Professional Documents
Culture Documents
In re: ) CHAPTER 11
)
PITT PENN HOLDING CO., INC., et al.1, ) Case No. 09-11475 (BLS)
) (Jointly Administered)
Debtors. )
)
Important Dates
- and -
Pace Reich
Benjamin Reich
PACE REICH, PC
726 Meetinghouse Road
Elkins Park, PA 19027
Telephone: (215) 790-0100
Facsimile: (215) 790-7360
Email: pacereichpc@msn.com
I. INTRODUCTION .............................................................................................................................................. 1
II. PURPOSE OF THE DISCLOSURE STATEMENT AND PROVISIONS FOR VOTING AND
CONFIRMATION ...................................................................................................................... 1
A. Purpose ................................................................................................................................................ 1
B. Voting Provisions ................................................................................................................................ 2
1. General ................................................................................................................................... 2
2. Claimants Not Entitled to Vote .............................................................................................. 2
a. Administrative and Priority Tax Claims .................................................................. 2
b. Unimpaired Claims .................................................................................................. 3
3. Claimants Entitled to Vote; Impaired Claims ........................................................................ 3
4. Acceptance of the Plan ........................................................................................................... 3
C. Confirmation ........................................................................................................................................ 4
1. Objections .............................................................................................................................. 4
2. Confirmation by Acceptance.................................................................................................. 4
3. Confirmation Without Acceptance......................................................................................... 4
D. Representation Limited ....................................................................................................................... 5
III. INQUIRIES ...................................................................................................................................................... 5
IV. THE DEBTORS ............................................................................................................................................... 5
A. Pre-Petition Background and History .................................................................................................. 6
B. Background – Formation and Maintenance of Corporate Records ...................................................... 6
C. Acquisitions ......................................................................................................................................... 8
D. Private Placements - July 2005 through March 2006 .......................................................................... 9
E. John D. Mazzuto’s Personal Bankruptcy is Disclosed to the Board .................................................. 11
F. Indecent Disclosure: The Use of Press Releases, Investor Meetings, and “Promoters” .................... 12
G. February 2008 - John D. Mazzuto Resigns and James W. Margulies Becomes CEO and CFO ....... 15
H. April 2008 - Mr. Margulies Discusses the Company’s Cash Requirements with a Number of
Significant Investors ................................................................................................... 15
I. April 2009 - All Prior Financials, Stock Issuances, and Disclosures Are Under Review By
Current Management .................................................................................................. 16
1. The Chaotic State of the Corporate Records Has Created a Major Problem for
New Management ......................................................................................... 17
2. State of IEAM Accounting Books and Records ................................................................... 18
3. Class Action Lawsuit and SEC Inquiries Result in the Formation of a Governance
Committee - October 2008 ........................................................................... 21
4. Capital Structure .................................................................................................................. 22
5. Government Regulation ....................................................................................................... 37
6. Employees ............................................................................................................................ 37
J. Events that Lead to the Bankruptcy Filing.......................................................................................... 38
1. Litigation .............................................................................................................................. 41
a. Zyskind Action....................................................................................................... 41
b. Goldknopf Action .................................................................................................. 41
c. Margulis Action ..................................................................................................... 42
2. Contested Litigation ............................................................................................................. 42
a. Trinity Bui Action .................................................................................................. 42
b. Black Nickel Actions ............................................................................................. 42
c. EMC New Jersey Litigation ................................................................................... 43
d. Securities Class Action .......................................................................................... 43
e. Bankruptcy Litigation ............................................................................................ 44
3. Cooperation with Regulatory Authority/Law Enforcement ................................................. 44
K. Chapter 11 Cases ............................................................................................................................... 45
1. Initial Events in Bankruptcy................................................................................................. 45
2. Events Occurring in the Bankruptcy Case – DIP Financing, Avoiding
Conversion, Plan Filing .................................................................. 45
a. Bankruptcy Litigation ............................................................................................ 45
V. THE PLAN OF REORGANIZATION ........................................................................................................... 47
A. Plan Summary ................................................................................................................................... 47
I. INTRODUCTION.
On April 30, 2009 through May 6, 2009 (the "Petition Dates"), the Debtors filed with the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") Voluntary
Petitions (the "Petitions") under Chapter 11 of the Bankruptcy Code. Since the Petition Dates,
the Debtors have continued in the management and limited operation of their property as debtors
in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
A. Purpose.
Other than as set forth in this Disclosure Statement, no representations concerning the
Debtors, their assets, their financial condition, management or future operations are authorized
by the Debtors. Any representations or inducements made to secure acceptance of the Plan other
than as contained in the Plan and described in this Disclosure Statement are not authorized by the
Debtors and accordingly should not be relied upon by the holder of any Claim or Interest in
reaching a decision whether or not to vote to accept or reject the Plan.
(2) a ballot for accepting or rejecting the Plan (if applicable); and
(3) a copy of the Order of the Bankruptcy Court approving the Disclosure
Statement setting forth: the time period and the manner by which to vote
to accept or reject the Plan, the time period for objecting to Confirmation
of the Plan, and fixing the time for the hearing on the Confirmation of the
Plan.
B. Voting Provisions.
1. General.
a. DIP Claims
c. Unimpaired Claims.
Certain classes are Impaired under the Plan and Claimants in such Classes, therefore, are
entitled to vote on the Plan. Claimants in Classes C, D, E and F are entitled to vote on the Plan
since such classes are impaired.
Please note that the Plan is deemed accepted by a Class of Claims or Interests when it is
approved by holders of Claims and Interests who hold at least two-thirds of the dollar amount,
and who comprise more than one-half in number of, the Allowed Claims or Interests of such
Class that actually vote. An abstention by a Claim or Interest holder will not count toward either
acceptance or rejection of the Plan.
The Debtors recommend that each holder of a Claim or Interest that is entitled to vote to
vote to ACCEPT the Plan. IN ORDER FOR YOUR VOTE TO COUNT, YOUR BALLOT
Pace Reich, PC
726 Meetinghouse Road
Elkins Park, PA 19027
Even though a Claim or Interest holder may choose not to vote or may vote against the
Plan, such Claim or Interest holder will nevertheless be bound by the terms and treatment set
forth in the Plan if the Plan is accepted by the requisite majorities in each Class entitled to vote
and is confirmed by the Court. Allowance of a Claim or Interest for voting purposes does not
necessarily mean that the Claim or Interest will be Allowed for purposes of distribution under the
terms of the Plan. Any Claim or Interest to which an objection has been or will be filed will be
Allowed for purposes of distribution only after determination by the Court. Such determination
may be made after the Plan is Confirmed.
C. Confirmation.
1. Objections.
Should you have an objection to Confirmation of the Plan, it must be filed, in writing,
with the Bankruptcy Court and served on counsel for the Debtors, on or before , 2010.
A hearing to consider confirmation of the Plan will be held on , 2010,
beginning at ______ before the Honorable Brendan L. Shannon in the United States Bankruptcy
Court for the District of Delaware, 824 Market Street, 6th Floor, Courtroom 1, Wilmington,
Delaware 19801.
2. Confirmation by Acceptance.
The Debtors are seeking Confirmation of the Plan under Section 1129(a) of the
Bankruptcy Code. Confirmation under Section 1129(a) is dependent upon a finding of the
Bankruptcy Court that a number of requirements have been met. One of these requirements is
that each Impaired Class of Claims and Interests entitled to vote on the Plan must accept the
Plan. Accordingly, the Plan cannot be Confirmed under Section 1129(a) unless accepted by each
Impaired Class of Claims and Interests.
Under Section 1129(b)(1) of the Code, the Court may confirm the Plan even if it has not
been accepted by one or more Impaired Classes of Claims and Interests, provided that the Plan
does not discriminate unfairly and it is fair and equitable with respect to each Impaired Class of
Claims or Interests that has not accepted the Plan.
In order for the Plan to be fair and equitable with respect to an Impaired Class of Secured
Claims, Section 1129(b)(2)(A) of the Code requires that the Plan provide for each Claimant in
such Class: (a) to receive payments over time which, in the aggregate, total at least the Allowed
In order for the Plan to be fair and equitable with respect to an Impaired Class of
Unsecured Claims, Section 1129(b)(2)(B) of the Code requires that the Plan provide either: (a)
that each Claimant in such Class shall receive on account of its Claim property which has a
present value, as of the Effective Date of the Plan, equal to the Allowed amount of such Claim or
(b) that no Claimant or holder of an Interest in the Debtor that is junior to the Claims of such
Impaired Class will receive or retain under the Plan any property on account of such junior
Claim or Interest.
In order for the Plan to be fair and equitable with respect to an Impaired Class of
Interests, Section 1129(b)(2)(C) of the Code requires that the Plan provide either: (a) that each
Interest holder in such Class shall receive on account of its Interest property which has a present
value, as of the Effective Date of the Plan, equal to the value of such Interest or the Allowed
amount of any fixed liquidation preference or redemption price to which the holder of such
Interest is entitled or (b) that no holder of an Interest in the Debtor that is junior to the Interests
of such Impaired Class will receive or retain under the Plan any property on account of such
junior Interest.
D. Representation Limited.
III. INQUIRIES.
The chart below summarizes the treatment of each class of claims and of unclassified
claims under the Plan. Please note, however:
The chart is only a general summary and the actual treatment of each class and of
unclassified claims is governed by the terms and provisions of the Plan.
The estimated allowed amounts in each category and the estimated percentage
recoveries are merely estimates. The actual amounts may vary considerable from
these estimates.
Debtors reserve the right, at any time provided for pursuant to bankruptcy law, to
object to any proof of claim which exceeds the amounts scheduled, in order to provide
a conservative picture, the Debtor has estimated the approximate amount of total
general unsecured claims to equal proximately $11,219,388.
The current management of IEAM first became affiliated with the company’s
subsidiaries on September 12, 2008. Management’s access to corporate records of the parent,
IEAM, has been limited as a result of the refusal of certain members of prior management to turn
over books and records. Management is relying on public filings previously made with the
United States Securities and Exchange Commission and records that they have been given access
to or obtained by a document request through the use of the turnover motion in the Bankruptcy
Court. As such, certain disclosures may be subject to revision and current management cannot
be certain if they have received all of IEAM’s records.
IEAM’s organizational history was last described in a Form 10-KSB Amendment 1-FY
2006, Filed December 28, 2007. That document disclosed the following:
• IEAM originally operated as a holding company with four (4) wholly owned
subsidiaries, Pitt Penn Holding Inc., a Delaware corporation ("PPH"), EMC
Packaging, Inc., a Delaware corporation ("EMC"), Unifide Industries Limited
Liability Company, a New Jersey limited liability company ("Unifide"), and
Todays Way Manufacturing, LLC, a New Jersey limited liability company
("Todays Way").
• PPH, through its wholly owned subsidiary Pitt Penn Oil Co., LLC, an Ohio
limited liability company (“Pitt Penn”), was a leading manufacturer, marketer and
seller of automotive chemicals and additives.
• Todays Way manufactured and packaged the products which were sold by
Unifide.
The Company was originally incorporated in the State of Florida on June 14, 1990 as
Mid-Way Medical Diagnostic Center, Inc. ("Mid-Way (Florida)"). Mid-Way (Florida) was
initially engaged in the business of seeking to establish and operate medical and diagnostic
centers. During 1991, Mid-Way (Florida) abandoned its efforts to engage in such business.
In December 1997, Mid-Way (Florida) changed its name to Ciro International, Inc.
("Ciro"); at the same time, Ciro merged with Mid-Way Medical and Diagnostic Center, Inc., a
Nevada corporation, which was established solely for the purpose of changing the domicile of
the Company from the State of Florida to the State of Nevada.
On April 21, 2003, Ciro and Advanced Bio/Chem, Inc., a Texas corporation (“ABC
Texas”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby a
wholly owned subsidiary of Ciro, Ciro Acquisition Corp., a Texas corporation (which was
inappropriately identified in the Merger Agreement as Advanced Bio/Chem Acquisition Corp.),
merged with and into ABC Texas in a tax free exchange of shares at which time ABC Texas
became a wholly owned subsidiary of Ciro (the "Merger").
Until June 2003, the Company existed primarily as a holding company, and accordingly,
the operations were those of the former operating subsidiary, Ciro Jewelry. Until late 2002, the
main source of income derived from the licensing of the “Ciro” name. Effective June 9, 2003,
the Company sold all of the issued and outstanding common stock of the wholly owned
subsidiary, Ciro Jewelry, to Merchant’s T&F, Inc. (“MT&F”). Following December 2002, Ciro
Jewelry became a “shell” corporation with no defined business purpose and began the process of
searching for a new line of business or a merger candidate.
