Download - ZGallerie MidSize Turnaround
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 1
TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Entry form—Turnaround of the Year Award Category Place an “x” in the appropriate category to the left
Person Submitting the Entry
Name Jeffrey W. Dulberg Company Pachulski Stang Ziehl & Jones LLP Address 10100 Santa Monica Blvd. City, State, Zip, Country Los Angeles, CA 90004 Telephone number (310) 277-6910 Fax number (310) 201-0760 E-mail address [email protected]
Nominee(s) If same as above, indicate “Self Nomination” on the name line below. To the extent applicable, please nominate all contributing team members: at least one attorney, one financial advisor, one turnaround manager, one company leader and/or one investment banker. Please note individual contributions made by each of the contributing team members, and explain why that member's contributions to the team were award-worthy. TMA membership is a requirement for nomination of each team member. (To check current TMA membership status, please visit www.turnaround.org/Default.aspx.)
Name Jeffrey W. Dulberg Company Pachulski Stang Ziehl & Jones LLP Address 10100 Santa Monica Blvd. City, State, Zip, Country Los Angeles, CA 90004 Telephone number (310) 277-6910 Fax number (310) 201-0760 E-mail address [email protected]
Name Teddy M. Kapur Company Pachulski Stang Ziehl & Jones LLP Address 10100 Santa Monica Blvd. City, State, Zip, Country Los Angeles, CA 90004 Telephone number (310) 277-6910 Fax number (310) 201-0760 E-mail address [email protected]
Name Thomas S Paccioretti Company Broadway Advisors, LLC Address 511 30th Street City, State, Zip, Country Newport Beach, CA, 92663 Telephone number (213) 625-2584 Fax number (213) 947-1833 E-mail address [email protected]
Large company Revenue of $300 million USD or greater at onset of turnaround X Mid-size company Revenue between $300 million and $50 million USD at onset of turnaround Small company Revenue of $50 million USD or less at time of transaction International company Company has significant cross-border operations Pro Bono company No payment for services for the turnaround
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 2
Nominee(s) (cont’d.)
Name Benjamin F. Cary Company Broadway Advisors, LLC Address 511 30th Street City, State, Zip, Country Newport Beach, CA, 92663 Telephone number (213) 625-2584 Fax number (213) 947-1833 E-mail address [email protected]
Name Robert L. LeHane Company Kelley Drye & Warren LLP Address 101 Park Avenue City, State, Zip, Country New York, NY 10178 Telephone number (212) 808-7573 Fax number (212) 808-7897 E-mail address [email protected]
Reorganized Company Information
Company Name Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena, CA, 90249 Contact name Michael Zeiden Contact telephone (310) 630-1211 Contact E-mail [email protected] Dun & Bradstreet Rating -- SIC Code 5719; 5999 Ownership: Indicate NYSE, NASD, AMEX, or Private. List ticker number if applicable.
Private
Next page for additional questions and information
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 3
Key Players Using the enclosed “Key Players Contact Sheet,” please list the contact information requested for the following key players. This contact sheet is a required component of the entry. Members of the awards committee may contact and interview these key players.
CEO COO CRO Chairman of the Board CFO Lead Banker Primary Attorney Primary Financial Advisor Primary Accountant Creditors Committee Counsel Chair of the Creditors Committee Debtors Counsel Lender Major Unsecured Creditor
Narrative Descriptions Each response below should not exceed a maximum of 750 words per question.
1. Describe the company PRIOR TO reorganization. Do not include details about the turnaround. That information will be discussed separately.
Z Gallerie is a family-owned retailer of home furnishings and decorative accessories that was founded by two brothers and a sister in 1979 as a small poster shop in Sherman Oaks, California. Over the next 29 years, they enjoyed steady growth. By 2006 there were 86 locations, 1,000 employees, $236M in annual revenue and $6.4M in EBITDA. In November 2008, the Debtor renewed its long-standing revolving secured financing arrangement with City National Bank that provided the Debtor with a line of credit and other accommodations for financing up to $13 million until January 31, 2009 and $10 million thereafter until April 1, 2009, when the outstanding amount became due and payable (the “Revolving Credit Facility”). As of the Petition Date, April 10, 2009, the Debtor had approximately $25 million of priority and general unsecured obligations that were held by approximately 134,000 creditors. The Debtor owed approximately $1.6 million of unpaid prepetition priority taxes (including payroll withholding, FUTA and sales taxes) to 55 taxing authorities. 16,275 customers had deposits of approximately $4.4 million (of which amount $3.5 million had priority status), and customers held approximately 118,000 gift cards with an outstanding balance of $5.9 million (all of which had priority status). Moreover, the Debtor had no means to identify the customers that held gift cards.
2. What were the company’s problems leading up to the involvement of a turnaround team? As the housing boom turned to bust, Z Gallerie (the “Debtor”) did a belly-flop and in 2008 posted a EBITDA loss of $4.7M, a (173)% swing from 2006. Competitive pricing pressures in the Debtor’s business sector – retail home furnishings – due to wide-spread promotional activity and “going out of business” sales, the maturity of the Revolving Credit Facility and the continued decline of the economy in general put further pressure on the Debtor’s business, making it necessary for it to seek protection under chapter 11 of the Bankruptcy Code. The Debtor engaged an investment banking firm, The Sage Group, LLC and Sage Partners Securities, LLC (“Sage”), in March, 2009 to assist the Debtor pursue a sale of substantially all of its assets as a going concern. Sage contacted more
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 4
than 114 parties regarding a potential sale transaction, and indications of interest and letters of intent were submitted by only two potential going concern buyers and two liquidators at valuations below expectations. Sage’s efforts revealed that 363 sale offers left no recovery for general unsecured creditors nor did a straight liquidation – neither was surprising. There had to be a better solution.
3. What actions did the turnaround team take? The Z Gallerie turnaround team performed a perfect Triple Lindy: Rodney Dangerfield’s über difficult high dive in the film Back to School. Confirm a plan of reorganization for a 56-store retail chain, save 865 jobs, and recover 50 cents on the dollar for the unsecured creditors. In less than six months. “Impossible – retail 11s are either sold or liquidated, period” they said. See Circuit City, Linen & Things, Whitehall Jewelers. Z Gallerie was different. Under the direction of Debtor's professionals, 26 underperforming locations and an East Coast warehouse were closed BEFORE a Chapter 11 filing. By creatively utilizing cost-effective in-house resources to monetize inventory, vacate premises and sell assets, Z Gallerie gained staying power and a stronger negotiating position to restructure its balance sheet AND improve its income statement metrics through a bankruptcy filing. Z Gallerie faced three challenges during the bankruptcy: (1) obtaining product and exiting bankruptcy before the holiday season, (2) obtaining exit financing, and (3) working with an uninterested incumbent lender. Seasonal inventory needed to be ordered, delivered and stocked before Thanksgiving. Both domestic and off-shore vendors were hungry to ship but were wary to give credit. The Company needed to conserve its cash to satisfy administrative claims upon the planned September, 2009 exit. No cash, no exit. The Team and Z Gallerie developed a creative plan to assure its vendors of the Company’s long term prospects. They brought vendors “under the tent” and provided unprecedented transparency and access to the company’s plans and performance. Regular meetings and conference calls updated vendors on the Debtor’s performance and provided a forum for Q&A. Management visited vendors’ facilities and the reorganization plan was discussed openly and in great detail. The vendors came around. Credit was extended. Cash was conserved. The prevailing sentiment in the Spring and Summer of 2009 for obtaining financing for a home furnishings retailer exiting bankruptcy was “don’t even think about it.” The current lender was not interested and thrice replaced key contacts, wrecking havoc on exit timing. In response, the Team identified potential new lenders and began the lender/borrower dance. The Team built the story: store closures completed, creditors support plan, rent concessions negotiated, meeting projections, plenty of collateral. What’s not to like? Potential lenders balked at gift card and deposits liabilities. They were showed that the liability was measurable and moderate. Still, lenders took larger reserves. The Team strategized with ownership to assume the $12M in gift card and deposit liabilities from 134,000 claimants, priority claims that if not assumed would be paid before the unsecured creditors. Inventory valuations were argued despite current data from recently closed stores. The inventory that would fuel availability was on the water and not scheduled to land until AFTER the company exited bankruptcy. More availability was needed. And then the unexpected happened. The new lender now required that all landlords sign a rights waiver or it would reserve rights against the inventory value of non-compliant locations. This was a serious challenge as 80% of the inventory was at the store level. As administrative expenses mounted, increasing the cash needed to exit, the Team worked diligently with counsel to get the waivers, but not fast enough. The exit was delayed a month, more availability was required, again. Needing a miracle, the Team made the argument to the owners that as landlords of the HQ/warehouse - why not pledge the real estate? Brilliant. The last financing hurdle was cleared and the Z Gallerie reorganization was completed.
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 5
4. What was the outcome of the turnaround in relation to the actions discussed in Number 3? Z Gallerie partnered with its professionals: counsel to landlords, debtor and committee counsels, financial advisors and real estate advisors, to negotiate rent relief and prepare a new business model based on current economic realities. The Team created a climate of trust and cooperation needed to craft an out-of-the-box solution rarely used in retail cases: new value, continued operations, and a 50% recovery to the $16.1M in unsecured claims. In short, a plan of reorganization. A Triple Lindy. For six months Z Gallerie worked diligently with all parties and hit every mark. The plan was approved by 97.7% of the unsecured class. Z Gallerie emerged from Chapter 11 and delivered a 2009 EBITDA of $5.2M, a 211% improvement, a perfect 10. This deal (1) saved 865 jobs and provided a platform to create more jobs, (2) cost effectively refocused Z Gallerie’s geographical footprint, (3) improved business processes, gross margins and increased EBITDA by 200% to $5M, and (4) improved customer service and satisfaction. The successful reorganization helped recapitalize Z Gallerie’s balance sheet and eliminate more than $40 million in long-term liabilities through the surgical rejection of unfavorable leases, closure of an East Coast warehouse and the reduction of lease costs at remaining locations. With the Team’s assistance, Z Gallerie refocused its sourcing, merchandising and pricing efforts to restore gross margins to historical levels (better than 50%) and reduced mark-down dependency. Along with overhead reductions rationalized to the new footprint, these process improvements contributed significantly to the bottom line. This deal left Z Gallerie in the hands of its original owners, something that vendors and landlords found important - they now all have skin in the game. The essence of the Company remains. Its hip but accessible lifestyle continues under the guidance of Carole Malfatti, Z Gallerie’s chief merchandising officer. Carole was named one of the 50 most powerful people in fashion and design in Home Furnishings News’ “Fashion 50 List” outranking Ralph Lauren, Tommy Hilfiger and Vera Wang. Without this turnaround there would be no retailer to fill that niche. Because of this turnaround, Z Gallerie has retained its unique look and feel and special connection to its customers. 5,000 Facebook fans are connected to their lifestyle retailer of choice. The company has continued all of its principal merchandising and customer affinity programs, including its private label credit card used to extend responsible credit to an underserved market. And Z Gallerie continues to enhance its website and social networking capabilities, Twitter and RSS, to inspire its customers with home and lifestyle visions. Without this turnaround, there’s another 56 “dark” retail locations in prime regional malls, another 56,000 square feet of vacant retail space, 865 people added to the unemployment rolls, job losses at more than 600 long-time vendors, no recovery for the unsecured creditors and a consumer left with pedestrian options to improve their living style and attitude. Luckily, and with an impressive collaboration between many interested parties, the turnaround was a success.
5. If applicable, submit a copy of any final disclosure statement and confirmed plan of reorganization, and include a key point summary, such as recovery to each class.
A copy of the confirmed Disclosure Statement and Chapter 11 Plan of Reorganization is enclosed as Exhibit A.
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 6
SUMMARY OF CLAIMS AND INTERESTS UNDER THE PLAN
CLASS CLAIM/INTEREST TREATMENT ESTIMATED
AGGREGATE
AMOUNT
ESTIMATED
PERCENTAGE
RECOVERY
n/a Administrative Claims
Allowed Administrative Claims will be paid in full on the later of the Effective Date and the date on which such Administrative Claim becomes an Allowed Claim.
$3,781,020.00 100%
n/a Priority Tax Claims
Allowed Priority Tax Claims will be paid in equal monthly installments with the first installment being made on the Effective Date, or when the Priority Tax Claim becomes an Allowed Priority Tax Claim, whichever is later, and last installment being made on April 10, 2014 as required by 11 U.S.C. § 1129(a)(9)(C).
$0—The Debtor believes that all Priority Tax Claims have been paid pursuant to previous order of the Court
100%
1 Reclamation Claims An Allowed Reclamation Claim will be paid in full on the later of the Effective Date and the date on which such Reclamation Claim becomes an Allowed Claim.
$24,917.46 100%
2 Priority Non-Tax Claims –consisting of employee vacation claims and other Unsecured Claims other than Administrative Claims and Priority Tax Claims that are entitled to priority in payment pursuant to section 507(a) of the Bankruptcy Code.
The Debtor believes that all such vacation claims are being or have been satisfied by the Debtor’s honoring its prepetition policies in the ordinary course of its business pursuant to previous Order of the Court.
To the extent any Allowed Priority Non-Tax Claims exist, the Debtor shall pay the Allowed amount of such Claims on the later of the Effective Date and the date such Claim becomes an Allowed Claim.
$234,421.65 100%
3 CNB Secured Claim The CNB Secured Claim will be paid in full on the later of the Effective Date and the date on which such CNB Secured Claim becomes an Allowed Claim.
$8,531,000.00 100%
4 Other Secured Claims—consisting of all Secured Claims other than the CNB Secured Claim.
The Debtor is not aware of any Other Secured Claims.
$0, none known 100%
5 General Unsecured Claims—consisting of all Claims that are not classified in another Class under the Plan
Subject to the terms of the Subordination Agreement and the Escrow Agreement, each Holder of an Allowed General Unsecured Claim will receive a pro-rata share, based on the amount of the Allowed General Unsecured Claim, of $8.045 million in cash (i.e., the Maximum General Unsecured Distribution), less the amount required to fund the Post-Effective Date Committee Reserve, paid in installments, without interest, as follows: (1) $3.25 million on
$16,107,017.00 50%
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 7
January 1, 2010, (2) $3.25 million on January 1, 2011 and (3) $1.545 million on January 1, 2012; provided, however, if the Cash and inventory on the Effective Date exceeds the amounts set forth in the Plan Cash Flow Projections, an amount equal to 50% of such excess shall be held in trust and shall be paid on a pro rata basis with the January 1, 2010 payment and deducted from the January 1, 2012 payment. The Allowed General Unsecured Claims are secured by a lien in the amount of $8.045 million against all of the Reorganized Debtor’s assets that is junior in priority only to any lien securing the Senior Debt and cannot be enforced in any manner whatsoever until such time as the Senior Debt is Paid in Full; provided further, that neither the lien securing the Senior Debt nor the lien securing the Maximum General Unsecured Distributions shall attach to the Reorganized Debtor’s leases, leasehold interests or improvements (i.e., such liens shall attach only to the proceeds of the Reorganized Debtor’s leases and leasehold interests).
6 Insider Unsecured Claims—Unsecured Claims held by the Zeidens
Each Holder of an Allowed Insider Unsecured Claim will receive a pro-rata share of $1.705 million in cash to be distributed only after all distributions to the Holders of Allowed Class 5 Claims have been made. The payment of interest on Allowed Insider Unsecured Claims will be deferred until all Plan Distributions have been made to Holders of Allowed Class 5 Claims.
$3,410,000.00 50%
7 All Interests—Common Stock in Debtor
Common stock in Debtor is cancelled. Holders of Allowed Interests will receive on account of their New Equity Contributions 100% of the stock of the Reorganized Debtor, with each Insider receiving one-third of the stock.
N/A N/A
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 8
TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Key Players Contact Sheet (Indicate “N/A” for positions that are not applicable.) You are strongly encouraged to submit a statement from a representative of each key constituency in the case—e.g., lenders, unsecured creditors, equity holders—to enable judges to better understand how the turnaround was viewed by the constituents affected. CEO
Name Joseph Zeiden Company Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena/CA/90249 Telephone number (310) 630-1200 Fax number (310) 527-2955 E-mail address [email protected]
COO
Name N/A Company Address City, State, Zip, Country Telephone number Fax number E-mail address
CRO
Name N/A Company Address City, State, Zip, Country Telephone number Fax number E-mail address
Chairman of the Board
Name Michael Zeiden Company Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena/CA/90249 Telephone number (310) 630-1211 Fax number (310) 527-2955 E-mail address [email protected]
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 9
TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central
Key Players Contact Sheet–Page 2 CFO
Name Michael Zeiden Company Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena/CA/90249 Telephone number (310) 630-1211 Fax number (310) 527-2955 E-mail address [email protected]
Lead Banker
Name Frederick Schmidtt Company The Sage Group Address 11111 Santa Monica Boulevard City, State, Zip, Country Los Angeles/CA/90025 Telephone number (310) 478-7899 Fax number (310) 478-6619 E-mail address [email protected]
Primary Attorney
Name Jeffery Dulberg Company Pachulski Stang Ziehl and Jones, LP Address 10100 Santa Monica Boulevard City, State, Zip, Country Los Angeles/CA/90067 Telephone number (310) 772-2355 Fax number (310) 201-0760 E-mail address [email protected]
Primary Financial Advisor
Name Thomas S Paccioretti Company Broadway Advisors, LLC Address 511 30th Street City, State, Zip, Country Newport Beach/CA/92663 Telephone number (213) 625-2584 Fax number (213) 947-1833 E-mail address [email protected]
Primary Accountant
Name Ronald J. Friedman Company Stonefield Josephson Address 2049 Century Park East, Suite 400 City, State, Zip, Country Los Angeles, CA 90067 Telephone number (310) 453-9400 Fax number (310) 453-1187 E-mail address [email protected]
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 10
TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central
Key Players Contact Sheet–Page 3
Creditors Committee Counsel
Name Robert L. LeHane Company Kelley Drye & Warren LLP Address 101 Park Avenue City, State, Zip, Country New York/NY/10178 Telephone number (212) 808-7573 Fax number (212) 808-7897 E-mail address [email protected]
Chair of the Creditors Committee
Name Ron Tucker Company Simon Property Group, Inc. Address 225 W. Washington Street City, State, Zip, Country Indianapolis, IN 46204 Telephone number (317) 263-2346 Fax number (317) 263-7901 E-mail address [email protected]
Debtors Counsel
Name Jeffery Dulberg Company Pachulski Stang Ziehl and Jones, LLP Address 10100 Santa Monica Boulevard City, State, Zip, Country Los Angeles/CA/90067 Telephone number (310) 772-2355 Fax number (310) 201-0760 E-mail address [email protected]
Lender
Name Robert A. Willner, Esq. Company Buchalter Nemer, counsel to Wells Fargo, N.A. Address 1000 Wilshire Blvd., Suite 1500 City, State, Zip, Country Los Angeles, CA 90017-2457 Telephone number (213) 891-0700 Fax number (213) 630-5607 E-mail address [email protected]
Major Unsecured Creditor
Name Ivan Gold Company Allen Matkins Leck Gamble Mallory & Natsls LLP,
counsel to Federal Realty Trust Investment Address Three Embarcadero Center, 12th Floor City, State, Zip, Country San Francisco/CA/94111-4074 Telephone number (415) 837-1515 Fax number E-mail address [email protected]
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org
TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Information Release Form Questions or concerns regarding this release may be directed to Donna Steigerwald at 1-312-242-6040 or [email protected]. Please note: If the person completing the entry form and the nominee are not the same person, each person must submit an information release form. To the best of my knowledge, the information provided on the entry form is true and complete. I understand that all financial information shall remain confidential unless I agree to its release. By submitting this entry, I acknowledge that I accept the Awards Committee’s decision as final. If I am selected as an award recipient, I hereby authorize the use of the following (in connection with the TMA Awards Program): my name; my company/organization name; non-financial information; photographs; video and audio recordings of myself or others related to the award from the awards ceremony or an alternate source. I agree that no compensation shall be due to me or my company for such usage. X By placing an “x” in the box to the left and providing my name and the date below, I
indicate my understanding and compliance with the terms of this information release. Name: Jeffrey Dulberg Date: May 3, 2010 Award category (Turnaround or Transaction): Turnaround of the Year – Midsize Company Award entry (“Nominee for Nominated Company”): Chapter 11 Reorganization of Z Gallerie
Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org
TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Key Players Confirmation Letter The award entry must contain at least two completed Key Players Confirmation Letters supporting the nomination from two of the unrelated key parties in the transaction. The letters must be submitted in this provided format. Key parties are: CEO, COO, CRO, Chairman of the Board, CFO, Lead Banker, Primary Attorney, Primary Financial Advisor, Primary Accountant, Creditors Committee Counsel, Chair of the Creditors Committee, Debtors Counsel, Lender, or a Major Unsecured Creditor.
Nominated company: ZGallerie Award category: Turnaround of the Year – Mid-size Company
I have reviewed the nomination of the company listed above for the TMA award category listed above, and I fully support the nomination. My role in this turnaround/transaction was as:
Please place a check next to the appropriate descriptor: CEO COO CRO Chairman of the Board
CFO Lead Banker Primary Attorney Primary Financial Advisor Primary Accountant Creditors Committee Counsel Chair of the Creditors Committee
X Debtors Counsel Lender Major Unsecured Creditor
I was and am aware of the many challenges and circumstances of the turnaround/transaction and that the nominee was the principal architect and/or driving force for this turnaround/transaction. If any member of the TMA Awards Committee has additional questions or would like to discuss this nomination further, I am willing to be contacted.
X By placing an “x” in the box to the left and providing my name and the date below, I indicate my signature of this letter.
Printed name: Jeffrey Dulberg Date: May 3, 2010
X By placing an “x” in the box to the left and providing my name and the date below, I indicate my permission
for TMA to use this application for academic research in its efforts to enhance the practice of corporate renewal.
