Plaza Realty One Partnership,
Class 2.......................................31
7. Secured Claims, Class 3.......................32
8. Unsecured Claims, Class 4.....................32
9. Longina Ben-Shmuel - Class 5..................33
10. Preferred Interest Holders, Class 6...........34
11. Common Interest Holders - Class 7.............34
B. Means and Mechanics for Execution of The Plan.....35
C. Amendment To Charter Documents Of Debtor
And Other Matters.................................36
D. Executory Contracts...............................39
VIII. MANAGEMENT OF REORGANIZED DEBTOR.......................39
IX. POST-REORGANIZATION OPERATION OF REORGANIZED DEBTOR....44
A. Statement Re XPLORER..............................44
B. Financial Projections For Reorganized Debtor......44
X. STATEMENT RE ATLANTIC PACIFIC TRUST,S.A................45
XI. COMPARISON OF THE DEBTOR'S PLAN TO ALTERNATIVES........47
XII. LIQUIDATION ANALYSIS...................................49
XIII. ACCEPTANCE AND CONFIRMATION............................50
A. Acceptance........................................50
B. Confirmation Without Acceptance By All Impaired
Classes...........................................51
XIV. RISK FACTORS...........................................52
XV. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN....53
XVI. STATUS AND RESALE OF SECURITIES TO BE ISSUED
PURSUANT TO PLAN.......................................55
XVII. CONCLUSION.............................................56
DECLARATION OF ALFRED JAY MORAN, JR............................58
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TABLE OF AUTHORITIES
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STATUTES PAGE(S)
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Section 362 of the Bankruptcy Code................................32
Section 503 of the Bankruptcy Code................................30
Section 507 of the Bankruptcy Code................................32
Section 507(a)(1) of the Bankruptcy Code..........................30
Section 507(a)(2) of the Bankruptcy Code..........................30
Section 507(a)(5) of the Bankruptcy Code..........................31
Section 507(a)(3) of the Bankruptcy Code..........................31
Section 507(a)(4) of the Bankruptcy Code..........................31
Section 507(a)(6) of the Bankruptcy Code..........................31
Section 510(b) of the Bankruptcy Code.............................34
Section 1123(a)(6)of the Bankruptcy Code..........................37
Section 1129(b) of the Bankruptcy Code.............................2
Section 1143 of the Bankruptcy Code...............................34
Section 1145 of the Bankruptcy Code...........................29, 55
RULES
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Rule 144 under the Securities Act of 1933.........................56
OTHER
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Bankruptcy Tax Act of 1980........................................54
Internal Revenue Code of 1986.....................................53
Revenue Reconciliation Act of 1990................................54
Securities Act of 1933............................................55
Tax Reform Act of 1984............................................54
Tax Reform Act of 1986............................................54
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I.
INTRODUCTORY STATEMENT
----------------------
The Debtor has filed with the Bankruptcy Court a proposed Plan
of Reorganization and this Disclosure Statement. After notice and
hearing, this Disclosure Statement was approved by the Bankruptcy
Court as containing adequate information in sufficient detail to
enable the holders of Claims against the Debtor to make an informed
judgment about the merits of approving the Plan of Reorganization.
THE PLAN OF REORGANIZATION IS SET FORTH IN FULL IN EXHIBIT "A"
TO THIS DISCLOSURE STATEMENT. EACH RECIPIENT OF THIS DISCLOSURE
STATEMENT IS URGED TO REVIEW THE PROVISIONS OF THE PLAN OF
REORGANIZATION FULLY PRIOR TO REVIEWING THIS DISCLOSURE STATEMENT.
The Bankruptcy Court has set __________, 1996, at __:__ _.m.,
for a hearing on the Confirmation of the Plan of Reorganization.
Creditors may vote on the Plan of Reorganization by filling out and
mailing the accompanying Ballot for Accepting or Rejecting Plan of
Reorganization to Douglas D. Kappler of Robinson, Diamant, Brill &
Klausner, A Professional Corporation, 1888 Century Park East, Suite
1500, Los Angeles, California 90067. In order for creditors' votes
to count, the ballots must be received on or before __________,
1996. The Debtor will file the ballots timely received with the
Bankruptcy Court.
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Each creditor is entitled to vote for or against the Plan. As
a creditor your vote is important. The Bankruptcy Court cannot
consider Confirmation of the Plan of Reorganization until
acceptance thereof has been obtained pursuant to the affirmative
vote of each impaired class of creditors who holds at least
two-thirds (2/3) in dollar amount and more than one-half (1/2) in
number of the Allowed Claims of such classes voting on the Plan of
Reorganization. Following acceptance, the Bankruptcy Court will
hold a hearing on the Confirmation of the Plan of Reorganization
and will enter an Order of Confirmation with respect to the Plan of
Reorganization if it finds that, among other things, all payments
to be made by the Debtor in connection with the case or Plan of
Reorganization have been disclosed to the Bankruptcy Court; each
class of creditors has accepted the Plan of Reorganization or is
not impaired by the provisions thereof, and that confirmation is
not likely to be followed by the liquidation or need for further
financial reorganization of the reorganized Debtor.
The Plan of Reorganization may be confirmed even if it is not
accepted by all of the classes of creditors if the Bankruptcy Court
finds that the Plan does not discriminate unfairly against and is
"fair and equitable" as to such class or classes. This provision,
set forth in Section 1129(b) of the Bankruptcy Code, requires that,
among other things, the claimants in the impaired classes must
either receive the full value of their claims or, if they receive
less than the full value of their claims, no class with junior
liquidation priority may receive anything and no senior claimant
may receive more than full payment. Section 1129(b) is a complex
provision and this summary is not intended to be a complete
statement of the law. The Debtor will elect to rely upon this
provision to seek confirmation of the Plan if it is not accepted by
each impaired class of creditors.
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NO REPRESENTATIONS CONCERNING THE DEBTOR'S FINANCIAL
CONDITION, THE PLAN OF REORGANIZATION, OR THE VALUE OF THE
SECURITIES TO BE ISSUED PURSUANT TO THE PLAN ARE AUTHORIZED BY THE
DEBTOR OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED
BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS
CONTAINED IN THIS DISCLOSURE STATEMENT.
II.
DEFINITIONS
-----------
Unless otherwise provided in this Disclosure Statement for
the Plan, all terms used herein shall have the meanings assigned to
such terms in Title 11 of the United States Code. For purposes of
both this Disclosure Statement and the Plan, the terms defined in
the Plan shall have the meanings set forth in Article I of the Plan
entitled "Definitions," which Article is incorporated herein by
this reference. A copy of the Plan is attached hereto as Exhibit
"A".
III.
BACKGROUND OF DEBTOR
--------------------
Gerant Industries, Inc. (the "Company" or the "Debtor") was
incorporated under the laws of the State of Nevada on May 2, 1984.
The Company changed its name to Gerant Industries, Inc. from L. A.
Entertainment, Inc. effective December 18, 1992.
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The Company was a capital management company that specialized
in the restructuring and revitalization of small and medium-sized
public and private operating companies in various industries. The
Company's business strategy was to identify, provide financing for
and in conjunction therewith acquire significant equity positions
in high potential companies with superior risk/return
characteristics which were in financial distress, undercapitalized
and/or undervalued due to a variety of factors, including
inadequate management or excess leverage. Each such investment was
expected either to be or ultimately to result in an individual
public company in order to maximize the return to the Company's
shareholders.
As of March 1, 1994, the date the Debtor filed the within
chapter 11 Petition, the Debtor's continuing operations consisted
of investments as follows:
-- 53.09% interest in Turbo, Inc., the parent of
Contemporary Resources, Inc. (see "Turbo, Inc." below).
-- 24.5% interest in American Blood Institute, Inc. (see
"American Blood Institute, Inc." below).
-- 100% interest in United Realty Group, Inc. and 59.7% of
United Realty Group L.P. (see "United Realty Group, Inc." below).
-- 70% interest in EHI, Inc., the parent of Enviro Trading,
Inc. (see "Enviro Trading, Inc." below).
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A. TURBO, INC.
Effective March 31, 1992, the Company's newly formed
subsidiary, Turbo, Inc., a Nevada corporation ("Turbo"), acquired
100% of the issued and outstanding common stock of Contemporary
Resources, Inc., a California corporation ("CRI"), from First
Colonial Ventures, Ltd., a publicly-held Utah corporation ("FCVL"),
in exchange for 49% of the capital stock of Turbo and Turbo's
issuance of a $500,000 demand note with interest at 10% payable to
FCVL. In conjunction with this transaction, FCVL granted a
security interest in the $500,000 note to CRI to secure
approximately $500,000 of intercompany indebtedness payable by FCVL
to CRI. On May 22, 1992, FCVL liquidated its $500,000 debt to CRI
by assigning the $500,000 note to CRI. The Company issued to Turbo
4,838,710 shares of its restricted common stock at the fair market
value of $.31 per share. The Company had originally agreed to
register the shares by December 31, 1992.
Effective June 30, 1992, FCVL and the Company sold their
aggregate 100% equity interest in Turbo for a combined 80% equity
interest in Lucky Chance Mining Company, Inc., a publicly-held
Arizona corporation ("Lucky"), with Turbo thus becoming a wholly-
owned subsidiary of Lucky at that time. Accordingly, the Company's
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equity interest was concurrently reduced to 40.8%. Lucky had filed
a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on August 22, 1989, and operated as debtor-in-
possession. Lucky confirmed its Second Amended Plan of
Reorganization on June 8, 1992, and the Order Confirming Debtor's
Second Amended Plan of Reorganization was entered by the Bankruptcy
Court on June 17, 1992. In conjunction with this transaction,
effective September 30, 1992, the Company provided $500,000 of
additional financing to Lucky by issuing 2,285,715 shares of its
restricted common stock at the fair market value of $.22 per share,
in exchange for which the Company received 10,000,000 shares of
Lucky's restricted common stock.
As a result of the aforedescribed transactions, the Company's
equity interest in New Turbo was 53.09% at March 31, 1993. Lucky
subsequently merged with and into Turbo, with the result that Turbo
became the surviving public company ("New Turbo").
Daniel Lezak, the Company's former President and Director, was
Lucky's President and controlling shareholder from July 1989
through June 30, 1992. Murray Goldenberg, the President of CRI and
FCVL, was appointed the President of Lucky effective July 1, 1992.