In May 2004, the Company entered into an Asset Purchase Agreement (the “Power3
Agreement”) with Power3 Medical Products, Inc., a New York corporation ("Power3"), Steven
The corporate records of IEAM, the parent, had allegedly been maintained in at least two
locations, its former New York headquarters at 711 Third Avenue, New York, NY and at the law
offices of Margulies and Levinson LLP, 30100 Chagrin Blvd., Suite 250, Pepper Pike, OH
44124. Upon the February 2008 resignation of John D. Mazzuto, president and chief financial
officer, the records held at the New York office were packed and sent to the attention of R.
Daniel Redmond, President, PPO and Executive Vice President, IEAM.
With the departure of John D. Mazzuto in February 2008, IEAM’s functional corporate
headquarters shifted to the offices of Margulies and Levinson, 30100 Chagrin Blvd., Suite 250,
Pepper Pike OH 44124. At least two employees of IEAM and/or its subs have been domiciled
at that location. They included James W. Margulies and Steven W. Berger.
Upon investigation and review it appears that the vast majority of the corporate records
may have been under the custody and control of James W. Margulies, Esquire, who has acted in
various capacities at IEAM. His role was multifaceted. At one time or another, he acted as an
attorney for MC Industrial (FKA New Jersey Acquisition Corp.) a shell corporation which had
announced that it had reached an agreement to acquire EMC packaging which was subsequently
acquired by IEAM in October 2004. Mr. Margulies was engaged as outside counsel to IEAM,
became its CFO before resigning from that position on December 4, 2006. During the period
December 2006 through July 2007, Mr. Margulies was named and received salary compensation
from PPO in return for his services as head of IEAM’s legal department. Mr. Margulies rejoined
IEAM as CEO and CFO and a director in February 2008 as noted in the Company’s 8-K.
On March 6, 2009, the Company received a conditional resignation as its chief executive
officer, James W. Margulies, to be effective March 9, 2009. On March 9, 2009, the Company’s
Board of Directors accepted the resignation of Mr. Margulies as a director, chief executive
officer and chief financial officer. The resignation letter did not indicate any disagreement with
the company’s operations, policies or practices. Mr. Margulies offered to continue to assist the
Company in the completion of the June 2007 filing on Form 10-K, if requested.
As a result of Mr. Margulies’s various and ever-changing relationships with IEAM and
its former management and Board he appears to have been the custodian of the vast majority of
the parent company’s official corporate records, minutes, correspondence with regulators,
transfer agent, and D&O carrier, among others. He has also been the primary signatory on the
largest of the Company’s checking accounts. In his various capacities, Mr. Margulies and Mr.
Mazzuto were the two primary interfaces with IEAM’s outside auditors and various sub-
contractors of accounting services to the parent corporation.
In October 2004, the Company purchased all of the issued and outstanding capital stock
of EMC (the "EMC Shares") from the then holders of the EMC Shares. EMC became the
Company’s wholly owned subsidiary on the effective date of that purchase.
Effective June 30, 2005, the Company acquired 100% ownership of Unifide, which was a
leading marketer and seller of automotive chemicals and additives for an aggregate consideration
of approximately $3.1 million in cash, notes and stock, and Today’s Way, which manufactured
and packaged the products which were sold by Unifide, for an aggregate consideration of
approximately $950,000 in cash, notes and stock. As a result of these acquisitions, Unifide and
Today’s Way became the Company’s wholly owned subsidiaries as of July 17, 2005.
On May 12, 2006, the Company sold Springdale Specialty Plastics, Inc., a subsidiary of
Pitt Penn (" Springdale ") pursuant to an Asset Purchase Agreement with Fortco Pittsburgh, LLC
("Fortco"). Pursuant to the Asset Purchase Agreement, the Company sold all right, title and
interest in and to the property and assets, real, personal or mixed, of every kind and description,
which relate solely to the business of Springdale to Fortco for an aggregate amount of two
million five hundred thousand dollars ($2,500,000.00), subject to adjustment as provided in the
Asset Purchase Agreement. The terms of the Asset Purchase Agreement were determined by
arms-length negotiations between the parties.
On December 28, 2007 the former management of IEAM filed Form 10-KSB,
Amendment Number 1 for the fiscal year ending June 2006. In that document prior management
identified three private placements. Unless otherwise noted, Debtors are relying on that
document for information disclosed with respect to private placements.
IEAM reported that it entered into a subscription agreement as of July 19, 2005.
Pursuant to that subscription agreement, certain investors purchased securities, in a private
placement pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended
Pursuant to the subscription agreement, IEAM was required to file with the Securities and
Exchange Commission (the "SEC"), within 30 days of the closing of the July 2005 private
placement, a registration statement which registers the resale of all shares of its common stock
underlying the convertible notes and the warrants issued or issuable by IEAM to the investors in
the July 2005 private placement. IEAM did not comply with those obligations.
IEAM entered into a securities purchase agreement dated as of January 27, 2006 with
JLF Asset Management, LLC and the three funds it manages, JLF Offshore Fund, Ltd., JLF
Partners I, L.P., and JLF Partners II, L.P. (together, “JLF” or the “JLF entities”), pursuant to
which the three JLF entities purchased from IEAM, in a private placement pursuant to Rule 506
of Regulation D under the Securities Act, (1) debentures convertible into shares of IEAM
common stock, as well as (2) Class A warrants to purchase an aggregate of 1,064,166 (post split)
shares of IEAM common stock, and (3) Class B warrants to purchase an aggregate of 1,713,611
(post split) shares of IEAM common stock, for an aggregate purchase price of $5,000,000.
Pursuant to the January 2006 purchase agreement, IEAM agreed to file with the
Commission, within 60 business days of the closing of that offering, a registration statement
which registers the resale of all shares of IEAM common stock underlying the convertible
debentures and the warrants issued or issuable by IEAM to the JLF entities. IEAM did not
comply with those obligations. IEAM filed the registration statement on May 31, 2006.
IEAM reported that it entered into a securities purchase agreement dated as of March 8,
2006 with certain investors pursuant to which those investors purchased securities, in a private
placement pursuant to Rule 506 of Regulation D under the Securities Act, (1) debentures
convertible into shares of IEAM common stock, as well as (2) Class A warrants to purchase an
aggregate of 402,778 (post split) shares of IEAM common stock, and (3) Class B warrants to
In addition, also effective March 8, 2006, IEAM entered into a separate securities
purchase agreement (together with the abovementioned securities purchase agreement, the
“March 2006 purchase agreements”) with Truk International Fund, LP and Truk Opportunity
Fund, LLC (together, “Truk”), pursuant to which these investors purchased from IEAM, in a
separate private placement pursuant to Rule 506 of Regulation D under the Securities Act,
(1) debentures convertible into shares of IEAM common stock, as well as (2) Class A warrants to
purchase an aggregate of 138,888 (post split) shares of IEAM common stock, and (3) Class B
warrants to purchase an aggregate of 138,888 (post split) shares of IEAM common stock, for an
aggregate purchase price of $500,000.
The Class A warrants IEAM issued in the March 2006 private placement had the exercise
price of $3.40 per share, and the Class B warrants have the exercise price of $3.40 per share.
Each of the Class A and Class B warrants will expire on the third anniversary of their issuance
date, and can be exercised at any time during such period. The warrants we issued to the
investors in the March 2006 private placements are not subject to cashless exercise. As
previously noted, management is relying on information contained in a filing made by former
management of IEAM in Form 10-KSB, Amendment Number 1 for the fiscal year ending June
2006, filed on December 28, 2007. That document was silent with respect to the exercise of the
warrants. Current management is still reviewing these transactions. Any of such warrants
which have not been exercised have expired.
Pursuant to the March 2006 purchase agreements, IEAM agreed to file with the SEC,
within 60 business days of the closing dates of those offerings, a registration statement which
registers the resale of all shares of our common stock underlying the convertible debentures and
the warrants issued or issuable by IEAM to the investors in the March 2006 private placements.
IEAM did not comply with those obligations. IEAM filed the registration statement on May 31,
2006.
In March 2006, the members of the Board of Directors of IEAM, were sent certified
letters by the former CEO of Advanced Biochem, Crawford Shaw. Among other things, those
letters notified the company that John Mazzuto’s 2002 bankruptcy which was filed in the U.S.
Bankruptcy Court Southern District of New York (SDNY), Case 02-15586-rdd, had not been
disclosed and needed to be disclosed in SEC filings.
• Mr. Shaw used an action against IEAM in Texas as the vehicle by which
he sued for payment under his employment contract.
On May 31, 2006 the Company filed a Form SB2 which is a securities registration for
small business. This registration statement is relevant. Despite the March 2006 written notice to
directors, IEAM continued to omit material facts. Specifically, this filing failed to disclose Mr.
Mazzuto’s bankruptcy, and the bankruptcy of George Cannan, Sr. (Chapter 7 Southern District
of Florida, Case 01-27073-BKC-RBR, Kenneth A Welt, US Bankruptcy Trustee).
According to U.S. Securities and Exchange Commission, Litigation Release No. 19732 /
June 21, 2006, SEC v. Carl R. Rose, et al., Civil Action No. H-04-CV-2799, the SEC announced
that on June 19, 2006, the United States District Court for the Southern District of Texas entered
a Final Judgment against Defendant George J. Cannan, Sr., based on his consent.
Cannan, Sr., without admitting or denying the allegations of the complaint, consented to
an order of permanent injunction which permanently restrained and enjoined him from violating,
directly or indirectly, the anti-fraud and reporting provisions of the Exchange Act as well as
other provisions of the Securities laws, including, Exchange Act Sections 10(b) (and Rule 10b-5
thereunder), 13(a), 13(d)(1) (and Rules 13d-1 and 13d-2 thereunder), 15(a)(1) and 16(a) (and
Rule 16a-3 thereunder) and Securities Act Sections 5 and 17(a) and Rule 101 of Regulation M
under the Exchange Act. The order also bars Cannan Sr. for five years from acting as an officer
or director of any issuer that has a class of securities registered pursuant to Section 12 of the
Exchange Act or that is required to file reports pursuant to Section 15(d). Further, the order
requires Cannan, Sr., to pay a civil penalty in the amount of $75,000.
George Cannan, Sr. acted as President and CEO of EMC from the time of its acquisition
on October 7, 2004 until his termination for cause on July 14, 2008. He was one of the five
highest paid officers of IEAM and its subsidiaries subsequently reached an agreement with the
SEC to refrain from acting as an officer or director of a public company.
Neither the SEC investigation nor the consent order was ever disclosed by IEAM in a
public filing. Further, despite a change in the corporate by-laws mandating the filing of a proxy
and the holding of an annual meeting, IEAM under the Mazzuto and Margulies management
never filed a proxy or held a shareholder meeting.
At the heart of the IEAM problems was Mazzuto’s and Margulies’s attempt to portray the
Debtors as a business success. As noted earlier, starting in late-2006, the Company hosted a
series of investor meetings designed to portray IEAM as a small but growing company in a
mundane business with professional management which was beginning to generate positive cash
2
Baker MacKenzie represented IEAM in this matter.
In early-December 2006, James Margulies resigned as CFO and moved to the legal
department. John Mazzuto assumed the role and announced the search for a permanent
replacement. In March 2007 the company announced that Dennis O’Neill had accepted a
position as CFO. Under a potential adversary proceeding in the Bankruptcy Court, Mr. O’Neill’s
counsel turned over certain documents including a March 8, 2007 initial agreement and a copy of
a May 11, 2007 resignation letter. The March 8, 2007 letter contradicts the Company’s public
statements. Points One and Two of that agreement are as follows:
1. All parties agree that the current operations of IEAM are in a “troubled state.”
2. The extent of this condition, if any, is not yet known to the parties.
With these three acquisitions under its belt, IEAM management was now in a position to
begin to tell a “story” which might attract investor interest. Company management made a series
of presentations in various public forums outlining their strategy of integrating these three
businesses on both an operational and financial basis.4
The company with the assistance of David Zazoff of ZA-Consulting began a public
relations campaign to tell the IEAM story. With JLF Asset Management, LLC, a well known
money management firm, as a core investor, the company began to craft a series of presentations
hosted by brokerage firms. The apparent purpose of these presentations was to promote the
merits of IEAM as being an attractive investment opportunity.
Management also began hosting a series of plant tours. The October 25, 2006 investor
package was representative of IEAM’s standard presentation. In addition, beginning in
December 2006 the company was distributing a 77-page package telling the IEAM story. The
first seven pages of that package made a number of material misstatements about both the
company and Mr. Mazzuto. The last 70 pages consisted of public filings.
3
In retrospect, it appears that IEAM may have been insolvent in March 2007 or earlier. In response to a request from the
bankruptcy court, Dennis O’Neill’s attorney has turned over 2,000 pages of documents between August 25, 2009 and
August 31, 2009. A review of Mr. O’Neill’s correspondence in March 2007 suggests that was known to Mr. Mazzuto and
others at that time.