Printed name: Jeffrey Dulberg Date: May 3, 2010
Z Gallerie Historical Financial Statements (000's)Interim Period Fiscal Years Ended December 31,
3 Months Certified Certified Certified Projected3/31/2010 Year: 2007 Year: 2008 Year: 2009 Year: 2010
Sales - Gross 30,800$ 223,800$ 195,249$ 133,000$ 121,700$ Returns & Allowances - - - - -
Sales - Net 30,800$ 223,800$ 195,249$ 133,000$ 121,700$ Cost of Goods Sold 13,200 106,142 91,800 67,300 60,200
Gross Profit 17,600$ 117,658$ 103,449$ 65,700$ 61,500$ Gross Profit, % 57.14% 52.57% 52.98% 49.40% 50.53%
Operating Expenses 13,900 116,940 105,700 60,200 56,060 Operating Expenses, % 45.13% 52.25% 54.14% 45.26% 46.06%
Operating Profit 3,700$ 718$ (2,251)$ 5,500$ 5,440$ Operating Profit, % 57.14% 52.57% 52.98% 49.40% 50.53%
Interest Expense 90 650 500 400 300 Other Income (Expense) 60 - - (6,000) - Other Income (Expense) 30 - - - -
Pre-Tax Income 3,700$ 68$ (2,751)$ (900)$ 5,140$
Plus: Depr & Amor. - - - - - Net Advances (Payments) on Debt (1,000) - - - - Less: CAPX - - - - - Other (see attachment) (2,500) - - - - Net Cash Flow 200$ 68$ (2,751)$ (900)$ 5,140$
Balance Sheet - AssetsCash & Equivalents 5,800$ 5,300$ 9,860$ 7,500$ 5,000$ Accounts Receivable 1,100 - 200 - - Inventory 13,900 30,800 26,300 14,200 12,600 Prepaid Expenses 300 500 700 - - Deferred Income Taxes - - - - - Other Current Assets - - 100 1,000 - Current Assets 21,100$ 36,600$ 37,160$ 22,700$ 17,600$ PP&E - NBV 20,037 43,700 41,300 22,200 21,000 Intangibles - - - - - Other Assets 3,800 1,000 1,000 3,800 17,000 Other Assets 900 - - - - Other Assets - - - - 400 Total Assets 45,837$ 81,300$ 79,460$ 48,700$ 56,000$
Balance Sheet - LiabilitiesAccounts Payable 6,000$ 21,000$ 14,900$ 15,000$ 10,000$ N/P Bank - - - - - Accrued/Other Current 18,300 10,500 11,000 6,700 2,000 Income Taxes Payable - - - - - Current Portion LTD - 4,500 8,500 2,950 3,000 Current Liabilities 24,300$ 36,000$ 34,400$ 24,650$ 15,000$ Long-Term Debt - - - 4,500 3,000 Deferred Taxes - - - - - Intercompany Loans 1,700 1,570 3,450 2,000 2,000 Other Liabilities 16,500 38,000 40,000 18,000 30,000 Other Liabilities 1,337 730 810 2,550 - Total Liabilities 43,837$ 76,300$ 78,660$ 51,700$ 50,000$ Book Net Worth 2,000 5,000 800 (3,000) 6,000 Total Liab. & NW 45,837$ 81,300$ 79,460$ 48,700$ 56,000$
Book Net Worth 2,000 5,000 800 (3,000) 6,000 Additions - - - - - Subtractions - - - - - Adj.-Tangible N.W. 2,000$ 5,000$ 800$ (3,000)$ 6,000$
Key ratios and metricsWorking Capital (3,200)$ 600$ 2,760$ (1,950)$ 2,600$ Current ratio 0.9 1.0 1.1 0.9 1.2 Debt to Equity 0.9 1.2 14.9 (3.2) 1.3 Number of employees - - - - Sales per employee NA NA NA NA NADays Accounts Receivable 12.85714286 0 0.368759891 0 0Days Inventory 162.4675325 49.54423592 48.49192569 38.43609023 37.27198028Days Accounts Payable 163.6363636 71.22533964 58.43137255 80.23774146 59.80066445Revenue growth -12.8% -31.9% -8.5%Return on Invested Capital 0 0 0 0 0Order Backlog -$ -$ -$ -$ -$
ATTACHMENTS Exhibit A Second Amended Disclosure Statement and Chapter 11 Plan of Reorganization
for Z Gallerie (Dated August 13, 2009) Exhibit B Recent Awards and Distinctions Exhibit C New Chapter -- Z Gallerie, Unlike Many Home Furnishings Chains, Has Bounced
Back, Steve McLinden, Retailing Today, March, 2010
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98002-002\DOCS_LA:206319.9
Jeffrey W. Dulberg (CA Bar No. 181200) Scotta E. McFarland (CA Bar No. 165391) Teddy M. Kapur (CA Bar No. 242486) PACHULSKI STANG ZIEHL & JONES LLP 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100 Telephone: 310/277-6910 Facsimile: 310/201-0760 E-mail: [email protected] [email protected] [email protected]
Attorneys for Z Gallerie, Debtor and Debtor in Possession
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re: Z GALLERIE, Debtor. Fed. Tax I.D. No. 95-3733816
Case No.: 2-bk-09-18400-VZ Chapter 11 SECOND AMENDED DISCLOSURE STATEMENT AND CHAPTER 11 PLAN OF REORGANIZATION FOR Z GALLERIE (DATED AUGUST 13, 2009) Disclosure Statement Approval Hearing Date: August 6, 2009 Time: 1:30 p.m. Place: Courtroom 1368 Edward R. Roybal Federal Building 255 East Temple Street Los Angeles, California 90012 Judge: Vincent P. Zurzolo Plan Confirmation Hearing Date: October 1, 2009 Time: 1:30 p.m. Place: Courtroom 1368 Edward R. Roybal Federal Building 255 East Temple Street Los Angeles, California 90012 Judge: Vincent P. Zurzolo
Case 2:09-bk-18400-VZ Doc 315 Filed 08/13/09 Entered 08/13/09 19:58:25 Desc Main Document Page 1 of 77
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TABLE OF CONTENTS
Page I INTRODUCTION......................................................................................................................... 1
II DISCLAIMER ............................................................................................................................. 5
III OVERVIEW OF THE PLAN..................................................................................................... 7
IV DESCRIPTION OF THE DEBTOR ........................................................................................ 14
A. Description of the Debtor�’s Past and Future Business........................................... 14
B. The Debtor�’s Recent Financial History ................................................................. 15
C. The Debtor�’s Corporate Structure and Ownership. ............................................... 16
D. The Debtor�’s Principal Pre-Petition Secured Indebtedness. .................................. 16
E. The Debtor�’s Other Indebtedness. ......................................................................... 17
F. The Debtor�’s Management .................................................................................... 18
G. Marketing Efforts................................................................................................... 19
H. Amendments to Non-Residential Real Property Leases........................................ 20
V THE DEBTOR�’S CHAPTER 11 CASE.................................................................................... 20
A. Events Preceding the Chapter 11 Filings ............................................................... 20
B. Events During the Chapter 11 Case ....................................................................... 20
1. Retention of Debtor�’s Professionals .......................................................... 20
2. Appointment of Committee and Retention of Committee Professionals... 21
3. Use of Cash Collateral ............................................................................... 21
4. Rejection of Executory Contracts and Unexpired Leases.......................... 23
5. Summary of Other First Day Orders.......................................................... 23
6. The Claims Bar Dates ................................................................................ 24
C. Investigation and Analysis of Causes of Action. ................................................... 25
VI THE PLAN OF REORGANIZATION .................................................................................... 25
A. Treatment of Unclassified Claims Under the Plan ................................................ 25
1. Treatment of Administrative Claims ......................................................... 25
2. Bar Dates for Administrative Claims......................................................... 26
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3. Treatment of Priority Tax Claims .............................................................. 26
B. Classification and Treatment of Claims and Interests Under the Plan .................. 27
1. Class 1 (Reclamation Claims).................................................................... 28
2. Class 2 (Priority Non-Tax Claims). ........................................................... 28
3. Class 3 (CNB Secured Claim). .................................................................. 29
4. Class 4 (Other Secured Claims). ................................................................ 29
5. Class 5 (General Unsecured Claims). ........................................................ 31
6. Class 6 (Insider Unsecured Claims)........................................................... 32
7. Class 7 (Interests)....................................................................................... 32
C. Executory Contracts and Unexpired Leases .......................................................... 33
1. Assumption of Executory Contracts and Leases ....................................... 33
2. Rejection of Executory Contracts or Leases.............................................. 34
D. The Source of Money to Pay Claims. .................................................................... 34
E. Distribution of Property Under the Plan. ............................................................... 35
1. Collateral and Disbursement Agent ........................................................... 35
2. Timing of Distributions.............................................................................. 36
3. Compliance with Tax Requirements.......................................................... 36
4. Manner of Cash Payments ......................................................................... 36
5. Setoffs ........................................................................................................ 36
6. De Minimis Distributions........................................................................... 37
7. No Distributions With Respect to Disputed, Contingent or Unliquidated Claims .................................................................................. 37
8. Delivery of Distributions ........................................................................... 38
9. Undeliverable or Unclaimed Distributions ................................................ 38
F. Objections to and Estimation of Claims ................................................................ 39
G. Litigation................................................................................................................ 40
1. Existing and Potential Causes of Action.................................................... 40
2. Preservation of All Litigation and Causes of Action Not Expressly Settled and Released .................................................................................. 42
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H. The Releases .......................................................................................................... 44
VII MODIFICATION AND REVOCATION OF THE PLAN; CONDITIONS TO CONFIRMATION AND THE EFFECTIVE DATE; REQUEST TO CRAM-DOWN PLAN ................................................................................................................................. 45
A. Modification of the Plan ........................................................................................ 45
B. Revocation of the Plan. .......................................................................................... 46
C. Conditions Precedent to Confirmation................................................................... 46
D. The Effective Date ................................................................................................. 46
E. Conditions to the Effective Date............................................................................ 47
F. Confirmation Request ............................................................................................ 47
G. Effect of Failure of the Plan to Become Effective................................................. 47
VIII EFFECT OF CONFIRMATION OF THE PLAN ................................................................. 47
A. Binding Effect of Confirmation ............................................................................. 47
B. Revesting of the Property in the Reorganized Debtor ........................................... 48
C. Good Faith ............................................................................................................. 48
D. Authority to Implement Plan ................................................................................. 48
E. Discharge and Injunction ....................................................................................... 48
F. Post-Confirmation Effectiveness of Proofs of Claim ............................................ 49
G. Post-Effective Date Committee ............................................................................. 49
H. Reorganized Debtor�’s Reports to the Post-Effective Date Committee.................. 51
IX OTHER PLAN PROVISIONS................................................................................................. 51
A. Corporate Action.................................................................................................... 51
B. Reorganized Debtor�’s Board of Directors ............................................................. 52
C. Further Assurances................................................................................................. 52
D. Payment of Statutory Fees ..................................................................................... 52
E. Services by and Fees for Professionals.................................................................. 52
1. Prior to the Effective Date. ........................................................................ 52
2. From the Effective Date............................................................................. 52
F. Post-Confirmation Status Reports.......................................................................... 52
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G. No Recourse........................................................................................................... 53
H. Severability of Plan Provisions.............................................................................. 53
I. Entry of a Final Decree .......................................................................................... 53
J. Governing Law ...................................................................................................... 54
K. Retention of Jurisdiction ........................................................................................ 54
L. Successors and Assigns.......................................................................................... 56
M. Saturday, Sunday, or Legal Holiday ...................................................................... 56
N. Headings ................................................................................................................ 56
X CERTAIN RISK FACTORS TO BE CONSIDERED .............................................................. 56
A. Risks that the Debtor Will Have Insufficient Cash for the Plan to Become Effective................................................................................................................. 56
B. Bankruptcy Risks ................................................................................................... 56
C. Business Risks ....................................................................................................... 57
1. Industry Conditions.................................................................................... 58
2. Competition................................................................................................ 58
3. Seasonality ................................................................................................. 58
4. Operating.................................................................................................... 58
XI VOTING PROCEDURES AND REQUIREMENTS .............................................................. 59
A. Parties in Interest Entitled to Vote ......................................................................... 59
B. Classes Impaired and Entitled to Vote Under the Plan.......................................... 60
C. Vote Required for Acceptance by Classes of Claims ............................................ 61
XII CONFIRMATION OF THE PLAN........................................................................................ 61
A. Confirmation Hearing ............................................................................................ 61
B. Who May Object to Confirmation of the Plan....................................................... 61
C. Requirements for Confirmation of the Plan........................................................... 62
1. Acceptance................................................................................................. 62
2. Fair and Equitable Test .............................................................................. 63
3. Feasibility................................................................................................... 64
4. �“Best Interests�” Test .................................................................................. 65
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XIII FINANCIAL INFORMATION ............................................................................................. 66
XIV ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN ..... 67
XV CERTAIN U.S. FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PLAN ................................................................................................................................. 67
A. Federal Income Tax Consequences to the Creditors.............................................. 68
B. Tax Consequences to the Debtor ........................................................................... 68
XVI RECOMMENDATION......................................................................................................... 69
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Index of Exhibits to Z Gallerie Plan and Disclosure Statement
Exhibit “A” - Definitions for capitalized terms
Exhibit “B” - List of Claims that are deemed Allowed for voting purposes because (i) they are listed on the Bankruptcy Schedules and are not shown as disputed, contingent or unliquidated or (ii) a proof of Claim was timely filed to which no objection has yet been filed
Exhibit “C” - Plan Cash Flow Projections
Exhibit “D” - Three types of financial documents, including balance sheets, cash flow statements and income and expense statements for the period including the most recent twelve-month calendar year and all months subsequent thereto
Exhibit “E” - List of the officers of the Reorganized Debtor and the proposed salary effective as of the Effective Date for each
Exhibit “F” - List of the leases of its retail store locations and other designated agreements the Debtor seeks to assume
Exhibit “G” - Liquidation Analysis
Exhibit “H” - List of the Debtor's Assets as of May 31, 2009
Exhibit “I” - List of the liabilities as of May 31, 2009
Exhibit “J” - Schedule of Source of Funds
Exhibit “K�” Exit Financing Term Sheet Agreement between Debtor and Wells Fargo, National Association.
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98002-002\DOCS_LA:206319 98002-002\DOCS_LA:206319.9 vii
IMPORTANT DATES Date by which Ballots must be received: September 18, 2009, at 5:00 p.m. Pacific Time Date by which objections to Confirmation of the Plan must be filed and served: September 18,
2009, at 5:00 p.m. Pacific Time Hearing on Confirmation of the Plan: October 1, 2009, at 1:30 p.m. Pacific Time. 11 U.S.C. § 1125(b) PROHIBITS SOLICITATION OF AN ACCEPTANCE OR REJECTION OF THE PLAN UNLESS A COPY OF THE PLAN, OR A SUMMARY THEREOF, IS ACCOMPANIED OR PRECEDED BY A COPY OF A DISCLOSURE STATEMENT APPROVED BY THE BANKRUPTCY COURT. THIS PROPOSED DISCLOSURE STATEMENT HAS NOT YET BEEN APPROVED BY THE BANKRUPTCY COURT, AND, THEREFORE, THE FILING AND DISSEMINATION OF THIS PROPOSED DISCLOSURE STATEMENT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED AS, AN AUTHORIZED SOLICITATION PURSUANT TO 11 U.S.C. § 1125 AND RULE 3017 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE. NO SUCH SOLICITATION WILL BE MADE EXCEPT AS AUTHORIZED PURSUANT TO SUCH LAW AND RULES.
Jeffrey W. Dulberg Scotta E. McFarland Teddy M. Kapur PACHULSKI STANG ZIEHL & JONES LLP 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100 Telephone: 310/277-6910 Counsel to Debtor and Debtor in Possession
Dated: August 13, 2009
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I
INTRODUCTION
Z Gallerie, debtor and debtor in possession herein, filed a bankruptcy petition under chapter
11 of the Bankruptcy Code on April 10, 2009. The document you are reading is both the Debtor�’s
Plan of Reorganization and the Disclosure Statement. The Plan sets forth the proposal of how the
Debtor intends to treat the claims of the Debtor�’s Creditors and Interest Holders. The Disclosure
Statement describes the assumptions that underlie the Plan and how the Plan will be executed. The
Plan and Disclosure Statement contain a number of capitalized terms. The definitions for these
capitalized terms, unless otherwise defined herein, are contained in Exhibit “A” attached hereto.
The Bankruptcy Court has scheduled a hearing on confirmation of the Plan for
October 1, 2009 at 1:30 p.m. Pacific Time at the United States Bankruptcy Court for the
Central District of California, Los Angeles Division, Courtroom 1368, 255 East Temple Street,
Los Angeles, California. Any objections to confirmation of the Plan must be in writing and
filed with the Bankruptcy Court, and served so as to be received by 5:00 p.m. Pacific Time on
September 18, 2009, upon counsel to the Debtor, Pachulski Stang Ziehl & Jones LLP, 10100
Santa Monica Blvd., 11th Floor, Los Angeles, California 90067, Attn: Jeffrey W. Dulberg.
The Disclosure Statement sets forth information (a) regarding the history of the Debtor, its
business, and this chapter 11 case, (b) concerning the Plan and alternatives to the Plan, (c) advising
the Holders of Claims and Interests of their rights under the Plan, (d) assisting the Holders of Claims
and Interests in making an informed judgment regarding whether they should vote to accept or reject
the Plan, and (e) assisting the Bankruptcy Court in determining whether the Plan complies with the
provisions of the Bankruptcy Code, and should be confirmed.
By Order entered August __, 2009 (the �“Disclosure Statement Order�”), the Bankruptcy
Court, after notice and a hearing, approved the Disclosure Statement as containing �“adequate
information�” to permit affected Holders of Claims and Interests to make an informed judgment in
exercising their rights to vote to accept or reject the Plan, and authorized its use in connection with
the solicitation of votes with respect to the Plan. THE BANKRUPTCY COURT�’S APPROVAL OF
THIS DISCLOSURE STATEMENT DOES NOT MEAN THAT THE BANKRUPTCY COURT
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RECOMMENDS EITHER ACCEPTANCE OR REJECTION OF THE PLAN. No solicitation of
votes may be made except pursuant to this Disclosure Statement and section 1125 of the Bankruptcy
Code. In voting on the Plan, Holders of Claims should not rely on any information relating to the
Debtor and its business other than that contained in this Disclosure Statement, the Plan, and all
exhibits hereto and thereto.
The Plan is a reorganization plan in that Joseph Zeiden, Carole Malfatti and Michael Zeiden
(the �“Zeidens�”), the current owners of 100% of the stock of the Debtor, will reorganize the Debtor�’s
business around a core group of stores. The Zeidens will receive, in exchange for the New Equity
Contribution, 100% of the stock of the Reorganized Debtor and will manage and operate the
Reorganized Debtor. The Plan provides for the payment of the CNB Secured Claim, Administrative
Claims, Priority Tax Claims, valid Reclamation Claims, and Priority Non-Tax Claims in full, in
Cash on the Effective Date of the Plan and for satisfaction of the General Unsecured Claims by
payment of annual installment payments over three years. The Allowed Claims will be satisfied
pursuant to the Plan from Available Cash, cash contributed by the Zeidens, the proceeds of the Exit
Financing arranged by the Debtor and income generated by the Reorganized Debtor. The Court has
not yet confirmed the Plan, which means that the terms of the Plan are not yet binding on anyone.
Only Holders of Claims that are Allowed under section 502 of the Bankruptcy Code or
temporarily allowed for voting purposes under Bankruptcy Rule 3018 and whose Claims are in those
Classes of Claims that are �“impaired�” (as defined in section 1124 of the Bankruptcy Code) under the
Plan (with the exception discussed below) are entitled to vote to accept or reject the Plan. A Claim
is defined by the Code to include a right of payment from the Debtor.
A Claim is Allowed if proof of the Claim is properly filed before the applicable bar date and
no party in interest has objected to the Claim, or if the Court has entered an order allowing the
Claim. Please refer to Section V.B.6 below for specific information regarding the bar dates in this
Case. Under certain circumstances a creditor may have an Allowed Claim even if a proof of claim
was not filed and the applicable bar date for filing the proof of claim has passed. A Claim is deemed
allowed if the Claim is listed on the Debtor�’s Bankruptcy Schedules and is not scheduled as
disputed, contingent or unliquidated. Exhibit “B” hereto contains a list of Claims that are deemed
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Allowed for voting purposes because (i) they are listed on the Bankruptcy Schedules and are not
shown as disputed, contingent or unliquidated or (ii) a proof of Claim was timely filed to which no
objection has yet been filed.
A Class of Claims is impaired if the legal, equitable, or contractual rights of the Claims in the
Class are altered. Generally, all Holders of Claims that are impaired are entitled to vote on the Plan,
however, Classes of impaired Claims that are not entitled to receive or retain any property under the
Plan are deemed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy Code and,
therefore, are not entitled to vote on the Plan. Classes of Claims that are not impaired are
conclusively presumed to have voted to accept the Plan pursuant to section 1126(f) of the
Bankruptcy Code and, therefore, are not entitled to vote on the Plan. The following chart
summarizes which Classes of Claims are impaired, which Classes of Claims are not impaired under
the Plan and which Classes are entitled to vote.
CLASS
DESCRIPTION
IMPAIRED/ UNIMPAIRED
VOTING STATUS
Class 1 Reclamation Claims Unimpaired Deemed to have accepted
Class 2 Priority Non-Tax Claims Unimpaired Deemed to have accepted
Class 3 CNB Secured Claim Unimpaired Deemed to have accepted
Class 4 Other Secured Claims Impaired Voting
Class 5 General Unsecured Claims Impaired Voting
Class 6 Insider Unsecured Claims Impaired Voting
Class 7 Interests in Debtor Impaired Voting
To summarize, there are two prerequisites to voting: a Claim must be both Allowed and
impaired under the Plan.
All Holders of Claims, including Holders of Claims in Classes that do not have the right to
vote, have the right to file objections to the Plan if they determine that such objections are warranted.
Also, even if all impaired classes do not accept the Plan, the Plan may nonetheless be confirmed if
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the dissenting class is treated in a manner prescribed by the Code and at least one Class of non-
Insider impaired Claims accepts the Plan. Please refer to Section XII.C.2 below for information
regarding confirmation of the Plan even in the event a class rejects the Plan.
If you are a Holder of a Claim in a Class that is entitled to vote to accept or reject the Plan,
accompanying this Disclosure Statement and Plan is a Ballot for casting your vote on the Plan and a
pre-addressed envelope for the return of the Ballot. BALLOTS FOR ACCEPTANCE OR
REJECTION OF THE PLAN ARE BEING PROVIDED ONLY TO HOLDERS OF CLAIMS IN
CLASSES LISTED IN THE ABOVE CHART WHICH ARE ENTITLED TO VOTE TO ACCEPT
OR REJECT THE PLAN. If you are the Holder of a Claim in such a Class, and (a) did not receive a
Ballot, (b) received a damaged or illegible Ballot, (c) lost your Ballot, or (d) if you are a party in
interest and have any questions concerning the Disclosure Statement, any of the Exhibits hereto, the
Plan, or the voting procedures in respect thereof, please contact the Debtor�’s counsel Jeffrey W.