In conjunction with the aforedescribed transactions, New Turbo
has received an aggregate of 7,124,425 shares of the Company's
common stock valued at $2,000,000. On or about March 31, 1993, New
Turbo sold 3,000,000 shares of such common stock for $216,000.
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During June 1993, New Turbo sold an additional 250,000 shares of
such common stock for $20,000. In October 1993 FCVL notified the
Company that it was unilaterally rescinding the transactions
whereby the Company acquired its 53.09% ownership of CRI.
Litigation was commenced against FCVL, CRI and Murray Goldenberg in
connection with the purported rescission. In the Bankruptcy Court
a motion to abstain was made by Defendants on the grounds that the
Bankruptcy Court lacked jurisdiction. The motion was granted and
the case was dismissed without prejudice. The Debtor has filed an
action in state court against FCVL, CRI and Murray Coldenberg in
connection with the purported rescission.
B. AMERICAN BLOOD INSTITUTE, INC.
Effective December 31, 1992, the Company entered into various
agreements with American Blood Institute, Inc. ("ABI") and certain
of its shareholders which contemplated a recapitalization of ABI.
The recapitalization included an equity investment of $1,422,091,
of which $1,122,081 was to be provided by the Company, and $300,010
was to be provided by an unrelated party, which was paid. As of
March 31, 1993, the Company had provided $425,000 of its financing
commitment. During April through June 1993, the Company provided
$475,000 of its financing commitment in cash, $171,741 by certain
agreed-upon offsets and credits, with the remainder of $50,340
reduced to an unsecured note payable at June 30, 1993.
Accordingly, as a result of the aforementioned transaction, the
Company acquired a 65.7% equity interest in ABI.
In 1993, the strategic direction of ABI was changed whereby it
was determined to acquire a core group of plasma collection centers
and ultimately to discontinue the whole blood operations.
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In October of 1993, ABI purchased AVRE, Inc. ("AVRE") and
Binary Associates, Inc. ("Binary") for $1 million. These two
companies owned six plasma collection centers. The purchase was
financed with a $1 million loan from CVD Financial Corporation
("CVD") and guaranteed by Conversion Industries, Inc. The Debtor
owned 65.7% of ABI prior to the CVD loan, but was required to give
one-half of its ownership in ABI as a fee to Conversion to finance
the Debtor on an emergency basis. The Debtor currently owns 24.5%
of ABI. Voluntary petitions under chapter 11 were filed by ABI,
AVRE and Binary on January 7, 1994, after CVD, the Debtor's primary
lender, declared a default under its loan agreements. ABI, AVRE
and Binary have filed a joint plan of reorganization, which was
confirmed by order entered on or about January 24, 1996. The joint
plan provides for no distribution to the Debtor on account of its
equity interest in ABI and the Debtor's equity interest was
eliminated.
C. UNITED REALTY GROUP, INC.
On April 21, 1993, the Debtor consummated the Purchase
Agreement described below, and as a result acquired effective
control of United Realty Group, L.P., a Delaware limited
partnership ("URGLP"). URGLP was a publicly traded master limited
partnership ("MLP"), of which the units of limited partnership
interests ("Units") were traded in the over-the-counter market and
were listed on the NASDAQ System under the symbol "URGLP". URGLP
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commenced active business operations on April 18, 1991, and engages
in the business of operating, financing, improving, selling and
acquiring income-producing real estate properties (primarily
shopping centers) in 10 states.
Pursuant to the Purchase Agreement, effective at the closing
on April 21, 1993, the Company acquired the following assets and
interests: (i) all of the 3,000 issued and outstanding shares of
capital stock of United Realty Group, Inc. ("URG") the sole general
partner of URGLP; (ii) 855,041 Units of URGLP; and (iii) certain
promissory notes and accounts receivable, and certain fees and
amounts due or accrued for advances under management contracts and
other amounts aggregating approximately $1,300,000. These and
subsequent transactions related to URG and URGLP and their ultimate
disposition are complex and are covered in a separate article of
this disclosure statement entitled "United Realty Group
Transactions", infra, at Article IV.
D. ENVIRO TRADING, INC.
Effective July 2, 1992, the Debtor's subsidiary, EHI, Inc., a
California corporation ("EHI"), acquired 100% of the capital stock
of Enviro Trading, Inc., a California corporation ("Enviro"), in
exchange for which EHI issued 30% of its common stock and 1,313,622
(as adjusted) shares of its callable, non-voting preferred stock
with a stated value of $1.00 per share to Longina Ben-Shmuel. The
preferred stock is callable at the option of EHI based on certain
conditions through June 1997. On October 26, 1993, the Company
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committed to call this preferred stock for twelve months at the
rate of $25,000 per month. During the year ended March 31, 1993,
221,000 shares of such preferred stock were redeemed at their
stated value for $221,000.
Enviro was engaged in the redemption and recycling of metals,
glass and plastics in a facility located in Southern California
under license from the State of California. Enviro had revenues of
$1,327,000 and a net loss of $168,000 for the period from July 2,
1992 through March 31, 1993. Effective March 31, 1993, the Company
decided that Enviro did not fit the Company's investment criteria,
and accordingly, the Company classified the operations of Enviro as
discontinued, and began an effort to sell its interest in Enviro.
Accordingly, the Company charged to operations its investment in
Enviro of $1,700,327 at March 31, 1993.
On August 27, 1993, Longina Ben-Shmuel and Amos Ben-Shmuel
(the "Ben-Shmuels"), filed a lawsuit against the Debtor and various
officers, directors and affiliates in the Superior Court of the
State of California for the County of Los Angeles, Case No. BC
088244, alleging breach of contract, breach of fiduciary duty,
intentional misrepresentation, and various other torts, and
requested damages of at least $3,825,000. The Debtor filed a
cross-complaint for intentional misrepresentation and other torts
against the Ben-Shmuels. The dispute with the Ben-Shmuels was
resolved pursuant to the terms of a settlement agreement approved
by the Bankruptcy Court by order entered November 16, 1994. Among
other things, the settlement agreement provided that the Debtor
transfer its 70% interest in EHI to Longina Ben-Shmuel. The
settlement agreement between the Debtor and the Ben-Shmuels is
covered in detail in a separate section of this Disclosure
Statement entitled "Resolution of the Ben-Shmuels Claim," infra, at
VI.F.
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E. THE MARUTAKA LITIGATION.
On August 2, 1991, the Debtor entered into an Amendment to the
Stock Purchase Agreement (the "Agreement") with Hajime Wada, the
controlling shareholder of Marutaka Co., Ltd. (the "Seller"), and
Marutaka Co., Ltd. ("Marutaka"), to amend the Stock Purchase
Agreement dated June 27, 1991. Marutaka is principally engaged in
the leisure, entertainment and real estate industries in Japan.
The Agreement contemplated that the Company would acquire 100% of
the capital stock of Marutaka in exchange for 5,000,000 shares of
the Debtor's common stock and shares of the Debtor's Series B
preferred stock such that upon conversion, the Seller would own 52%
of the issued and outstanding common stock of the Debtor, after
giving effect to the exercise of all stock options and warrants
outstanding, the conversion of Series A preferred stock, and the
aforementioned 5,000,000 shares of common stock. The Series B
preferred stock had the right to elect a majority of the board of
directors, and had certain voting rights and conversion privileges,
and was never issued. Pursuant to the Agreement, at the "First
Closing" in September 1991, the 5,000,000 shares of common stock
were issued into an escrow account. In May 1992, the Seller and
Marutaka unilaterally terminated the Agreement with the Debtor.
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During September 1992, the Debtor filed a lawsuit against the
Seller and Marutaka for breach of contract and various other torts
in the United States District Court for the Central District of
California, Case No. CV 92-76460 SVW (EEx). Thereafter, the
Debtor received a judgment against Marutaka Company, Ltd.; Haiu
Redevelopment Company, Ltd.; Hollywoodland Tokyo, Ltd.; and Hajime
Wada in the amount of $52,018,909. The Debtor is not pursuing
collection efforts on that judgment due to the high cost of
enforcing a foreign judgment in Japan.
IV.
UNITED REALTY GROUP TRANSACTIONS
--------------------------------
A. THE DEBTOR'S ORIGINAL PURCHASE OF UNITED REALTY GROUP AND
THE PARTNERSHIP INTERESTS.
1. THE PURCHASED ASSETS.
On March 10, 1993, the Debtor entered into an agreement (the
"Purchase Agreement") with Plaza Realty One Limited Partnership
("PRO"), Jimmy E. Nix ("Nix"), Richard F. Watkins ("Watkins") and
Professional Investment Fund, a Texas joint venture ("PIF"). PRO,
which is privately owned by affiliates of Nix and Watkins, is a
Texas limited partnership engaged in commercial real estate
development and management. Prior to March 10, 1993, PRO was the
owner of the outstanding 3,000 shares of capital stock of an entity
known as United Realty Group, Inc., a Delaware corporation ("URG"),
the corporate general partner of United Realty Group, L.P., a
Delaware limited partnership (the "Partnership"). PIF was the
owner of 855,041 units of limited partnership interests in the
Partnership. URG was the sole general partner of the Partnership.
2. THE CONSIDERATION PAID BY DEBTOR.
Pursuant to the Purchase Agreement, the Debtor purchased the
URG shares from PRO and the limited partnership interests ("Units")
and certain accounts receivable from PIF. The Purchase Agreement
required the Debtor to pay PIF the sum of $320,000 in cash as
consideration for the Units. As consideration for the URG shares,
the Debtor was to pay PRO the sum of $1,380,000, evidenced by a
promissory note ("Note A") from the Debtor made payable to PRO.
Such note was secured by 4,000,000 shares of common stock of the
Debtor. In consideration for the receivables, the Debtor was to
issue to PIF (i) the sum of $300,000 evidenced by a promissory note
("Note B") payable to the order of PIF and (ii) warrants to
purchase 1,500,000 shares of Gerant stock at an exercise price of
$.25 per share.
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3. THE SECURITY FOR NOTES A AND B.
Note A and Note B were secured by the following assets: (a)
all of the URG shares acquired by the Debtor from PRO pursuant to
the Purchase Agreement; (b) all of the Units acquired by the Debtor
from PIF contemporaneously with the Purchase Agreement; and (c) the
receivables which were payable by the Partnership to PIF and
acquired by the Debtor contemporaneously with the execution of the
Purchase Agreement.