4
While IEAM took some steps to integrate operations, it continued to maintain three separate accounting systems. IEAM,
the parent company, kept its books on a Quickbooks accounting system. Pitt Penn Oil used a vibrant, state-of-the art
Microsoft Great Plains accounting system. Unifide and Today’s Way accounting were partially, but not completely,
integrated into this system. EMC Packaging maintains its accounting on a legacy accounting system.
Between October 2006 and the Spring of 2007, IEAM had begun to attract the attention
of many sophisticated institutional investors as well as a diverse group of individual investors.
The appeal of IEAM was based upon the proposition that a group of entrepreneurs had found a
publicly traded shell corporation (IEAM-FKA Advanced Bio Chem) and with the assistance of
some outside financing had assembled a portfolio of corporations producing products for the
automotive after markets.
In addition, in December 2006, the Company issued a press release which noted that it
had signed a joint venture with Sino Chem to import specialized gas into the United States.5
Further, while dilution was expected from the exercise of warrants and the conversion of various
notes, management suggested in various public forums that with all exercises fully diluted shares
would fall within a range of 13.0 – 14.0 million shares.
On February 16, 2007, the Company filed Form 10-QSB for the period ended
December 31, 2006. That filing indicated that there were 12.9 million shares outstanding. On
April 20, 2007 the company filed Form 8-A12B/A which is a NASDAQ listing application. That
form indicated that there were 16.848 million shares outstanding as of April 18, 2007. When
questioned about this on a conference call, Mr. Mazzuto suggested that these shares did not
reflect the “retirement” of certain shares due to stock purchase. On May 22, 2007 the company
filed a 10-QSB for the period ending March 31, 2007. That filing indicated that there were
13.297 million shares outstanding as of May 18, 2007.
An 8-K filing and a subsequent conference call shows that there was a $6.2 million
investment in a joint venture (which was identified as being with the Chinese partner). That
filing and conference call also indicated that there was a problem with revenue recognition. That
issue has subsequently been identified as a “bill and hold issue.” The issues of revenue
recognition and bill and hold are the central elements in a current class action complaint.
5
While SEC regulations require the filing of a report on Form 8-K to disclose “material events,” this press release was
among one of at least three press releases discussing a material event which were never filed with the SEC. As we have
determined, the information contained in the press release was false. Independent investigation and a Spring 2008 e-mail
from George Cannan to Dan Redmond confirm that there never was a joint venture.
On October 11, 2007, IEAM, along with all of its subsidiaries, entered into a $5.0 million
revolving credit line with Sovereign Bank. Margulies and Levinson provided an opinion letter to
Martin Weisberg at Baker McKenzie. Weisberg provided an opinion letter with respect to IEAM
to Sovereign Bank. In our subsequent review of the documents submitted to the bank it appears
that (1) the backgrounds of the principals were misstated, (2) IEAM was clearly not current in its
financial filings with the SEC, (3) other documentation supplied by IEAM may have been false,
and (4) IEAM was out of compliance with the terms of the loan when it was made.
On November 7, 2007 the Company issued two press releases. One related to the
suspension of Jorge Yepes, a CFO who had been appointed on September 4, 2007. The second
press release made a number of material disclosures relating to (1) a variable interest entity
(VIE) in Akron, OH; (2) an increase in a litigation reserve; (3) reversal of bill and hold activities
for the December 2006 and March 2007 quarters; (4) the settlement of certain litigation; (5) a
share count increased to 26.0 million shares; and (6) a continuation of a stock buyback program,
among other items. These disclosures, all of which were material, were never filed with the SEC
on Form 8-K.
On January 31, 2008, the Company filed an 8-KA which indicated that on January 15,
2008 Black Nickel had lent IEAM $750,000 at a double digit interest rate and received 75,000
purchase warrants plus 2.0 million shares of IEAM stock increasing the shares outstanding to
28.0 million.7
On February 5, 2008, James Margulies replaced John Mazzuto as both CEO and CFO.
On February 19, 2008 the Company issued a four page press release entitled, “IEAM Provides an
Accounting and Operational Update.” That press release discussed (1) the delayed filings, (2)
the increase in share count announced in the July 12, 2007 press release, and (3) the company’s
financing needs.8
Of particular interest was the caption, “The substantial increase in share count
announced in the July 12, 2007 Press Release was a surprise to investors and to the Board.”
6
Our subsequent review of the record books shows that as of June 30, 2007 the company’s transfer agent suggests that there
were approximately 22.9 million shares outstanding. In our limited access to board records, we have found no such
approval. Further given the company’s actual cash position at the time, no such program was feasible.
7
The company failed to disclose that on January 15, 2008 it had issued some 500,000 shares of freely trading IEAM shares
to Black Nickel under its S-8 registration statement.
8
The February 19, 2008 press release was never filed as part of a Form 8-K.
In February 2008, Jim Margulies committed to filing the company 10-K for the period
ending June 2007 within several weeks of taking office as CEO and CFO. No such 10-K has yet
been filed.
Immediately prior to taking the position of CEO and CFO and, shortly thereafter, Mr.
Margulies, the new CEO and CFO of IEAM, discussed the capital requirements of IEAM on a
going-forward basis. The problems facing IEAM were described as a simple liquidity issue.
Certain large investors who owned up to 60.0% of the outstanding shares of the Company’s
common stock indicated that upon the filing of the 10-K for FY 2007, they were willing to
consider a participation in a rights offering to provide $3.0-$5.0 million of common or preferred
stock. The condition was that it be open and available to all current stockholders of the
Company.
Despite assurances to both the investment community and to the Company’s secured
lender that Mr. Margulies was merely reviewing a 10-K prepared by Mr. Mazzuto, no such 10-K
was ever filed. As noted later, the failure to file the June 2007 10-K was a violation of the
Company’s loan agreement with Sovereign Bank as well as a violation of the Black Nickel
agreement. As a result of the failure to file the 10-K, Mr. Margulies caused IEAM to issue an
additional 1.5 million shares to Black Nickel. Further, the failure to file the 10-K was the
proximate cause of Sovereign Bank’s decision to freeze the funds in the Company’s bank
accounts in October 2008.
On April 7, 2008, Mr. Margulies, Mr. Redmond, Mr. Zazoff and Daniel Boucher met
with institutional investors and others who owned more than 45.0% of the company’s shares
outstanding. The purpose of the meeting was to discuss (1) certain financing alternatives, (2) the
potential sale of EMC to George Cannan, Sr. and (3) provide an update on the preparation of the
10-K for FY 2007. During the course of that discussion, Mr. Margulies asserted that if IEAM
did not receive a cash injection of more than $9.0 million by Friday, April 11, 2008 he would be
forced to file “bankruptcy.” He did not specify whether he was contemplating Chapter 11 or
Chapter 7 nor did he specify which of the corporate entities he was considering for a bankruptcy
alternative.
9
Our review of the share issuance data, as discussed later in this report, shows that the transfer agent received instructions
signed by either Mr. Mazzuto or Mr. Margulies to issue shares pursuant to an S-8 filed in February 2005. The S-8 was
never made effective. In addition, while the July 12th press release refers to 19.0 million shares outstanding as of the end of
June 2007, there were actually 22.9 million shares outstanding.
On Saturday August 9, 2008, Mr. Margulies and the outside investors agreed on a
conceptual approach towards resolving the financial and operational problems faced by IEAM
and its subsidiaries. Other members of IEAM’s operating management then became involved in
the due diligence process. A review of the subsidiary books and records revealed that PPO was
being burdened with excessive salaries including those at parent. The combined staff salaries
throughout the organization as of June 30, 2008 were just under $5.0 million. This did not
include any stock based compensation or grants to various “consultants” or outside contractors
being paid by parent (IEAM). In addition, a review of the internal books and records of the
subsidiaries suggested that there was a significant disconnect between reported results and
reality.
Despite the problems at IEAM, numerous press releases and presentations suggested that
PPO (the major operating entity) was generating positive cash flow during all of 2007. As a
result of questions asked during an intensive due diligence review which began on or about
June 29, 2008, Mr. Redmond prepared a report which indicated that Pitt Penn Oil had never
generated positive cash flow.
I. April 2009 - All Prior Financials, Stock Issuances, and Disclosures Are
Under Review By Current Management.
In a Form 8-K filed with the SEC on May 29, 2009, the current management of IEAM
made the following disclosure:
Under new management, Debtors have been conducting an ongoing review of the
financial records and the books and records of subsidiaries and parent. As part of this review, the
Company has been endeavoring to gather and analyze the books and records from various
sources.
To date, the Company’s review has focused upon the intracompany transactions and the
issuance of the Company’s securities pursuant to certain agreements between the Company and
the subsidiaries and various consultants.
IEAM is a holding company incorporated in the State of Nevada, with four direct
subsidiaries, EMC, Today’s Way, Unifide, and PPH. IEAM is the sole owner of PPO as a result
of its 100% ownership of PPH. PPO, with annual revenues of approximately $25 Million at the
time of its acquisition in January 2006, became the main operating subsidiary of the IEAM
By January 2007 Pitt Penn Oil was paying for the obligations of PPO, Today’s Way and
Unifide. In February and May 2007, IEAM acquired the assets of Fire 1st Defense LLC (“FFD”)
and High-Tach respectively. High-Tach was absorbed into PPO.
By 2006, IEAM, as the parent company, had no employees. The burden of payroll
disbursements, as well as the obligations of Today’s Way and Unifide previously mentioned,
were pushed down to PPO.
Functionally, IEAM typically only appears to have had two or three officers at any given
time. From the period December 2006 through February 2008, John Mazzuto was the CEO/CFO
at which time he resigned and was replaced on an interim basis by James Margulies. Mr.
Margulies, over the period 2005 to July 2007, held various roles including CFO and Secretary.
During that period he was paid as an employee of PPO. Robert Dan Redmond served as
Executive VP and President of IEAM during his tenure. Dennis F. O’Neill served as CFO as did
his replacement Jorge Yepes. All of those individuals received their compensation from PPO.
Mr. Margulies continued to be actively engaged with the company on legal and
accounting matters until he assumed the CEO/CFO role in February 2008. In fact, the
accounting records indicate that even after he stepped down as CFO in December 2006 he
appeared to be actively engaged along with Mr. Mazzuto, in the preparation of IEAM’s internal
financial records. The National City Bank checkbook was maintained in Cleveland Ohio at his
office during that time.
Rather than consolidate IEAM financial operations at PPO, where the bulk of the staff
and the most robust accounting system resided, IEAM used paid professionals to fulfill other
roles, primarily accounting. Both Dennis O’Neill and Jorge Yepes, CFOs of IEAM maintained
offices at PPO. Debtors do not know what access, if any they had to IEAM parent records or
checkbooks.
IEAM’s accounting books and records have been maintained on QuickBooks by John
Mazzuto and James Margulies with the assistance of third party paid professionals. The records
indicate they included David Selmon until March 2007; Tracie Matsuo, Selmon’s eventual
replacement, was initially engaged in late 2006 to assist with the completion of the 10Q for the
quarter ending December 31, 2006 and again for March 31, 2007. Ms. Matsuo was then
employed under a consulting agreement by John Mazzuto. This relationship was maintained by
James Margulies, through March 2009. Prior to the arrangement with paid professionals, the
company appears to have relied upon Ilene Engelberg. Ms. Engelberg was originally the CFO of
EMC Packaging, a subsidiary of IEAM through its acquisition in 2004. As disclosed in an 8K in
December 2004, Ms. Engelberg was named Assistant Controller and Dennis O’Neill Controller.
Ms. Matsuo did not provide monthly accounting services, instead would periodically
make necessary accounting entries or adjustments, dependent upon documentation provided by
IEAM. Until September 2008, Mr. Mazzuto, and subsequently Mr. Margulies were the sole
contact points for Ms. Matsuo. Michael Dignazio joined Pitt Penn Oil Company as Corporate
Controller on October 17, 2007 and had limited interface with Ms. Matsuo and the company’s
auditor, DeJoya Griffith & Co., LLC. His interaction was limited to those matters that affected
the subsidiaries.
On August 25, 2008, Mr. Dignazio (at that time the corporate controller of PPO) received
an email request from Tracie Matsuo regarding intercompany transactions on the parent
company books that could not be reconciled (other than several brief phone calls, this was the
first email Mr. Dignazio received since January 25, 2008). Mr. Dignazio prepared an analysis of
the intercompany transactions, noting the schedule Ms. Matsuo provided reflected transactions,
specifically cash transactions related to wire transfers that were not recorded on the books and
records of the subsidiaries. On August 28, 2008, Mr. Dignazio emailed Mr. Margulies in regards
to the intercompany accounts, identifying for him beginning balance differences between the
books and records of IEAM and its subsidiaries. Mr. Dignazio stated in the email that entries
will need to be made on both the parent and subsidiary accounting records to properly reflect
previously unrecorded transactions that Mr. Dignazio identified. Mr. Dignazio noted that we
would need to document the reason for the transactions with supporting documentation.