Dulberg, Esq., Pachulski Stang Ziehl & Jones LLP, 10100 Santa Monica Blvd., Suite 1100, Los
Angeles, California 90067; Telephone: (310) 277-6910; e-mail: [email protected].
THE DEBTOR RECOMMENDS THAT THE HOLDERS OF CLAIMS IN ALL CLASSES
ENTITLED TO VOTE SUBMIT A BALLOT TO ACCEPT THE PLAN.
VOTING ON THE PLAN, BY EACH HOLDER OF A CLAIM ENTITLED TO VOTE, IS
IMPORTANT. EACH SUCH CLAIM HOLDER SHOULD READ THIS DISCLOSURE
STATEMENT WITH ITS EXHIBITS, INCLUDING THE PLAN, IN ITS ENTIRETY. AFTER
CAREFULLY REVIEWING THESE DOCUMENTS, PLEASE FOLLOW THE DIRECTIONS
FOR VOTING CONTAINED ON THE BALLOT AND RETURN THE BALLOT IN THE
ENVELOPE PROVIDED. TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED BY
SEPTEMBER 18, 2009, AT 5:00 P.M. (THE �“VOTING DEADLINE�”) AT THE ADDRESS SET
FORTH ON THE ENCLOSED PRE-ADDRESSED ENVELOPE AND IN YOUR BALLOT.
Votes cannot be transmitted orally, by fax or by e-mail. Accordingly, you are urged to return
your signed and completed Ballot promptly. Ballots not received by the Voting Deadline and
unsigned Ballots will not be counted. Any executed Ballots that are timely received, but that do not
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98002-002\DOCS_LA:206319.9 5
indicate either an acceptance or rejection of the Plan, shall be deemed to constitute an acceptance of
the Plan.
II
DISCLAIMER
THE DISCLOSURE STATEMENT CONTAINS INFORMATION THAT MAY BEAR
UPON YOUR DECISION TO ACCEPT OR REJECT THE PLAN. PLEASE READ THIS
DOCUMENT WITH CARE. THE PURPOSE OF THE DISCLOSURE STATEMENT IS TO
PROVIDE �“ADEQUATE INFORMATION�” OF A KIND, AND IN SUFFICIENT DETAIL, AS
FAR AS IS REASONABLY PRACTICABLE IN LIGHT OF THE NATURE AND HISTORY OF
THE DEBTOR AND THE CONDITION OF THE DEBTOR�’S BOOKS AND RECORDS, THAT
WOULD ENABLE A HYPOTHETICAL REASONABLE INVESTOR, TYPICAL OF HOLDERS
OF CLAIMS OR INTERESTS OF THE RELEVANT CLASS, TO MAKE AN INFORMED
JUDGMENT CONCERNING THE PLAN. SEE 11 U.S.C. § 1125(a). UNLESS OTHERWISE
INDICATED, THE DATE OF ALL OF THE FINANCIAL INFORMATION PROVIDED IN THIS
DISCLOSURE STATEMENT IS AS OF MAY 31, 2009.
FOR THE CONVENIENCE OF CREDITORS, THIS DISCLOSURE STATEMENT
CONTAINS A SUMMARY OF THE TERMS OF THE PLAN, BUT THE PLAN ITSELF
QUALIFIES ANY SUMMARY. IF ANY INCONSISTENCY EXISTS BETWEEN THE PLAN
AND THE SUMMARY OF THE PLAN CONTAINED IN THE DISCLOSURE STATEMENT,
THE TERMS OF THE PLAN CONTROL.
OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT, NO
REPRESENTATIONS CONCERNING THE DEBTOR, ITS FINANCIAL CONDITION, OR ANY
ASPECT OF THE PLAN ARE AUTHORIZED BY THE DEBTOR. ANY REPRESENTATIONS
OR INDUCEMENTS MADE TO SECURE YOUR ACCEPTANCE OR REJECTION OF THE
PLAN, WHICH ARE OTHER THAN AS CONTAINED IN, OR INCLUDED WITH, THIS
DISCLOSURE STATEMENT, SHOULD NOT BE RELIED UPON BY YOU IN ARRIVING AT
YOUR DECISION.
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THE FINANCIAL INFORMATION CONTAINED HEREIN, UNLESS OTHERWISE
INDICATED, IS UNAUDITED. THE DEBTOR IS UNABLE TO WARRANT OR REPRESENT
THAT THE INFORMATION CONTAINED HEREIN IS WITHOUT ANY INACCURACIES.
GREAT EFFORT, HOWEVER, HAS BEEN MADE TO ENSURE THAT ALL SUCH
INFORMATION IS PRESENTED FAIRLY.
PACHULSKI STANG ZIEHL & JONES LLP (�“PSZJ�”) COMMENCED REPRESENTING
THE DEBTOR AND DEBTOR IN POSSESSION IN OR ABOUT JANUARY 2009, AS
GENERAL BANKRUPTCY COUNSEL. PSZJ HAS NOT AT ANY TIME IN THE PAST, NOR
DOES IT PRESENTLY, REPRESENT THE DEBTOR IN A GENERAL WAY, OR IN ANY
OTHER WAY, OTHER THAN AS GENERAL BANKRUPTCY COUNSEL.
PSZJ HAS RELIED UPON INFORMATION PROVIDED BY THE DEBTOR�’S
EMPLOYEES IN CONNECTION WITH PREPARATION OF THIS DISCLOSURE
STATEMENT. ALTHOUGH PSZJ HAS PERFORMED CERTAIN LIMITED DUE DILIGENCE
IN CONNECTION WITH THE PREPARATION OF THIS DISCLOSURE STATEMENT, IT HAS
NOT INDEPENDENTLY VERIFIED THE INFORMATION CONTAINED HEREIN.
THIS DISCLOSURE STATEMENT HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
REGULATORY AUTHORITY HAS ASSESSED THE ACCURACY OR ADEQUACY OF THIS
DISCLOSURE STATEMENT, THE EXHIBITS HERETO, OR THE STATEMENTS
CONTAINED HEREIN.
THE CONTENTS OF THIS DISCLOSURE STATEMENT SHOULD NOT BE
CONSTRUED AS LEGAL, BUSINESS, OR TAX ADVICE. ANY TAX INFORMATION
CONTAINED HEREIN WAS NOT INTENDED TO BE USED, AND IT CANNOT BE USED,
FOR THE PURPOSE OF AVOIDING ANY TAX PENALTIES THAT MAY BE IMPOSED ON
ANY PERSON. THERE IS NO LIMITATION IMPOSED ON ANYONE READING THIS
DISCLOSURE STATEMENT ON DISCLOSURE OF THE TAX TREATMENT OR TAX
STRUCTURE OF ANY TRANSACTION. NOTHING IN THIS DISCLOSURE STATEMENT
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MAY BE USED OR REFERRED TO IN PROMOTING, MARKETING OR RECOMMENDING A
PARTNERSHIP OR OTHER ENTITY, INVESTMENT PLAN, OR ARRANGEMENT TO ANY
PERSON. ALL CREDITORS AND/OR INTEREST HOLDERS SHOULD CONSULT THEIR
OWN LEGAL COUNSEL AND/OR ACCOUNTANT(S) AS TO LEGAL, TAX, AND OTHER
MATTERS CONCERNING THEIR CLAIMS OR INTERESTS.
III
OVERVIEW OF THE PLAN
The following is a brief overview of the material provisions of the Plan and is qualified in its
entirety by reference to the full text of the Plan. For a more detailed description of the terms and
provisions of the Plan, see Article VI below, entitled The Plan of Reorganization.
As discussed in more detail below, the Debtor, via Available Cash, a cash infusion from the
Zeidens, Exit Financing and the Debtor�’s ongoing sales, will have sufficient funds to make
distributions to Holders of Allowed Claims and permit the Debtor to reorganize its business around a
core group of approximately 55 stores. The Plan designates a series of Classes of Claims and one
Class of Interests, which include all Claims against, and Interests in, the Debtor. These Classes take
into account the differing nature and priority under the Bankruptcy Code of the various Claims and
Interests, as well as the compromises and settlements among the Classes reflected therein. Pursuant
to the Plan, the CNB Secured Claim, Allowed Reclamation Claims, and Allowed Administrative
Claims will be paid in full, in cash, on the Effective Date or when they become Allowed Claims,
whichever is later. Allowed Priority Tax Claims will be paid over a period ending not later than five
(5) years after the Petition Date. Allowed Non-Priority Tax Claims, which, to the Debtor�’s
knowledge, consist of claims for accrued and unused vacation pay1 will be honored in the ordinary
course of the Debtor�’s business. Holders of Allowed General Unsecured Claims will receive a pro-
rata share of $8.045 million in Cash (the �“Maximum General Unsecured Distribution�”), paid to the
Escrow Agent in three installments on the following dates: (1) January 1, 2010, (2) January 1, 2011
and (3) January 1, 2012; however, if the Debtor�’s Available Cash and inventory on the Effective
1 The customer deposits and gift card obligations are not included in this Class because the Debtor is providing the customers with the property purchased in the ordinary course of business and, therefore, under the terms of section 507(a)(7) of the Bankruptcy Code, these obligations are not Non-Priority Tax Claims.
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Date exceeds the amounts set forth in the Plan Cash Flow Projections, attached hereto as Exhibit
“C”, an amount equal to 50% of that excess will be held in trust and distributed on a pro rata basis
the Holders of the Allowed General Unsecured Claims along with the January 1, 2010 payment and
will be deducted from the amount of the January 1, 2012 payment. On the 46th day after the
transfers to the Escrow Agent, if no Blockage Period is in effect, the Escrow Agent shall transfer the
applicable Distribution amount plus any interest that has accrued thereon to the
Collateral/Disbursement Agent who will distribute such amount, subject to the amounts necessary to
fund the Post-Effective Date Committee Reserve, on a pro rata basis to the Holders of Allowed
General Unsecured Claims. The Allowed General Unsecured Claims are secured in the amount of
the Maximum General Unsecured Distribution by a lien against all of the Reorganized Debtor�’s
assets that is junior in priority only to any lien securing the Senior Debt; provided, however, that any
lien securing the Senior Debt and the junior lien securing the Maximum General Unsecured
Distribution shall not attach to the Reorganized Debtor�’s leases, leasehold interests or improvements
(i.e. such liens shall attach only to the proceeds of the Reorganized Debtor�’s leases and leasehold
interests).. The Allowed Insider Unsecured Claims are subordinated in payment to the Allowed
General Unsecured Claims and the Holders of the Allowed Insider Unsecured Claims will receive a
pro-rata share of $1.705 million to be distributed only after all Plan distributions to the Holders of
Allowed General Unsecured Claims in Class 5 of the Plan have been made. Allowed Insider
Unsecured Claims shall not receive interest on such claims until payment of all Plan Distributions to
Holders of Allowed General Unsecured Claims are complete. The stock of the Debtor will be
cancelled and the Holders of Allowed Interests in the Debtor will receive the common stock in the
Reorganized Debtor in exchange for their New Equity Contributions. Further, the Plan includes
releases between various parties.
The following table (the �“Plan Summary Table�”) summarizes the treatment of Claims and
Interests under the Plan with: (a) the Debtor�’s estimates of the Allowed amount of Claims in each
Class that have not previously been satisfied in the ordinary course of the Debtor�’s business or
pursuant to an Order of the Court, and (b) a description of the treatment provided for in the Plan for
each Class of Claims and Interests. The dollar amounts included in the Plan Summary Table have
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been estimated by the Debtor as of May 31, 2009, and do not constitute an admission by the Debtor
as to the validity or amount of any particular Claim or Interest. The Debtor reserves the right to
dispute the validity or amount of any Claim or Interest that has not already been Allowed by the
Bankruptcy Court or by agreement of the parties. Accordingly, no representation can be, or is being,
made with respect to whether (a) the estimated Allowed amount of Claims in each Class is accurate,
or (b) the estimated recoveries that will actually be realized by the Holder of an Allowed Claim in
any particular Class.
SUMMARY OF CLAIMS AND INTERESTS UNDER THE PLAN
CLASS CLAIM/INTEREST TREATMENT ESTIMATED
AGGREGATE
AMOUNT
ESTIMATED
PERCENTAGE
RECOVERY
n/a Administrative Claims-- consisting of accrued and unpaid Professional Fee Claims, fees payable to the Office of the United States Trustee, section 503(b)(9) Claims and other miscellaneous Administrative Claims under section 503(b) of the Bankruptcy Code.
Allowed Administrative Claims will be paid in full on the later of the Effective Date and the date on which such Administrative Claim becomes an Allowed Claim. The Plan describes the bar dates applicable to various types of Administrative Claims.
$3,781,020.00 100%
n/a Priority Tax Claims-- Allowed Claims of governmental units for taxes owed by the Debtor that are entitled to priority in payment pursuant to section 507(a)(8) of the Bankruptcy Code. The Debtor believes that all Priority Tax Claims have been paid pursuant to Order of the Court
Allowed Priority Tax Claims will be paid in equal monthly installments with the first installment being made on the Effective Date, or when the Priority Tax Claim becomes an Allowed Priority Tax Claim, whichever is later, and last installment being made on April 10, 2014 as required by 11 U.S.C. § 1129(a)(9)(C). Each payment shall include interest on the unpaid amount at the rate set forth in 11 U.S.C. § 511.
$0�—The Debtor believes that all Priority Tax Claims have been paid pursuant to previous order of the Court
100%
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1 Reclamation Claims An Allowed Reclamation Claim will
be paid in full on the later of the Effective Date and the date on which such Reclamation Claim becomes an Allowed Claim.
$24,917.46 100%
2 Priority Non-Tax Claims �–consisting of employee vacation claims and other Unsecured Claims other than Administrative Claims and Priority Tax Claims that are entitled to priority in payment pursuant to section 507(a) of the Bankruptcy Code. The Debtor does not believe that any Claim based upon a deposit or gift card is a valid Priority Non-Tax Claim because the property purchased has been or will be delivered or provided in the Debtor�’s ordinary course of business. The Debtor is not aware of any other Priority Non-Tax Claims.
The Debtor believes that all such vacation claims are being or have been satisfied by the Debtor�’s honoring its prepetition policies in the ordinary course of its business pursuant to previous Order of the Court. The Debtor intends to object to any such claim on the grounds that vacation has either been utilized, will be utilized or paid to the employee upon separation from the company in the ordinary course of business. To the extent any Allowed Priority Non-Tax Claims exist, the Debtor shall pay the Allowed amount of such Claims on the later of the Effective Date and the date such Claim becomes an Allowed Claim.
$234,421.65 100%
3 CNB Secured Claim The CNB Secured Claim will be paid
in full on the later of the Effective Date and the date on which such CNB Secured Claim becomes an Allowed Claim.
$8,531,000.00 100%
4 Other Secured Claims�—consisting of all Secured Claims other than the CNB Secured Claim. The Debtor is not aware of any Other Secured Claims
After the Debtor makes its election as set forth below, each Holder of an Allowed Other Secured Claim, except to the extent that the Holder of a particular Claim has agreed to a different treatment, shall receive, at the election of the Reorganized Debtor in its sole discretion, one of the following treatments in full satisfaction, discharge, exchange and release of its Allowed Other Secured Claim: 1. The Reorganized Debtor
shall abandon the collateral
$0, none known 100%
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securing such Allowed Other Secured Claim to the Holder of the Claim in full satisfaction and release of such Claim;
2. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim cash equal to the amount of its Allowed Other Secured Claim, or such lesser amount to which the Holder of such Claim shall agree, in full satisfaction and release of such Claim;
3. The Reorganized Debtor shall reinstate the Other Allowed Secured Claim in compliance with section 1124(2) of the Bankruptcy Code and shall not otherwise alter the legal, equitable, or contractual rights to which such claim entitles the Holder;
4. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim, on account of such Claim, deferred Cash payments, pursuant to section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code, totaling at least the Allowed amount of such Claim, of a present value, as of the Effective Date, of at least the value of such Holder's interest in the Debtor�’s interest in property that serves as collateral for such Claim; or
5. The Reorganized Debtor shall deliver to the Holder of the Allowed Other Secured Claim the indubitable equivalent of such Claim..
5 General Unsecured Claims�—consisting of all Claims that are not classified in another Class under the Plan
Subject to the terms of the Subordination Agreement and the Escrow Agreement, each Holder of an Allowed General Unsecured Claim will receive a pro-rata share, based on the amount of the Allowed General Unsecured Claim, of $8.045
$16,107,017.00 50%
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million in cash (i.e., the Maximum General Unsecured Distribution), less the amount required to fund the Post-Effective Date Committee Reserve (defined below), paid in installments, without interest, as follows: (1) $3.25 million on January 1, 2010, (2) $3.25 million on January 1, 2011 and (3) $1.545 million on January 1, 2012; provided, however, if the Cash and inventory on the Effective Date exceeds the amounts set forth in the Plan Cash Flow Projections, an amount equal to 50% of such excess shall be held in trust and shall be paid on a pro rata basis with the January 1, 2010 payment and deducted from the January 1, 2012 payment. Each of the above described Distributions shall be disbursed to the Escrow Agent on the dates indicated in accordance with the Terms of the Escrow Agreement. The account maintained by the Escrow Agent shall be an interest bearing account. On the 46th day after each Distribution is made, the Escrow Agent shall either (i) disburse the applicable Distribution plus accrued interest to the Collateral/Disbursement Agent if no Blockage Period is in effect, or (ii) if a Blockage Period is in effect, return the applicable Distribution plus accrued interest to the Reorganized Debtor, in either case in accordance with the terms and conditions of the Escrow Agreement.
The Allowed General Unsecured Claims are secured by a lien in the amount of $8.045 million against all of the Reorganized Debtor�’s assets that is junior in priority only to any lien securing the Senior Debt and cannot be enforced in any manner whatsoever until such time as the Senior Debt is Paid in Full; provided further, that neither the lien securing the Senior Debt nor the lien securing the Maximum General Unsecured Distributions shall attach to the Reorganized Debtor�’s leases, leasehold interests or improvements
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(i.e., such liens shall attach only to the proceeds of the Reorganized Debtor�’s leases and leasehold interests).
The Collateral/Disbursement Agent, as agent for the Holders of the Allowed General Unsecured Claims, will enter into the Subordination Agreement with Wells Fargo, which Subordination Agreement will set forth additional terms and conditions governing the payment of Distributions and the priority of the lien securing the Maximum General Unsecured Distributions. Each Holder of an Allowed General Unsecured Claim agrees to be bound by the terms and conditions of the Subordination Agreement as a �“Subordinated Creditor�” thereunder to the same extent as if a signatory thereto. The Subordination Agreement is incorporated herein by reference.
6 Insider Unsecured Claims�—Unsecured Claims held by the Zeidens
Each Holder of an Allowed Insider Unsecured Claim will receive a pro-rata share of $1.705 million in cash to be distributed only after all distributions to the Holders of Allowed Class 5 Claims have been made. The payment of interest on Allowed Insider Unsecured Claims will be deferred until all Plan Distributions have been made to Holders of Allowed Class 5 Claims.
$3,410,000.00 50%
7 All Interests�—Common Stock in Debtor
Common stock in Debtor is cancelled. Holders of Allowed Interests will receive on account of their New Equity Contributions 100% of the stock of the Reorganized Debtor, with each Insider receiving one-third of the stock.
N/A N/A
THE TREATMENT AND DISTRIBUTIONS PROVIDED TO HOLDERS OF
ALLOWED CLAIMS AND ALLOWED INTERESTS PURSUANT TO THE PLAN ARE IN
FULL AND COMPLETE SATISFACTION OF THE ALLOWED CLAIMS AND ALLOWED
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INTERESTS ON ACCOUNT OF WHICH SUCH TREATMENT IS GIVEN AND
DISTRIBUTIONS ARE MADE.
IV
DESCRIPTION OF THE DEBTOR
A. Description of the Debtor’s Past and Future Business.
The Debtor, a privately held California corporation, is a leading specialty home furnishing
retailer selling a variety of high-quality, reasonably priced merchandise for the home and office,
including furniture, artwork, lighting, tabletop items, textiles and decorative accessories from around
the world. Z Gallerie was founded in June 1979 by three siblings, Joseph Zeiden, Carole Malfatti
and Mike Zeiden, as a poster shop located in Sherman Oaks, California.
As of the Petition Date, the Debtor was operating 57 retail stores located in 18 states with the
largest concentration of its stores located in the western and southeastern United States. Since the
Petition Date, the Debtor has ceased operations in two additional retail stores, leaving 55 stores (54
locations and 1 outlet) currently operating. Each of the retail stores that remains open contains
approximately 10,000 square feet of merchandise. The Debtor also operates an e-commerce site at
www.zgallerie.com, allowing customers to shop 24 hours a day.
During this Case, as a result of the elimination of the burdensome store and warehouse
locations, the Debtor has streamlined its retail operations. The Debtor and its professionals have
also negotiated various key amendments to certain leases of the Debtor�’s retail store locations
(subject to definitive documentation) that will further reduce the financial burdens on the
Reorganized Debtor. The Debtor has also executed a term sheet regarding the Exit Financing to
support the Reorganized Debtor�’s obligations under the Plan and its post-Effective Date operations.
(See Article VI for more details of the Debtor�’s Plan obligations.) Based upon these measures in
combination with the restructuring of its indebtedness as provided in the Plan, the Debtor believes
that the Reorganized Debtor will be able to successfully operate the remaining retail store locations
and perform under the Plan.
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B. The Debtor’s Recent Financial History
The Debtor experienced uninterrupted sales growth through 2006 when sales peaked at $236
million out of 74 nationwide locations. Sales decreased 5.6% and 15.2% for the years 2007 and
2008, respectively, and the Debtor�’s net income declined from a $56,530 gain in 2007 to a loss of
$4.7 million in 2008. The sales decline continued in 2009. January 2009 sales decreased to $12.3
million as compared to $15.3 million for the same period a year earlier, which was a decrease of
19.4% and 23.7% when compared to the previous year�’s performance in both total sales and
comparable store sales, respectively. As a result, the Debtor�’s management took several corrective
steps to resize the business to fit the current market environment. These steps included:
Performing an extensive analysis of all store locations, resulting in the closing of 23
locations and rejection of three additional locations under development. These
actions reduced outstanding lease liabilities by $40.5 million. In addition, these
stores were projected to deliver EBITDA losses in excess of $1.3 million on an
annualized basis.