4. THE AMENDMENTS TO THE PURCHASE AGREEMENT.
The transaction failed to close on March 12, 1993 as scheduled
and the deadline for closing was extended to April 5, 1993. The
parties thereafter amended the Purchase Agreement in the following
manner: (1) the Debtor agreed to make a payment to PRO of no less
than $320,000 at the time of closing; and (2) the Debtor further
agreed to pledge and pay over all convertible preferred stock,
Series URG ("Gerant Preferred Stock") as such collections were
released from escrow until the following had been paid in full: (a)
the $300,000 payable to PIF as Note B; (b) the following payments
due on Note A; (ii) a $280,000 payment due on March 31, 1993 as per
the Purchase Agreement and (ii) the $200,000 payment due on April
21, 1993 as per the Purchase Agreement. Additionally,
the parties agreed that the final payment of $900,000 due under
Note A would be due August 31, 1993.
The transaction as amended failed to close on April 5, 1993.
Thereafter, the parties agreed to extend the closing date to April
20, 1993 and once again agreed to amend certain terms of the
Purchase Agreement as follows: (a) at closing, the Debtor was to
pay PIF the sum of $320,000 in cash; (b) Note A was amended to call
for principal payments due and payable as follows: (i) $280,000
on or before June 1, 1993; (ii) $200,000 on or before June 15, 1993
and (iii) $900,000 on or before August 31, 1993; (c) Note B was
amended to call for a $300,000 payable to PIF due and payable on or
before June 1, 1993.
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In addition to the $320,000 to be paid to PIF at the closing,
the Debtor agreed to pledge and pay over 60% of all collections
from subscriptions to Gerant Preferred Stock as such collections
were released from escrow until the following were paid in full:
(a) the $300,000 with interest payable to PIF on Note B; (b) the
following payments with interest due on Note A: (i) the $280,000
payment due on or before June 1, 1993; and (ii) the $200,000
payment due on or before June 15, 1993.
5. THE FIRST CLOSING.
On April 20, 1993, the Purchase Agreement transaction closed.
At the closing, the Debtor delivered: (1) to PIF, $320,000 in
cash; (2) to PIF, Note B duly executed in the principal amount of
$300,000; (3) to PIF, a warrant duly executed to purchase 1.5
Million Gerant shares; (4) to PRO, Note A duly executed in the
principal amount of $1,380,000 payable to PRO; (5) to PRO,
certificates duly executed representing 4 Million shares of the
Debtor's common stock in the name of PRO; (6) to PRO, certificates
duly executed representing 500,000 shares of common stock pursuant
to a consulting agreement.
For its part, PRO delivered to the Debtor a certificate
representing 3,000 URG shares and PIF delivered to the Debtor
certificates covering Units aggregating 855,041 and an assignment
covering the receivables.
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B. THE FORECLOSURE AND REDEMPTION AGREEMENT.
The Debtor defaulted on its obligations and PRO foreclosed on
its security on June 14, 1993. PRO acquired all of the collateral
at a foreclosure sale conducted on June 14, 1993. Thereafter, on
July 1, 1993, the Debtor and PIF agreed to redeem the URG Shares
and the partnership Units and to renew and extend the PRO note and
compromise and settle certain claims and disputes in a certain
Redemption Agreement. Pursuant to the Redemption Agreement, the
Debtor substantially restructured the original transaction, and in
the process reacquired from PRO the URG shares, the Units and
certain shares of stock. Contemporaneous with the execution of the
redemption agreement the Debtor executed a revised note and entered
into a revised security agreement. In consideration for the
redemption, the Debtor issued to PRO:
(1) A $1 million promissory note dated April 20, 1993, and
(2) An additional $1 million promissory note dated July 21,
1993.
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1. THE MANAGEMENT AGREEMENT.
As additional security for the Debtor's obligations, PRO
required that the Debtor enter into a certain management agreement
with PRO dated as of June 15, 1993 (the "Management Agreement").
The Management Agreement provided in pertinent part for PRO to
continue managing URG until the notes referenced above were paid in
full. The disposition of the Management Agreement, as well as the
revised Management Agreement, is discussed more fully below.
The Management Agreement retained and engaged PRO to provide
for executive management personnel for the conduct and operation of
the business and affairs of URG and provided that the sole
responsibility of PRO was to provide and make available to URG the
principals of PRO to serve as members of the board of directors of
URG and its chairman of the board, president, chief executive
officer and chief operating officer of URG.
As consideration for providing the management services PRO was
to be paid: (i) $75,000 per week from the sale of the Debtor's
stock and then not in any event less than $40,000 per week and with
an aggregate of $300,000 during any calendar month through the
first thirteen weeks following closing and (ii) thereafter
approximately $100,000 per week and in any event not less than
$50,000 per week and not less than an aggregate of $400,000 during
any calendar month until the full amount of the management fee is
paid. The Management Agreement provided for a management fee in
the aggregate amount of $1,550,000 together with interest at 8 1/2
percent until paid. Payments made under the Management Agreement
were in large part to be credited against payments due under the
revised note.
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2. THE REVISED MANAGEMENT AGREEMENT.
On November 10, 1993 PRO and the Debtor entered into a revised
management agreement (the "Revised Management Agreement"). As of
the date of the Revised Management Agreement the Debtor had paid an
aggregate of $736,262.72 in connection with the Management Fee
through October 31, 1993 but was in default under a portion of the
remaining balance of the Management Fee. PRO undertook to
foreclose pursuant to the revised security agreement on the
collateral covered by the revised security agreement.
At the time of the Revised Management Agreement the Debtor was
the owner of record of all of the outstanding stock of URG and
1,755,041 units of limited partnership interest. Pursuant to the
Revised Management Agreement and in consideration for PRO's
forbearance from foreclosure pursuant to the revised security
agreement the Management Fee was increased as follows:
(1) As compensation to PRO for services rendered
pursuant to the Revised Management Agreement the Debtor
agreed to pay PRO during the term of the Revised
Agreement an aggregate management fee of $2.4 million
(the "Revised Management Fee") of which a balance of
$1,663,737.28 remained unpaid as of November 1, 1993
together with accrued interest from November 1, 1993,
payable in monthly payments of not less than $400,000 and
provided that if the Management Fee had not been paid in
full on or before January 31, 1994 then the Management
Fee was to be increased by an additional $100,000 per
month. Further, the unpaid balance of the Management
Feeand any additional fee was to bear interest at the
rate of 8 1/2% per annum until paid;
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C. DEFAULT ON THE REVISED AGREEMENT.
The Debtor subsequently defaulted under various of the
provisions of the Revised Management Agreement as well as under
various provisions of the foreclosure forbearance agreements
between the parties, and a public foreclosure on the collateral was
scheduled for March 10, 1994. However, on March 1, 1994, the
Debtor filed a voluntary petition for relief under chapter 11 of
Title 11 United States Code.
D. THE DEBTOR'S MOTION TO REJECT THE MANAGEMENT AGREEMENT.
On March 10, 1994, the Debtor filed its motion seeking
authority to reject the Management Agreement and the Revised
Management Agreement. In making this motion, the Debtor asserted
that the fees and charges provided for in the Management Agreement
as well as the Revised Management Agreement were excessive and
unreasonable for the services which PRO was required or entitled to
provide under those agreements. The Debtor also asserted that
services of the same nature could be performed at little or no cost
by the Debtor itself or could be contracted for by the Debtor at a
fraction of the cost provided for in those agreements.
On April 15, 1994, the Bankruptcy Court entered its order
granting the motion and authorizing the rejection of the Management
Agreement and all revisions thereto.
-18-
E. THE EXCHANGE AGREEMENT.
Subsequent to the Court's granting of the Debtor's motion to
reject the Management Agreement, both the Debtor and PRO began
discussions in earnest concerning the resolution of all disputes
remaining between the parties arising from the transactions
described above. Those efforts resulted in the parties' entry,
subject to the Court's approval, into a certain "Exchange Agreement
between Plaza Realty One Limited Partnership and Gerant Industries,
Inc. dated as of June 20, 1994" (the "Exchange Agreement"). In
summary, the primary terms of the Exchange Agreement are as
follows:
(1) The Debtor will sell, assign, relinquish and transfer to
PRO all of the Debtor's interests in and to the URG shares and the
1,755,041 common limited partnership units free and clear of all
liens, claims, encumbrances and rights of others, and subject only
to certain "Permitted Encumbrances" as set forth in the Exchange
Agreement. Contemporaneously therewith, PRO shall assign and
deliver 400,000 PRO common units as security for a certain
promissory note to be executed by PRO in favor of the Debtor as
described below:
(2) PRO shall pay, issue and deliver to the Debtor (i) the sum of
$100,000 cash and (ii) a five year, non-recourse promissory note of
PRO payable to the Debtor in the principal amount of $400,000,
bearing interest at the rate of 8% per annum (the "Note") which
Note is secured by the above-referenced 400,000 PRO Units:
-19-
(3) PRO shall assign and release to the Debtor (i) the
4,000,000 shares of Debtor common stock and (ii) the two Debtor
promissory notes payable to PRO in the original principal amounts
of $1 Million each, which notes shall be marked "canceled":
(4) The Partnership shall issue to URG and URG shall assign
to the Debtor 500,000 preferred units of the Partnership, $1 par
value per unit, such preferred units being redeemable in 3 years
and which accrue and pay monthly interest at the rate of 8% per
annum. The preferred units are secured by certain tenants-in-
common interests in the partnership. In addition, PRO will release
the Debtor from any and all obligations owing to PRO, which total
approximately $1.3 million.
In sum, upon consummation of the terms as set forth in the
Exchange Agreement, all of the Debtor's obligations to PRO shall be
extinguished. Furthermore, in exchange for its assignment to PRO
of its interest in the URG Shares and the 1,755,041 limited
partnership units, the Debtor (1) shall no longer be required to
satisfy obligations to PRO under the Debtor Notes currently
totaling in excess of $1,300,000, and (2) shall receive $1 Million
in consideration.
On August 3, 1994, the Bankruptcy Court entered an order
giving the Debtor authority to enter into the Exchange Agreement.
The Exchange Agreement was thereafter executed, and all parties
thereto are in compliance and current with its terms.