September 2008 New Management Assumes Positions at Pitt Penn Holding, et al.
Preliminary due diligence began April 8, 2008; an accelerated due diligence process
began on June 30, 2008. In trying to determine a proforma set of financials for all subsidiaries, it
was determined that despite public statements to the contrary, EMC records were still being
maintained on a legacy accounting system and their specific financial closing was only
performed quarterly. Further, new management also requested due diligence be performed on
the state of the company’s IT systems.
EMC results were accounted for on a legacy “Novell” network based system. The
stability of this system has been greatly compromised since June 2008; accounting data has been
extracted through system reports and is in the process of being transferred into Great Plains.
EMC production was similarly suspended in September 2008 with only limited production runs
until December 2008. Beginning in September 2008, we began an implementation process to
integrate EMC into the Great Plains accounting system.
October 2008: Current Management Finally Sees National City Bank Statements for IEAM:
More Questions Than Answers.
Mr. Margulies informed us that the account with National City was the primary checking
account for IEAM. Mr. Margulies noted in a conversation that IEAM had a money market
account at Wachovia. It was stated that the account had limited activity and balance, and that it
10
Steve Berger had been an employee of Margulies Law, Mr. Berger participated in Sovereign Loan note. On or about
November 2007, Mr. Berger became an employee of PPO and was nominally named General Counsel to IEAM. Mr.
Berger worked out of the law offices of Margulies Law in Cleveland, Ohio. From September 12, 2008 until September 18,
2008, Mr. Berger reported to Robert Renck. At this point, Mr. Margulies recommended that Mr. Berger work under his
direction to gather documents for the preparation of the 10K for the year ending June 30, 2007. As of October 31, 2008,
Mr. Berger was terminated from his employment. Because of the use of the berger@bergerlaw.com email, it appears that
some outsiders may have thought they were dealing with an outside general counsel for both IEAM and PPH.
It appears that during the period December 2006 through the balance of 2007, that
account was a major recipient and dispenser of funds for IEAM. In one month alone, there were
$5.0 million of transfers in and out of this account. Many of these transactions appeared to have
had questionable business purposes. This appeared to be a prima facie indication of possible
wire fraud.
Since December 2007, Mr. Dignazio made requests for documents to former company
management for the purposes of properly identifying and supporting material transactions on the
books and records of IEAM and its subsidiaries. Those requests, beginning with a list provided
by the auditors to John Mazzuto in December 2007, went largely unfulfilled and left open the
status of the audit for the fiscal year ending June 30, 2007. As of October 2008 those requests
were largely unfulfilled.
On October 19, 2007, the Company’s outside general counsel, Martin Weisberg, was
indicted on matters unrelated to IEAM or his then current employer. On November 7, 2007
IEAM made two announcements. One related to its then current CEO, Jorge Yepes. A second
indicated that as of November 7, 2007 IEAM now had 26.0 million shares outstanding and was
investigating certain bill and hold activities.
Subsequent to the November 7, 2007 announcement a class action suit was filed against
the company, its officers, directors, and certain individual defendants.11
Subsequent to IEAM’s failure to answer the class action suit in New York State Court,
the Company’s D&O insurance carrier, ACE-INA, secured Alston & Byrd to defend the
company in that action. In June 2008, Alston & Byrd resigned its representation purportedly due
to an irreconcilable conflict. As a result of that resignation, both James W. Margulies and
Dennis O’Neill (a former CFO) were given independent representation paid for by the D&O
carrier. ACE-INA chose Cozen O’Connor to replace Alston & Byrd to as company counsel in
defense of this action. At that juncture the Board of Directors consisted of Robert Casper
(Chairman of the Board and Head of the Audit Committee), James W. Margulies (CEO and
CFO) and Jerome Davis (an Independent director). Prior to November 2008, the only
correspondence between new counsel, Cozen O’Connor, and the company was through Steven
W. Berger, Esquire who reported directly to Mr. Margulies, and was domiciled at the offices of
Margulies and Levinson.
11
As disclosed in the Company’s May 29, 2009 8-K filed with the SEC, the SEC began an informal investigation.
There were several pre-conditions to Mr. Ward and Mr. Renck joining the subsidiary
Board:
• Mr. Margulies had represented in public filings with the SEC agreements with the
company’s lender and to Mr. Ward and Mr. Renck that IEAM’s 2007 10-K for the
year ended June 2007 would be filed on or before October 31, 2008.
• Upon the filing of that 10-K, Mr. Ward and Mr. Renck agreed to consider
becoming members of parent Board and providing transition management as Mr.
Margulies returned to the practice of law. It was left open whether Mr. Margulies
would continue and complete the delinquent filings for FY 2008 and the first two
quarters of FY 2009. The last due date for the December 2008 10-Q would be
February 15, 2009.
• There were three additional pre-conditions to Mr. Ward and Mr. Renck’s
acceptance of positions. They included:
The purpose of the Corporate Governance Committee was to provide a formal vehicle for
(1) Mr. Renck to review and examine parent company books and records, (2) review inter-
company transactions, (3) evaluate the company’s response to the class action and (4) to provide
a vehicle for Mr. Ward and Mr. Renck to have unfettered communication with the sole
independent director Jerome W. Davis.
Under the auspices of the Governance Committee, current management began reviewing
corporate records. As part of that process they made repeated requests to Mr. Margulies for
IEAM documents.
Mr. Margulies was extraordinarily selective in his response to the Governance Committee
for documents. Even after his resignation as a director, CEO and CFO of IEAM, was accepted
on March 23, 2009 by Jerome W. Davis, Mr. Margulies has delayed in returning the company’s
original records. Based upon a November 5, 2009 order of the Federal Bankruptcy Court, Mr.
Margulies did turn over some 160,000 Bates Stamped copies of certain records.
4. Capital Structure.
The present members of PPH management first began to have limited access to the
underlying books and records of PPO beginning April 9, 2008. Extensive and exhaustive due
diligence began on June 27, 2008. By mid-July 2008 it was apparent that PPO was an
extraordinarily troubled company.
PPO, which had been purchased as of January 2006, had its operations merged with
Unifide and Today’s Way as of that date. Starting in or about January 2007, then current
management of PPO changed the underlying chart of accounts and the inventory cost
methodology making operational cost comparisons difficult at best.
Those fundamental changes have left a discontinuous accounting for operational data.
This has been compounded by a series of inter-company transactions with parent and a sister
company, EMC. Despite recommendations from a forensic accounting consulting group brought
in by the audit committee of the parent in or about September 2007, any and all
recommendations to consolidate all of the related accounting systems have been rejected or
ignored. The only recommendation that was accepted was the hiring of a new controller and
assistant controller in mid-October 2007.
Public filings, conference call transcripts and press releases suggested a relatively high
level of profitability at parent virtually all of which was publicly attributed to its major operating
asset PPO. Without going into detail it was suggested that adjusted EBITDA (ex-Capex) for
each of three quarters ended March 2007 was running around $4.0 million per quarter. It was
further suggested that the company had or would implement operating efficiencies that would
result in annual cost reductions of $4.5 million.
IEAM last reported its capital structure as of March 31, 2007 on a consolidated basis on
a Form 10-Q filed May 22, 2007.
ASSETS
Current Assets
Total Checking/Savings 1,299,315.96
Notes Receivable
Packaged Air Products, Inc. 30,000.00
Brooke Capital LLC 250,000.00
Nick Torrens 250,000.00
Total Notes Receivable 530,000.00
Prepaid Expenses
Consultant Fees 4,359,161.70
Insurance 15,195.37
Total Prepaid Expenses 4,374,357.07
Fixed Assets
Total Furniture, Fixtures & Equipment 146,292.75
Other Assets
Goodwill 1,371,380.00
Debt Issuance Costs, unamort 155,504.34
Investments
China J.V. 6,262,156.50
Total Davison Warehouse 942,335.05
Due To
Total Related Party 80,402.64
Notes Payable
Total Convertible 5,073,556.88
Equity
Equity pre-Earnings
Total Contributed Capital 71,713,159.55
IEAM last reported its Income Statement for the nine months ended as of March 31, 2007
on a consolidated basis on a Form 10-Q filed May 22, 2007.
Expenses:
Selling, general &
administrative 4,400,328 2,403,874
Salaries and contract labor 0 1,422,995
Depreciation and amortization 1,621,236 370,839
Legal and professional fees 203,018 1,323,267
Operations and consolidation
expense 250,000
Total Expenses $ 6,224,582 $ 5,770,975
Ordinary Income/Expense
Expense
Amortization Expense
Total Amortization Expense 826,330.82
Consultants 17,089,260.55
Contributions/Donations 16,100.00
Depreciation Expense 2,589.49
Dues and Subscriptions 6,086.25
Total Insurance 29,494.61
Interest Expense
Total Interest Expense 13,612,363.43
Rent 67,332.75
Repairs
Computer Repairs 60.32
Total Repairs 60.32
Other Income/Expense
Total Other Income 2,436,829.80
Total Other Expense (250,000.00)
The Debtors note that there are some self-evident differences between the IEAM
consolidated income statement and the parent company income statement:
• The consolidated statement shows total expenses of $6.224 million, not including
interest expense of $14.284 million. This would bring total expense (including
interest expense) to $20.508 million.
• The parent company only statement shows total expenses (including interest
expense of $13.612 million) of $35.405 million, which is $15.0 million greater
than reported on the consolidated financials. This raises questions that can only
be resolved by access to IEAM’s complete books and records.
• The consolidated statement shows net income from operations of $5.170 million
and total net loss of $6.701 million. The major difference between these two
numbers is accounted for by subtracting interest expense of $14.284 million.
• The parent company statement shows net loss of $35.405 million before an off-set
of other income of $2.68 million. Parent company financials show a net loss of
$32.718 million.
• The difference between the two different presentations of net income amounts to
just over $26.0 million.
• In order for IEAM to report a consolidated loss of only $6.7 million versus $32.7
million at the parent company level, the implication is that all of the subsidiaries
would need to have produced net income of $26.0 million.
The financial records of the Company’s operating subsidiaries do not support that
contention.
As noted previously, PPO absorbed the operations of Unifide and Today’s Way on an
operational basis as of January 2006. However, the accounting systems were not integrated until
January 2007. Consequently, the only numbers we have been able to review for PPO prior to
January 2007 are disaggregated into PPO and Unifide.
As noted above, PPO’s Pre-Tax Income reflected a $1 million loss for the quarters ended
September 2006 and December 2006 respectively. Debtors cannot reconcile these pre-tax losses
when considered in conjunction with the Unifide financial statement presented below.
A new executive, R. Daniel Redmond, was hired in the spring 2007. He became both
Executive VP of parent and president and Chief Operating Officer (COO) of PPO. He was
subsequently named president and COO of IEAM as well. It appears that under his direction the
accounting for PPO and Unifide were finally consolidated for the period beginning January
2007. Despite the fact that parent and subs are on a June fiscal year, inexplicably the
consolidation was not done for the quarters beginning July 1, 2006 and October 1, 2006.
PPO/Unifide’s consolidated summary income statements for the periods January 2007 to
December 2007 and January 2008 to September 2008 follows:
The data presented above, removes the question of intercompany transactions for the
quarter ended March 2007 (the last financial period reported to the SEC). The major operating
entity of the Parent shows a pre-tax loss of $2.5 million suggesting that an additional
$5.5 million was earned between the operations of the parent and EMC. Again, the Debtors’
review of records suggests that such a profit does not exist.
Prior to taking control on September 12, 2008 current PPH management was of the
opinion that it would be possible to restore PPH to profitability through a combination of
(1) significant, sustained expense reduction; (2) the injection of temporary working capital
through a protected $3.0 million purchase money line and an early-2009 injection of up to
$4.0 million equity at either the parent or PPH level through a rights offering to current
shareholders backstopped with a standby commitment by one or more of six entities who
collectively had owned up to 60.0% of parent (whose market value had reached over
$100.0 million in late-2006, early-2007). In the Debtors’ view, this would have allowed for the
refinancing and expansion of the current credit line.
A combination of factors has made this impossible. The Lehman bankruptcy, which
occurred on September 14, 2008, has led to the freezing of the credit markets and other macro
events. As importantly, the Debtors’ review of internal documents, many of which were not
available during the due diligence process, have put a different color on the financial results of
both parent and PPO.
Based on this significant and serious disconnect between results attributed nominally to
parent and more substantially to PPO, PPH management’s assessment of PPO’s financial
condition combined with the lender’s actions, determined that the best course of action to protect
creditors and preserve collateral was to mothball the plant.
Although IEAM has presented its financial statements and filed its financial results with
the SEC, the internal records that have been turned over to the present management are
extraordinarily deficient. The former management, under the leadership of Messrs. John D.