Actively renegotiating lease terms for the remaining 54 retail locations. These efforts
are being achieved through internal and external resources, at a minimum reducing
annual projected rent expenses at the store level from $18.9 million to $11.7 million.
The Debtor is in the process of negotiating definitive documentation memorializing
these lease amendments.
Refocused sourcing, merchandising and pricing efforts to restore gross margins to
historical levels, which were in excess of 50%, resulting in projected EBITDA
improvements of $1.2 million on an annualized basis.
Reduced corporate overhead and expenses through increased efficiency and
rationalization of staff. These efforts resulted in $5.4 million in annualized cost
savings and are expected to increase as additional efficiencies are identified as a
result of the Debtor�’s reduced retail footprint
Attached hereto as Exhibit “D” are three types of financial documents, including balance
sheets, cash flow statements and income and expense statements for the calendar years of 2007
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(audited) and 2008 (unaudited), for January 1, 2009 through April 9, 2009 and for April 10, 2009
through May 31, 2009 (both unaudited) (collectively, the �“Financial Statements�”). The Debtor has
also prepared cash flow projections through the life of the Plan that are attached hereto as Exhibit
“C”. For detailed information about the Debtor�’s financial projections, see Section XII.C.3 below.
C. The Debtor’s Corporate Structure and Ownership.
The Debtor is a privately held California corporation. As of the Petition Date the Debtor was
owned 40% by Joseph Zeiden, 30% by Carole Malfatti and 30% by Michael Zeiden. The Debtor
will remain a California corporation after the Effective Date. In exchange for the New Equity
Contribution, the Zeidens each will receive one-third of the stock of the Reorganized Debtor.
D. The Debtor’s Principal Pre-Petition Secured Indebtedness.
In November 2008, the Debtor renewed its long standing revolving secured financing
arrangement with CNB that provided the Debtor with a line of credit and other accommodations for
financing up to $13 million until January 31, 2009 and $10 million thereafter until April 1, 2009,
when the outstanding amount became due and payable (the �“Revolving Credit Facility�”). The
outstanding balance under the Revolving Credit Facility as of the Petition Date was approximately
$10,563,000.00, including approximately $2,063,000.00 held as collateral for various letters of
credit. The Debtor pledged substantially all of its assets to CNB as security for the repayment and
performance of the terms of the Revolving Credit Facility. The Revolving Credit Facility is also
secured by real estate owned by Zeiden Properties, LLC (the members of which are the Zeidens) and
personal guarantees from each of the Zeidens. After the Petition Date, the Debtor entered into a
Cash Collateral Stipulation that was approved by the Court whereby the Debtor is utilizing CNB�’s
cash collateral, pursuant to an agreed upon budget, to operate its business. For more information on
the Cash Collateral Stipulation, see Section V.B.3 below. It also has been paying CNB interest and
account fees. The outstanding balance under the Revolving Credit Facility, therefore, has remained
substantially the same and will be paid in full pursuant to the terms of the Plan.
The Debtor and Wells Fargo, National Association (�“Wells Fargo�”), have entered into a term
sheet (the �“Term Sheet�”) regarding proposed terms of the Debtor�’s Exit Financing. A copy of the
Term Sheet is attached hereto as Exhibit “K”. Such Exit Financing is subject to, among other
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things, due diligence to be conducted by Wells Fargo and the execution and delivery of a Landlord
Disclaimer and Consent on Wells Fargo�’s standard form (or another form acceptable to Wells Fargo
in its sole discretion) from each of the Reorganized Debtor�’s landlords. The Debtor expects to enter
into a binding Exit Financing agreement with Wells Fargo that formally documents the provisions of
the financing as set forth in the Term Sheet, subject to Court approval as part of the Confirmation
Order. This Exit Financing will be utilized, in part, to pay the Revolving Credit Facility in full.
E. The Debtor’s Other Indebtedness.
As of the Petition Date, the Debtor had approximately $25 million of priority and general
unsecured obligations that were held by approximately 134,000 creditors, including holders of gift
cards that the Debtor has no means to identify and the customers who had made deposits for
purchases. Pursuant to various orders entered by the Court at the beginning of this Case, as
discussed in more detail in Article V below, the Debtor has honored or paid some of these
obligations in the ordinary course of its business and will continue to do so.
On the Petition Date, the Debtor owed approximately $1.6 million of unpaid prepetition
priority taxes (including payroll withholding, FUTA and sales taxes) to 55 taxing authorities.
However, pursuant to the Order Authorizing the Debtor to Pay (i) Prepetition Sales and Use and Similar
Taxes in the Ordinary Course of Business and (ii) Directing Banks and Financial Institutions to Honor and
Process Checks and Transfers Related Thereto (Docket No. 48), the Debtor has paid these taxes in the
ordinary course of its business pursuant to the Tax Order. The Debtor does not believe any amount of
prepetition taxes remains outstanding.
As of the Petition Date, 16,275 customers had deposits of approximately $4.4 million (of
which amount $3.5 million had priority status) and customers held approximately 118,000 gift cards
with an outstanding balance of $5.9 million all of which had priority status. Pursuant to the Order
Authorizing the Debtor to Honor Certain Prepetition Obligations to Customers and to Otherwise
Continue Customer Programs and Practices (Docket No. 44), the Debtor has been honoring these
obligations in the ordinary course of its business and intends to continue doing so. As of May 31,
2009, 15,158 customers had deposits of approximately $1,160,599. In addition, 114,804 gift cards
with an approximate balance of $5,536,633 remained outstanding. Because these obligations,
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pursuant to section 507(a)(7) of the Bankruptcy Code, are Priority Claims only in the event that the
property purchased is not delivered or provided and the Debtor is providing the purchased property
to the customers in the ordinary course of the Debtor�’s business, these obligations are not included
as Non-Priority Tax Claims under the Plan.
Additionally, approximately $12,576,810 in unsecured claims is held by 26 landlords under
leases that the Debtor has rejected during the course of this Case. The Debtor owed other landlords
approximately $2,957,015.00 for prepetition rent as of the Petition Date, but the Debtor is assuming
the leases related to those Claims and will cure the defaults thereunder. For a list of contracts and
leases to be assumed and the amounts that the Debtor asserts are due to cure defaults under those
contracts and leases, see Exhibit “F”. Further, the Debtor owed its vendors approximately
$2,137,529 as of the Petition Date and that amount remains due.
F. The Debtor’s Management
Joseph Zeiden, the Debtor�’s Chief Executive Officer and President, Michael Zeiden, the
Debtor�’s Chief Financial Officer and Secretary, and Carole Malfatti, the Debtor�’s Senior Vice
President of Merchandising, started the Debtor when they were all young adults. Since that time,
they have jointly operated the business, each holding a variety of positions with the company,
including, but not limited to, purchasing inventory, selling inventory, leasing retail and warehouse
locations, and performing accounting, operational, human resource and information technology
functions.
Today, in addition to overseeing the daily operations of the business, each of the Zeidens
primarily focuses on a different critical component of the Debtor�’s operations: Joseph Zeiden
focuses on all real estate matters including negotiations with landlords, identification of new
locations, and management of tenant improvement projects; Michael Zeiden focuses on all financial
matters including financial reporting, cash management, budget projections and financing; and
Carole Malfatti, who was named one of the 50 most powerful people in fashion and design in Home
Furnishings News�’ �“Fashion 50 List�”, outranking such well-known designers as Ralph Lauren,
Tommy Hilfiger and Vera Wang, concentrates on the merchandizing function of the business,
including the identification of merchandise that best reflects the buying habits and style of the
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Debtor�’s customer base, the procurement of merchandise from local, national and off-shore vendors
and the management of vendor relations. It is anticipated that the Reorganized Debtor�’s
management will be substantially the same as the Debtor�’s.
The Plan places a cap on shareholder compensation equal to two times the current
shareholder salaries, excluding dividends or draws required for tax purposes (Debtor is an S Corp)
and interest on shareholder debt, until all Plan Distributions have been made to Holders of Allowed
General Unsecured Claims. Attached hereto as Exhibit “E” is a list of the officers of the
Reorganized Debtor and the proposed salary effective as of the Effective Date for each. The
amounts shown on Exhibit “E” do not include accrued, unpaid interest on shareholder debt.
Payment of interest on shareholder debt will be deferred until all distributions to Holders of allowed
General Unsecured Claims are made and interest shall not be used to calculate the cap on
shareholder compensation under the Plan.
The Debtor, prior to filing this Case, retained the services of a turnaround consultant,
Broadway Advisors, LLC (�“Broadway�”), a boutique management consulting firm focused solely on
advising and assisting financially and operationally troubled companies. The firm consists of
seasoned professionals with over fifty years of combined turnaround, restructuring and crisis
management experience. Thomas Paccioretti, a principal and founder of Broadway, and Benjamin
F. Cary, a senior associate, have assisted the Debtor with (among other things) cash flow forecasting,
identification and implementation of cost reduction initiatives, store closure analysis, and the
management and completion of the reorganization process in the Case.
G. Marketing Efforts
The Debtor has been pursuing a �“right-sizing�” strategy to reorganize its business around its
strongest performing stores and eliminate burdensome locations and related assets unnecessary to the
Debtor�’s reorganization. In addition to this effort, the Debtor also engaged an investment banking
firm, The Sage Group, LLC and Sage Partners Securities, LLC (�“Sage�”), in March, 2009 to assist the
Debtor in pursuing a sale of substantially all of its assets as a going concern. Sage contacted more
than 114 parties regarding a potential sale transaction, and indications of interest and letters of intent
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have been submitted by only two potential going concern buyers and two liquidators at valuations
below expectations.
H. Amendments to Non-Residential Real Property Leases
The Debtor and its professionals have negotiated amendments to various of the Debtor�’s
leases of its retail store locations. The Debtor is in the process of documenting these amendments.
In each case, the amendments provide for reduced lease obligations for the Debtor. The Debtor
seeks to assume each of the leases of its retail store locations and other designated agreements as set
forth on Exhibit “F”.
V
THE DEBTOR’S CHAPTER 11 CASE
A. Events Preceding the Chapter 11 Filings
The Debtor experienced a severe drop in sales beginning in 2006, with this decline
accelerating in the last quarter of 2008 and continuing unabated in the first quarter of 2009.
Competitive pricing pressures in the Debtor�’s business sector �– retail home furnishings �–
due to wide-spread promotional activity and �“going out of business�” sales, the maturity of the
Revolving Credit Facility and the continued decline of the economy in general put further pressure
on the Debtor�’s business, making it necessary for it to seek protection under chapter 11 of the
Bankruptcy Code.
B. Events During the Chapter 11 Case
1. Retention of Debtor�’s Professionals
Prior to the commencement of the Case, the Debtor retained PSZJ as bankruptcy counsel and
Broadway Advisors, LLC as its financial advisor. The Bankruptcy Court approved the retention of
those professionals effective as of the Petition Date, pursuant to orders entered on May 1, 2009
(Docket Nos. 81 and 83, respectively).
The Debtor also has retained (i) The Abernathy McGregor Group, Inc. as its corporate
communications consultant, approved by Order of the Bankruptcy Court entered May 1, 2009
(Docket No. 82); (ii) The Sage Group LLC, and Sage as investment bankers, approved by Order of
the Bankruptcy Court entered May 4, 2009 (Docket No. 91); (iii) Retail Consulting Services, Inc.
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d/b/a RCS Real Estate Advisors as real estate advisor, approved by Order of the Bankruptcy Court
entered May 4, 2009 (Docket No. 92); (iv) Salmon, Lewis & Weldon, PLC as special real estate
counsel, approved by Order of the Bankruptcy Court entered June 5, 2009 (Docket No. 158); and (v)
Omni Management Group, LLC as claims and noticing agent, approved by Order to the Bankruptcy
Court entered April 14, 2009 (Docket No. 38).
2. Appointment of Committee and Retention of Committee Professionals
On May 4, 2009, the United States Trustee formed the Official Committee of Unsecured
Creditors (the �“Committee�”) to represent the interest of the general unsecured creditors of the Estate,
and appointed four (4) members thereto: (i) Simon Property Group, Inc., (ii) Oakbrook Shopping
Center, LLC, (iii) World Wide Fabric, Inc., and (iv) Portfolio Productions, Inc. dba Sitcom. Since
the formation of the Committee, the Debtor has consulted extensively and cooperated with the
Committee concerning various aspects of the Case. The Committee has employed (i) Kelley Drye &
Warren LLP as its bankruptcy counsel, approved by the Bankruptcy Court by Order entered June 23,
2009; (ii) Landsberg Margulies LLP as its local California and conflicts counsel, approved by the
Bankruptcy Court by Order entered June 22, 2009; (iii) and Scouler & Company LLC as its financial
advisor, as approved by the Bankruptcy Court by Order entered July 7, 2009.
3. Use of Cash Collateral
At the commencement of the Case, as a result of discussions between the Debtor and CNB,
the parties entered into the Stipulation Between Creditor City National Bank and Debtor-in-
Possession Z Gallerie re Interim Use of Cash Collateral (the �“Initial Stipulation�”) (Docket No. 8).
The Court approved the Debtor�’s use of CNB�’s cash collateral in accordance with the Initial
Stipulation, on a short term basis, pursuant to the Interim Order Granting Emergency Motion of
Debtor (A) Authorizing Use of Cash Collateral Pursuant to Stipulation, (B) Granting Adequate
Protection for Use of Prepetition Collateral, and (C) Granting Related Relief entered by the Court
on April 15, 2009 (the �“Interim Cash Collateral Order�”) (Docket No. 43).2
2 The Debtor and CNB entered into an (Amended) Stipulation Between Secured Creditor City National Bank and Debtor-in-Possession Z Gallerie Re Use of Cash Collateral (the �“Stipulation�”) in connection with the Interim Cash Collateral Order.
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During the term of the Interim Cash Collateral Order, the Debtor, CNB and the Committee
entered into the (Amended) Stipulation Between Secured Creditor City National Bank and Debtor-
in-Possession Z Gallerie re Use of Cash Collateral (the �“Final Stipulation�”) (Docket No. 128). On
May 20, 2009, the Court entered the Final Order (A) Authorizing Use of Cash Collateral Pursuant
to Stipulation, (B) Granting Adequate Protection for Use of Prepetition Collateral, and (C) Granting
Related Relief (the �“Final Cash Collateral Order�”) (Docket No. 132) approving the Final Stipulation.
Under the terms of the Final Stipulation and Final Cash Collateral Order, the Debtor is
authorized to utilize, through July 10, 2009, CNB�’s Cash Collateral, pursuant to an agreed upon
budget, to operate its business and to pay the approved fees of the Professionals. Any funds
generated by the Debtor�’s business in excess of the amounts available to the Debtor pursuant to the
budget are held in an account and cannot be disbursed to the Debtor or to CNB absent further order
of the Court or agreement between the Debtor and CNB. The Final Stipulation also contains
provision for the payment of the Professionals after the term of the Final Stipulation expires.
No further advances under the Revolving Credit Facility have been made to the Debtor
postpetition. On a monthly basis during the Case, the Debtor is paying CNB a $31,000 interest
payment, $20,000 towards CNB�’s legal fees and $6,000 for account services.
As adequate protection of CNB�’s interest in its Cash Collateral that the Debtor is using and
any diminution in the value of CNB�’s collateral as a result of the imposition of the automatic stay in
the case, the Debtor granted CNB liens and first priority security interests (collectively, the
�“Replacement Liens�”) in any and all assets and property of the Debtor now owned or hereafter
acquired, (excluding Avoidance Actions and the Debtor�’s leasehold interests (but including the
proceeds of the Debtor�’s leasehold interests). The Replacement Liens are (i) senior and superior to
any and all other mortgages, liens, claims and security interests existing on the Petition Date (except
for creditors, if any, with valid, binding, enforceable, unavoidable and perfected liens and security
interests on the Post-Petition Collateral existing on the Petition Date and that were senior in priority
to the security interests of CNB immediately prior to the Petition Date) and (ii) second priority liens
in such assets and property to the extent that the assets and property were subject to valid, binding,
enforceable, unavoidable and perfected mortgages, liens and security interests held by other parties
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at the time of the Petition Date. CNB was also granted a super priority claim for the amount of its
Cash Collateral used by the Debtor and an administrative expense claim under Section 507(b), with
priority, superior to all other costs and expenses of administration of the kinds specified in, or
ordered pursuant to, Sections 105, 326, 327, 328, 330, 331, 503, 506(c), 507, 726, or 1114 of the
Code to protect any claim arising from the deterioration of the value of CNB�’s collateral during the
term of the Final Stipulation.
4. Rejection of Executory Contracts and Unexpired Leases
As part of its �“First Day�” motions, the Debtor filed a motion to (i) reject 24 store leases and
the lease for its Atlanta warehouse, all of which had been surrendered to the respective landlords
prior to the Petition Date, (ii) abandon any personal property that remained at those locations after
the Debtor vacated the premises, and (iii) establish a procedure for the future rejection of leases and
abandonment of personal property. On April 16, 2009, the Court entered an order approving the
rejection of the leases and the abandonment of such personal property effective as of the Petition
Date (Docket No. 51) but continued consideration of the rejection procedures to a later hearing. The
Court approved the procedures for the future rejection of leases and abandonment of personal
property pursuant to an order entered on May 21, 2009 (Docket No. 136).
After the Petition Date, the Debtor determined that two other retail store locations were
burdensome to the Estate. It surrendered these locations to the respective landlords and by order
entered on June 16, 2009 (Docket No. 175), the Court approved the rejection of the related leases
effective as of May 31, 2009.
As part of its efforts to consolidate its operations, the Debtor filed a motion to reject various
of its equipment schedules with GE Capital Corporation, Crown Credit Company and Celtic Leasing
Corporation. The Court entered an order approving the rejection of those equipment schedules
effective as of April 30, 2009 (Docket No. 133).
5. Summary of Other First Day Orders
Soon after the commencement of the Case, the Bankruptcy Court entered certain orders
designed to minimize disruption of the Debtor�’s operations, and to facilitate its chapter 11 case (the
�“First Day Orders�”). In addition to the Interim Cash Collateral Order and the lease rejection orders
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discussed above, the Debtor also obtained orders: (a) authorizing the Debtor to pay certain pre-
petition employee wage claims, to reimburse employee expenses and to maintain employee benefit
payments and policies (the �“Wage Order�”) (Docket Nos. 42 and 137); (b) authorizing the Debtor to
honor customer refunds, deposits and other programs that existed prior to the Petition Date (the
�“Customer Practices Order�”) (Docket No. 44); (c) authorizing the Debtor to continue using its cash
management system to manage cash receipts and disbursements as it had done prior to the Petition
Date (Docket No. 46); (d) authorizing the Debtor to pay prepetition shipping and warehousing
charges (Docket No. 47); (e) authorizing the Debtor to pay prepetition taxes and regulatory fees in
the ordinary course of business (the �“Tax Order�”) (Docket No. 48); (f) approving limited notice
procedures (Docket No. 49); and (g) prohibiting utilities from altering, refusing, or discontinuing
service, and establishing procedures for determining adequate assurance of payment for future utility
services (Docket No. 50).
6. The Claims Bar Dates
On May 20, 2009, the Court entered its Order Granting Motion (A) Establishing the
Procedures and Deadlines for Filing (i) Proofs of Claim and Interests and (ii) Requests for Payment
of Administrative Expense Pursuant to 11 U.S.C. § 503(b)(9); (B) Approving Form and Manner of
Notice of Bar Dates; (C) Granting Related Relief (Docket No. 131) establishing the Claims Bar
Dates. This Order established July 31, 2009 as the last date to file all Claims that arose before the
Petition Date (including all Claims under section 503(b)(9) of the Bankruptcy Code), except as set
forth below:
a. Rejection Bar Date: the deadline to file claims arising from the rejection
pursuant to section 365 of the Bankruptcy Code of executory contracts or unexpired leases,
including, without limitation, claims for prepetition arrearages or other asserted prepetition defaults,
is the later of (a) thirty (30) days after the effective date of the rejection of the executory contract or
unexpired lease, or (b) July 31, 2009;
b. Avoided Transfer Bar Date: the deadline to file a proof of claim arising from
the avoidance of a transfer under chapter 5 of the Bankruptcy Code is the later of (a) thirty (30) days
after the entry of judgment avoiding the transfer or (b) July 31, 2009; and
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c. Governmental Units Bar Date: the deadline to file a proof of claim of
governmental units (which shall include all entities defined as such in section 101(27) of the
Bankruptcy Code, including any such entities that hold a Claim arising from prepetition tax years or
periods or prepetition transactions to which the Debtor was a party) that arose before the Petition
Date, is October 7, 2009, 180 days after the date of the Order for Relief in this case.
C. Investigation and Analysis of Causes of Action.
The Debtor has not yet completed an analysis of potential Causes of Action that may be
asserted by the Estate. The Plan contemplates that the Reorganized Debtor will conduct such
analysis after the Effective Date and pursue Causes of Action it deems appropriate.
VI
THE PLAN OF REORGANIZATION
A. Treatment of Unclassified Claims Under the Plan
1. Treatment of Administrative Claims
Administrative Claims include Claims for the actual, necessary costs and expenses of
preserving the Estate, Professional Fee Claims, Claims arising under section 503(b)(9) of the
Bankruptcy Code, which are Claims for the value of any goods sold to the Debtor in the ordinary
course of the Debtor�’s business that were received by the Debtor within the twenty (20) day period
before the Petition Date, all of the foregoing as determined by the Bankruptcy Court after notice and
hearing, and statutory fees or charges assessed against the Estate under 28 U.S.C. § 1930. Except to
the extent the Holder of an Allowed Administrative Claim agrees otherwise, each Holder of an
Allowed Administrative Claim shall be paid in Cash the full amount of such Allowed Administrative
Claim, without interest, as soon as practicable after the later of (a) the Effective Date and (b) the date
on which such Administrative Claim becomes an Allowed Administrative Claim. Professionals
having Professional Fee Claims that have not already been paid pursuant to the interim
compensation procedures approved by the Court during the Case will be paid only upon Court order
pursuant to section 330 of the Bankruptcy Code.
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2. Bar Dates for Administrative Claims
Requests for payment of Administrative Claims, except as provided below, must be filed and
served on the Reorganized Debtor�’s counsel and the Office of the United States Trustee no later than
forty-five (45) days following the Effective Date. Excluded from this requirement are (i)
Administrative Claims that arose under section 503(b)(9) of the Bankruptcy Code (the bar date for
these Claims was July 31, 2009), (ii) Claims resulting from ordinary course of business transactions
with the Debtor, (iii) Professional Fee Claims, and (iv) statutory fees. An Administrative Claim that
must be filed in accordance with this provision is referred to as a �“General Administrative Claim.�”
Any objection to a General Administrative Claim must be filed within sixty (60) days from the date
such General Administrative Claim is filed and served on the Reorganized Debtor�’s counsel.