V.
REASONS FOR FILING BANKRUPTCY CASE
----------------------------------
In early 1994, the Debtor defaulted under various provisions
of the Management Agreement between the Debtor and PRO, the largest
creditor of the Debtor, as well as on certain other agreements.
Although settlement discussions were underway between PRO and the
Debtor, PRO commenced foreclosure proceedings on its collateral and
scheduled a public sale for March 10, 1994. Prior to the sale, on
March 1, 1994 the Debtor filed a voluntary petition for relief
under chapter 11 of the Bankruptcy Code. The chapter proceedings
-20-
were commenced to protect the assets of the Debtor from foreclosure
as well as to protect the Debtor from certain other creditors that
were unwilling to take a positive approach to the Debtor's
continuing restructuring efforts. Current management commenced its
financial and workout efforts in April, 1993 but determined that
without the protection of the federal bankruptcy laws, management
would be unable to continue the work of restructuring and
refinancing the Debtor, including the workout of certain
liabilities incurred under previous management.
VI.
SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE
---------------------------------------------
A. GENERAL.
Following the filing of the Debtor's petition seeking
reorganization under chapter 11 of the Bankruptcy Code, the Debtor
has operated its business as a debtor in possession.
The Bankruptcy Court has certain supervisory powers over the
operations of the Debtor during the reorganization. These powers
generally consist of reviewing and ruling upon any objection raised
by a party in interest to business operations or proposed
transactions of the Debtor. Except as otherwise authorized by the
Bankruptcy Court, the Debtor has given notice of any transactions
not in the ordinary course of business, and of any other matters
that require notice pursuant to Bankruptcy Court Rules or as
ordered by the Bankruptcy Court. In addition, the Bankruptcy Court
has exercised supervisory powers in connection with the employment
of attorneys and other professionals.
-21-
B. RETENTION OF PROFESSIONALS.
During the course of its chapter 11 case, the Debtor has
employed pursuant to authority granted by the Bankruptcy Court
various professionals to assist it in these Chapter 11 proceedings
and in conducting its ongoing operations. The Debtor employed
Robinson, Diamant, Brill & Klausner as bankruptcy counsel, Tilles,
Webb, Kulla & Grant as special corporate counsel and the Law
Offices of Steven V. Rheuban as special litigation counsel in
connection with the litigation against Anding & Co. The Creditors
Committee employed Chrystie & Berle as its counsel pursuant to
authority granted by the Bankruptcy Court.
C. UNITED REALTY GROUP.
During the course of this case, the Debtor sought and obtained
an order of the Bankruptcy Court permitting the Debtor to reject
the Management Agreement between the Debtor and PRO. Thereafter,
the Debtor entered into discussions with PRO relating to resolution
of all disputes relating to URG and URGLP. Ultimately, an Exchange
Agreement was reached whereby the Debtor's interests in URG and
URGLP would be sold to PRO. By order entered August 3, 1994, the
Exchange Agreement was approved by the Bankruptcy Court. The
United Realty Group Transactions are complex and are treated at
length in a separate article in this disclosure statement, supra,
commencing at page 12.
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D. NASDAQ DELISTING.
On June 22, 1994, the Debtor was notified that the Debtor's
stock would be delisted from the NASDAQ Small Cap Market pursuant
to Paragraph 3(a)3 of Part II of Schedule D of the NASDAQ By-Laws
which pertains to the protection of investors and the public
interest. In this case, based upon statements made by NASDAQ
representatives, management believes that the significant ownership
interest in the Debtor by Mr. Sherman Mazur and/or entities deemed
to be controlled by him was perceived as a threat to the public
interest by NASDAQ. The Debtor disputed the notion that Mr. Mazur
effected any control over the company and showed that the Debtor
was in compliance with all filing and formula requirements of
NASDAQ on the date it was delisted. However, in spite of such
arguments, the Debtors stock was delisted on June 23, 1994. That
decision was upheld on appeal. The Reorganized Debtor will reapply
for a NASDAQ listing after Confirmation of the Plan.
E. CREDITORS COMMITTEE APPOINTMENT.
In July, 1994 the Office of the United States Trustee
appointed a committee of creditors holding unsecured claims. The
Creditors Committee consisted of Civitan Regional Blood Center,
Casino Realty and Metropolitan Talent Agency. More recently, the
Creditors Committee was disbanded following the purchase of claims
of Creditors Committee members by Southwest Underwood Co., an
entity which the Debtor believes is controlled by Daniel S. De La
Garza ("De La Garza"). Certain negotiations with De La Garza are
described in further detail, infra, in Section G.
-23-
F. RESOLUTION OF BEN-SHMUEL CLAIM.
Prior to July 1992, Longina Ben-Shmuel ("Longina") was the
sole shareholder of Enviro, a corporation engaged in the redemption
and recycling of metals, glass and plastics in a facility located
in Southern California under license from the State of California.
In July 1992, pursuant to a written agreement (the "Agreement"),
the Debtor acquired an interest in Enviro from Longina in a rather
complex transaction which is summarized as follows:
(a) EHI was formed as a wholly owned subsidiary of the
Debtor (the Debtor was known at that time as LA Entertainment,
Inc.).
(b) Longina transferred 100% of the stock of Enviro to EHI.
(c) 30% of the stock of EHI was transferred to Longina.
(d) In addition to the stock in EHI, Longina was to receive
from the Debtor $100,000 cash, a $400,000 promissory note, and
certain other consideration as set forth in the Agreement.
(e) Performance under the Agreement was to be secured by
shares of stock in Gerant, which were transferred to attorney Simon
Langer to hold in escrow.
(f) Amos Ben-Shmuel ("Ami") entered into an agreement with
Enviro whereby certain assets of Ami were transferred to Enviro.
(g) EHI and Longina entered into a "call" agreement whereby
Longina was to receive shares of preferred stock of EHI equal to
$1.4 million.
(h) EHI, the Debtor and Longina entered into a "put"
agreement whereby Longina was to receive shares of preferred stock
of EHI equivalent to $900,000.
-24-
Various amendments were thereafter entered into between the
parties to the agreement including the following:
(a) Gerant and EHI agreed to pay for the defense of Longina
and certain others in connection with various lawsuits;
(b) The "put" agreement was changed to a "call" agreement;
and
(c) Cash payments under the agreement were changed to
preferred stock of the Debtor.
As part of the foregoing transaction, Gerant delivered 933,334
of its pre-reverse split shares of common stocks to Simon Langer to
secure certain performance criteria. During the year ended March
31, 1993, 221,000 shares of the callable non-voting stocks of
Enviro held by Longina were redeemed at their stated value of
$221,000.
On or about August 27, 1993, the Ben-Shmuels filed a lawsuit
against the Debtor and various past and present officers, directors
and affiliates (the "Defendants") in the Superior Court of the
State of California for the County of Los Angeles, as Case No. BC
088244 entitled Longina Ben-Shmuel, an individual and Amos Ben-
Shmuel, an individual, Plaintiffs, v. EHI Inc., a Nevada
corporation; Enviro Trading Corp., a California corporation; Gerant
Industries Inc., a Nevada corporation, successor by name change to
LA Entertainment Inc., a Nevada corporation; Daniel Lezak, an
individual; Alfred Jay Moran, Jr., an individual; Sherman Mazur, an
individual; and Does 1 through 200, inclusive, Defendants (the
"Ben-Shmuel Litigation"). The Complaint alleged breach of
contract, breach of fiduciary duty, intentional misrepresentation,
and various other torts and requested damages of at least
$3,825,000. The Debtor answered and filed a cross-complaint for
intentional misrepresentation and other torts against the Ben-
Shmuels. The parties thereafter engaged in substantial discovery.
-25-
Subsequently, the Debtor and the Ben-Shmuels entered into a
comprehensive settlement agreement (the "Settlement Agreement"),
which was approved by the Bankruptcy Court by order entered
November 16, 1994. The salient terms of the Settlement Agreement
can be summarized as follows:
1. The Debtor transferred its 70% interest in EHI to
Longina.(Note 1)
2. The Debtor directed Simon Langer to transfer to Longina
the 933,334 shares of pre-reverse split common stock of the Debtor
he holds in escrow.(Note 2)
3. Longina shall have an allowed general unsecured claim in
this bankruptcy case for $500,000. The claim shall be separately
classified from the claims of other unsecured creditors in the
Debtor's plan of reorganization. In addition, Longina shall
receive on account of her claim 145,667 shares of Reorganized
Gerant as contemplated in the Debtor's Amended Plan of
Reorganization (the "Previous Plan") together with certain
distributions from liquidation of "Plan Assets" as contemplated by
the Previous Plan. All other claims of Longina and Ami, or either
of them, were withdrawn and/or disallowed.
4. The Ben-Shmuel Litigation was dismissed with prejudice,
and the parties to the Settlement Agreement, including the
Defendants, mutually released one another from all claims and
liability arising out of the subject matter of the State Court
Litigation.
Pursuant to the within Plan, Longina shall receive on account
of her monetary claim, $75,000 cash or, alternatively, 125,000
shares of the Reorganized Debtor (XPLORER) if Longina elects such
alternative treatment in writing on the ballot with respect to this
Plan. In addition, in satisfaction of the stock portion of her
claim, Longina shall receive 145,667 shares of the Reorganized
Debtor.
- -----------------
(1) Enviro was valueless and had no substantial assets. Its
balance sheet as of May 31, 1994 showed a negative net worth of
$35,531. Prior to the agreement with the Ben-Shmuels, the Debtor
had attempted unsuccessfully to market Enviro, and was about to
close down the Enviro operations.
(2) The reverse split was 100/1 so that the shares held by
Langer represents 9,333 shares of the current common stock of the
Debtor.