Mazzuto and James W. Margulies, appear to have never filed a federal or state tax return for any
of the entities since they assumed management control on October 7, 2004. The books and
records of the major operating subsidiary, Pitt Penn Oil (100% owned by PPH), does not support
the public statements of prior management.
In reviewing the QuickBooks files for IEAM for the period October 2004 through
June 30, 2007, IEAM’s parent company books recorded the following:
• Revenues None
• Total Expenses $83,706,441.35
• Net Ordinary Loss $83,706,441.35
• Other Income $3,013,256.66
• Total Other Expense $10,561,729.27
• Net Other Loss $7,548,472.61
• Net Loss $91,254,913.96
Based on the same records, parent IEAM recorded the following net losses by fiscal year:
Of the total $83.7 million of expenses, the major categories which were identified were as
follows:
A further review of IEAM parent company only data illustrates that while the
QuickBooks records indicate total expenses of $83.7 million, payments to identified vendors
total only $41.0 million. Expenses attributed to the ten largest “vendors” in QuickBooks totaled
$36.4 million. Those “vendors” were as follows:
The timing and the amounts of issuances, including the disputed S-8 issuances, are shown
in the table which follows:
In addition, the Debtors have sought the return of over $1.7 million from the proceeds of
common stock issued to Yale University and $1.5 million issued to Tabor Academy at the
instruction of John D. Mazzuto. Mr. Mazzuto is a graduate of both Yale and Tabor.
Current management has also advised broker/dealers and clearing firms who received
these freely trading shares of these issuances. The Debtors are examining their potential liability
as being part of an improper distribution of securities under the federal securities laws.
With respect to government regulation, IEAM’s amended 10-K for the year-ended
June 30, 2006, which was filed on December 28, 2007, made the following assertion:
During the course of the Debtors’ review of operations at EMC prior to making a
decision to cease operations and vacate the facility, the Debtors noted there were some
unresolved issues at EMC prior to its acquisition by IEAM in October 2004.
6. Employees.
With respect to employees, IEAM’s amended 10-K for the year-ended June 30, 2006,
which was filed on December 28, 2007, made the following assertion:
As of December 31, 2008 IEAM had placed its manufacturing operations on hiatus. The
Company and its subsidiaries maintained a skeleton staff of four employees until September 18,
2009. They also used the services of certain former employees on an as needed part time basis.
On September 18, 2009, Michael Dignazio (who was then VP Finance and Corporate Secretary
of each of the entities) announced his immediate resignation. He continued to assist in the
transition as a part time consultant until late-January 2010. The Company continued with one
full time employee, Robert L. Renck, Jr., its President and CEO. Mr. Renck has deferred his
contractual compensation through January 31, 2010. The Debtors are using the part time
The Debtors will evaluate their employment needs on an ongoing basis particularly after
they determine the extent of damages and insurance and other recovery at its Creighton PA
manufacturing facility. Management continues to have orders filled at its FFD subsidiary by
Spray Manufacturing. The Debtors are evaluating their capital needs and intend to raise
sufficient capital to finalize Underwriters Laboratory approval and expand marketing of the
product line.
As noted above, prior to taking control on September 12, 2008 current PPH management
was of the opinion that it would be possible to restore PPH to profitability through a combination
of (1) significant, sustained expense reduction; (2) the injection of temporary working capital
through a protected $3.0 million purchase money line and an early-2009 injection of up to
$4.0 million equity at either the parent or PPH level through a rights offering to current
shareholders backstopped with a standby commitment by one or more of six entities who
collectively had owned up to 60.0% of parent (whose market value had reached over
$100.0 million in late-2006, early-2007). In the Debtors’ view, this would have allowed for the
refinancing and expansion of the current credit line.
Those plans were rendered moot when Sovereign Bank foreclosed on the note in late-
October 2008. The proximate cause was IEAM’s failure to file a Form 10-K for FY 2007. That
was a condition of both the original loan and the forbearance agreements signed during calendar
2008 by Mr. Margulies.
As a result of these actions, manufacturing at the Debtors’ facilities were put on hiatus
while management of PPH actively solicited prospective buyers or manufacturing partners. In its
discussions with potential operators, management determined that PPO’s facilities had certain
appeal.
Despite the obvious gap between published reports and the underlying reality reflected in
the accounting records, the production capacity of the Creighton facility and its location has
continued to be the primary attraction to prospective buyers.
Based upon our examination of the underlying accounting records, customer and supplier
records, and preliminary conversations with various interested parties within and outside the
industry our preliminary conclusions are as follows:
• The operations of PPO have been burdened by excessive costs at parent and at the
operating level. Particularly in the areas of management and sales management.
• An operator with other facilities would achieve further synergies by reducing PPO
to a sole function as a manufacturing facility.
• Much of the value ascribed to PPO comes from the location of the facility and
most importantly the access to rail transportation and the ability to receive
shipments by barge.
• Location and access to water and rail lines also assists in the shipment process.
• To industry participants, whose facilities are outside the natural shipping radius,
the maintenance of customer accounts may be an asset.
Expressions of Interest
Since assuming their positions at PPH on September 12, 2008 the current management
has fielded new inquiries from various parties and made contact with every single caller who has
expressed an interest in PPO. Because of PPO’s status as the major asset of a public corporation
which is not current in its filings with the SEC, PPH management was not been in a position to
actively explore the level of interest by third parties with respect to the sale of the PPO asset.
During the period November 1, 2008 through March 2009 PPH management had
extensive conversations with more than ten qualified operators or buyers who had some degree
of interest in purchasing or operating the facility. Among the considerations was the facility’s
status, the grandfathering with respect to certain building regulations, the availability of its
manufacturing lines, and the best way to utilize the net operating loss carry forward available at
both parent and PPO.
Despite IEAM’s public statements that it had consolidated and streamlined operations,
former executive management at IEAM failed to consolidate the company’s three separate
accounting systems. This failure and the continued refusal of James Margulies to turn over
corporate records to the Governance Committee, beginning in late-2008 and since he advised the
Board of his intent to resign on March 8, 2009 has damaged the corporation in many respects.
• There were no accounting entries on the books of Pitt Penn Oil which reflected a
loan from GSL. Despite the fact that its public statements and filings suggested
the company was (1) cash flow positive, (2) engaged in a stock repurchase
program, and (3) free of all long-term debt as of June 30, 2007; the management
of IEAM entered into a loan agreement with GSL wherein it pledged
approximately $1.1 million of production and office equipment as security for a
$760,000 loan bearing interest at 14.0%. GSL was also given an equity kicker to
make this loan. Senior management of IEAM had characterized this loan as a
lease on the books of Pitt Penn Oil.
• PPO did not possess a copy of the GSL loan document, which was dated as of
April 7, 2007. The loan document had been executed on or about October 2007
by James Margulies in his capacity as Corporate Secretary. Since Mr. Margulies
has not returned the company’s original financial and corporate records, current
management cannot determine if the loan was entered on the books of parent.
Further, it cannot verify from the financial information available to it whether or
not IEAM or PPO received the proceeds of the GSL loan. Neither Mr. Margulies
nor GSL has provided copies of the wire transfer.
• The fact that this was a loan, not a lease, gave GSL certain rights it would not
have had as a lease. In the event that a company chooses to file for protection
under chapter 11, it has the right to accept or reject leases. If it chooses to accept
a lease, it needs to bring the lease current and make all future payments. PPH
made a fully funded offer to cure the lease and late-April 2009. That offer was
rejected by GSL. Under the terms of its loan agreement, GSL had the right to sell
the collateral in a public auction to recover its secured position. GSL had taken
control of the company’s facilities on Friday April 3rd. PPH had received reports
In addition to the operational issues which are affecting PPH, PPO, and EMC, parent
company, IEAM, had been involved in significant litigation which had drained corporate
resources. The existence of that litigation and, in many cases, the failure of prior management to
provide case files was a primary factor in deciding to file a petition for bankruptcy for IEAM.
On May 29, 2009 Debtors filed a report with the SEC on Form 8-K in which it discussed the
status of that litigation.
1. Litigation.
The Company is managing various litigations involving the Company and its subsidiaries
in various courts throughout the country. These litigations fall into three basic categories:
abandoned by prior management, contested, and bankruptcy-related.
The defense of certain lawsuits was effectively abandoned by prior management after the
withdrawal of representation by a law firm as of December 14, 2007.
a. Zyskind Action.
In 2004, Beryl Zyskind (“Zyskind”) loaned the Company a total of $100,000.00. This
loan was memorialized in four notes. Each note was convertible into the Company’s common
stock. Zyskind alleges that the Company refused to comply with the terms of the notes, and
refused to convert them into the Company’s common stock. Zyskind therefore filed a lawsuit
captioned Zyskind v. Industrial Enterprises of America, Inc., New York County, NY Supreme
Court Index No. 602523/2006. On March 3, 2009, the Court entered an order (the “Zyskind
Judgment”) awarding Zyskind 121,500,280 shares of the Company’s common stock, along with
approximately $8.3 million in cash. The Company has sought reargument of the March 3, 2009
Order because, inter alia, the Company believes that Zyskind could not have recovered more
than $1,314,955.70 under the terms of the notes. The Company has also filed an appeal. Mr.
Zyskind filed a proof of claim against IEAM in the amount of $10,758,463.30. In addition he
filed a proof of claim for 120.5 million shares of IEAM common. IEAM disputes his claim.
The foregoing Claims and disputes have been resolved by letter agreement dated April 7,
2010 between and among the Debtors, the DIP Lenders and Zyskind (the “Zyskind Settlement”),
providing that, among other things, Zyskind be granted an Allowed General Unsecured Claim in
the amount of $5,500,000.00 (the “Allowed Zyskind Claim”) in full and final satisfaction of his
Claims against the Debtors, and in exchange for his return of all shares of stock in IEAM issued
to him pursuant to the Zyskind Judgment, less any shares sold prior to the date of execution of
the Zyskind Settlement. To the extent necessary, the Plan will constitute a motion for approval
of the Zyskind Settlement in accordance with the applicable provisions of the Bankruptcy Code.
IEAM was named as a defendant in an action brought in the 157th Judicial District Court
of Harris County, Texas, which trial occurred on April 7, 2009. The case is captioned Ira L.
Goldknopf v. Industrial Enterprises of America, Inc., John Mazzuto, Regal Partners, Inc. and
Crawford Shaw. Following the trial, the court award judgment for Goldknopf and against the
Company as follows: (i) Goldknopf was awarded $365,492.12 in past due principal and interest
on a note executed by the Company to Goldknopf; (ii) Goldknopf was awarded $113,427.91 on
credit card charges Goldknopf had paid or still owes that had not been reimbursed by the
Company; (iii) Goldknopf was awarded $6,000 for payments made on a loan owed by the
Company; (iv) the court found that Goldknopf was entitled to reimbursement for any amounts he
may pay in the future on the foregoing loan; and (v) Goldknopf was awarded attorney fees of
which $22,500 was awarded against the Company. Mr. Goldknopf has filed a proof of claim
against IEAM in the amount of $761,417.73. The present management has not had an
opportunity to review any of the underlying documents in this case. Upon the completion of its
review, IEAM will determine whether it will dispute his claim.
c. Margulis Action.
On February 27, 2008, Barry Margulis filed suit against the Company in the New York
Supreme Court, County of New York, seeking approximately $848,408 on a promissory note.
After settlement talks failed, the Company did not contest this suit. The court granted
Mr. Margulis a default judgment on June 4, 2008, in the amount of $853,834.76. Mr. Margulis
has filed a proof of claim against IEAM in the amount of $1,414,309.38. The present
management of IEAM is reviewing this claim. The promissory note stems from the purchase of
stock from Mr. Margulis under a ”buyback” program. The terms of the purchase included a
private sale at an approximate 20.0% premium to market, an apparent contradiction of SEC
regulations covering buybacks. IEAM disputes his claim.
2. Contested litigation.
On January 23, 2008, Trinity Bui and her investment company filed suit in United States
District Court, Southern District of New York, against the Company, Beckstead and Watts, LLP,
John Mazzuto, James Margulies, Dennis O’Neill, and Jorge Yepes in connection with certain
securities of the Company issued to Trinity Bui’s investment company, seeking approximately
$2.5 million in damages. The Company, James Margulies, and Dennis O’Neill filed a motion to
dismiss on May 9, 2008, which was later joined by John Mazzuto. Trinity Bui filed an amended
complaint on or about October 31, 2008, to which the court applied the previously-filed motions
to dismiss. On January 15, 2009, the court granted the motion to dismiss the amended complaint
with prejudice as to the Company, James Margulies, Dennis O’Neill, and James Mazzuto,
dismissed the complaint without prejudice as to the other defendants, and directed the clerk of
the court to close the case.