An Administrative Claim, other than a Professional Fee Claim or an Administrative Claim
arising under 503(b)(9), incurred in the ordinary course of the Debtor�’s business will be treated as an
Allowed Administrative Claim in accordance with the terms and conditions of the particular
transaction that gave rise to the Claim without requiring the entity holding such Administrative
Claim to file a request for payment.
Professionals or other entities seeking payment with respect to a Professional Fee Claim must
file and serve on all parties entitled to notice thereof an application for final allowance of
compensation and reimbursement of expenses no later than the sixtieth (60th) day following the
Effective Date. All such requests for payment of Professional Fee Claims will be subject to the
authorization and approval of the Bankruptcy Court. Any objection to Professionals Fee Claims
shall be filed on or before the date specified in the application for final compensation.
Holders of General Administrative Claims, Professional Fee Claims and Administrative
Claims arising under 503(b)(9), that do not timely file the appropriate requests for payment will be
forever barred from asserting such Claims against the Debtor, the Debtor�’s Estate, the Reorganized
Debtor, or its property.
3. Treatment of Priority Tax Claims
Priority Tax Claims are Allowed Claims of governmental units for taxes owed by the Debtor
that are entitled to priority in payment pursuant to section 507(a)(8) of the Bankruptcy Code. The
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taxes entitled to priority are (a) taxes on income or gross receipts that meet the requirements set forth
in section 507(a)(8)(A) of the Bankruptcy Code; (b) property taxes meeting the requirements of
section 507(a)(8)(B) of the Bankruptcy Code; (c) taxes that were required to be collected or withheld
by the Debtor and for which the Debtor is liable in any capacity as described in section 507(a)(8)(C)
of the Bankruptcy Code; (d) employment taxes on wages, salaries, or commissions that are entitled
to priority pursuant to section 507(a)(3) of the Bankruptcy Code, to the extent that such taxes also
meet the requirements of section 507(a)(8)(D) of the Bankruptcy Code, (e) excise taxes of the kind
specified in section 507(a)(8)(E) of the Bankruptcy Code; (f) customs duties arising out of the
importation of merchandise that meet the requirements of section 507(a)(8)(F) of the Bankruptcy
Code; and (g) pre-petition penalties relating to any of the foregoing taxes to the extent such penalties
are in compensation for actual pecuniary loss as provided in section 507(a)(8)(G) of the Bankruptcy
Code. The Debtor is unaware of any Priority Tax Claim that remains unpaid. The Priority Tax
Claims were paid pursuant to the Tax Order (Docket No. 48).
To the extent any Allowed Priority Tax Claim exists, except to the extent the Holder of an
Allowed Priority Tax Claim agrees otherwise, each Holder of an Allowed Priority Tax Claim shall
be paid in respect of such Allowed Claim the full amount thereof, in Cash, in the form of equal
monthly payments commencing on the later of the Effective Date and the date such Claim becomes
an Allowed Claim, with the last payment to be made on or before April 10, 2014 pursuant to section
1129(a)(9)(C) of the Bankruptcy Code. Each payment shall include interest on the unpaid Allowed
amount of the Priority Tax Claim at the rate set forth in section 511 of the Bankruptcy Code. The
Reorganized Debtor may, without penalty, prepay any amount or the entire amount of an Allowed
Priority Tax Claim at any time.
B. Classification and Treatment of Claims and Interests Under the Plan
The following is a detailed description of the Claims and Interests and their treatment under
the Plan.
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1. Class 1 (Reclamation Claims).
a. Classification
Class 1 consists of Reclamation Claims, as such Claims are defined in section 546(c) of the
Bankruptcy Code.
b. Treatment
To the extent any Allowed Reclamation Claims exist, and unless otherwise mutually agreed
upon by the Holder of an Allowed Reclamation Claim and the Debtor, each Holder of an Allowed
Reclamation Claim will receive Cash in an amount equal to such Allowed Reclamation Claim
(which has not already been satisfied) on the later of the Effective Date (or as soon as practicable
thereafter) and the date such Reclamation Claim becomes an Allowed Reclamation Claim pursuant
to a Final Order, or as soon thereafter as is practicable. Class 1 is unimpaired under the Plan and
pursuant to section 1126(f) of the Bankruptcy Code, each Holder of an Allowed Reclamation Claim
is conclusively presumed to have accepted the Plan, and may not vote with respect thereto.
2. Class 2 (Priority Non-Tax Claims).
a. Classification
Class 2 consists of unsecured Claims that are priority claims under section 507 (a)(4), (5), or
(7), which are Claims for wages, salaries, commissions (including vacation) and benefits up to a
maximum of $10,950.00 that accrued within the 180 days before the Petition Date (the �“Wage and
Benefit Claims�”) and Claims, up to a maximum of $2,425.00 per person, for deposits of money
made before the Petition Date in connection with the purchase of property, for personal, family or
household use, that was not delivered or provided (the �“Deposit and Gift Card Claims�”).
b. Treatment
The Debtor has satisfied or will satisfy all Wage and Benefit Claims in the ordinary course of
its business in accordance with its prepetition policies pursuant to the Wage Order (Docket No. 42).
The Debtor has delivered or will deliver or provide the persons who have made deposits or hold gift
cards with the property that has been or is purchased in the ordinary course of its business pursuant
to the Customer Practices Order (Docket No. 44). Because the Debtor is honoring its obligations
related to the deposits and gift cards in the ordinary course of its business, the outstanding
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prepetition deposit and gift card amounts do not qualify under section 507(b)(7) of the Bankruptcy
Code as priority Deposit and Gift Card Claims. As a result, the Debtor is unaware of any Deposit
and Gift Card Claims. To the extent any Priority Non-Tax Claims exist, other than the Wage and
Benefit Claims that have been or are being satisfied in the Debtor�’s ordinary course of business, and
unless otherwise mutually agreed upon by the Holder of an Allowed Priority Non-Tax Claim and the
Debtor, each Holder of an Allowed Priority Non-Tax Claim will receive Cash in an amount equal to
such Allowed Priority Non-Tax Claim (which has not already been paid) on the later of the Effective
Date (or as soon as practicable thereafter) and the date such Priority Non-Tax Claim becomes an
Allowed Priority Non-Tax Claim pursuant to a Final Order, or as soon thereafter as is practicable.
Class 2 is unimpaired under the Plan and pursuant to section 1126(f) of the Bankruptcy Code, each
Holder of an Allowed Priority Non-Tax Claim is conclusively presumed to have accepted the Plan,
and may not vote with respect thereto.
3. Class 3 (CNB Secured Claim).
a. Classification
Class 3 consists of the CNB Secured Claim.
b. Treatment
Unless otherwise mutually agreed upon by the CNB and the Debtor, CNB will receive Cash
in an amount equal to the unpaid amount of the Allowed CNB Secured Claim (which has not already
been paid) on the later of the Effective Date (or as soon as practicable thereafter) and the date such
CNB Secured Claim becomes an Allowed CNB Secured Claim pursuant to a Final Order, or as soon
thereafter as is practicable. Class 3 is unimpaired, and pursuant to section 1126(f) of the Bankruptcy
Code, CNB is conclusively presumed to have accepted the Plan, and may not vote with respect
thereto.
4. Class 4 (Other Secured Claims).
a. Classification
Class 4 consists of all Other Secured Claims.
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b. Treatment
The Debtor is unaware of any Other Secured Claims. If Other Secured Claims are filed, as
soon as practicable after the Debtor makes its election as set forth below, each Holder of an Allowed
Other Secured Claim, except to the extent that the Holder of a particular Claim has agreed to a
different treatment, shall receive, at the election of the Reorganized Debtor in its sole discretion, one
of the following treatments in full satisfaction, discharge, exchange and release of its Allowed Other
Secured Claim:
1. The Reorganized Debtor shall abandon the collateral securing such Allowed Other Secured
Claim to the Holder of the Claim in full satisfaction and release of such Claim;
2. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim Cash
equal to the amount of its Allowed Other Secured Claim, or such lesser amount to which the
Holder of such Claim shall agree, in full satisfaction and release of such Claim;
3. The Reorganized Debtor shall reinstate the Other Allowed Secured Claim in compliance with
section 1124(2) of the Bankruptcy Code and shall not otherwise alter the legal, equitable, or
contractual rights to which such claim entitles the Holder;
4. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim, on
account of such Claim, deferred Cash payments, pursuant to section 1129(b)(2)(A)(i)(II) of
the Bankruptcy Code, totaling at least the Allowed amount of such Claim, of a present value,
as of the Effective Date, of at least the value of such Holder's interest in the Debtor�’s interest
in property that serves as collateral for such Claim; or
5. The Reorganized Debtor shall deliver to the Holder of the Allowed Other Secured Claim the
indubitable equivalent of such Claim.
The Reorganized Debtor shall have ten (10) business days after the later of the Effective Date
or the date upon which the Other Secured Claim becomes and Allowed Other Secured Claim to elect
which treatment to provide to the Holder of such Allowed Other Secured Claims but may make the
election at any such earlier date as the Debtor deems appropriate.
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5. Class 5 (General Unsecured Claims).
a. Classification
Class 5 consists of all General Unsecured Claims, other than the Unsecured Claims held by
the Zeidens.
b. Treatment.
Subject to the terms of the Escrow Agreement and the Subordination Agreement, each
Allowed General Unsecured Claim will receive a pro rata share of the following cash distributions,
less the amount required to fund the Post-Effective Date Committee Reserve (defined below): (a) a
distribution of $3.25 million to be made on January 1, 2010; (b) a distribution of $3.25 million, to be
made on January 1, 2011; and (c) a distribution of $1.545 million, to be made on January 1, 2012;
provided however, if the value of the Debtor�’s total Cash plus projected inventory determined as of
the Effective Date exceeds the total value of such assets set forth in the Plan Cash Flow Projections
attached hereto as Exhibit “C”, fifty percent (50%) of that excess amount (the �“Excess Amount
Payment�”) will be set aside in a trust account on the Effective Date and will be distributed on a pro
rata basis to the Holders of Allowed General Unsecured Claims along with the distribution of $3.25
million to be made on January 1, 2010. The amount of the Excess Amount Payment will be
deducted from the $1.545 million distribution to be made on January 1, 2012. Each of the above
described Distributions shall be disbursed to the Escrow Agent on the dates indicated in accordance
with the terms of the Escrow Agreement. The Escrow Agent shall hold the funds in an interest
bearing account in accordance with the Escrow Agreement. On the 46th day after each Distribution
is made, the Escrow Agent shall either (i) disburse the applicable Distribution plus accrued interest
to the Collateral/Disbursement Agent if no Blockage Period is in effect, or (ii) if a Blockage Period
is in effect, return the applicable Distribution plus accrued interest to the Reorganized Debtor, in
either case in accordance with the terms and conditions of the Escrow Agreement. The Allowed
General Unsecured Claims are secured by a lien in the amount of the Maximum General Unsecured
Distribution against all of the Reorganized Debtor�’s assets junior in priority only to any lien securing
the Senior Debt required under the Plan (the �“Unsecured Creditor Lien�”). The Unsecured Creditor
Lien shall not be enforced in any manner whatsoever until such time as the Senior Debt has been
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Paid in Full. Neither the lien securing the Senior Debt nor the Unsecured Creditor Lien attach to the
Reorganized Debtor�’s leases, leasehold interests or improvements (i.e. such liens shall attach only to
the proceeds of the Reorganized Debtor�’s leases and leasehold interests).
Any payment to the Holder of an Allowed General Unsecured Claim as provided herein shall
commence with respect to each Allowed General Unsecured Claim on the later of (a) the January 1,
2010 distribution and (b) the date such Claim becomes an Allowed General Unsecured Claim.
The Collateral/Disbursement Agent, as agent for the Holders of the Allowed General
Unsecured Claims, will enter into the Subordination Agreement with Wells Fargo, which
Subordination Agreement will set forth additional terms and conditions governing the payment of
Distributions and the priority of the lien securing the Maximum General Unsecured Distributions.
Each Holder of an Allowed General Unsecured Claim agrees to be bound by the terms and
conditions of the Subordination Agreement as a �“Subordinated Creditor�” thereunder to the same
extent as if a signatory thereto. The Subordination Agreement is incorporated herein by reference.
6. Class 6 (Insider Unsecured Claims)
a. Classification
Class 6 consists of all Unsecured Claims held by the Zeidens.
b. Treatment
After all of the Distributions to the Holders of Allowed Class 5 Claims have been completed,
the Reorganized Debtor shall distribute, on a pro rata basis, $1.705 million to the Holders of the
Allowed Insider Unsecured Claims. Interest on Allowed Insider Unsecured Claims shall accrue but
not be paid until all Plan Distributions have been made to Holders of Allowed Class 5 Claims. Until
all such Distributions have been made, the salaries payable to Holders of Allowed Insider Unsecured
Claims by the Reorganized Debtor shall be capped at two times such Holders�’ current salaries it
being understood that accrued interest on Allowed Insider Unsecured Claims is not to be included in
the amount of current salaries for the Insiders shown on Exhibit “E”.
7. Class 7 (Interests).
a. Classification
Class 7 consists of all Interests in the Debtor.
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b. Treatment.
The common stock of the Debtor will be cancelled. The Holders of Allowed Interests in the
Debtor will receive on account of their New Equity Contributions 100% of the stock of the
Reorganized Debtor that will be distributed to the three of them in equal percentages.
C. Executory Contracts and Unexpired Leases
1. Assumption of Executory Contracts and Leases
Attached hereto as Exhibit “F” is a list of all Assumed Agreements. Each Assumed
Agreement listed on Exhibit “F” as of September 4, 2009, a date that is fourteen (14) days prior to
the Ballot Date, shall be assumed by the Debtor on the Effective Date. Any monetary amounts
required as cure payments on any Assumed Agreements will be satisfied, pursuant to section
365(b)(1) of the Bankruptcy Code, by payment of the cure amount in Cash on the Effective Date, or
upon such other terms as the parties to such Assumed Agreement otherwise may agree. Exhibit “F”
contains the Debtor�’s calculation of the cure amount for each applicable Assumed Agreement. Any
party to an Assumed Agreement who disputes (i) the amount of any cure payment set forth in
Exhibit “F”, (ii) the ability of the Reorganized Debtor to provide �“adequate assurance of future
performance�” (within the meaning of section 365 of the Bankruptcy Code) under the applicable
Assumed Agreement, or (iii) any other matter pertaining to assumption of an Assumed Agreement
shall be required to file an objection on or before September 18, 2009, the date set for objections to
be filed to the Plan. Failure to file an objection shall be deemed consent to the cure amount set forth
on Exhibit “F” and a waiver of any and all rights to challenge such cure amount or of the ability of
the Reorganized Debtor to provide �“adequate assurance of future performance�” of the terms of the
Assumed Agreement and consent to the assumption of the Assumed Agreement. A dispute
regarding the Debtor�’s assumption of any Assumed Agreement shall be subject to the jurisdiction of
the Bankruptcy Court.
The Debtor reserves the right to add any executory contract or unexpired lease to Exhibit
“F” until September 4, 2009, which is fourteen (14) days prior to the Ballot Date or to delete any
Assumed Agreement from Exhibit “F” until the earlier of fourteen (14) days prior to the Ballot Date
and the date the Court otherwise enters an order approving the assumption of such Assumed
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Agreement. Creditors should be aware that, if the Debtor removes any agreements from Exhibit �“F�”
as provided, the counterparties to such agreements may assert claims for rejection damages against
the Debtor resulting from the rejection of their agreements. Such claims may dilute and reduce the
projected fifty percent (50%) recovery to Holders of Allowed General Unsecured Claims.
2. Rejection of Executory Contracts or Leases
Any and all executory contracts or unexpired leases that (i) have not expired by their own
terms on or prior to the Effective Date, (ii) that have not been assumed, assumed and assigned, or
rejected with the approval of the Bankruptcy Court or by operation of law prior to the Effective
Date, (iii) that are not the subject of a motion to assume or assume and assign pending as of the
Effective Date, or (iv) that are not among the Assumed Agreements listed on Exhibit “F” on
September 4, 2009, the date that is fourteen (14) days prior to the Ballot Date (collectively, the
�“Rejected Contracts�”) are rejected by the Debtor effective on the Effective Date. The entry of the
Confirmation Order by the Bankruptcy Court will constitute approval of such rejections effective on
the Effective Date pursuant to sections 365(a) and 1123 of the Bankruptcy Code.
IF THE REJECTION OF AN EXECUTORY CONTRACT OR UNEXPIRED LEASE
RESULTS IN DAMAGES TO THE OTHER PARTY OR PARTIES TO SUCH CONTRACT OR
LEASE, ANY CLAIM FOR SUCH DAMAGES, IF NOT HERETOFORE EVIDENCED BY A
FILED PROOF OF CLAIM, WILL BE FOREVER BARRED AND WILL NOT BE
ENFORCEABLE AGAINST THE DEBTOR, THE REORGANIZED DEBTOR, ITS PROPERTIES
OR AGENTS, OR SUCCESSORS OR ASSIGNEES, UNLESS A PROOF OF CLAIM IS FILED
WITH THE BANKRUPTCY COURT AND SERVED UPON COUNSEL FOR THE
REORGANIZED DEBTOR ON OR BEFORE THIRTY (30) DAYS AFTER THE DATE OF
ENTRY OF AN ORDER BY THE BANKRUPTCY COURT AUTHORIZING AND APPROVING
THE REJECTION OF A PARTICULAR EXECUTORY CONTRACT OR UNEXPIRED LEASE.
D. The Source of Money to Pay Claims.
The Plan cannot be confirmed unless the Court finds that it is �“feasible,�” which means that
the Debtor has timely submitted evidence establishing that the Reorganized Debtor will have
sufficient funds available to satisfy all of its expenses, including the payments to creditors as
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discussed above. The sources of all Distributions and payments under the Plan are Available Cash,
which is expected to be approximately $8,384,608.00, the New Equity Contribution by the Debtor�’s
Insiders in the amount of $2,000,000.00, the income from the operation of the Reorganized Debtor�’s
business and the Exit Financing. See the Plan Cash Flow Projections attached hereto as Exhibit
“C”.
The Debtor and Wells Fargo have entered into the Term Sheet regarding proposed terms of
the Debtor�’s Exit Financing. A copy of the Term Sheet is attached hereto as Exhibit “K”. Such
Exit Financing is subject to, among other things, due diligence to be conducted by Wells Fargo and
the execution and delivery of a Landlord Disclaimer and Consent on Wells Fargo�’s standard form
(or another form acceptable to Wells Fargo in its sole discretion) from each of the Reorganized
Debtor�’s landlords.. The Debtor expects to enter into a binding Exit Financing agreement with
Wells Fargo that formally documents the provisions of the financing as set forth in the Term Sheet,
subject to Court approval as part of the Confirmation Order.
The Plan Cash Flow Projections, which are the projections for the duration of the Plan, are
attached hereto as Exhibit “C”. The feasibility of the Plan and the assumptions and details
surrounding the Plan Cash Flow Projections are discussed more fully in Article XIII below.
E. Distribution of Property Under the Plan.
1. Collateral and Disbursement Agent
Ten days prior to the Confirmation Hearing, the Committee will file with the Court the name
of the party that it has selected, with the advice and consent of Wells Fargo, to serve as the collateral
and disbursement agent (the �“Collateral/Disbursement Agent�”) under the Plan. The
Collateral/Disbursement Agent will hold the Unsecured Creditor Lien on behalf of all Holders of
Allowed General Unsecured Claims and will have the authority, among other things, to enter into an
inter-creditor agreement with Wells Fargo that provides, among other things, for the subordination
of the Unsecured Creditor Lien to the lien that secures the Senior Debt. The
Collateral/Disbursement Agent will also make all Distributions to the Holders of Allowed General
Unsecured Claims as provided in this Plan. Any fees of the Collateral/Disbursement Agent shall be
paid out of the Post-Effective Date Committee Reserve, as defined below.
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2. Timing of Distributions
The timing of Distributions will be as provided in the provisions of the Plan that specify the
treatment of each Class of Claims. Whenever any Distribution to be made under the Plan is due on a
day other than a Business Day, such Distribution will instead be made, without interest, on the
immediately succeeding Business Day, but will be deemed to have been made on the date due. The
Reorganized Debtor, unless it has received a Blockage Notice, shall wire transfer the funds needed
to make each of the Plan Distributions to the Holders of Allowed General Unsecured Claims to the
Collateral/Disbursement Agent five (5) business days prior to the date each of the Plan Distributions
is to be made.
3. Compliance with Tax Requirements
To the extent applicable, the Reorganized Debtor will comply with all tax withholding and
reporting requirements imposed on it by any governmental unit, and all Distributions pursuant to this
Plan will be subject to such withholding and reporting requirements.
4. Manner of Cash Payments
Unless the entity receiving a payment agrees otherwise, cash payments to domestic entities
holding Allowed Claims will be denominated in U.S. dollars and will be made by checks drawn on a
domestic bank selected by the Reorganized Debtor or, at the Reorganized Debtor�’s option, by wire
transfer from a domestic bank. Cash payments to foreign entities holding Allowed Claims may be
paid, at the Reorganized Debtor�’s option, either in the same manner as payments to domestic entities
or in any funds and by any means that are necessary or customary in the particular foreign
jurisdiction.
5. Setoffs
The Reorganized Debtor, pursuant to sections 502 and 553 of the Bankruptcy Code or
applicable nonbankruptcy law, may set off against any Allowed Claim, and the Distributions to be
made pursuant to the Plan on account thereof (before any Distribution is made on account of such
Claim), the claims, rights, and causes of action of any nature that the Debtor or Reorganized Debtor
may have against the Holder of such Allowed Claim; provided, however, that neither the failure to
effect such a setoff, nor the allowance of any Claim under the Plan, shall constitute a waiver or
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release by the Reorganized Debtor of any such claims, rights, and causes of action that the Debtor
may possess against such Holder; and, provided, further, that nothing contained in the Plan is
intended to compromise the rights of any Creditor to effectuate a setoff prior to the Effective Date in
accordance with the provisions of sections 362 and 553 of the Bankruptcy Code.