-26-
G. DE LA GARZA NEGOTIATIONS.
Beginning in July 1995, the Debtor has had various
negotiations with Mr. Daniel De La Garza, President and Chief
Executive of Health Trust, Inc., regarding the possibility of a
Plan of Reorganization which could be mutually beneficial to all
parties in interest in the Debtor's Chapter 11 case. In the course
of those discussions, various commitments, deadlines and promises
have been made by Mr. De La Garza regarding good faith cash
deposits, cash payments to Unsecured Creditors, the structure of
the Plan of Reorganization, the value of assets proposed to be made
as part of the Plan of Reorganization and the amount of value to be
distributed to the various parties in interest. Because of what
the Debtor perceived as an inability to rely on terms, conditions
and commitments made by Mr. De La Garza, the Debtor began to search
for alternatives which could bring value to the Creditors and
Shareholders of the Debtor. The result is the Plan which is now
proposed by the Debtor. After the Debtor began pursuing
alternatives, Mr. De La Garza, through Southwest Underwood Co., a
company which the Debtor believes he controls, purchased certain
creditors' claims, and the Debtor believes that he may propose a
competing plan which the Debtor believes will be of lesser value to
the Creditors and Shareholders than the one proposed by the Debtor.
-27-
H. MISCELLANEOUS.
Pursuant to an order of this Court, July 15, 1994 was set as
the last day to file proofs of Claims in this case.
VII.
SUMMARY OF PLAN
---------------
The Plan is attached as Exhibit "A" to this Disclosure
Statement. The following summary of the Plan does not include all
provisions of the Plan and therefore the Plan should be read in its
entirety. The Plan, if confirmed, will constitute a legally
binding agreement between the Debtor and the holders of Claims, and
it is, therefore important for you to understand its provisions.
Holders of Claims are urged to discuss any questions they may have
with their respective counsel and/or accountants.
The Debtor's Plan of Reorganization contemplates the
capitalization of the Reorganized Debtor by way of a transaction
with the holders of Units of Beneficial Interest (UBIs) in the
Atlantic Pacific Trust ("Atlantic") whereby holders or
approximately 500,000 UBIs with an estimated value of approximately
$25,000,000 will exchange their interests on the Effective Date of
the Plan for 1,250,000 shares of restricted Preferred Stock of the
Reorganized Debtor.
-28-
On the Effective Date, the Reorganized Debtor will change its
name to "XPLORER, S.A." ("XPLORER"). XPLORER will be a capital
management corporation specializing in the capitalization of
business organizations in which XPLORER will have an ownership
interest. XPLORER will also pursue the collection of the Debtor's
assets, including the Marutuka Judgment.
Prior to Confirmation and with Bankruptcy Court approval,
Atlantic will loan up to $750,000 to the Debtor to fund the
Debtors' cash obligations under the Plan. The specific treatment
of Creditors and Interest holders under the Plan is described
below.
A. TREATMENT OF CLAIMS AND INTERESTS.
For purposes of the Plan, the Debtor has divided its Creditors
into different classes of Claims and Interests. Essentially, the
Plan proposes to treat Creditors and Interest holders as follows:
-29-
1. ADMINISTRATIVE CLAIMS.
(a) GENERAL ADMINISTRATIVE CLAIMS. Except as set forth
specifically below, the holders of Allowed Claims entitled to
priority under section 507(a)(1) and (2) of the Code, including
entities entitled to payment pursuant to section 503 of the Code,
shall receive cash in the amount of such Claims on the Effective
Date, unless a claimant elects other treatment. In the event that
an Administrative Claim is a disputed Claim, or is otherwise not
allowed as of the Effective Date, such Claim shall be paid within
ten (10) days after such Claim becomes an Allowed Claim.
Professionals who have rendered services to the Debtor in the
chapter 11 case may elect to be paid in Common Stock of the
Reorganized Debtor (XPLORER) at the rate of one share per dollar of
Claim allowed by the Bankruptcy Court. Holders of Claims for
accrued administrative wages (Alfred J. Moran, Jr. and Jerry L.
Burdick) totalling approximately $245,000 through Confirmation
shall be paid on a pro rata basis 150,000 shares of the Common
Stock of the Reorganized Debtor in complete satisfaction of their
Claims.
(b) SPECIAL ADMINISTRATIVE CLAIMS. CD Financial, Inc., a
Nevada corporation, will receive 750,000 shares of Common Stock of
the Reorganized Debtor as a finder's fee and for its professional
services in putting the financial transactions together in the
Plan. Holders of Loan Debtor Notes (a) may elect to be paid by the
Reorganized Debtor in accordance with the terms of those notes or,
(b) may elect to exchange those notes for Units of Reorganized
-30-
Debtor's Securities at the rate of $1.00 face value of Loan Debtor
Note for every one (1) Unit of Reorganized Debtor's Securities.
Holders of UBI Debtor Notes (a) may elect to be paid by the
Reorganized Debtor in accordance with the terms of those notes or,
(b) may elect to exchange those notes for shares of common stock of
the Reorganized Debtor at the rate of $2.00 face value of UBI
Debtor Note for every one (1) share of common stock.
2. TAX CLAIMS.
The Debtor intends to pay all Tax Claims in cash on the
Effective Date. The Debtor estimates that Claims in this category
total less than $500.
3. UNITED STATES TRUSTEE QUARTERLY FEE CLAIMS.
All due and unpaid United States Trustee quarterly
disbursement fees payable pursuant to 28 U.S.C. section1930(a)(6) will be
paid in cash on the Effective Date.
4. RETIREE BENEFITS.
There are no Claims against the Debtor under Code Section 1114
on account of insurance benefits to retired persons.
5. PRIORITY CLAIMS, CLASS 1.
All Claims entitled to priority under sections 507(a)(3), (4),
(5) or (6) of the Code will be paid in cash in full on the
Effective Date. The Debtor estimates that there are no Claims in
this category.
-31-
6. CLAIMS OF PLAZA REALTY ONE PARTNERSHIP, CLASS 2.
Class 2 consists of the Allowed Claims of Plaza Realty One
Limited Partnership secured by 3,000 shares of $.01 par value
common stock of United Realty Group, Inc., a Delaware corporation
and 1,755,041 common units of limited partnership interest in
United Realty Group, L.P., a Delaware limited partnership.
The Class 2 claimant shall be treated in accordance with the
terms of that certain Order Approving Sale of Interest In United
Realty Group, Inc., and United Realty Group, L.P. and For Authority
to Compromise Controversy, entered by the Bankruptcy Court. The
Class 2 Claims of PRO total approximately $1,427,000.
7. SECURED CLAIMS, CLASS 3.
Class 3 Claims consist of all other Allowed secured Claims to
the extent of the value of the claimant's interest in its
collateral. Class 3 claimants shall be offered possession of the
collateral in which the claimant holds a validly perfected, non-
avoidable security interest and shall be granted relief from the
automatic stay of section 362 of the Bankruptcy Code to foreclose
and collect upon said collateral in accordance with applicable
state law. The proceeds of said foreclosure or collection of the
Allowed amount of the secured Claim, shall be retained by the Class
3 claimant in full satisfaction of said claimant's Class 3 Claim.
To the extent of any deficiency recognizable under applicable
federal or state law due such claimant after recourse to its
collateral, such deficiency Claim shall be deemed to be a Class 4
Claim. The Debtor does not believe that there are any Class 3
Claims.
8. UNSECURED CLAIMS, CLASS 4.
Class 4 consists of the Allowed Claims of unsecured creditors
of the Debtor not entitled to priority under section 507 of the
Bankruptcy Code and not otherwise included in any other class
hereof including, without limitation, Claims which may arise out of
the rejection of executory contracts or deficiency Claims of
secured creditors.
-32-
As soon as practicable after the Effective Date, each Class 4
claimant shall receive fifteen cents ($0.15) cash for each dollar
of its Allowed Claim up to a maximum total payment of $150,000 for
all Class 4 claimants. Alternatively, each Class 4 claimant which
elects in writing on the ballot for voting on the Plan shall
receive one share of the common stock of the Reorganized Debtor
(XPLORER) for each $4.00 of its Allowed Claim. To the extent Class
4 Claims electing cash payment exceed $1,000,000 the sum of
$150,000 shall be distributed Pro Rata to those Class 4 Claimants
so electing.
The Debtor scheduled general unsecured Claims of $1,350,000 in
its Bankruptcy Schedules. The Debtor estimates that there are
approximately $865,000 in allowable general unsecured Claims
exclusive of the Ben-Shmuel Claim, which is separately classified
as Class 5 pursuant to the settlement reached with Ben-Shmuel.
9. LONGINA BEN-SHMUEL - CLASS 5.
Class 5 consists of the Allowed Claim of Longina Ben-Shmuel.
As soon as practicable after the Effective Date, the Class 5
claimant shall receive in full, final and complete satisfaction of
her Allowed Unsecured Claim for $500,000 the sum of $75,000 cash.
Alternatively, if the Class 5 claimant elects in writing on the
ballot for voting on the Plan, such claimant shall receive 125,000
shares of the common stock of the Reorganized Debtor (XPLORER). In
addition, in satisfaction of the stock portion of her Claim
pursuant to the Court approved settlement agreement, the Class 5
Claimant shall receive 145,667 shares of the common stock of the
Reorganized Debtor.
-33-
10. PREFERRED INTEREST HOLDERS, CLASS 6.
Class 6 consists of the holders of series A preferred stock of
the Debtor. Holders of series A preferred stock will be deemed to
have exercised their conversion privilege prior to the filing of
the bankruptcy case. All outstanding Series A preferred stock will
be deemed canceled as of the day after Confirmation. The common
stock deemed received will be treated as Class 7 Interests.
11. COMMON INTEREST HOLDERS - CLASS 7.
Each outstanding share of common stock of Gerant and related
section 510(b) Claims are classified as Class 7 Interests. Class 7
Interest holders shall receive a Pro Rata distribution of 400,000
shares of the common stock of the Reorganized Debtor (XPLORER).
Each share of such common stock shall have one warrant attached.
Each warrant will be for the purchase of one share of the common
stock of the Reorganized Debtor (XPLORER) one year from the date of
the issuance of the warrant. The warrant price will be 70% of the
market asking price one year from the issuance of the warrant. The
warrant must be exercised within 30 days after one year from the
date of the issuance of the warrant. If not exercised in writing
within such 30 day period, the warrant will become null and void.
Pursuant to section 1143 of the Bankruptcy Code, upon
Confirmation, Class 6 and 7 Interest holders must surrender their
certificates representing the securities of the Debtor within one
(1) year of Confirmation as a condition to receiving the securities
to be distributed by the Reorganized Debtor pursuant to the Plan.