On April 30, 2008, Black Nickel Vision Fund, LLC (“Black Nickel”) filed suit against
the Company in the New York Supreme Court, Count of New York, for alleged breaches of a
Loan and Purchase Agreement, seeking the issuance of 1,500,000 shares of Company common
stock plus $750,000 plus interest. The Company subsequently issued 1,500,000 shares of
common stock to Black Nickel on or about May 12, 2008. Black Nickel then moved for
summary judgment on July 3, 2008. The Company opposed the motion for summary judgment.
On August 15, 2008, Black Nickel filed a second suit against the Company and
Sovereign Bank in the New York Supreme Court, Count of New York, for specific performance
of certain provisions of a note issued in connection with the Loan and Purchase Agreement.
Black Nickel subsequently brought a motion by order to show cause seeking a preliminary
injunction enjoining the Company from further encumbering the manufacturing facility in East
Deer Township, Pennsylvania. The Company and Sovereign Bank opposed the motion for a
preliminary injunction, and Sovereign Bank subsequently brought a motion to dismiss as to
Sovereign Bank.
On February 10, 2009, the court issued decisions in both Black Nickel lawsuits. As to
the first suit, the court denied Black Nickel’s motion for summary judgment. As to the second
suit, the court denied Black Nickel’s motion for a preliminary injunction, and granted Sovereign
Bank’s motion to dismiss. Black Nickel has filed a notice of appeal as to the court’s dismissal of
Sovereign Bank. On April 14, 2009, the court referred both Black Nickel suits to a mediator
assigned by the Alternative Dispute Resolution Program of the Commercial Division. The
Company believes that it has adequate defenses to both Black Nickel suits and is vigorously
defending these matters. This action is stayed as to IEAM pursuant to the Bankruptcy Code.
Black Nickel has not filed a proof of claim.
The Company, along with its subsidiary, EMC, is named as a defendant in an action for
breach of an employment agreement (against EMC only), replevin and conversion. The action
was filed and is currently pending in the Superior Court of the State of New Jersey, Ocean
County. EMC has filed counterclaims and third-party claims. The case is captioned Cannan,
et al. v. EMC Packaging Inc., et al., Docket No. OCN-L-3559-08. In their complaint, the
plaintiffs, George Cannan and EMC Aerosol LLC, seek possession of certain cylinders of
refrigerant gas which they claim to have purchased from EMC for a total purchase price of
$450,000, which was paid to the Company. Plaintiffs alternatively seek money damages against
EMC and the Company. EMC and the Company deny that the Plaintiffs are entitled to either
these cylinders or money damages. EMC is currently enjoined from transferring or removing
any of the remaining cylinders from their warehouse location, unless EMC deposits in escrow, a
specified sum per cylinder sought to be transferred or removed. Plaintiff George Cannan is a
former employee and officer of EMC and the complaint includes a wrongful termination claim
brought on his behalf against EMC. EMC denies all liability for that claim and maintains that
Mr. Cannan was an at-will employee who was nevertheless terminated for cause under his
written employment agreement. EMC has filed counterclaims against Plaintiffs and third-party
The Company was named as a defendant in a securities law class action brought in the
federal court for the Southern District of New York in November 2007. The case is captioned
Mallozzi v. Industrial Enterprises of America, Inc., et al., Case No.: 07- CV-10321. The case
was filed by a purported class of persons who purchased the Company’s common stock during
the period December 4, 2006 through November 7, 2007. Plaintiffs allege that the Company and
its co-defendants (several of the Company’s officers who are no longer with the Company) made
fraudulent misrepresentations and omissions about the Company’s financial condition that
caused the plaintiffs to purchase the Company’s stock and to suffer damages. The Company
filed a motion to dismiss those claims, and prior to a Court ruling on the motion to dismiss, the
parties agreed to settle the case for $3.8 million, with the proceeds of the settlement being paid to
plaintiffs by the Company’s insurer. On April 16, 2009, the Southern District of New York
preliminarily approved that settlement and directed that notice of the settlement be sent to class
members. A final hearing on the proposed settlement was scheduled for July 29, 2009. On
May 1, 2009, the Company filed for bankruptcy under Chapter 11 of the Federal Bankruptcy
Code.
The proposed settlement had an “opt-out clause.” Under the terms of that clause, if more
than 1.0 million share of the common opted out of the settlement (to preserve their right of
private action), any one of the defendants could terminate the settlement. Some 9.0 million
shares (out of an estimated 25.0 million eligible for settlement) elected to do so. Under the terms
of the settlement, settling shareholders would have received just over $0.10 per share and given
up their rights to recover against the individual defendants as well as related professionals.
Based upon the large number of opt-outs, counsel for Dennis O’Neill, a former CFO,
exercised his right to terminate the settlement. After that election the matter was referred to
magistrate’s court in the Southern District of New York to renew settlement discussions. Said
discussions terminated. The case has been re-filed on behalf of a truncated class.
This action is stayed as to IEAM pursuant to the Bankruptcy Code. A proof of claim in
the amount of $50,000,000 has been filed against IEAM. The Company disputes this claim.
On Tuesday May 25, 2010, Manhattan District Attorney Cyrus R. Vance, Jr., announced
the indictment against JOHN D. MAZZUTO, a corporate executive, and JAMES W.
MARGULIES, an attorney, for illegally issuing shares of stock to enrich themselves and others,
and for engaging in fraudulent activity to inflate the stock's value and deceive investors.12 The
defendants were charged with Grand Larceny, Scheme to Defraud, Conspiracy, Falsifying
Business Records, and violations of the Martin Act (New York State's securities fraud law). The
crimes charged in the indictment occurred between 2004 and 2008 and relate to Industrial
Enterprises of America, Inc. ("IEAM"), a public holding corporation located in Manhattan. The
defendants illegally issued millions of shares of stock in IEAM to family, friends, and close
associates, and engaged in myriad fraudulent activities in their scheme to steal more than $60
million. The defendants stole from the corporation and legitimate investors, and engaged in a
variety of fraudulent accounting and securities practices to disguise the theft and pump up the
value of the stock.
K. Chapter 11 Cases.
On May 1, 2009, the Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code in the Bankruptcy Court under Case No. 09-11508. On April 30, 2009,
PPH, a Delaware Corporation, and PPO, an Ohio limited liability company, each filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court
under Case Nos. 09-11475 and 09-11476, respectively. On May 4, 2009, EMC, a Delaware
corporation, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court under Case No. 09-11524. On May 6, 2009, Unifide, a New Jersey limited
liability company, and Today’s Way, a New Jersey limited liability company, each filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court
under Case Nos. 09-11587 and 09-11586, respectively. PPH, PPO, EMC, Unified, and Today’s
Way are each subsidiaries (the “Subsidiaries”) of the Company.
12
The DA's Office press release is available here:
http://www.manhattanda.org/whatsnew/press/2010-05-25.shtml
a. Joint Administration.
The Honorable Brendan L. Shannon is presiding over the Debtors’ bankruptcy cases.
The Bankruptcy Court entered an order of joint administration of the Debtors’ cases on May 11,
2009 (D.I. 21). Accordingly, these cases have been procedurally consolidated into the Pitt Penn
Holding Company, Inc. Bankruptcy Case No. 09-11475 (BLS).
b. Retention of Professionals.
The Court has approved the Debtors’ retention of the following professionals pursuant to
11 U.S.C. § 327:
Debtors’ authority to borrow and to use cash collateral under the First DIP Facility
expired was originally scheduled to expire on August 31, 2009. By Order dated September 28,
2009 (D.I. 219), the Debtors’ authority to use cash collateral and to borrow under the First DIP
Facility was extended through December 31, 2009. In addition, by Order dated September 28,
2009, the Bankruptcy Court approved a carve-out of Omtammot LLC’s superpriority claim in
favor of professional fees. The Debtors have borrowed 100% of the availability under the First
DIP Facility, the proceeds of which were used to finance the administration of these bankruptcy
cases.
Atlas Waste Paper Corporation also requested relief from the automatic stay by motion
dated June 9, 2009 (D.I. 84) in order to recover certain equipment. The Debtors consented to the
relief requested as reflected in the consensual Order dated July 7, 2009 (D.I. 133).
e. Allstate Lease.
Debtor Pitt Penn Oil Company LLC (“PPO”) assumed a lease of a certain boiler with
Allstate Leasing, Inc. and Allstate Equipment Leasing (collectively, “Allstate”) by Order dated
September 1, 2009 (D.I. 193). The rental payments under the Allstate lease are $2,012.94 per
month. Allstate subsequently filed a motion to enforce its rights under the boiler lease and was
awarded damages. PPO is now current under the Allstate lease.
3. Bankruptcy Litigation.
The Debtors have filed a number of actions in the Bankruptcy Court. They include the
following:
• The Company is in active litigation against GSL of Ill., LLC (“GSL”), an entity
which purports to be a secured creditor of the Company and PPO. GSL
previously filed a replevin action in Pennsylvania state court. The relief obtained
by GSL in that Pennsylvania state court action, the manner in which GSL and
related parties have pursued such relief, and GSL’s conduct post-filing by the
Company are currently being litigated before the Bankruptcy Court. Debtor,
PPO, has filed a complaint against Norman Lynn, GSL of Illinois, BLN Capital,
and Washington International Insurance. This action alleges conversion of more
than $300,000 of debtor inventory and seeks the payment of normal and
customary rent of the plant of $1,000 per day during a portion of time that GSL
has occupied the plant. It also seeks an accounting for the sale of assets under the
company’s Replevin action. The initial complaint was amended to encompass
damages from a fire that occurred at the plant while it was under the custody and
control of GSL. The case is currently in discovery.
• Debtor, PPO, has filed a complaint against Koki Laboratories of Akron, OH and
its owner John Piscitelli. This action is seeking to recover $599,819.77 of
inventory held at Koki. Specifically, debtors allege that Koki and Piscitelli have
either improperly converted to their own use, sold, or improperly delivered to
third parties $502,093.52 of PPO’s inventory of raw materials and finished
products. Debtor also alleges negligence with respect to manufacturing of
product for a customer in Dubai and seeks $344,940.00 plus future profits due to
the loss of the Dubai customer. Debtor is also seeking $824,000.00 with respect
to a fraudulent transfer. The case is currently in discovery.
• Debtor, EMC, has filed a receivables claim against Precision Thermoplastics, Inc.
in the amount of $255,786.68 plus interest for payment of a receivable. A
Settlement has been reached and submitted to the Court for approval. It calls for
the payment of $100,000 to EMC.
• Debtor, PPO, has filed a receivable claim against Kupey Industries, San Juan, PR
in the amount of $239,614.59. Defendant has defaulted and debtor has been
granted a default judgment.
• Debtor, IEAM, has filed five adversary actions in the bankruptcy court. Those
actions have alleged that some 6.153,200 shares worth $31,535,425.50 were
issued directly from the company’s transfer agent, Computershare, to the
defendants at the direct instructions of either John D. Mazzuto or James W.
Margulies, Esq. without requisite approval under the terms of an S-8 registration
1. LNG Consulting and Lloyd Dohner received 585,000 shares with a value
of over $2.6 million from FY 2005 through FY 2008. Neither defendant
responded and a default judgment has been entered.
• Since at least February 2008, counsel to debtors advised then current management
that they were under an affirmative obligation to preserve all company files,
including electronic correspondence. That request has not been followed in every
instance. No apparent action was taken to preserve various e-mail servers or
certain other records. Certain officers and consultants used e-mail accounts where
the internet service provider (ISP) was not under contract to one of the debtors. In
its effort to recover original documents and records from former officers,
employees, consultants, or others; debtors have generally made requests for the
voluntary turnover of files and records belonging to the debtors. In certain
instances the current management has been forced to file turnover motions under
Section 542 of the bankruptcy code. Prior to February 15, 2010, management has
made three such requests. They were to Mr. John D. Mazzuto, Dennis O’Neill,
and James W. Margulies, Esq. Documents have been received from all of those
respondents. Current management is continuing to review the document
production.
• After reviewing the production of documents from James Margulies, debtors filed
a contempt motion for Mr. Margulies failure to turn over original corporate
• The hearing on the contempt motion was adjourned. In the interim, Debtor
deposed Mr. Margulies on April 20, 2010. During the course of that Deposition,
Mr. Margulies admitted that, despite an instruction to preserve documents. (1) all
of his outgoing emails had been deleted, (2) certain incoming emails had been
deleted, (3) original company paper files had not been turned over, (4) certain
original electronic files had been removed from his office computers , (5) certain
interactive electronic files, specifically Quick Books and excel spreadsheets had
not been turned over.
• In addition Mr. Margulies testified that IEAM had made use of a Margulies and
Levinson IOLTA account at a Cleveland bank and a Margulies Law Group
IOLTA account at a brokerage firm. The Debtors have demanded Mr. Margulies
turn over a complete accounting of both accounts, particularly with respect to the
distributions from those accounts. As of May 26, 2010 the Debtors are still
waiting for Mr. Margulies to comply.