6. De Minimis Distributions
Any other provision of the Plan notwithstanding, the Reorganized Debtor shall not be
required to make Distributions to any creditor in an amount less than $20.00. Cash allocated to an
Allowed Claim but withheld from a Distribution pursuant to this subsection shall be held by the
Reorganized Debtor for the account of and future Distribution to the Holder of such Allowed Claim,
if any, provided, however, that if the Distribution is the final Distribution to the Holder of such
Claim, then such Distribution shall be made to such Holder.
7. No Distributions With Respect to Disputed, Contingent or Unliquidated Claims
No payments or other Distributions will be made to a Holder of a Disputed Claim unless and
until such Disputed Claim becomes an Allowed Claim; provided, however, a Holder of a Disputed
Claim may receive payment on the Effective Date or any other date on which Distributions are made
on account of any portion of the Disputed Claim that is undisputed. If a Disputed Claim is not an
Allowed Claim on the Effective Date or when payment is otherwise due under the Plan, payments
equal to the amount of Distribution that would have been made to the Holder of such Claim had such
Claim been an Allowed Claim as of the Effective Date will be paid to the Holder of such Claim
within ten (10) days of the entry of a Final Order allowing such Disputed Claim. At the time of any
Distributions to Holders of Allowed Claims, an amount sufficient to have paid each Holder of a
Disputed Claim its pro rata share of such Distribution, calculated according to the Face Amount of
such Claim, shall be reserved for the potential benefit of the Holder of the Disputed Claim, and
thereafter an amount based upon the Allowed Amount of the Claim shall be distributed as set forth
above, but in the event that a creditor asserts duplicative, overlapping or multiple Claims, the total
amount reserved shall not exceed the total amount subject to Distribution to such Creditor on
account of such Claim.
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Until such time as a contingent or unliquidated Claim or a contingent or unliquidated portion
of a Claim become fixed or is disallowed, such claim will be treated as a Disputed Claim for all
purposes related to Distributions under the Plan, including the calculation of the required reserve, if
any. The Holder of a contingent or unliquidated Claim will only be entitled to receive Distributions
under the Plan when and if such contingent or unliquidated Claim becomes any Allowed Claim.
8. Delivery of Distributions
For purposes of all Distributions under the Plan, the Reorganized Debtor will be entitled to
rely on the name and address of the Holder of each Allowed Claim as shown on any timely filed
proof of Claim and, if none, as shown on the Schedules as of the date of the hearing on Confirmation
of the Plan, except to the extent that the Reorganized Debtor receives written notice of a name
change, transfer or change of address (including such a notice filed with the Court and served on the
Reorganized Debtor), properly executed by the Holder or its authorized agent, at least ten (10) days
before the Distribution date. If such notice is received after ten (10) days before the Distribution
Date and the Distribution is returned to the Reorganized Debtor, such Distribution will be re-sent on
the next Distribution date in accordance with the information contained on the notice. Notices
should be served on the Reorganized Debtor at the following address:
Z Gallerie Michael G. Zeiden Chief Financial Officer and Secretary 1855 West 139th Street Gardena, California 90249
With copies to:
Jeffrey W. Dulberg Pachulski Stang Ziehl & Jones LLP 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100
9. Undeliverable or Unclaimed Distributions
Unclaimed Property, which includes any Cash or other property that is returned to the
Reorganized Debtor after a Distribution and remains unclaimed for one hundred and eighty (180)
days after such Distribution is sent by mail to the last known mailing address for the Person entitled
thereto, will be deemed paid to the Person entitled thereto, and such Person will not be entitled to
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any future Distributions under this Plan. Any Unclaimed Property shall revest in the Reorganized
Debtor; provided, however, that Unclaimed Property that is returned to the Reorganized Debtor on
account of an undeliverable or unclaimed Distribution to a Holder of an General Unsecured Claim
will be distributed pro rata to the Holders of the other Allowed General Unsecured Claims.. Nothing
in the Plan requires the Reorganized Debtor to attempt to locate any entity holding an Allowed
Claim whose Distribution is undeliverable.
F. Objections to and Estimation of Claims
The Reorganized Debtor or the Post-Effective Date Committee (defined below), as
applicable, may object to the allowance of Claims or Interests filed with the Bankruptcy Court
where the Reorganized Debtor or the Post-Effective Date Committee disputes liability or allowance
in whole or in part. All objections will be litigated to Final Order; provided, however, that the
Reorganized Debtor or the Post-Effective Date Committee, as applicable, will have the authority to
file, settle, compromise, or withdraw any objections to Claims, in its sole and absolute discretion,
without approval of the Bankruptcy Court. The Reorganized Debtor or the Post-Effective Date
Committee, as applicable, will file and serve all objections to Claims as soon as practicable, but no
later than one-hundred twenty (120) days after the Effective Date, unless upon motion of the
Reorganized Debtor or the Post-Effective Date Committee, as applicable, the Bankruptcy Court
extends such deadline. Objections to Claims filed after the Debtor distributes Ballots to Holders of
Claims entitled to vote on the Plan shall not disenfranchise such Claims from voting on the Plan.
The Reorganized Debtor or the Post-Effective Date Committee, as applicable, at any time
may request that the Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code, regardless of whether the Reorganized Debtor or the Post-
Effective Date Committee previously objected to such contingent or unliquidated Claim or whether
the Bankruptcy Court ruled on any such objection. The Bankruptcy Court will retain jurisdiction to
estimate any contingent or unliquidated Claim at any time during litigation concerning any objection
to any contingent or unliquidated Claim, including, without limitation, an objection during the
pendency of any appeal relating to any such objection. Subject to the provisions of section 502(j) of
the Bankruptcy Code, in the event that the Bankruptcy Court estimates any contingent or
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unliquidated Claim, the amount so estimated will constitute the allowed amount of such contingent
or unliquidated Claim. If the estimated amount constitutes a maximum limitation on the amount of
such contingent or unliquidated Claim, the Reorganized Debtor or the Post-Effective Date
Committee, as applicable, may pursue supplementary proceedings to object to the allowance of such
contingent or unliquidated Claim. All of the aforementioned objection, estimation, and resolution
procedures are intended to be cumulative and not necessarily exclusive of one another. Claims may
be estimated and subsequently compromised, settled, withdrawn, or resolved by the parties with no
further order of the Court.
G. Litigation
1. Existing and Potential Causes of Action
Due to the size and scope of the Debtor�’s business operations and the multitude of business
transactions therein, there may be Causes of Actions that currently exist, or may subsequently arise,
in addition to the matters identified below. The Debtor does not intend, and it should not be
assumed, that because any existing or potential claims or Causes of Action have not yet been
pursued by the Debtor, or do not fall within the list below, that any such claims or Causes of Action
have been waived. Under the Plan and as more specifically discussed below, the Reorganized
Debtor retains all rights to pursue any and all Causes of Action to the extent the Reorganized Debtor
deems appropriate (under any theory of law or equity, including, without limitation, the Bankruptcy
Code and any applicable local, state, or federal law, in any court or other tribunal, including, without
limitation, in an adversary proceeding filed in the Case), provided, however, the Debtor, upon
Confirmation of the Plan, will be deemed to have waived any claim or Cause of Action to avoid (i) a
preferential transfer under section 547 of the Bankruptcy Code or any state law or (ii) any fraudulent
conveyance pursuant to section 544 or 548 of the Bankruptcy Code or any state law that it may hold
against a Holder of an Allowed General Unsecured Claim (the �“Waived Avoidance Actions�”).
Existing or potential claims or Causes of Action that may be pursued by the Reorganized
Debtor after the Effective Date, include, without limitation, (i) any and all Causes of Action pursuant
to any applicable section of the Bankruptcy Code, including, but not limited to, (a) any claims of the
Debtor arising under section 362 of the Bankruptcy Code; (b) turnover claims arising under sections
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542 or 543 of the Bankruptcy Code and (c) any avoidance actions arising under sections 544, 547 or
548 of the Bankruptcy Code, except for the Waived Avoidance Actions. (ii) objections to Claims;
(iii) claims that the Estate is entitled to set off or recoup against parties with claims against the
Estate; and (iv) any action for equitable subordination of any Claim against the Estate. Moreover,
the Reorganized Debtor may pursue existing or potential claims or Causes of Action related to any
other litigation or Causes of Action, whether legal, equitable, or statutory in nature, arising out of, or
in connection with, the Debtor�’s business, assets, or operations, or otherwise affecting the Debtor,
including without limitation, possible claims against the following types of parties for the following
types of claims: (a) possible claims against vendors, customers, or suppliers for warranty, indemnity,
charge back/set-off issues, overpayment or duplicate payment issues, and collections/accounts
receivable matters; (b) possible claims against persons or parties for wrongful or improper
termination of services to the Debtor; (c) failure of any persons or parties to fully perform under
contracts with the Debtor before the assumption or rejection of such contracts; (d) possible claims
for deposits or other amounts owed by any creditor, lessor, supplier, vendor, factor, or other person;
(e) possible claims for damages or other relief against any party arising out of environmental, or
product liability matters; (f) actions against insurance carriers relating to coverage, indemnity, or
other matters; (g) counterclaims and defenses relating to notes or other obligations; (h) possible
claims against local, state, and federal taxing authorities (including, without limitation, any claims
for refunds of overpayments, challenges to audits, assessments, penalties, interest or any other
obligations imposed by governmental agencies); (i) possible claims against Secured Creditors,
including, without limitation, claims relating to the inclusion of improper charges, fees, interest,
penalties in any alleged Secured Claim and the nature, extent, priority and validity of any lien; and
(j) contract, tort, or equitable claims that may exist or subsequently arise.
The Debtor�’s investigation of potential causes of action is ongoing and will occur in large
part after the Effective Date. As a result, Holders of Claims and other parties in interest should be,
and are pursuant to the terms of the Plan, specifically advised that, notwithstanding that the existence
of any particular Causes of Action may not be listed, disclosed, or set forth in this Plan, Causes of
Action may be brought against the Holder of any Claim at any time, except for the Waived
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Avoidance Actions or as otherwise provided in this Plan and subject to the bar-date limitations set
forth in the Plan and/or the Bankruptcy Code.
THE REORGANIZED DEBTOR WILL MAKE THE DECISION OF WHETHER OR NOT
TO PURSUE CAUSES OF ACTION. THE REORGANIZED DEBTOR MAY SEEK TO RETAIN
COUNSEL ON A CONTINGENCY BASIS TO PROSECUTE SOME OR ALL OF SUCH
CLAIMS OR MAY DECIDE NOT TO PURSUE SUCH CLAIMS AT ALL. AS SET FORTH IN
THE PLAN, THE REORGANIZED DEBTOR, ITS EMPLOYEES, CONTRACTORS, OFFICERS,
DIRECTORS, SUCCESSORS, AND ASSIGNS AND THE EMPLOYEES OF THE DEBTOR
AND ITS RESPECTIVE PROFESSIONALS AND REPRESENTATIVES SHALL NOT HAVE
ANY LIABILITY ARISING OUT OF THE REORGANIZED DEBTOR'S GOOD FAITH
DETERMINATION OF WHETHER OR NOT TO PURSUE PROSECUTION OF THE
FOREGOING CLAIMS.
2. Preservation of All Litigation and Causes of Action Not Expressly Settled and Released
The Reorganized Debtor retains all rights on behalf of the Debtor, the Reorganized Debtor,
and the Estate to commence and pursue, as appropriate, any and all claims or Causes of Action,
whether arising before or after the Petition Date, in any court or other tribunal, including, without
limitation, a adversary proceeding filed in the Case, except for the Waived Avoidance Actions. The
Reorganized Debtor has the exclusive right, authority, and discretion to institute, prosecute,
abandon, settle, or compromise any and all such claims, rights, and Causes of Action without the
consent or approval of any third party, and without any further order of the Court, except for the
Waived Avoidance Actions.
While the Debtor has attempted to identify claims or Causes of Action that may be pursued
in the preceding section and the Disclosure Statement, the failure to list any potential or existing
claims or Causes of Action is not intended to limit the rights of the Reorganized Debtor to pursue
any claims or Causes of Action not listed or identified, except for the Waived Avoidance Actions.
After the Effective Date, the Reorganized Debtor may continue to prosecute any litigation or Causes
of Action, whether legal, equitable, or statutory in nature, arising out of, or in connection with, the
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Debtor�’s business, assets, or operations, or otherwise affecting the Debtor, except as otherwise
provided herein.
Unless a claim or Cause of Action against a Creditor or other person or entity is expressly
waived (i.e. the Waived Avoidance Actions), relinquished, released, compromised, or settled in the
Plan or any Final Order, the Reorganized Debtor expressly reserves such claim or Cause of Action
for later adjudication (including, without limitation, claims and Causes of Action not specifically
identified, of which Debtor may presently be unaware, or that may arise or exist by reason of
additional facts or circumstances unknown to the Debtor at this time, or facts or circumstances that
may change or be different from those that Debtor now believes to exist) and, therefore, no
preclusion doctrine, including, without limitation, the doctrines of res judicata, collateral estoppel,
issue preclusion, claim preclusion, waiver, estoppel (judicial, equitable, or otherwise), or laches shall
apply to such claims or Causes of Action upon, or after, the Confirmation or consummation of the
Plan based on the Disclosure Statement, the Plan, or the Confirmation Order, except where such
claims or Causes of Action have been expressly released in the Plan or other Final Order (i.e. the
Waived Avoidance Actions).
Except as otherwise provided in the Plan or in any contract, instrument, release, indenture, or
other agreement entered into in connection with the Plan, the Reorganized Debtor is authorized to
exercise and perform the rights, powers, and duties held by the Estate, including without limitation
the authority under Bankruptcy Code section 1123(b)(3) to provide for the settlement, adjustment,
retention, and enforcement of Claims and Interests of the Estate, including, but not limited to, all
Causes of Action and the authority to exercise all rights under sections 1106, 1107, and 1108 of the
Bankruptcy Code, including, but not limited to, those Causes of Action listed in the preceding
section, shall vest in the Reorganized Debtor, except for the Waived Avoidance Actions.
Any person to whom Debtor has incurred an obligation (whether on account of services,
purchase, sale of goods, or otherwise), or who has received services from the Debtor or a transfer of
money or property of the Debtor, or who has transacted business with the Debtor, or leased
equipment or property to the Debtor should assume that such obligation, transfer, or transaction may
be reviewed by the Reorganized Debtor subsequent to the Effective Date and may, if appropriate, be
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the subject of an action after the Effective Date, whether (i) such person has filed a proof of claim
against Debtor in this Case; (ii) such person�’s proof of claim has been objected to by the Estate; (iii)
such person�’s Claim was included in the Debtor�’s Bankruptcy Schedules; (iv) such person�’s
scheduled Claims have been objected to by the Estate or have been identified by the Estate as
disputed, contingent, or unliquidated; or (v) such action falls within the list of Causes of Action in
the preceding section.
H. The Releases
In consideration for the New Equity Contribution made by the Zeidens, the Debtor on
behalf of the Estate hereby fully and unconditionally releases and forever discharges Joseph
Zeiden, Carole Malfatti and Michael Zeiden and their attorneys, agents, advisors, professionals,
representatives and assigns (the “Zeiden Releasees”) from and against any and all claims, causes
of action, damages, losses, liabilities, obligations, expenses, debts, dues, sums of money, accounts,
reckonings, contracts, controversies, known or unknown, fixed or contingent, direct or indirect,
accrued or not accrued, liquidated or unliquidated or suspected or unsuspected, in contract or in
tort or otherwise, that the Debtor or the Estate ever had, now have or hereafter can, shall or may
have, or may claim to have, whether directly or indirectly, or by assignment or succession, against
the Zeiden Releasees, or any of them, for, upon, or by reason of any matter relating to the
ownership, management or operation of the Debtor through the Effective Date. This release shall
be effective as of the Effective Date.
The Zeidens acknowledge that they are aware of and have read Section 1542 of the
California Civil Code, which provides as follows:
“A general release does not extend to claims which the creditor does not know or suspect
to exist in his or her favor at the time of executing the release, which if known by him or her must
have materially affected his or her settlement with the debtor.”
Except to the extent arising from willful misconduct or gross negligence, any and all
Claims, liabilities, causes of action, rights, damages, costs and obligations held by any party
against the Debtor and its attorneys, accountants, agents and other professionals, and its officers,
directors and employees, whether known or unknown, matured or contingent, liquidated or
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unliquidated, existing, arising or accruing, whether or not yet due, in any manner related to the
Post-Petition administration of the Case or the formulation, negotiation, prosecution or
implementation of the Plan, shall be deemed fully waived, barred, released and discharged in all
respects, except as to rights, obligations, duties, claims and responsibilities preserved, created or
established by terms of the Plan; provided, however, that, notwithstanding the foregoing, this
provision does not limit the nature of any objection to the allowance and payment of (i) any
Professional Fees, (ii) any Insider Claims other than the Allowed Insider Unsecured Claims in
Class 6 or (iii) or any Insider compensation.
Pursuant to section 1125(e) of the Bankruptcy Code, the Reorganized Debtor, the
Committee and their respective present and former members, ex-officio members, officers,
directors, trustees, employees, agents, designees, successors or assigns, and the Debtor and any
Professional Persons (acting in such capacity) employed by any, of the foregoing entities, will
neither have nor incur any liability to any Person for any act or omission occurring after the
Petition Date and in connection with, relating to or arising out of the Case, formulation,
negotiation or implementation of the Plan, solicitation of acceptances of the Plan, the pursuit f
Confirmation of the Plan, the consummation of the Plan, Confirmation of the Plan or the
administration of the Plan or the property to be distributed under the Plan. Nothing in this
section shall be construed to exculpate any entity from liability for their willful misconduct or
gross negligence..
VII
MODIFICATION AND REVOCATION OF THE PLAN; CONDITIONS TO
CONFIRMATION AND THE EFFECTIVE DATE; REQUEST TO CRAM-DOWN PLAN
A. Modification of the Plan
In accordance with section 1127 of the Bankruptcy Code, the Debtor reserves the right to
alter, amend or modify the Plan or any Plan exhibit or schedule, prior to Confirmation including
amending or modifying it to satisfy the requirements of the Bankruptcy Code. The Bankruptcy
Court may require a new disclosure statement and/or revoting on the Plan if the Debtor materially
modifies the Plan subsequent to the solicitation of votes regarding the Plan but before Confirmation.
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The Debtor or the Reorganized Debtor may modify the Plan at any time after confirmation
and before substantial consummation of the Plan, but only if circumstances warrant such
modification and after notice and hearing.
B. Revocation of the Plan.
The Debtor reserves the right to withdraw or revoke the Plan at any time before the entry of
the Confirmation Order.
At the option of the Debtor, the Plan shall be deemed null and void if any of the following
events occur: (i) the Plan is revoked or withdrawn; (ii) the Confirmation Order is not entered; (iii)
the Effective Date does not occur; (iv) consummation of the Plan is not substantially achieved; or (v)
the Confirmation Order is reversed or revoked. Nothing contained in the Plan shall be deemed to
constitute a waiver of any claim by the Debtor, or to prejudice in any manner the rights of the Debtor
in any further proceedings.
C. Conditions Precedent to Confirmation
The Confirmation of the Plan shall be subject to the following conditions precedent:
(1) the Clerk of the Bankruptcy Court shall have entered an order granting approval of
the Disclosure Statement and finding that it contains adequate information pursuant to section 1125
of the Bankruptcy Code and that order shall have become a Final Order; and
(2) the Confirmation Order shall have been signed by the Bankruptcy Court and duly
entered on the docket for the Case by the Clerk of the Bankruptcy Court.
D. The Effective Date
The Plan will not be consummated or become binding unless and until the Effective Date
occurs. Provided that the conditions to the Effective Date, as set forth below, have been fulfilled, the
Effective Date will be the later of:
(1) the first (1st) business day after the eleventh (11th) day following the Confirmation
Date; and
(2) the first business day after such date under clause (a) on which there is not in force
any stay or injunction against the enforcement of the Plan or the Confirmation Order.
The Debtor expects the Effective Date to be on or about October 12, 2009.
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E. Conditions to the Effective Date
The Effective Date shall be subject to the following conditions precedent:
(1) the conditions to Confirmation have been met; and
(2) the Exit Financing shall be fully funded and in place.
F. Confirmation Request
In the event that all of the applicable requirements of section 1129(a) are met other than
section 1129(a)(8), the Debtor requests confirmation of the Plan notwithstanding the requirements of
such paragraph under 11 U.S.C. § 1129(b).
G. Effect of Failure of the Plan to Become Effective
Notwithstanding anything to the contrary in the Plan, if the Confirmation Order is not entered
or is vacated or if the Effective Date does not occur, the Plan will be null and void, and nothing
contained in the Plan shall (i) be deemed to be an admission by the Debtor with respect to any matter
discussed in the Plan, including liability on any Claim or the propriety of any Claim�’s classification;
(ii) constitute a waiver, acknowledgment, or release of any Claims, Interests, or any claims held by
the Debtor; or (iii) prejudice in any manner the rights of the Debtor in any further proceedings.
VIII
EFFECT OF CONFIRMATION OF THE PLAN
A. Binding Effect of Confirmation
Confirmation will bind the Debtor, all Creditors, Interest Holders, and other parties in interest
to the provisions of the Plan, whether or not the Claim or Interest of such Creditor or Interest Holder
is impaired under the Plan, and whether or not such Creditor or Interest Holder has accepted the
Plan. If the Confirmation Order is not entered or is vacated, the Plan shall be null and void in all
respects and nothing contained in the Plan or the Disclosure Statement shall (a) constitute a waiver
or release of any Claims against, or any Equity Interest in, the Debtor or any claim by, or right of,
the Debtor; (b) prejudice in any manner the rights of the Debtor; or (c) constitute an admission,
acknowledgment, offer, or undertaking by the Debtor in any respect.
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B. Revesting of the Property in the Reorganized Debtor
Except as otherwise set fort in the Plan, on the Effective Date, title to all Assets and property
of the Debtor, and all property of the Estate, including, pursuant to section 1123(b)(3)(b) of the
Bankruptcy Code, each and every claim, demand, or cause of action that the Debtor had or had
power to assert immediately prior to Confirmation (except for the Waived Avoidance Actions), will
revest in the Reorganized Debtor free and clear of all liens, Claims, and Interests. Thereafter, the
Reorganized Debtor will hold these assets without further jurisdiction, restriction, or supervision of
the Court.
C. Good Faith
Confirmation of the Plan shall constitute a finding that (i) the Plan has been proposed in good
faith and in compliance with applicable provisions of the Bankruptcy Code; and (ii) the solicitation
of acceptances or rejections of this Plan by all Persons and, to the extent applicable, the offer,
issuance, sale, or purchase of any security offered or sold under the Plan has been in good faith and
in compliance with applicable provisions of the Bankruptcy Code.