-34-
B. MEANS AND MECHANICS FOR EXECUTION OF THE PLAN.
1. On the Effective Date of the Plan, holders of 500,000
UBIs shall contribute those UBIs in exchange for 1,250,000 shares
of Preferred Stock of the Reorganized Debtor. The Preferred Stock
of the Reorganized Debtor issued in exchange for the UBIs will not
be issued pursuant to section 1145 of the Bankruptcy Code.
2. Prior to Confirmation and pursuant to Bankruptcy Court
authorization, holders of UBIs in Atlantic will sell to the Debtor
approximately 500,000 of those UBIs in return for which the Debtor
will issue Debtor Notes at the rate of $50 face value of Debtor
Notes per UBI. The Debtor Notes shall be secured by the UBIs until
repayment.
3. At least fifteen (15) days prior to the Confirmation
Date, Atlantic will have loaned to the Debtor the sum of up to
$750,000 but not less than $450,000 to be evidenced by Debtor Notes
in order to fund the cash payments required under the Plan for
Administrative Claims, Tax Claims, Class 4 Claims and Class 5
Claims. On the Effective Date, the Reorganized Debtor shall be
authorized to take all actions necessary or appropriate to complete
and consummate the transactions described herein and to enter into
and implement the contracts, instruments, and other agreements or
documents created in connection with the Plan or to be executed and
delivered pursuant to the Plan before, on, or after the Effective
Date.
-35-
4. On the Effective Date all property of the Estate shall be
vested in the Reorganized Debtor, and the Reorganized Debtor shall
retain such property free and clear of all Claims and interests of
creditors, except as provided by this Plan.
5. The Reorganized Debtor shall distribute all property to
be distributed under this Plan. The Reorganized Debtor may employ
or contract with other entities to assist in or to perform the
distribution of the property. Property to be distributed under the
Plan shall be distributed as soon as practicable after the
Effective Date.
6. Any property to be distributed to creditors under the
Plan shall be forfeited if it is not claimed by the entity entitled
to it before the later of one (1) year after Confirmation of the
Plan or sixty (60) days after an order allowing the Claim of that
entity becomes a final order.
7. Any person or entity entitled to receive consideration or
securities of the Reorganized Debtor may designate a nominee or
designee to receive the consideration or stock to be issued
pursuant to this Plan.
C. AMENDMENT TO CHARTER DOCUMENTS OF DEBTOR AND OTHER
MATTERS.
1. On the Effective Date, except as otherwise provided
herein, all outstanding instruments and securities representing
Claims or Interests in the Debtor and any rights to acquire
Interests in the Debtor shall be deemed canceled and of no further
force or effect, without any further action on the part of the
Bankruptcy Court or any person. The holders of such canceled
instruments, securities, and other documents shall have no rights
arising from or relating to such instruments, securities or other
documents or the cancellation thereof, except the rights provided
pursuant to the Plan.
-36-
2. On the Effective Date, the board of directors of the
Reorganized Debtor shall be authorized to amend the Articles of
Incorporation and Bylaws to accomplish the following:
a. Change the Debtor's name to XPLORER, S.A. of such name as
the board of directors determines.
b. Change the place of incorporation of the Reorganized
Debtor to any State or Territory of the United States or to any
foreign jurisdiction.
c. Authorize the issuance of 25,000,000 shares of common
stock.
d. Authorize the issuance of 15,000,000 shares of preferred
stock. The board of directors shall determine in its discretion
the par value, rights, preferences, privileges, and restrictions
granted to or imposed on such shares.
e. In accordance with section 1123(a)(6) of the Code, the
Reorganized Debtor shall adopt an amendment to its Articles of
Incorporation that shall contain provisions that prohibit the
issuance of nonvoting equity securities to Creditors or
shareholders of the Debtor.
f. Carry out a stock split or reverse stock split, which may
provide that the shares of odd lot shareholders (those holding less
than 100 shares after a reverse stock split) may be rounded
pursuant to a board of directors resolution and which stock split
may be discriminatory as compared to non-odd lot shareholders, or
may be paid in cash.
-37-
g. Establish an employee stock option and/or stock bonus
plan.
h. Effect a quasi-reorganization for accounting purposes.
i. Change the Reorganized Debtor's fiscal year end.
j. Issue shares, warrants or other securities to carry out a
merger, acquisition or any other transaction contemplated in the
Plan without solicitation of or notice to shareholders.
k. Prohibit any governmental taxing authority from charging
any transfer, sales, or any other type of fee or tax pursuant to a
corporate action made in consummation of the Plan.
l. Take all action necessary and appropriate to carry out
the terms of the Plan.
m. Amend the Debtor's Articles of Incorporation and/or
Bylaws to provide the maximum indemnification or other protections
to the Reorganized Debtor's officers and directors that is allowed
under applicable law.
n. Without shareholder approval, take any and all action
necessary or appropriate to effectuate any amendments to its
Certificate of Incorporation and/or Bylaws called for under the
Plan and the board of directors and officers of the Reorganized
Debtor shall be authorized to execute, verify, acknowledge, file
and publish any and all instruments or documents that may be
required to accomplish same.
-38-
D. EXECUTORY CONTRACTS.
Except for those executory contracts assumed by the Debtor
prior to Confirmation, the Debtor hereby rejects any and all
executory contracts including, but not limited to, leases, warrants
to purchase stock of the Debtor, employees' stock option or profit
sharing plans and all other stock options outstanding, which were,
or which are claimed to be, or to have been in existence at any
time during the course of this case or before this case was filed.
Any Claims arising out of the rejection of executory contracts or
leases under Article VII must be filed with the Court within thirty
(30) days after Confirmation or be forever barred. A separate
notice will be sent by the Debtor upon Confirmation to the holders
of contracts to be rejected advising them of the deadline for
filing Claims.
VIII.
MANAGEMENT OF REORGANIZED DEBTOR
--------------------------------
The Board of Directors of the Reorganized Debtor shall consist
of Thomas C. Roddy, P.E., Steven B. Mortensen, Jon Bice, Joyce Jane
Pellet and Benjamin C. Rice, J.D. Members of the Board of
Directors of the Reorganized Debtor shall receive compensation of
$150 per meeting. In addition to the compensation indicated below
for each officer and director, the officers and directors of the
Reorganized Debtor shall divide equally a bonus of ten percent
(10%) of the net profit of the Reorganized Debtor.
-39-
Thomas C. Roddy, P.E.
Director, President and Chief Executive Officer
Mr. Roddy is a registered civil engineer in the State of
California. He received a B.S. in civil engineering from
California State University, Fresno in 1978. From 1978 through
1985 he was the senior engineer for Boyle Engineering Corporation,
Bakersfield, California. From 1985 through 1996 Mr. Roddy has been
a consulting engineer in Bakersfield, California. His engineering
experience is extensive and includes experience as project
manager/engineer for various mining projects in California and
Nevada, engineering superintendent for construction of the Aman
Power Plant near Modesto, California, extensive experience in road,
sewer water, and drainage system design, and engineering services
related to Santa Fe Energy Company for the construction of enhanced
recovery facilities. He is a member of the American Society of
Civil Engineers, the Society of Petroleum Engineers, the American
Petroleum Institute, and the Kern County Air Pollution Control
District Hearing Board.
Mr. Roddy shall be compensated for serving as President and
Chief Executive Officer of the Reorganized Debtor at the rate of
$60 per hour for time actually spent on company business.
-40-
Steven B. Mortensen
Director, Secretary, and Chairman
Mr. Mortensen majored in computer science and math at Brigham
Young University. More recently, Mr. Mortensen has been the
project estimator and marketing director for Life Style Homes Inc.
and Mortensen Construction, Inc. In that connection, Mr. Mortensen
is responsible for all cost containment and keeps the company's
profit margins at a maximum by monitoring all price fluctuations
and job costs carefully. He prepares and submits all the necessary
paperwork to regulatory agencies for approval. He is responsible
for keeping all housing construction projects in compliance with
OSHA, VA, FHA, city, county, state and federal agencies. As
marketing director for Lifestyle Homes, Inc. and Mortensen
Construction, Mr. Mortensen directed the marketing strategies that
have kept these companies in the top ten largest construction
companies in his area. Mr. Mortensen is also a trustee of Atlantic
Pacific Trust. As trustee in trust for Atlantic, Mr. Mortensen is
responsible for asset management and the compilation of financial
documents to obtain certified financial statements for Atlantic.
Mr. Mortensen works jointly with the other trustee of Atlantic in
managing the affairs of this diversified and fast growing trust.
Mr. Mortensen is also a co-trustee of the Rocky Mountain Trust. In
that capacity he is solely responsible for asset management and all
investments of that trust. Previously Mr. Mortensen has been
project coordinator for Mortensen Construction; a senior vice
president of the "B" paper division of Trump Mortgage Group Inc.;
-41-
President of North Star Industries, a mining, residential and
commercial contractor, commercial real estate financing and land
and business acquisition corporation; President of ESMI
Corporation, an energy, securities and mineral investment
corporation; President and owner of Hillcrest Development, a land
and mine development company; President and owner of MOR
Investments, a real estate investment company; Sales
and Marketing Director of Mortensen Construction and Lifestyle
Homes, Inc.
Mr. Mortensen shall be compensated for serving as Secretary of
the Reorganized Debtor at the rate of $60 per hour for time
actually spent on company business.
Jon W. Bice
Director, Treasurer and Chief Financial Officer
Jon W. Bice is 51 years of age. He has operated his own
accounting and tax business since 1971. He prepares over 600
individual tax returns, 40 corporate returns, and 15 partnership
returns per year. His tax practice is national with clients in 29
states.
His accounting clients have ranged from small individual
business to $100 million multi-national corporations. These
clients are located across the nation, though a majority are
located in California and Colorado. He is licensed to practice
before the Internal Revenue Service and the United States Tax Court
on tax matters. He performs an estimated annual average of 100 to
-42-
125 tax examination audits. Mr. Bice has been the CFO for other
corporations in the past. These ranged in size from $36 million
per year in sales to $100 million in international sales.
Mr. Bice shall be compensated for serving as Treasurer and
Chief Financial Officer of the Reorganized Debtor at the rate of
$60 per hour for time actually spent on company business.
Joyce Jane Pellet
Director
Ms. Pellet presently serves as trustee of Bedrock Trust, which
owns and manages several rental properties. She also actively
serves as trustee for Sequoia Trust and Atlantic Pacific Trust.
She presently serves as treasurer and director of EMTEC, Inc.