• On February 16, 2010, management filed a turnover motion with respect to David
Zazoff and ZA Consulting. Management may file additional turnover motions.
1. Plan Settlements.
The Plan will implement the terms of (a) the Zyskind Settlement; (b) the DIP Loan
Settlement and (c) the compromise and settlement between the Debtors and OMTAMMOT, LLC
with respect to the Prepetition Lender Claims (the “Prepetition Loan Settlement”). To the extent
necessary, the Plan constitutes a motion for approval of the Zyskind Settlement, the DIP Loan
Settlement and the Prepetition Loan Settlement pursuant to Bankruptcy Rule 9019 and
Bankruptcy Code section 1123(b)(3)(A) and consistent with Bankruptcy Code section 1129. The
Confirmation Order will constitute an order of the Bankruptcy Court finding and determining
that the Zyskind Settlement, the DIP Loan Settlement and the Prepetition Loan Settlement are (i)
in the best interests of the Debtors and their estates, (ii) fair, equitable and reasonable, (iii) made
in good faith and (iv) approved by the Bankruptcy Court.
2. Limited Consolidation.
For the purposes of consummating the Plan, including for purposes of voting,
Confirmation and distributions to be made under the Plan, the Debtors will seek authority under
In accordance with Bankruptcy Code section 1123(a)(1), the DIP Loan Claims,
Administrative Claims and Priority Tax Claims have not been classified, and the respective
treatment of such unclassified Claims is set forth in Article V.B.1 below. All Claims and
Interests other than the DIP Loan Claims, Administrative Claims, and Priority Tax Claims have
been placed in the Classes set forth in Article V.B.2 below.
GSL was a secured creditor, whose security was limited to the value of its equipment.
when PPH filed for protection under Chapter 11. GSL has not yet submitted a report of its
August 2009 auction and prior sales. It is impossible for IEAM to determine whether GSL’s
secured claims satisfied by the sale. To the extent that there excess proceeds, they would revert
to the Debtor. To the extent there was a deficiency, it is the Debtor’s position that the deficiency
would become an unsecured claim and be added to Class D Claims.
With the exception of Omtammot’s claims, the GSL claim is the only secured claim of
which Debtors are aware.
Pursuant to the DIP Loan Settlement, on or before the Effective Date, each holder of an
Allowed DIP Loan Claim shall receive in full satisfaction, settlement, release and discharge of,
and in exchange for, its Allowed DIP Loan Claim an amount of Preferred A Shares of
Reorganized IEAM (the “Preferred A Shares”) equal to one (1) Preferred A Share for each one
dollar ($1.00) of Allowed DIP Loan Claims. Each Preferred A Share shall accrue interest at a
rate of seven percent (7%) per annum from the Effective Date until payment, and such interest
shall accrue and shall only be payable upon payment via the liquidation preference outlined in
the succeeding sentence. The Preferred A Shares shall have a liquidation preference equal to one
dollar ($1.00) for each Preferred A Share plus all interest accrued thereon from the Effective
Date through the date of payment. The Preferred A Shares shall have a liquidation preference
over the Preferred B Shares of Reorganized IEAM (the “Preferred B Shares”)[, the Preferred C
Shares of Reorganized IEAM (the “Preferred C Shares”) and any newly issued Common Stock.
The Preferred A Shares may be convertible to additional shares of New Common B Stock of
Reorganized IEAM (the “New Common B Stock”) (at a conversion rate equal to 30 million
Shares of New B Common Stock divided by the aggregate amount of issued Preferred A Shares)
at any time upon the sole discretion of the holder of the Series A Preferred Stock. The Preferred
A shares will be voting shares.
Except to the extent that an Allowed Administrative Claim has been paid prior to the
Effective Date, each holder of an Allowed Administrative Claim shall receive payment of the
amount of such Allowed Administrative Claim in Cash on the Effective Date, or as soon as
reasonably practicable thereafter, or immediately after entry of an order approving an application
therefor if after the Effective Date, in full satisfaction, settlement, release and discharge of, and
in exchange for, such Allowed Administrative Claim.
Except to the extent that an Allowed Priority Tax Claim has been paid prior to the
Effective Date, each holder of an Allowed Priority Tax Claim shall receive in full satisfaction,
settlement, release and discharge of, and in exchange for, such Allowed Priority Tax Claim,
equal monthly payments over a period of five (5) years from the Effective Date in an aggregate
principal amount equal to the face amount of such Allowed Priority Tax Claim, with interest on
the unpaid portion thereof at the rate of interest determined under applicable nonbankruptcy law
as of the calendar month in which the Plan is confirmed.
Except to the extent that an Allowed Non-Tax Priority Claim has been paid prior to the
Effective Date, each holder of an Allowed Non-Tax Priority Claim shall receive in full
satisfaction, settlement, release and discharge of, and in exchange for, such Allowed Non-Tax
Priority Claim, payment of the amount of such Non-Tax Priority Claim in Cash on the Effective
Date or as soon as reasonably practicable thereafter.
Non-Tax Priority Claims are Unimpaired under the Plan and are accordingly not entitled
to vote on the Plan. The Debtors estimate that Allowed Non-Tax Priority Claims will be in the
approximate aggregate amount of $102,864.00.
Convenience Claims are Unimpaired under the Plan and are accordingly not entitled to
vote on the Plan. The Debtors estimate that Allowed Convenience Claims will be in the
approximate aggregate amount of $160,000.00.
The Allowed Prepetition Lender Secured Claims shall be bifurcated into a secured and
unsecured portion pursuant to Bankruptcy Code section 506. Pursuant to the Prepetition Loan
Settlement, OMTAMMOT, LLC and the Debtors have agreed that the value of the Debtors'
property subject to liens securing the Allowed Prepetition Lender Secured Claims is Two Million
Two Hundred Thousand Dollars ($2,200,000).
The Pitt Penn Oil facility, based on the last written appraisal done in June of 2006, was
appraised for $2,633,000. This appraisal was requested, by the lender, for the purpose of asset
valuation while securing credit lending. It would be reasonable to assume, since the property is
in the Northern Allegheny Development corridor that the property value has increased by an
average of eight percent per year up until last year. This would add 30 percent to the value
making the facility worth approximately $3,400,000. While GSL, a secured creditor, was in
possession of the facility a fire occurred on September 9th, 2009. These damages would reduce
the present value of the building. The structural damages may involve approximately 35 percent
of the building reducing the net present value to $2,200,000. There are some additional damages
but they are more cosmetic and should not affect the valuation as would the structural repairs that
are required. As the insurance company has not accepted coverage, nor tendered an offer, it is
impossible to determine the certainty and the amount of funding that is forthcoming. However,
once those funds are recovered and the repairs are completed, this facility should exceed the full
value of the appraised amount of $3,400,000 due to the newer construction and modernization.
In addition to the devaluation caused by the fire, the debtor (GSL) also removed piping, conduit
and catwalks that were not part of their collateral. This amount of stolen materials may exceed
$100,000. A suit has been filed to recover these damages but neither the exact sum of these
funds, nor the timing of their receipt, can accurately be included in the present valuation.
The inventory that was located, at the facility in Creighton, had an estimated value of
over $1,000,000 (book value). This valuation anticipated an active and ongoing marketplace for
the use of these products. However, since GSL took over the facility, there was a theft of
approximately $245,000 of raw product inventory ( as described by GSL) and, after we were
given access to assess our inventory, we found an additional amount of inventory missing. We
feel this amount is in excess of $400,000. We are unable to be specific on these amounts since
our original records were taken by GSL. The remaining inventory is either smoked damaged
from the fire or is of little value because it is raw materials for specific private labeled products
that we no longer contract for. The value of our inventory that was in the Koki plant, in Ohio that
was approximately $600,000 was found to be short by $503,000 when we inventoried those
items one year ago. We feel, after having agents sell whatever was salvageable, and evaluating
the balance of inventory in both plants that the present value of inventory that remains is less
than $100,000. The recovery of the stolen inventory, while uncertain, could be substantial.
Prepetition Lender Secured Claims are Impaired under the Plan and are accordingly
entitled to vote on the Plan. Pursuant to the terms of the Prepetition Loan Settlement, Prepetition
Lender Secured Claims will be Allowed in the aggregate amount of $4,800,000.00.
(i) Cash in an amount equal to the lesser of (A) two percent (2%) of the amount of
such Allowed General Unsecured Claim or (B) $200,000.00 to be distributed Pro Rata to the
holders of Class D Claims; plus an amount of Preferred B Shares to be issued on a Pro Rata basis
equal to the greater of (A) ninety-eight percent (98%) of the amount of such Allowed General
Unsecured Claim or (B) the total amount of all Allowed General Unsecured Claims in Class D
less $200,000.00. One (1) Preferred B Share shall be issued on account of each one dollar
($1.00) of Allowed General Unsecured Claims. The Preferred B Shares shall not accrue interest
or otherwise be convertible. The Preferred B Shares shall have a liquidation preference equal to
one dollar ($1.00) for each Preferred B Share. The Preferred B Shares shall have a liquidation
preference over the Preferred C Shares and any newly issued Common Stock. When the net cash
balances of Reorganized IEAM are equal to or greater than the preference amounts of Preferred
A Shares and Preferred B Shares, Reorganized IEAM may in its sole discretion liquidate the
Preferred B Shares. In addition, the holders of Preferred B Shares may require Reorganized
IEAM to liquidate the Preferred B Shares.
When the net cash balances of Reorganized IEAM are equal to or greater than the
preference amounts of Preferred A Shares and Preferred B Shares, Reorganized IEAM may in its
sole discretion liquidate the Preferred B Shares in whole or in part. In addition, the holders of
Preferred B Shares may require Reorganized IEAM to liquidate the Preferred B Shares. When
the cash and cash equivalents of litigation and asset recovery are in excess of 140% of the
combined book value of the DIP Loan, Series A, Series B and Series C preferred.
General Unsecured Claims are Impaired under the Plan and are accordingly entitled to
vote on the Plan. The Debtors estimate that Allowed General Unsecured Claims will be in the
approximate aggregate amount of $11,219,388.00.
The Existing IEAM Interests shall be deemed cancelled and extinguished as of the
Effective Date. On, or as soon as reasonably practicable after the Effective Date, each holder of
an Allowed Existing IEAM Interest shall receive its Pro Rata share of 30 million shares of New
Common B Stock, to be issued by Reorganized IEAM.
To the extent that monetary damages are assessed against any of the Debtors arising from
any claim for damages for the purchase or sale of any securities of any of the Debtors, and to the
extent such damages are not paid by any insurance, in accordance with the provisions of 510(b)
of the Code, such monetary damages shall treated by the issuance of Preferred C Shares. One (1)
Preferred C Share shall be issued on account of each one dollar ($1.00) of Allowed Subordinated
Claims. The Preferred C Shares will not accrue interest or otherwise be convertible; however,
the Preferred C Shares shall have a liquidation preference over New Common Shares of
Reorganized IEAM. Preferred C shares will be voting shares.
Subordinated Claims are Impaired under the Plan and are accordingly entitled to vote on
the Plan. The Debtors estimate that Allowed Subordinated Claims will be in the approximate
aggregate amount of $0.00.
All Non-IEAM Interests shall be deemed cancelled and extinguished as of the Effective
Date, and the holders of all Non-IEAM Interests shall not receive or retain any property or
interest in property under the Plan on account of such Non-IEAM Interests.
Non-IEAM Interests are Impaired under the Plan and are not entitled to vote on the Plan.
C. Limited Consolidation.
The Debtors believe that absent the compromises and settlements embodied in the
Prepetition Loan Settlement, the holders of General Unsecured Claims and Interests would not
be entitled to receive any distributions under the Plan due to the valuation of the Debtors’
prepetition secured debt. Therefore, for the purposes of consummating the Plan, including for
purposes of voting, Confirmation and distributions to be made under the Plan, the Debtors
respectfully request that the Court deem the Plan to serve as a motion under Bankruptcy Code
section 105 consolidating the Debtors solely with respect to Claimants who hold Class D General
Unsecured Claims and solely for the limited purposes described herein. In addition to the
compromises and settlements embodied in the Prepetition Loan Settlement, the Debtors believe
that the limited consolidation sought under the Plan is further warranted by the widespread
disregard of corporate formalities, fraudulent reporting and other extensive misconduct engaged
in by members of the Debtors’ former management as detailed in Article IV of this Disclosure
Statement.
The Debtors have been organized in a holding company structure. As noted in Section
IV of both the Debtors’ Initial Disclosure Statement and the Debtors’ First Amended Disclosure
• IEAM originally operated as a holding company with four (4) wholly owned
subsidiaries, Pitt Penn Holding Inc., a Delaware corporation ("PPH"), EMC
Packaging, Inc., a Delaware corporation ("EMC"), Unifide Industries Limited
Liability Company, a New Jersey limited liability company ("Unifide"), and
Todays Way Manufacturing, LLC, a New Jersey limited liability company
("Todays Way").