D. Authority to Implement Plan
Upon the entry of the Confirmation Order by the Bankruptcy Court, all matters provided
under the Plan shall be deemed to be authorized and approved without further approval from the
Bankruptcy Court. Debtor and the Reorganized Debtor shall be authorized, without further
application to or order of the Bankruptcy Court, to take whatever action is necessary to achieve
consummation and carry out the Plan and to make the contemplated Distributions.
E. Discharge and Injunction
Except as otherwise provided in the Plan, (i) the rights afforded in the Plan and the treatment
of all Claims and Interests therein, are in exchange for and in complete satisfaction, discharge, and
release of Claims and Interests of any nature whatsoever against the Debtor and the Reorganized
Debtor, or any of their assets or properties, except as set forth herein; (ii) on the Effective Date, all
such Claims against the Debtor shall be satisfied, discharged and released in full; and (iii) all Persons
and entities shall be precluded from asserting against the Reorganized Debtor, its successors, or its
assets or properties any other or further Claims based upon any act or omission, transaction, or other
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activity of any kind or nature that occurred prior to the Confirmation Date.
Unless otherwise provided, all injunctions or stays provided for in the Case under sections
105 and 362 of the Bankruptcy Code or otherwise in effect on the Confirmation Date shall remain in
full force and effect until the Effective Date.
Nothing in this Section VIII.E shall impair (i) the rights of any Holder of a Disputed Claim to
establish its Claim in response to an objection filed by the Debtor, Reorganized Debtor or Post-
Confirmation Committee, as applicable; (ii) the right of any defendant in an Avoidance Action to
assert defenses in such action; or (iii) the right of any counterparty to an assumed executory contract
or unexpired lease to enforce the terms of such contact or lease.
F. Post-Confirmation Effectiveness of Proofs of Claim
Proofs of Claim shall, upon the Effective Date, represent only the right to participate in the
Distributions contemplated by the Plan and otherwise shall have no further force or effect.
G. Post-Effective Date Committee
On the Effective Date, the Committee shall be dissolved and all members of the Committee
and its professionals shall be discharged from their duties as members of, and professionals retained
by, the Committee. Notwithstanding the dissolution of the Committee, the members of the
Committee retain the right to seek reimbursement of expenses (in the case of members of the
Committee) and final compensation (as to professionals retained by the Committee).
As of the Effective Date, there shall be formed a post-Effective Date committee (the �“Post-
Effective Date Committee�”). The members of such Post-Effective Date Committee will be those
members of the Committee who wish to continue to serve. Ten days prior to the Ballot Date, the
Committee shall file with the Bankruptcy Court a notice of selection of the Post-Effective Date
Committee�’s members, which notice will name the members of the Post-Effective Date Committee.
The Post-Effective Date Committee shall have the right to object to Claims, excluding the
Insider Unsecured Claims, and shall further have the right and authority to take all actions the Post-
Effective Date Committee may deem necessary in its business judgment to enforce the Reorganized
Debtor�’s obligations to Holders of General Unsecured Claims under the Plan, including without
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limitation any actions it may deem necessary in connection with the issuance of any Blockage
Notice to the Reorganized Debtor.
The Post-Effective Date Committee shall have the authority to retain counsel and other
professionals of its choosing.
The expenses of the Collateral/Disbursement Agent and the Post-Effective Date Committee,
including, but not limited to, the expenses of the members and the fees and expenses of any
professionals employed by the Post-Effective Date Committee and/or the Collateral/Disbursement
Agent shall be paid out of the $8.045 million Cash available for the Maximum General Unsecured
Distribution. Specifically, an amount shall be reserved and set aside from the initial Distribution of
Cash from the Maximum General Unsecured Distribution (and, as necessary, from subsequent
Distributions of Cash from the Maximum General Unsecured Distribution) to pay the reasonable
fees and expenses of Post-Effective Date Committee members and professionals retained by the
Post-Effective Date Committee (the �“Post-Effective Date Committee Reserve�”), which fees and
expenses may be paid from the Post-Effective Date Committee Reserve without further order of the
Court. The Post-Effective Date Committee (or its designee) shall hold the Post-Effective Date
Committee Reserve in a segregated account to be used exclusively to pay the reasonable fees and
expenses of Post-Effective Date Committee members and professionals retained by the Post-
Effective Date Committee. Any unused amounts deposited in the Post-Effective Date Committee
Reserve shall be distributed to Holders of Allowed General Unsecured Claims in accordance with
the Plan.
Neither the Collateral/Disbursement Agent, members of the Post-Effective Date Committee,
the Post-Effective Date Committee nor any of its retained professionals, employees or agents shall
be liable for any act taken, suffered or omitted to be taken in their capacity as members of the Post-
Effective Date Committee or in reliance on any provision of the Plan, except for acts of gross
negligence or willful misconduct (which gross negligence or willful misconduct must be determined
by a Final Order in a court of competent jurisdiction), in the performance of duties for the Post-
Effective Date Committee. Notwithstanding anything herein to the contrary, in no event shall the
Collateral/Disbursement Agent or any member of the Post-Effective Date Committee be liable to
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any party on account of the performance of duties for the Post-Effective Date Committee in an
amount that exceeds the fees and expenses such Collateral/Disbursement Agent, Post-Effective Date
Committee member or professional has received for its service on or to the Post-Effective Date
Committee.
Neither the Collateral/Disbursement Agent or the Post-Effective Date Committee shall not
be required to give any bond or surety for the performance of its duties.
The Post-Effective Date Committee will dissolve and the Collateral/Disbursement Agent will
be discharged upon the completion of all distributions to General Unsecured Creditors in accordance
with the terms of the Plan.
H. Reorganized Debtor’s Reports to the Post-Effective Date Committee
Until the last Distribution to the Holders of Allowed General Unsecured Claims occurs on
January 1, 2012 pursuant to the terms of the Plan, the Reorganized Debtor will provide the Post-
Effective Date Committee with quarterly reports, including consolidated financial statements and
supporting schedules, in advance of the meetings between the Board of Directors of the Reorganized
Debtor and the Post-Effective Date Committee that will take place quarterly until January 1, 2012
and that are to be scheduled on reasonable notice and to last no more than one (1) business day.
IX
OTHER PLAN PROVISIONS
A. Corporate Action
The Reorganized Debtor shall be empowered and authorized to put into effect and carry out
the Plan and any orders of the Court relative thereto and take any proceeding and do any act
provided in the Plan or directed by such orders without further action by any directors or
shareholders of the Debtor. Such power and authority may be exercised and such proceedings and
acts may be taken as may be directed by such orders with like effect as if exercised and taken by
unanimous action of all such directors or stockholders, as the case may be. In general and subject to
the protective provisions in the Plan, the Reorganized Debtor shall act for the Debtor and the Estate
in a fiduciary capacity as applicable to a board of directors.
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B. Reorganized Debtor’s Board of Directors
The members of the Reorganized Debtor�’s Board of Directors will be Joseph Zeiden, Carole
Malfatti and Michael Zeiden.
C. Further Assurances
The Debtor, the Reorganized Debtor, and all Holders of Claims receiving Distributions under
the Plan and all other parties in interest shall, from time to time, prepare, execute, and deliver any
agreements or documents and take any other actions as may be necessary or advisable to effect the
provisions and intent of the Plan.
D. Payment of Statutory Fees
All fees payable pursuant to 28 U.S.C. § 1930 shall be paid on or before the Effective Date.
The Reorganized Debtor shall pay fees that accrue under 28 U.S.C. § 1930 until a final decree is
entered in the Case, or the Bankruptcy Court otherwise orders. The Reorganized Debtor shall
submit U.S. Trustee status reports with each quarterly fee paid after Confirmation.
E. Services by and Fees for Professionals
1. Prior to the Effective Date. Fees and expenses for the Professionals retained by the
Committee or the Debtor for services rendered and costs incurred after the Petition Date and prior to
the Effective Date will be fixed by the Bankruptcy Court after notice and a hearing, and such fees
and expenses will be paid (less deductions for any and all amounts thereof already paid to such
Persons) after approval by the Bankruptcy Court to the extent so approved and as provided in the
Plan.
2. From the Effective Date. Fees owing for services rendered and costs incurred and
owing on and after the Effective Date by the Professionals retained by the Debtor will be paid by
Reorganized Debtor from the funds held by the Reorganized Debtor without further order of the
Court.
F. Post-Confirmation Status Reports
Within 120 days of the entry of the order confirming the Plan, the Reorganized Debtor shall
file a status report with the Court explaining what progress has been made toward consummation of
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the confirmed Plan. The status report shall be served on the United States Trustee, the Post-
Effective Date Committee and those parties who have requested special notice in the Case pursuant
to Bankruptcy Rule 2002. Further status reports shall be filed every 120 days and served on the
same entities until the Plan has been substantially consummated.
G. No Recourse
No entity other than an entity entitled to receive a payment or Distribution under the Plan or
the Holders of Allowed Interests will have any recourse against the Debtor, its Estate, or the
Reorganized Debtor or its Assets. Recourse against such parties shall be limited to enforcement of
the terms of the Plan.
H. Severability of Plan Provisions
If, before Confirmation, the Court holds that any Plan term or provision is invalid, void, or
unenforceable, the Court may alter or interpret that term or provision so that it is valid and
enforceable to the maximum extent possible consistent with the original purpose of that term or
provision. That term or provision will then be applicable as altered or interpreted. Notwithstanding
any such holding, alteration, or interpretation, the Plan�’s remaining terms and provisions will remain
in full force and effect and will in no way be affected, impaired, or invalidated. The Confirmation
Order will constitute a judicial determination providing that each Plan term and provision, as it may
have been altered or interpreted in accordance with this section, is valid and enforceable under its
terms. Should any provision in the Plan be determined to be unenforceable after Confirmation, such
determination shall in no way limit or affect the enforceability and operative effect of any and all
other provisions of the Plan.
I. Entry of a Final Decree
Once the Plan has been consummated, a final decree may be entered upon motion of the
Reorganized Debtor. The effect of the final decree is to close the Case. After such closure, a party
seeking any type of relief relating to a Plan provision can seek such relief in a state court of general
jurisdiction.
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J. Governing Law
The rights and obligations arising under the Plan and any agreements, contracts, documents,
or instruments executed in connection with the Plan will be governed by, and construed and enforced
in accordance with, California law without giving effect to California conflict-of-law principles,
unless a rule of law or procedure is supplied by (i) federal law (including the Bankruptcy Code and
the Bankruptcy Rules); or (ii) an express choice-of-law provision in any document provided for, or
executed under or in connection with, the Plan.
K. Retention of Jurisdiction
The Bankruptcy Court shall retain and have exclusive jurisdiction over any matter arising
under the Bankruptcy Code, arising in or related to the Case or the Plan, to the fullest extent
permitted by law including, but not limited to, the following matters:
(1) resolution of any matters related to the assumption, assumption and assignment, or
rejection of any executory contract or unexpired lease to which the Debtor is a party or with respect
to which the Debtor may be liable, and to hear, determine, and, if necessary, liquidate, any Claims
arising therefrom, including those matters related to the amendment after the Effective Date of the
Plan, and to add or delete any executory contracts or unexpired leases to the list of executory
contracts and unexpired leases to be assumed;
(2) entry of such orders as may be necessary or appropriate to implement or consummate
the provisions of the Plan and all contracts, instruments, releases, and other agreements or
documents created in connection with the Plan;
(3) Determination of any and all motions, adversary proceedings, applications, and
contested or litigated matters that may be pending on the Effective Date or that, pursuant to the Plan,
may be instituted by the Debtor, the Reorganized Debtor or the Post-Effective Date Committee after
the Effective Date;
(4) Ensuring that Distributions to Holders of Allowed Claims are accomplished as
provided in the Plan, including without limitation jurisdiction over any claims or disputes regarding
the issuance of a Blockage Notice;
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(5) Hearing and determining any timely objections to Administrative Claims or to proofs
of Claim filed, both before and after the Confirmation Date, including any objections to the
classification of any Claim and to allow, disallow, determine, liquidate, classify, estimate, or
establish the priority of secured or unsecured status of any Claim, in whole or in part;
(6) Entry and implementation of such orders as may be appropriate in the event the
Confirmation Order is, for any reason, stayed, revoked, modified, reversed, or vacated;
(7) Issuance of such orders in aid of execution of the Plan, to the extent authorized by
section 1142 of the Bankruptcy Code;
(8) Consideration of any modifications of the Plan, to cure any defect or omission, or
reconcile any inconsistency in any order of the Bankruptcy Court, including the Confirmation Order;
(9) Hearing and determining all applications for awards of compensation for services
rendered and reimbursement of expenses incurred prior to the Effective Date;
(10) Hearing and determining disputes arising in connection with, or relating to, the Plan
or the interpretation, implementation, or enforcement of the Plan, or the extent of any Person�’s
obligations incurred in connection with or released or exculpated under the Plan;
(11) Issuance of injunctions or other orders as may be necessary or appropriate to restrain
interference by any Person with consummation or enforcement of the Plan;
(12) Determination of any other matters that may arise in connection with, or are related
to, the Plan, the Disclosure Statement, the Confirmation Order, or any contract, instrument, release,
or other agreement or document created in connection with the Plan or the Disclosure Statement;
(13) Hearing and determining matters concerning state, local, and federal taxes in
accordance with sections 346, 505, and 1146 of the Bankruptcy Code;
(14) Hearing any other matter or for any purpose specified in the Confirmation Order that
is not inconsistent with the Bankruptcy Code;
(15) Entry of a final decree closing the Case; and
(16) Interpreting and enforcing Orders entered by the Bankruptcy Court.
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If the Bankruptcy Court abstains from exercising jurisdiction, or is without jurisdiction, over
any matter, this section will not effect, control, prohibit, or limit the exercise of jurisdiction by any
other court that has jurisdiction over that matter.
L. Successors and Assigns
The rights, benefits, and obligations of any Person or entity named or referred to in the Plan
shall be binding on, and shall inure to the benefit of, any heir, executor, administrator, successor, or
assign of such Person or entity.
M. Saturday, Sunday, or Legal Holiday
If any payment or act under the Plan should be made or performed on a day that is not a
Business Day, then the payment or act may be completed on the next succeeding day that is a
Business Day, in which event the payment or act will be deemed to have been completed on the
required day.
N. Headings
The headings used in the Plan are inserted for convenience only, and neither constitutes a
portion of the Plan nor in any manner shall affect the provisions or interpretation(s) of the Plan.
X
CERTAIN RISK FACTORS TO BE CONSIDERED
Holders of impaired Claims should read and consider carefully the factors set forth below, as
well as other information set forth in this Disclosure Statement and the documents delivered together
herewith and/or incorporated by reference herein, prior to voting to accept or reject the Plan.
A. Risks that the Debtor Will Have Insufficient Cash for the Plan to Become Effective
The Plan cannot be confirmed by the Bankruptcy Court unless the Debtor has sufficient
funds by the Effective Date to pay all Allowed Administrative Claims and Allowed Priority Claims,
unless particular Holders of such Claims agree to a deferred payment of their Claims. The Debtor
believes that at the time of Confirmation it will have sufficient Cash to satisfy all such Claims.
B. Bankruptcy Risks
Section 1122 of the Bankruptcy Code provides that a plan may place a claim or an interest in
a particular class only if such claim or interest is substantially similar to the other claims or interests
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of such class. The Debtor believes that the classification of Claims and Interests under the Plan
comply with the requirements set forth in the Bankruptcy Code. However, there can be no assurance
that the Bankruptcy Court would reach the same conclusion.
Even if all Classes of Claims that are entitled to vote accept the Plan, the Plan might not be
confirmed by the Bankruptcy Court. Section 1129 of the Bankruptcy Code sets forth the
requirements for confirmation and requires, among other things, that the confirmation of a plan is
not likely to be followed by the liquidation or the need for further financial reorganization, and that
the value of distributions to dissenting creditors and equity security holders not be less than the value
of distributions such creditors and equity security holders would receive if the Debtor were
liquidated under chapter 7 of the Bankruptcy Code. The Debtor believes that the Plan satisfies all
the requirements for confirmation of a plan and that the Bankruptcy Court would also conclude that
the requirements for Confirmation of the Plan have been satisfied.
C. Business Risks
While the Plan Cash Flow Projections incorporate certain assumptions, there are events that
could occur and risks associated with the Reorganized Debtor�’s reorganization that would hinder the
Reorganized Debtor�’s ability to meet its Plan obligations. For example, the Debtor will not be able
to consummate the Plan if it does not obtain the Exit Financing, and its ability to successfully
implement the Plan will be compromised if it is unable to enter into binding agreements with its
landlords memorializing the various rent reductions it has negotiated in principle. Moreover, the
successful implementation of the Reorganized Debtor�’s business plan is dependent on the interaction
of many other variables, including the Reorganized Debtor�’s ability to exploit and maintain its
current market niche, the effects of changing industry conditions and competition, the effects of
general economic trends influencing consumers' discretionary expenditures and the Reorganized
Debtor�’s marketing plan. Even though the Plan Cash Flow Projections are reflective of the Debtor�’s
reasonable judgment in assessing those risks, factors or events not foreseen or anticipated by the
Debtor could adversely affect the ability of the Reorganized Debtor to execute its business-plan
strategies. Specifically, the Reorganized Debtor�’s ability to meet its Plan Cash Flow Projections is
subject to the following risks, among others:
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1. Industry Conditions
There can be no assurance that the industry conditions under which the Reorganized Debtor
will operate will enable it to achieve the revenues, or the gross margins thereon, that the Reorganized
Debtor has relied upon to project future business prospects. Industry-wide demand is subject to
fluctuations in consumer tastes. Moreover, the industry in which the Reorganized Debtor
participates is highly competitive. As other retailers selling similar products vie for market share,
the relative market share enjoyed by the Reorganized Debtor may be adversely affected.
2. Competition
The Debtor�’s industry is highly competitive and is affected by changes in the public's habits
and preferences, demographic and sociocultural patterns, and local and national economic conditions
affecting consumer spending habits. The retail stores operated by the Debtor compete directly and
indirectly with a large number of national and regional operations. Other retailers may open new
stores in close proximity to the Debtor�’s existing stores. There are other companies engaged in the
retail sale of goods that are identical or similar to the goods sold by the Reorganized Debtor that
have substantially greater financial resources and a higher volume of sales than the Debtor. In
response to competition, the Reorganized Debtor may need to develop and implement new concepts
in order for its business to remain viable.
3. Seasonality
Sales in the Debtor�’s stores are subject to some seasonal fluctuation. As with many retail
operations, the Debtor may have higher sales during the holiday season between Thanksgiving and
Christmas and lower sales in first quarter of the year which will result in variable income in the
weeks immediately following these sales periods.
4. Operating
Ongoing Plan payments will be funded by internal operations. Although the Debtor has
made every effort, based upon its knowledge of its business and the current state of the economy, to
accurately project its future cash flow as reflected in the attached Plan Cash Flow Projections, there
can be no assurance that the operating cash flow of the Reorganized Debtor, after giving effect to
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operating requirements, will be adequate to fund fully the payment of its Plan obligations, as and
when due.
XI
VOTING PROCEDURES AND REQUIREMENTS
IT IS IMPORTANT THAT HOLDERS OF CLAIMS EXERCISE THEIR RIGHT TO
VOTE TO ACCEPT OR REJECT THE PLAN. All known Holders of Claims entitled to vote on the
Plan have been sent a Ballot together with this Disclosure Statement. Such Holders should read the
Ballot carefully and follow the instructions contained therein. Please use only the Ballot (or Ballots)
that accompanies this Disclosure Statement.
FOR YOUR VOTE TO COUNT, YOUR BALLOT MUST BE ACTUALLY RECEIVED
BY THE DEBTOR�’S BALLOT AGENT, OMNI MANAGEMENT, LLC, 16161 VENTURA
BLVD., STE. C, ENCINO, CA 91436 NO LATER THAN 5:00 P.M., PACIFIC TIME, ON
SEPTEMBER 18, 2009.
ANY BALLOT THAT IS EXECUTED AND RETURNED BUT WHICH DOES NOT
INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN WILL BE DEEMED AN
ACCEPTANCE OF THE PLAN. IF YOU HAVE ANY QUESTIONS CONCERNING VOTING
PROCEDURES OR IF A BALLOT IS DAMAGED OR LOST, YOU MAY CONTACT
DEBTOR�’S COUNSEL, PACHULSKI STANG ZIEHL & JONES LLP, 10100 SANTA MONICA
BOULEVARD, SUITE 1100, LOS ANGELES, CA 90067; TELEPHONE: (310) 277-6910; FAX:
(310) 201-0760; EMAIL: [email protected].
A. Parties in Interest Entitled to Vote
As previously discussed, in order for a Holder of a Claim to be entitled to vote, the Claim
must be both (i) Allowed and (ii) Impaired. Any Claim against the Debtor as of the Petition Date is
Allowed for voting purposes if (i) either such Holder�’s Claim has been scheduled by the Debtor (and
such Claim is not scheduled as disputed, contingent, or unliquidated) or the Holder of such has filed
a proof of claim on or before the applicable bar date and (ii) as of September 4, 2009, a date that is
fourteen (14) days prior to the Ballot Date, there is no objection to the Claim pending or no order
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disallowing the Claim has been entered. Such Claim is Impaired under the Plan if the legal,
equitable, and contractual rights of the Holder of such Claim are altered with respect to such Claim.
Unless otherwise permitted in the Plan, the Holder of any Claim that is the subject of a
pending objection is not entitled to vote with respect to such Claim unless such Holder files and
prosecutes an application with the Bankruptcy Court, pursuant to Bankruptcy Rule 3018 to
temporarily allow such Claim for the limited purpose of voting to accept or reject the Plan.
A vote on the Plan may be disregarded if the Bankruptcy Court determines, after notice and a
hearing, that such vote was not solicited or procured in good faith or in accordance with the
provisions of the Bankruptcy Code.
B. Classes Impaired and Entitled to Vote Under the Plan
The following chart summarizes which Classes of Claims are impaired and which Classes of
Claims are not impaired under each of the Plan.