Previously Ms. Pellet has owned and managed income producing
properties. She has served as trustee of various trusts and worked
as financial account manager for various corporations.
Benjamin C. Rice, J.D.
Director
Mr. Rice is an attorney licensed to practice in the State of
California. He received a B.S. in psychology and economics from
Brigham Young University in 1964 and a juris doctor degree from
Golden Gate University in 1971. He has been engaged in the private
practice of law since 1988 specializing in constitutional law,
trust, tax law, asset protection and mining law. He serves as
corporate counsel for several corporations and trusts including
Atlantic Pacific Trust and EMTEC, Inc. Previously, Mr. Rice has
been a law professor at National University and has served as
general counsel for an operating mining company.
-43-
IX.
POST-REORGANIZATION OPERATION OF REORGANIZED DEBTOR
---------------------------------------------------
A. STATEMENT RE XPLORER.
The Reorganized Debtor (XPLORER) will be a capital management
corporation, specializing in the capitalization of business
organizations in which XPLORER has an ownership. The business
strategy of XPLORER will be to: a) Exchange stock for ownership of
various income producing business organizations to increase the
income and asset base, b) Capitalize startup companies utilizing
technology related to XPLORER, c) Issue surety, d) Provide various
types of financing, e) Provide technology and/or management to
those business organizations that have, in the opinion of
management, a high potential for profit at a reasonable risk.
XPLORER also intends to pursue the collection of the Debtor's
assets and litigation, including the collection of the Marutaka
Judgment.
B. FINANCIAL PROJECTIONS FOR REORGANIZED DEBTOR.
A five (5) year proforma statement of income has been prepared
by management of the Debtor and is attached as Exhibit "B." The
projections are based on revenues from the distributions to be
received on account of the UBIs of Atlantic used to capitalize the
Reorganized Debtor and not from any other future business
operations or acquisitions of the Reorganized Debtor. Attached
hereto as Exhibit "C" is a proforma balance sheet for the Debtor
and adjustments thereto reflecting Confirmation of the Plan and
various assumptions concerning conversion of debt to equity. Also
attached hereto as Exhibit "D" is a distribution analysis
reflecting the estimated distribution of cash and securities under
the Plan.
-44-
These financial projections represent an estimate of future
events that may or may not occur. It is probable that some of the
assumptions on which the financial projections are based will not
materialize and that unanticipated events and circumstances will
occur which will affect these projections. Therefore, there can be
no assurance, and no representation or implication is made, that
the financial projections or related assumptions will constitute an
accurate reflection of the actual operating cash flow of the
Reorganized Debtor during the periods indicated and the financial
projections should not be relied upon as assurances of the actual
results that will be obtained.
X.
STATEMENT RE ATLANTIC PACIFIC TRUST,S.A.
----------------------------------------
ATLANTIC PACIFIC TRUST, S.A.
Atlantic Pacific Trust, S.A. ("Atlantic") is an irrevocable
trust which was formed on June 1, 1994 by and between Sequoia Trust
and Rocky Mountain Trust whereby said Trusts contributed 100% of
their ownership in Nevada Trust, S.A. to Atlantic. The Trustees of
Atlantic are Steven B. Mortensen, William M. Moreland and Joyce J.
Pellett. Nevada Trust, S.A. held as its principal asset, certain
mining claims referred to as the Evening Star property in the Green
Mountain Mining District (aka Piute Mining District) Kern County,
California. According to the November 30, 1993 audited financial
-45-
statements of Nevada Trust, S.A., the value of the gold ore
reserves held by Nevada Trust, S.A. are estimated at $165 million
Proven Reserves and $874 million Probable Reserves. A copy of the
November 30, 1993 financial statement is attached hereto as Exhibit
"E." This financial statement is based upon a geological report by
Precious Metals Exploration dated December 9, 1989 (the "Geological
Report"). A copy of a summary of the findings reported in the
Geological Report from Precious Metals Exploration is attached
hereto and marked as Exhibit "F." (Note 3) A compilation
balance sheet dated March 31, 1996 for Atlantic is attached hereto
and marked Exhibit "G."
The operations of Atlantic were capitalized through the
issuance of Units of Beneficial Interest ("UBIs"), issued and to be
issued for cash or assets as per trust minutes and recorded in the
register of the Trust Beneficiaries. Such holders of UBIs are
bound by the provisions of the Declaration of Trust and are
entitled to participate in all distributions of cash or gold
bullion in the proportion which the number of units held bears to
the total number of units issued and outstanding. Of the two
million fifty four thousand three hundred (2,054,300) UBIs issued
and outstanding at March 31, 1996, it is anticipated that
approximately one million (1,000,000) will be contributed by
current holders to capitalize the Reorganized Debtor (Xplorer).
The exploration, development and production of the Proven and
Probable reserves of Atlantic is being financed through the sale of
UBIs, forward bullion sales and the sale of Industrial Revenue
Bonds in Europe. Atlantic has contracted with EMTEC, Inc. to
conduct all exploration development and production activities
including all permitting, the design, construction and operation of
a pilot mill, the design, construction and operation of a full
production mill, and the processing of all precious metal ores
blocked out by the geologists. It is planned that the development
and production activities will begin in the fourth quarter of 1996,
with initial distributions to UBI holders anticipated during the
first quarter of 1997.
- -----------------
(3) Any interested party may obtain a copy of the Geological
Report by contacting counsel for the Debtor and arranging for
payment of appropriate photocopying and mailing costs.
-46-
XI.
COMPARISON OF THE DEBTOR'S PLAN TO ALTERNATIVES
-----------------------------------------------
Since the Debtor is no longer operating, the only alternative
to the Plan is a liquidation of the Debtor's assets. The Debtor
believes that the Plan is superior to a liquidation of the Debtor's
assets since the Plan provides for cash payments to creditors on
the Effective Date greater than they would receive in a
liquidation. Also, the Plan allows unsecured creditors, as an
alternative, to accept shares of stock in the Reorganized Debtor,
which will continue in business. See Exhibit "C" which reflects
the book value of the Reorganized Debtor's stock.
While one alternative to the Plan could be the conversion of
the case to a chapter 7 liquidation, the Debtor believes that
creditors will receive more sooner through the Plan as proposed by
the Debtor. If the case were converted to chapter 7, all assets
would be liquidated at liquidation sale prices or abandoned. A
case in point is the Marutaka Judgment which requires a significant
investment to attempt collection in Japan. A trustee in bankruptcy
may well abandon that asset in a Chapter 7 case.
Furthermore, in a chapter 7 case a trustee would be appointed
for the Debtor. The trustee would be entitled to a fee based on a
percentage of the funds distributed to creditors. The trustee
would also be likely to employ attorneys, accountants, and other
professionals to assist him, which professionals would be
unfamiliar with the case. A significant amount of time and money
could be expended simply by the trustee and his professionals
becoming familiar with the facts and issues involved in this case.
Accordingly, the Debtor believes that the time and expense
involved with a chapter 7 liquidation coupled with the inability of
a liquidating trustee to realize full value of many of the assets
of the Debtor make the chapter 7 alternative less desirable to
creditors than the Plan proposed by the Debtor. See Article XII
for the Debtor's Liquidation Analysis.
-48-
XII.
LIQUIDATION ANALYSIS (4)
------------------------
CHAPTER 7
BOOK LIQUIDATION
ASSETS VALUE VALUE
- ------------------------------------------- ------- ------------
Cash 6,000(5) 6,000
Sym-Tek Claim -0- (6) 16,000
URG Preferred Units (See Note 7) 500,000 400,000
Plaza Realty One Note (See Note 8) 400,000 -0-
53% ownership in Turbo/claim
against CRI, FCVL and Goldenberg
(See Note 9) 252,000 50,000
Investment in American Blood
Institute (See Note 10) -0- 0
Litigation filed against Anding &
Co., CPAS (See Note 11) -0- Unknown
Marutaka Judgment (See Note 12) -0- Unknown
- ------------------------------------------------------------------------
TOTAL LIQUIDATION VALUE $466,000
Less estimated chapter 7 and Chapter 11 $595,480
expenses of administration (See Note 13)
Balance available for creditors in chapter 7 $ -0-
liquidation
- ------------------------------------------------------------------------
- -----------------
(4) All figures are estimated as of Confirmation.
(5) Estimated balance at confirmation.
(6) Claim against Sym-Tek for breach of contract in the amount of
$350,000. Written off on books of Debtor when Sym-Tek filed chapter 11. An
initial distribution under the Sym-Tek chapter 11 case of $16,000 was received
on January 23, 1996. An estimated $16,000 is expected to be received from the
final distribution.
(7) 500,000 Preferred Class C Units of URG limited partnership, $1.00
par value per unit, redeemable by the Debtor in August 1997, with interest at
8% per annum. This obligation is secured by a security interest in the
undivided 75% tenant in common interest in the net proceeds attributable to
the Southwood Plaza Shopping Center in Charlotte, North Carolina. This note
would need to be discounted in order to achieve early liquidation and is non-
transferable.
-49-
XIII.
ACCEPTANCE AND CONFIRMATION
---------------------------
A. ACCEPTANCE.
As a condition to Confirmation, the Bankruptcy Code requires
that each impaired class of claims or interests accepts the Plan,
with the exceptions described in the following section. The
Bankruptcy Code defines acceptance of a plan by a class of claims
as acceptance by holders of two-thirds in dollar amount and a
majority in number of claims of that class, but for this purpose
counts only those who actually vote to accept or to reject the
plan. The Bankruptcy Code defines acceptance of a plan by a class
of interests (equity securities) as acceptance by two-third of the
number of shares, but for this purpose counts only shares actually
voting. Holders of claims or interests who fail to vote are not
counted as either accepting or rejecting the Plan.
Classes of claims and interest that are not "impaired" under a
plan are deemed to have accepted the plan. Acceptances of the Plan
are being solicited only from those persons who hold Claims or
Interests in impaired classes. A class is "impaired" if the legal,
equitable, or contractual rights attaching to the classes or
interests of that class are modified, other than by curing defaults
and reinstating maturities or by payment in full in cash. Classes
4 and 5 Claims and Classes 6 and 7 Interests are impaired under The
Plan.
- -----------------
(8) Five year, non-recourse, promissory note of Plaza Realty One
("PRO") for $400,000 with interest accrued at 8% due in 1999. Secured by
400,000 units of limited partnership interest in United Realty Group, L.P.
United Realty Group, L.P. was delisted from NASD in 1995. Accordingly,
prospects for recovery are not very good.
(9) Litigation was filed in California State Court during February
1996. Litigation in the Bankruptcy Court was removed to the State Court due
to lack of jurisdiction. Outcome of such litigation is unknown.
(10) American Blood Institute, Inc. filed a voluntary chapter 11
proceeding on January 7, 1994. The equity interest in the company was
eliminated under the terms of a Plan of Reorganization that was confirmed on
January 24, 1996.
(11) Litigation filed in October 1995. Value of claim and recovery
thereon is unknown.
(12) $52.0 million default judgment for damages against Marutaka
Company, Ltd.; Hain Redevelopment Company, Ltd.; Hollywoodland Tokyo, Ltd.;
and Hajime Wada, all Japanese entities. Attorneys for Gerant have conducted
preliminary reviews to ensure adherence with the Hague Convention and that
sufficient assets exist to proceed. Gerant has not had the resources to
pursue the collection of the judgment in Japan due to the high cost of such an
effort.
(13) Unpaid chapter 11 professional fees are estimated at $220,000.
Unpaid administrative wages during chapter 11 are estimated at $245,000.
Chapter 7 Trustee's fees estimated at 3%; chapter 7 professional fees and
costs of sale estimated at 25%.
-50-
B. CONFIRMATION WITHOUT ACCEPTANCE BY ALL IMPAIRED CLASSES.
The Bankruptcy Code contains provisions for confirmation of a
plan even if the plan is not accepted by all impaired classes,
provided at least one impaired class of claims has accepted it.
These "cramdown" provisions for confirmation of a plan despite the
nonacceptance of one or more impaired classes of claims or
interests are set forth in section 1129(b) of the Bankruptcy Code.
If a class of unsecured claims rejects the Plan, it may still
be confirmed so long as the Plan provides that (i) each holder of a
claim included in the rejecting class receives or retains on
account of that claim property which has as value, as of the
Effective Date, equal to the allowed amount of such claim; or that
(ii) the holder of any claim or interest that junior to the claims
of such class will not receive or retain on account of such junior
claim or interest any property at all. The Debtor believes that
the Plan does not meet this test and therefore the Plan may not be
confirmed if it is rejected by Class 4 or 5 claimants.
If a class of equity security interests rejects the Plan the
Plan may still be confirmed so long as the Plan provides that (i)
each holder of an interest included in the rejecting class receives
or retains on account of that claim property which has a value, as
of the Effective Date, 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, and the value of such interest; (ii) 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. The Debtors believe that the Plan meets this
test with respect to Class 7 Interests, and, therefore, the Plan
can be confirmed even if it is rejected by the holders of Class 7
Interests.
-51-
XIV.
RISK FACTORS
------------
A. The transactions contemplated by the Plan may have tax
consequences for interested parties. Nothing contained in the Plan
or this Disclosure Statement should be construed as advice with
respect to the income tax consequences for acceptance or rejection
of the Plan. Each interested party should review such tax
consequences with its tax advisor.
B. Creditors and Interest holders are cautioned that there
are no assurances regarding the re-listing of the Reorganized
Debtor's securities on NASDAQ or regarding the performance and/or
value of the securities to be issued pursuant to the Plan. The
future price of the stock is subject to numerous factors, such as
stock market conditions, supply and demand factors beyond the
control of the Reorganized Debtor, national economic conditions and
the future performance of the Reorganized Debtor. There can be no
assurances that the Reorganized Debtor's activities will prove
profitable or that future acquisitions or investments will be
successful. Additionally, there can be no assurances concerning
Atlantic's successful operations and its ability to make
distributions on account of the UBIs to be owned by the Reorganized
Debtor.
-52-
XV.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
---------------------------------------------------
Under the Internal Revenue Code of 1986 (the "Internal Revenue
Code"), there are significant federal income tax consequences
associated with the Plan described in this Disclosure Statement.
However, it is not practicable to present a detailed explanation of
all of the federal income tax aspects of the Plan and the following
is only a summary discussion of certain of the significant
consequences.
The tax consequences of the implementation of the Plan to a
creditor receiving securities of the Reorganized Debtor will depend
in part on whether that creditor's present debt Claim constitutes a
"security" for federal income tax purposes. The determination as
to whether the Claim of any particular creditor constitutes a
"security" for federal income tax purposes is complex, and depends
on the facts and circumstances surrounding the origin and nature of
the Claim. Generally, Claims arising out of the extension of trade
credit have been held not to be securities, while corporate debt
obligations evidenced by written instruments with maturities when
issued, of 10 years or more, have generally been held to be
securities. The Debtor expresses no views with respect to whether
the Claim of any particular creditor constitutes a "security" for
federal income tax purposes and urges each creditor to consult his
tax advisor.
-53-
A creditor who receives securities of the Reorganized Debtor
may recognize income or loss with regard to consideration received
in respect of accrued interest attributable to his existing Claim,
and gain or loss on the exchange of the principal of the Claim for
securities.
Under present law, there is substantial uncertainty
surrounding many of the tax consequences. Uncertainty is created,
in part, by the changes made by the Bankruptcy Tax Act of 1980, the
Tax Reform Act of 1984, the Tax Reform Act of 1986 and the Revenue
Reconciliation Act of 1990, certain provisions of which call for
the promulgation of regulations by the Treasury Department which
have not yet been promulgated in final form. In addition, there
are differences in the nature of the Claims of various creditors,
their methods of tax accounting and prior actions taken by
creditors with respect to their Claims. Further, the federal
income tax consequences to any particular creditor may be affected
by a variety of matters. For example, certain types of creditors
(including non-resident aliens and tax-exempt organizations) may be
subject to special rules. The transactions contemplated herein may
also have significant state and local tax consequences. Neither a
ruling from the Internal Revenue Service (the "IRS") nor an opinion
of counsel has been requested with respect to the federal income
tax consequences of the Plan.
ACCORDINGLY, HOLDERS OF CLAIMS AND INTERESTS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THE FEDERAL,
STATE AND LOCAL TAX CONSEQUENCES OF THE PLAN WITH RESPECT TO THEIR
CLAIM OR INTEREST.
-54-
XVI.
STATUS AND RESALE OF SECURITIES TO BE ISSUED PURSUANT TO PLAN
-------------------------------------------------------------
Under Bankruptcy Code section 1145, the original issuance of
the Reorganized Debtor's securities (hereinafter "Securities")
under the Plan will be exempt from the registration on requirements
of the Securities Act of 1933 and applicable state laws requiring
registration of securities. Resale of Securities by a creditor
receiving them directly under the Plan will also be exempt provided
the creditor is not an underwriter. Generally, a creditor will not
be deemed to be an underwriter if it: (1) has not become a
creditor of the Debtor with a view to distribution of any
Securities to be received in exchange for claims under the Plan;
(2) has not offered to sell the Securities for others; (3) has not
offered to buy the Securities from others where that offer is with
a view to their distribution, and under an agreement made in
connection with the Plan; (4) is not an issuer as that term is used
in the Securities Act of 1933. The determination of whether a
particular creditor would be deemed to be an underwriter is
necessarily an individual one, and any creditor considering
reselling Securities under the Plan should consult with its
securities advisor to determine whether it would be an underwriter,
and therefore, ineligible for the exemption described above.
-55-
A creditor who is deemed to be an underwriter may be able
to sell Securities without registration pursuant to the provisions
of Rule 144 under the Securities Act of 1933, which fact may permit
the public sale of Securities received pursuant to the Plan by
underwriters subject to volume limitations and certain other
conditions. Creditors who believe they may be underwriters are
advised to consult their own counsel with respect to the
availability of the exemptions provided by Rule 144.
THE ABOVE DISCUSSION IS INTENDED AS GENERAL INFORMATION
ONLY, AND ANY ENTITY DESIRING TO RESELL ANY SECURITIES RECEIVED BY
IT PURSUANT TO THE PLAN IS URGED TO CONSULT ITS SECURITIES ADVISOR
REGARDING THE AVAILABILITY OF ANY REGISTRATION EXEMPTION.
XVII.
CONCLUSION
----------
The Bankruptcy Court, after notice and hearing, approved this
Disclosure Statement as containing information adequate to permit
holders of Allowed Claims and Allowed Interests that are impaired
under the Plan to make an informed judgment as to whether or not to
accept the Plan. The Debtor believes that the Plan is
-56-
feasible and in the best interests of all persons holding Allowed
Claims and Allowed Interests, and recommends acceptance of the Plan.
DATED: September __, 1996 GERANT INDUSTRIES, INC.
A Nevada Corporation
By:_________________________________
ALFRED JAY MORAN, JR.
President
PRESENTED BY:
ROBINSON, DIAMANT, BRILL & KLAUSNER
A Professional Corporation
By:________________________________
MARTIN J. BRILL
DOUGLAS D. KAPPLER
Attorneys for Debtor
Gerant Industries, Inc.
-57-
DECLARATION OF ALFRED JAY MORAN, JR.
------------------------------------
I, Alfred Jay Moran, Jr. declare as follows:
1. I am the President and Chief Executive Officer of Gerant
Industries, Inc., the chapter 11 Debtor herein. I make this
Declaration in support of the Debtor's Disclosure Statement For
Debtor's Third Amended Plan Of Reorganization attached hereto. I
am over the age of 18 and competent to testify in a court of law.
2. I have personal knowledge of the facts set forth below,
and if called as a witness, I could and would competently testify
to the facts set forth below.
3. At my direction and with my assistance, Robinson,
Diamant, Brill & Klausner, A Professional Corporation, prepared the
attached disclosure statement.
4. All facts and representations in the plan and disclosure
statement are true to the best of my knowledge.
5. The financial information concerning the liquidation
analysis of the Debtor contained in the disclosure statement was,
at my direction, provided by Jerry Burdick, the Debtor's chief
financial officer.
6. To the best of my knowledge, no fact material to a
claimant or equity security holder in voting to accept or reject
the proposed plan has been omitted.
I declare under penalty of perjury under the laws of the
United States of America that the foregoing is true and correct and
that this declaration was executed this ___ day of April, 1996, at
Los Angeles, California.
_______________________________
ALFRED JAY MORAN, JR.
-58-