CLASS
DESCRIPTION
IMPAIRED/ UNIMPAIRED
VOTING STATUS
Class 1 Reclamation Claims Unimpaired Deemed to have accepted
Class 2 Priority Non-Tax Claims Unimpaired Deemed to have accepted
Class 3 CNB Secured Claim Unimpaired Deemed to have accepted
Class 4 Other Secured Claims Impaired Voting
Class 5 General Unsecured Claims Impaired Voting
Class 6 Insider Unsecured Claims Impaired Voting
Class 7 Interests in Debtor Impaired Voting
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C. Vote Required for Acceptance by Classes of Claims
The Bankruptcy Code defines acceptance of a Plan by a Class of Claims as acceptance by
holders of at least two-thirds in dollar amount and more than one-half in number of the Claims of
that Class that actually cast ballots for acceptance or rejection of the Plan. Thus, acceptance by a
Class of Claims occurs only if at least two-thirds in dollar amount and a majority in number of the
Holders of such Claims voting cast their Ballots in favor of acceptance. A Class of Holders of
Claims shall be deemed to accept the Plan in the event that no Holder of a Claim within that Class
submits a Ballot by the Ballot Date.
CREDITORS AND OTHER PARTIES IN INTEREST ARE CAUTIONED TO REVIEW
THE DISCLOSURE ORDER FOR A FULL UNDERSTANDING OF VOTING
REQUIREMENTS, INCLUDING WITHOUT LIMITATION, USE OF BALLOTS.
XII
CONFIRMATION OF THE PLAN
Under the Bankruptcy Code, the following steps must be taken to confirm the Plan.
A. Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold
a hearing on confirmation of a Plan. By order of the Bankruptcy Court, the Confirmation Hearing
has been scheduled for August 6, 2009 at 1:30 p.m. Pacific Time. The Confirmation Hearing may
be adjourned from time to time by the Bankruptcy Court without further notice except for an
announcement made at the Confirmation Hearing or any adjournment thereof.
B. Who May Object to Confirmation of the Plan
Section 1128(b) of the Bankruptcy Code provides that any party in interest may object to
confirmation of a Plan, whether or not such party is entitled to vote on the Plan. Any objection to
confirmation of the Plan must be in writing, conform to the Federal Rules of Bankruptcy Procedure
and the Local Rules of the Bankruptcy Court, set forth the name of the objecting party, the nature
and amount of the Claim or Interest held or asserted by the objecting party against the Debtor�’s
Estate, the basis for the objection, and the specific grounds therefor. The objection, together with
proof of service thereof, must then be filed with the Bankruptcy Court by September 18, 2009, with
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a copy to chambers, and served upon (i) counsel to the Debtor, Pachulski Stang Ziehl & Jones LLP,
10100 Santa Monica Boulevard, 11th Floor, Los Angeles, California 90067, Attn: Jeffrey W.
Dulberg, Esq. and (ii) counsel to the Committee, Kelley, Drye & Warren LLP, 101 Park Avenue,
New York, New York 10178, Attn: Eric R. Wilson, Esq., and Landsberg Margulies LLP, 16030
Ventura Boulevard, Suite 470, Encino, California 10178, Attn: Ian S. Landsberg, Esq.
Objections to confirmation of the Plan are governed by Federal Rule of Bankruptcy
Procedure 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY AND
PROPERLY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY
COURT.
C. Requirements for Confirmation of the Plan
At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan only if all of the
requirements of section 1129 of the Bankruptcy Code are met. Among the requirements for
confirmation are that the Plan (1) is accepted by all impaired Classes of Claims and Interests or, if
rejected by an impaired Class, that the Plan is accepted by at least one Impaired Class of Claims and,
as to the rejecting Class, �“does not discriminate unfairly�” and is �“fair and equitable�” as to such Class,
(2) is feasible, and (3) is in the �“best interests�” of Holders of Claims and Interests impaired under the
Plan.
1. Acceptance
Claims in Classes 4, 5 and 6 and Interests in Class 7 are impaired. The Holders of such
Claims and Interests are entitled to vote on the Plan and, therefore, Classes 4, 5, 6 and 7 must accept
the Plan in order for it to be confirmed without application of the �“fair and equitable test,�” described
below. As stated above, Classes 4, 5, 6 and 7 will have accepted the Plan if the Plan is accepted by
at least two-thirds in dollar amount, and a majority in number of the Claims of the voting Classes
(other than any Claims of creditors designated under section 1126(e) of the Bankruptcy Code) that
have actually voted to accept or reject the Plan.
Claims in Classes 1, 2 and 3 are unimpaired by the Plan, and the Holders thereof are
conclusively presumed to have accepted the Plan.
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2. Fair and Equitable Test
The Debtor will seek to confirm the Plan notwithstanding the non-acceptance of the Plan by
any impaired Class of Claims, as long as one non-insider Class of Claims that is impaired under the
Plan accepts the Plan. To obtain such confirmation, it must be demonstrated to the Bankruptcy Court
that the Plan �“does not discriminate unfairly�” and is �“fair and equitable�” with respect to such
dissenting impaired Class. A Plan does not discriminate unfairly if the legal rights of a dissenting
class are treated in a manner consistent with the treatment of other classes whose legal rights are
substantially similar to those of the dissenting class, and if no class receives more than it is entitled
to for its claims or interests. The Debtor believes that the Plan satisfies this requirement.
The Bankruptcy Code establishes different �“fair and equitable�” tests for secured claims and
unsecured claims, as follows:
a. Secured Claims
Either the Plan must provide (i) that the holders of such claims retain the liens securing such
claims, whether the property subject to such liens is retained by the debtor or transferred to another
entity, to the extent of the allowed amount of such claims, and each holder of a claim receives
deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the
effective date of the Plan, of at least the value of such holder�’s interest in the estate�’s interest in such
property; (ii) for the sale of any property that is subject to the liens securing such claims, free and
clear of such liens, with such liens to attach to the proceeds of such sale; or (iii) for the realization by
such holders of the indubitable equivalent of such claims.
b. Unsecured Claims
Either (i) each holder of an Impaired unsecured claim receives or retains under the Plan
property of a value equal to the amount of its allowed claim, or (ii) the holders of claims and
interests that are junior to the claims of the dissenting class will not receive or retain any property
under the Plan on account of their Claims or Interests. Under the Plan, the Zeidens are not retaining
their Interest in the Debtor or receiving the stock of the Reorganized Debtor �“on account of their
Interests in the Debtor�” but are receiving the stock of the Reorganized Debtor due to the New Equity
Contribution they are making to the Reorganized Debtor.
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THE DEBTOR BELIEVES THAT THE PLAN MAY BE CONFIRMED ON A
NONCONSENSUAL BASIS. ACCORDINGLY, THE DEBTOR WILL DEMONSTRATE AT
THE CONFIRMATION HEARING THAT THE PLAN SATISFIES THE REQUIREMENTS OF
SECTION 1129(b) OF THE BANKRUPTCY CODE AS TO ANY NON-ACCEPTING CLASS.
3. Feasibility
The Bankruptcy Code requires that confirmation of a plan is not likely to be followed by the
liquidation, or the need for further financial reorganization of a debtor. The Plan contemplates that
all Allowed Claims except for Allowed General Unsecured Claims and Allowed Insider Unsecured
Claims will be paid in full pursuant to the terms of the Plan and that the Debtor will reorganize
around a core group of existing stores. Because the Debtor seeks to reorganize around a core group
of profitable stores, the Debtor believes that no liquidation or further reorganization will be
necessary and that the Plan meets the feasibility requirement. In addition, the Debtor believes that
sufficient funds will exist at Confirmation to make all payments required by the Plan on the
Effective Date (see Exhibit “J”) and, subject to the discussion of �“Risk Factors�” set forth above,
that the Reorganized Debtor will have sufficient funds from its sales income, the New Equity
Contribution and the Exit Financing to meet all of the payment requirements in the Plan.
The Plan Cash Flow Projections for the Reorganized Debtor, which demonstrate the
feasibility of the Plan, are attached hereto as Exhibit “C”. The Debtor's management, with the
assistance of its financial advisors, prepared the financial projections using a methodology focused
on store level operations. Management developed an analysis of each individual store location to
determine its financial viability on a stand alone basis. This analysis used assumptions for sales,
gross margin, payroll and other related operating expenses based on historical data and current
operations. These efforts particularly focused on current sales trends realized in the first five months
of 2009 and input from store operations personnel. Management made additional assumptions
related to occupancy expense based on guidance from outside consultants, conversations with
current landlords and assessment of the current retail real estate market. This process was repeated to
develop projections on a monthly basis by store through December 2012.
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Upon completion of this process, management reviewed current corporate expenses and
adjusted projections to reflect efficiencies that could be realized due to a reduced store footprint. In
addition, management reviewed corporate expenses with corporate department management to
identify opportunities for cost rationalization and increased efficiency on a line-by-line basis. This
projection was combined with store level data to create monthly consolidated income statement
projections through December 2012.
Management then created projected balance sheets by combining the results of the
aforementioned income statement projections, historical trends for assets and liabilities and
corresponding adjustments to reflect changes in the reorganized entity. In particular, management
focused on recent customer deposit and gift card trends to adequately project those liabilities through
December 2012 on a monthly basis. In addition, management used recent discussions with lenders to
determine a potentially feasible debt structure with respect to type, rate and amortization necessary
to meet the cash needs of the business. Finally, management combined the results of the projected
income statement and balance sheet to develop a cash flow statement on a monthly basis through
2012.
To further assist you in determining whether the Plan is feasible, attached as Exhibit “D” are
the �“Financial Statements.
4. �“Best Interests�” Test
With respect to the impaired Classes of Claims, confirmation of the Plan requires that each
Holder in such Classes either (a) accepts the Plan, or (b) receives or retains under the Plan property
of a value, as of the Effective Date of the Plan, that is not less than the value such holder would
receive or retain if the Debtor were liquidated under chapter 7 of the Bankruptcy Code.
This analysis requires the Bankruptcy Court to determine what the Holders of Allowed
Claims in each impaired class would receive from the liquidation of the Debtor�’s Assets in the
context of a chapter 7 liquidation case. If the Plan were not confirmed and the Debtor�’s Assets were
liquidated under chapter 7, proceeds from the liquidation would be used to pay Unsecured Claims
(including the Insider Unsecured Claims) only after all of the following Claims and expenses were
paid in full and in the following order: (a) CNB�’s Claim, (b) the administrative costs of the chapter 7
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case, including, but not limited to the chapter 7 trustee�’s fees and the fees of his professionals, (c)
any unpaid chapter 11 administrative expenses, and (d) all Priority Claims, including taxes,
employee Wage and Benefit Claims and Customer Deposit and Gift Card Claims. An analysis of the
recovery by Holders of Allowed Claims in the event of a chapter 7 liquidation as compared to the
recoveries by such Holders under the Plan (the �“Liquidation Analysis�”) is attached hereto as Exhibit
“G”. As demonstrated by the Liquidation Analysis, in the event of a chapter 7 liquidation, Holders
of Allowed Claims, except for CNB, which is paid in full even under a liquidation scenario, would
receive a significantly smaller distribution than they will received pursuant to the Plan.
A liquidation under chapter 7 would result in the incurrence of administrative costs in excess
of those projected under the Plan because a chapter 7 trustee would be entitled to fees and he would
likely retain counsel and perhaps other professionals who would have to expend substantial time and
effort to become acquainted with the Debtor�’s assets and liabilities. The amount of Priority Claims
would be substantially greater than anticipated under the Plan because a chapter 7 trustee who is
liquidating the Debtor�’s assets would not be able to honor the accrued vacation of employees or the
deposits and gift cards of customers. Also, a new time period for the filing of Claims would
commence under Bankruptcy Rule 1019(2), possibly resulting in the filing of additional Claims
against the Estate. Conversion of the Case to a case under Chapter 7 and appointment of a trustee
for administration of the Estate also would significantly delay distributions to creditors because the
chapter 7 trustee and his professionals would have to familiarize themselves with the Debtor�’s assets
and liabilities, complete the liquidation of all assets (including the prosecution to conclusion of any
avoidance actions), and review all Claims and resolve any objections thereto.
In order to further assist you in your analysis of what would be recovered under s chapter 7
liquidation, attached hereto as Exhibit “H” and Exhibit “I” are lists of the Debtor�’s assets and
liabilities, respectively, as of May 31, 2009.
XIII
FINANCIAL INFORMATION
As discussed above, attached hereto as Exhibit “D” are the Financial Statements. Also,
attached as Exhibit “C” is the Plan Cash Flow Projections.
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XIV
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtor has thoroughly evaluated various alternatives to the Plan, including sale of the
Debtor�’s assets as a going concern and on an orderly liquidation basis and conversion of the Case to
a chapter 7 liquidation. As stated above, the Debtor employed an investment banker to market its
business. After an analysis of the offers received and studying the other alternatives, the Debtor has
concluded that the Plan is the best alternative, and will maximize recoveries by parties in interest,
assuming confirmation of the Plan. Specifically, the contribution being made by the Insiders makes
it possible for the Debtor to pay more to Holders of Allowed Claims than such Holders would
receive under any alternative reviewed by the Debtor.
XV
CERTAIN U.S. FEDERAL AND STATE INCOME
TAX CONSEQUENCES OF THE PLAN
THE FOLLOWING IS INTENDED TO BE ONLY A SUMMARY OF SELECTED
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PLAN AND IS NOT A
SUBSTITUTE FOR CAREFUL TAX PLANNING WITH, AND RECEIPT OF TAX ADVICE
FROM, A TAX PROFESSIONAL. THE SELECTED FEDERAL AND STATE TAX
CONSEQUENCES THAT ARE DESCRIBED HEREIN AND OTHER FEDERAL, STATE AND
LOCAL TAX CONSEQUENCES THAT ARE NOT ADDRESSED HEREIN ARE COMPLEX
AND, IN SOME CASES, UNCERTAIN. SUCH TAX CONSEQUENCES MAY ALSO VARY
BASED ON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF AN ALLOWED
CLAIM OR EQUITY INTEREST IN THE DEBTOR. ACCORDINGLY, AS NOTED ABOVE,
EACH HOLDER OF AN ALLOWED CLAIM OR EQUITY INTEREST IS STRONGLY
ADVISED TO CONSULT WITH ITS OWN TAX ADVISOR REGARDING THE FEDERAL,
STATE AND LOCAL TAX CONSEQUENCES OF THE PLAN. THE BELOW SUMMARY OF
TAX CONSEQUENCES IS NOT INTENDED TO BE AND IS NOT TAX ADVISE.
THE DEBTOR DOES NOT INTEND TO REQUEST A TAX RULING FROM THE
INTERNAL REVENUE SERVICE OR ANY OTHER TAXING AUTHORITY WITH RESPECT
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TO ANY OF THE TAX CONSEQUENCES OF THE PLAN. CONSEQUENTLY, THE
INTERNAL REVENUE SERVICE OR ANOTHER TAXING AUTHORITY MAY DISAGREE
WITH AND MAY CONTEST ONE OR MORE OF THE TAX CONSEQUENCES DESCRIBED
HEREIN TO THE DEBTOR, INTEREST HOLDERS OR TO THE EQUITY HOLDERS.
A. Federal Income Tax Consequences to the Creditors
The character, amount and timing of income, gain or loss the Holders of Allowed Claims
recognize as a consequence of the distributions under the Plan will depend upon, among other
things, (i) the manner in which the Claim or Interest was acquired, (ii) the length of time the Claim
was held, (iii) whether the Claim was acquired at a discount, (iv) whether the Holder of an Allowed
Claim has taken a bad debt deduction for the Claim, (v) whether the Holder has previously included
accrued but unpaid interest with respect to the Claim, (vi) the Holder�’s method of tax accounting,
(vii) whether the Claim is an installment obligation under the tax laws, and (viii) the type of
consideration received or deemed received by the Holder in exchange for its Claim. In addition, in
the event interest is paid on the Claim, the Holder may have interest income. Therefore, Holders of
Allowed Claims should consult their tax advisors for information that may be relevant to their
particular situations and circumstances and the particular tax consequences to such Holders as a
result thereof.
Depending on the nature of the claim, the Debtor may be required to file information returns
with the appropriate taxing agencies to report payments to the Holders of Allowed Claims. In order
to make Distributions, the Debtor will require that Holders of Allowed Claims provide certain
federal income taxpayer information, such as the Holder�’s taxpayer identification number. Should
the Holder fail to do so within six months of the request, the Debtor may withhold and bar any
Distribution to that Holder, and the other Holders�’ proportionate shares of the amount to be
distributed will be recalculated.
B. Tax Consequences to the Debtor
Based upon preliminary discussions with its accountants, the Debtor�’s initial impression is
that the Plan, as currently configured, does not result in any significant tax consequences to the
Debtor.
Case 2:09-bk-18400-VZ Doc 315 Filed 08/13/09 Entered 08/13/09 19:58:25 Desc Main Document Page 76 of 77
Case 2:09-bk-18400-VZ Doc 315 Filed 08/13/09 Entered 08/13/09 19:58:25 Desc Main Document Page 77 of 77
Recent Z Gallerie Awards and Distinctions
2010 Chapter 11 Reorganization of the Year (Below $100 mm), awarded by The M&A
Advisor, www.maadvisor.com/page/turnaround-awards
2010 Distressed M&A Turnaround Atlas Awards (www.globalmanetwork.com) Finalist in the following categories:
o Chapter 11 Reorganization o Retail Products & Services o Turnaround Deal of the Year
R T L N G T o D y
New ch apter Z GALLERIE, UNLIKE MANY HOME FURNISHINGS CHAINS , HAS BOUNCED BACK By Steve Mclinden
RETAILER STRUGGLING
toem.erge from bankruptcy these Jays staggers beneath a starkly Her-
culean load. And this may be especially true of home furnishings
chains, because the furniture segment, much like automotive sales,
has endured an inordinate amount of fiscal pain through every phase
of this downturn. Constrained by the armed with a vote of confidence in the nation's housing woes, tight consumer form of $22 million in new financ ing spending, mounting debt to suppliers, from Wells Fargo Business Cred it. The and competition from mass merchandis-ers and consolidators, most of the furni-ture chains that have gone down over these past few years have stayed down.
But Los Angeles-based Z Gallerie, a seller of moderately priced furnishings and decor that filed for Chapter 11 last spring, appears to have done something very right. The chain has re-emerged gracefully after shedding 25 unprofit-able and poorly located stores, merging its two distribution centers into one and otherwise leaving no stone unturned in it:.<; efforts to uncover what needs fixing.
"We reviewed every department, ev-ery expense line, our merchandise price points, transportation, everything," said Z Gallerie co-founder and C FO Mike Zeiden. The result: Z Gallerie officially climbed out of bankruptcy in October,
26 SCT I MAR C H 20 1 0
leaner chain now operates 54 stores ac ross 18 s ta tes , plus an outlet store in Gardena, Calif. "And we continue to look for ways in which we can be more efficient," said Zeiden.
Mike Zeid e n cq-owns Z Gallerie with his brother, Joe , and his sis-ter , Carole Mal-fatti. The chain was founded as a poster-art shop in a Sherman Oaks, Ca-lif., garage in 1979.
Eliminating its Atlanta distribution
center allowed Z Gallerie to carry less inventory, reduce shipping damage and improve shipping times to its stores east of the Miss issippi, Zeiden says. The re-tailer now ships from its main distribu-tion facility in Gardena.
Post-bankmptcy, Z Gallerie has pared back many price points, added several new shopper promotions and launched a Facebook page. The private company declines to disclose sales numbers, but Zeiden did say that Christmas sales met management's expectations. "Running leaner enabled us to have one of our best fourth quarters in years," he said.
Z Gallerie ranked No. 39 on the Fur-niture Today top 100 last year. And yet, the chain's bankruptcy filing last April chronicled a quick descent. T hough Z Gallerie enjoyed uninterrupted growth through 2006, with sales peaking at $236 million in the aggregate at 74 10-
Z GALLERIE SUCCESSFU LLY EMERGED FROM BANKRUPTCY PROTECTION - A RARITY THESE DAYS.
cations nationwide, it experienced a severe decline in 2007, which acceler-ated in the fourth quarter of 2008 and continued in the first quarter of 2009.
The retai ler's January 2009 sa les were down 19.4 percent from J anu-ary 2008, prompting the chain to be-gin eliminating what it described as "burdensome leases" and to reorganize around its strongest stores. "We were able to close stores which were no lon-ger performing due to the economic downturn, [allowing us to) rightsize our business," Zeiden said.
Lots of home furnishers have been cons iderably less fortunate. Indus try bankruptcies since the fall of 2007 include Bombay & Co. (September 2007), Seasonal Concepts (October 2007), Levitz (November 2007), Scan International (December 2007), Sofa Express (December 2007), Domain Home (January 2008), Fortunoff (Feb-ruary 2008), Wickes Furniture (Febru-ary 2008), Room Source (June 2008), American Home (November 2008) and Z Gallerie (April 2009). Bernie's, a New England-based flllTIiture, appliances and
big-box chain, filed Chapter
"Furniture remains one of the most distressed categories, with some very strong trends working against it ," said
values and home sales is going to remain a serious drain on furniture sales. People are deciding they can live with that old couch awhile longer." And though the smaller, niche furnish-ers may have repositioned themselves more nimbly in the downturn, this does not make them immune, she says. Ad-ditionally, the rise of Ashley Furniture,
which Brouwer describes as a bm ;;lIld low-priced OperaTOr, continues to wrest significant share from national and local furnishers, she says.
The housing crisis has affected Z Gallerie's sales significantly, Zeiden concedes. "But as far as our target shopper, it is difficult to measure," he said. The company did close all four of its Ohio stores. "We were disap-pointed that the [Ohio) economics did not work out for us," said Zeiden. "While we no longer have a presence there, we continue to see strong sales to individuals in Ohio through our Web site." All of Z Gallerie's customer programs were continued following the bankruptcy, including its private-label credit card.
And Z Gallerie chose the right bankruptcy advisory firm, says Zeiden, namely, Los Angeles-based turn-around manager Broadway Advisors. "They did a great job in the prepara-tion leading up to our filing," he said. Zeiden also lauds bankruptcy counsel
Pachulski Stang Ziehl & Jones. "We were able to get through the process , albeit a smaller company, but one in which the family ownership stayed in-tact," he said.
About 350 of the retailer's pre-bankruptcy total of 900 workers were laid off or transferred as a resu lt of the store closures. Zeiden declines to com-ment on the lease terms that come out of the bankruptcy, but notes th at Z Gallerie thanks its landlords for their support. Similarly, Malfatti, who is Z Gallerie's vice president, told the trade press that vendors have been support-ive of the company's retrenchment, though she cited no specifics.
"We can now spend the time n ecessary to focus on our custom-ers , employees and strengthening the Z G allerie brand," Zeiden said. When the retail real estate landscape changes, he says, the chain will again look at new markets or areas where it performed well in the past, but only given the right economics. seT
MAR C H20 1 0 I SCT 27