• PPH, through its wholly owned subsidiary Pitt Penn Oil Co., LLC, an Ohio
limited liability company (“Pitt Penn”), was a leading manufacturer, marketer and
seller of automotive chemicals and additives.
Current management believes that because of a secured borrowing of more than $4.6
million and the lack of collateral at the subsidiary level, unsecured creditors below the parent
level would have zero recovery in the absence of substantive consolidation.
Unless an objection to such limited consolidation is filed with the Court by any party in
interest and served on the Debtors and OMTAMMOT, LLC on or before five (5) days before the
voting deadline (or such other date as ordered by the Bankruptcy Court), an order authorizing
limited consolidation to the extent described herein may be entered by the Bankruptcy Court. If
any objections are timely filed, a hearing with respect to such objections shall be held at or prior
to the Confirmation Hearing at the direction of the Bankruptcy Court.
Notwithstanding any other provision of the Plan specifying a date or time for the
distribution of any payment to any holder of a Claim or Interest, payments and distributions in
respect of any Claim or Interest which at such date or time is disputed, unliquidated or
contingent shall not be made until such Claim or Interest becomes an Allowed Claim or Allowed
Interest, whereupon such payments shall be made promptly in accordance with Article 3.12 of
the Plan. Except as otherwise explicitly provided in the Plan, nothing shall affect the Debtors’,
Reorganized IEAM’s or any party in interest’s rights or defenses, both legal and equitable, with
respect to any Claims, and the rights of such Persons to object to the allowance of any Claim is
expressly preserved in the Plan.
No payment will be made on the disputed portion of a claim until thirty (30) days after
the claim is allowed by non-appealable Order of the Bankruptcy Court. Any claims subject to
Section 502(c) of the Bankruptcy Code shall be estimated and allowed to the extent provided in
the Plan for claims in the same class. Claims arising under Section 502(c) include contingent or
unliquidated claims, which if not fixed or liquidated would unduly delay the administration of
this proceeding, and right to payment arising from a right to an equitable remedy for breach of
performance.
Because the Debtors’ assets after the Plan is consummated will likely exceed their
liabilities the shares of stock will have some value. However, the Debtors desire that if they are
successful in the future that their creditors will be able to benefit from that success.
Section 1145 of the Bankruptcy Code provides an exemption from registration, pursuant
to the Securities Act of 1933, of the stock being issued pursuant to the Plan. Although the
Debtors believe that the holders of Claims and Interests who receive such stock as a distribution
pursuant to the Plan are entitled to transfer such stock to third parties without any additional
regulatory compliance, holders of Claims and Interests under the Plan should seek appropriate
legal advice in determining their stock transfer rights.
If the Plan is confirmed, the corporate charter of IEAM will be amended to authorize the
necessary shares of Preferred and New Common Stock to comply with the terms of the Plan.
The Debtors estimate that Reorganized IEAM will issue approximately 30,000,000 shares
of the new common stock to current shareholders of the common stock of IEAM. It will also
issue approximately 2,000,000 shares Preferred A stock, 13,000,000 shares of Preferred B and an
unknown number of shares of Preferred C.
The Debtors shall continue to exist as the Reorganized Debtors after the Effective Date as
separate legal entities, in accordance with the applicable laws in the respective jurisdictions in
which they are incorporated or otherwise organized and pursuant to their respective corporate
governance documents. In addition, the corporate governance documents of each Reorganized
B. Disbursement.
All distributions under the Plan on account of Allowed Claims and/or Interests shall be
made by the Debtors or the Reorganized Debtors. The Debtors may, in their sole discretion,
make distributions to any Class of creditors or interest holders in advance of the time provided
for in the Plan.
C. Default.
No default by any Debtor under the Plan shall be deemed to have occurred until forty-
five (45) days after such Debtor receives written notice of its failure to make a payment required
under the Plan or if, prior to the expiration of such 45-day period, the Debtor makes such
payment. Except as noted above, no Claimant shall receive interest on account of such
Claimant’s Allowed Claims.
D. Cash Payments.
All Cash payments to be made on or after the Effective Date provided for in the Plan
shall be made from Cash in the Debtors’ bank or operating accounts on the Effective Date. All
other Cash payments shall be made from the operating proceeds of Reorganized IEAM.
E. Borrowing.
Reorganized IEAM may borrow such additional amounts under the 2010 Debtor In
Possession Loan or under such other facilities as agreed to by the proposed lender, Reorganized
IEAM, and the holders of the Preferred A Shares as deemed necessary to fund all payments due
on or after the Effective Date.
Except as otherwise provided in the Plan, the Confirmation Order, or in any contract,
agreement or other document entered into in connection with the Plan, in accordance with
Bankruptcy Code section 1123(b), on the Effective Date, each Debtor or Reorganized Debtor
shall retain all of the respective Causes of Action, including all Avoidance Actions, that such
Debtor or Reorganized Debtor may hold against any Person, including, but not limited to, those
Causes of Action set forth in Schedule A attached to the Plan. The Debtors or Reorganized
Debtors may enforce, sue on, settle, or compromise all such Causes of Action, or may decline to
do any of the foregoing with respect to any such Causes of Action. The failure of the Debtors to
specifically list any Causes of Action in the Plan or in Schedule A to the Plan does not, and will
not be deemed to, constitute a waiver or release by the Debtors of such Causes of Action, and the
Debtors and Reorganized Debtors shall retain the right to pursue additional Causes of Action.
The Plan provides that except as otherwise provided in the Plan, or in any contract,
agreement or other document entered into in connection with the Plan, as of the Confirmation
Date each of the Debtors shall be deemed to have rejected all executory contracts and unexpired
leases other than those specifically assumed on or before the Confirmation Date or that are
otherwise subject to a motion to assume that is pending on or before the Confirmation Date,
pursuant to Bankruptcy Code section 1123(b)(2).
A. Generally.
A Claim against or Interest in one or more of the Debtors may be recognized as follows:
(1) the listing of a Claim by a Debtor in its Schedules, where such scheduled Claim is not listed
as: (a) disputed, (b) contingent or (c) unliquidated; or (2) the filing of a Proof of Claim or Proof
of Interest by the holder of such Claim or Interest in the time, form and manner approved by the
Bankruptcy Court.
By order of the Bankruptcy Court, September 8, 2009 was fixed as the last day for the
filing of Proofs of Claim by non-governmental creditors against the Debtors. For governmental
creditors, the bar date was set as November 2, 2009. Due notice of this date was furnished to all
creditors, Interest holders and other parties in interest. If a Claimant whose Claim has been
scheduled by one of the Debtors timely files a Proof of Claim, the Proof of Claim supersedes the
Claim of the Claimant as scheduled by that Debtor, unless objected to by the Debtors.
B. Administrative Claims.
All final requests for compensation or reimbursement of fees and expenses pursuant to
Bankruptcy Code sections 327, 328, 330, 331, 503(b) or 1103 for services rendered to the
Debtors prior to the Effective Date must be filed with the Bankruptcy Court and served on the
Debtors or the Reorganized Debtors and their respective counsel, as applicable, no later than
forty-five (45) days after the Effective Date, unless otherwise ordered by the Bankruptcy Court.
Objects to applications of such Professionals or other entities for compensation or reimbursement
of fees and expenses must be filed and served on the Debtors or the Reorganized Debtors and
their respective counsel, as applicable, and the requesting Professional or other entity no later
than forty-five (45) days (or such longer period as may be allowed by order of the Bankruptcy
Court) after the date on which the applicable application for compensation or reimbursement was
served.
X. TAX CONSEQUENCES.
If the Debtors’ Plan is confirmed by the Bankruptcy Court, there may be tax
consequences which could affect individual holders of Claims or Interests. The tax
consequences of the treatment of several Classes of Claims and Interests under the Plan are
uncertain. Accordingly, holders of Claims and Interests are urged to consult with an independent
tax advisor regarding such implications and how they may affect such individual holders based
on their individual circumstances.
Pursuant to Section 1141 of the Bankruptcy Code, upon Confirmation of the Plan and
vesting of all assets, except as otherwise expressly provided under the Plan, the Debtors will be
discharged of all claims and liabilities that arose prior to the Confirmation Date.
B. Discharge Injunction.
All entities which have held, hold, or may hold Claims against any of the Debtors, are
permanently enjoined, on and after the Effective Date, from (a) commencing or continuing in
any manner any action or other proceeding of any kind with respect to any such Claim, (b) the
enforcement, attachment, collection or recovery by any manner or means of any judgment,
award, decree or order against any of the Debtors on account of any such Claim, (c) creating,
perfecting or enforcing any encumbrance of any kind against any of the Debtors or against the
property or interest in property of any of the Debtors on account of any such Claim, (d) asserting
The Bankruptcy Court shall retain jurisdiction of the chapter 11 cases for the purposes of
Bankruptcy Code sections 105(a), 1127 and 1142(b) and for the following additional purposes:
(i) To hear and determine all Objections to the allowance or disallowance of any and
all Claims or Interests;
(iii) To hear and determine all motions to subordinate any and all Claims or Interests;
(iv) To hear and determine all matters relating to the assumption and rejection of any
executory contract or unexpired lease, including, but not limited to, any cure
payments or Claims for rejection damages arising therefrom;
(vi) To enforce and interpret the Plan, to resolve any disputes arising under or in
connection with the Plan, to effectuate payments under the Plan and/or to compel
performance of any Person in accordance with the provisions of the Plan.
(vii) To correct any defect, to cure any omission or to reconcile any inconsistency in
the Plan or in the Confirmation Order as may be necessary or advisable to carry
out the intents and/or purposes of the Plan;
(viii) To determine such other matters and for such other purposes as may be provided
in the Confirmation Order or otherwise deemed appropriate to accomplish its
intents and purposes;
(x) To recover all assets of the Debtors and property of the Debtors’ estates;
(xi) To adjudicate all Litigation Cases and Causes of Action brought in the
Bankruptcy Court either prior to or subsequent to the Effective Date; and
One of the Debtors’ most valuable assets is the net operating loss carry forward which the
Debtors estimate to be in excess of $100,000,000. Because a Chapter 7 liquidation does not
provide for debtor reorganization, this asset would be destroyed if the Chapter 11 cases were to
be converted to cases under Chapter 7. In addition, the Debtors currently intend to continue
litigation already commenced and to initiate substantial additional litigation. The Debtors
believe that they are in far better position to realize on such litigation than a Chapter 7 trustee.
The only hard assets available for liquidation in a Chapter 7 liquidation would be the
Debtors’ existing inventory, accounts receivable, and real estate. All of the proceeds of such
hard assets are subject to the liens of the secured creditor and therefore would not be available to
satisfy other Claims or Interests.
The proposed Plan currently provides that holders of General Unsecured Claims will
receive a distribution of the lesser of a 2% recovery in cash or pro rata share of $200,000.00 as
well as the issuance of Class B preferred stock. After evaluating the differences between the
Plan and a Chapter 7 liquidation, the Debtors believe that the Plan offers a more favorable
treatment to General Unsecured Creditors. Although in a Chapter 7 liquidation lawsuits brought
by a trustee may result in additional recoveries, a Chapter 7 liquidation of the Debtors would
surely involve a delay in any distribution to creditors and the incurrence of additional costs of
administering the bankruptcy.
It is most important to note that pursuant to the Prepetition Loan Settlement, the secured
creditor whose claim is in excess of $4,800,000.00 has agreed that it will receive only
As previously noted, the Debtors are organized in a holding company structure. IEAM,
the parent, is the direct owner of four subsidiaries, PPH, EMC, Unifide and Today’s Way. Of
these four subsidiaries only EMC has had significant economic activity since January 2007. The
vast majority of economic activity occurred at PPO, which is a 100% owned subsidiary of PPH.
Each of the Debtors is jointly and severally liable for the payment of a secured loan of
approximately $4.9 million. At the subsidiary level, proofs of claim totaling about $3.2 million
have been filed on behalf of unsecured creditors.
At the parent level, a contingent claim of $50.0 million has been filed by Plaintiff
attorneys in the class action; in addition, unsecured creditors have filed proofs of claim of just
under $13.4 million.
13
This table includes claims filed through February 17, 2010, including at least 15 claims filed well beyond the bar date
which will be objected to.
Total
Proofs of
Contingent Claims Filed
IEAM - 4,806,239.68
Pitt Penn Holding - 4,806,239.68
Pitt Penn Oil - 5,003,287.15
EMC - 4,806,239.68
Unifide - 4,982,039.68
Todays Way - 4,806,239.68
IEAM - -
Pitt Penn Holding - 126,835.63
Pitt Penn Oil - 316,031.92
EMC - 3,630.19
Unifide - 441,256.30
Todays Way - 52,252.50
Excluding the contingent claim, the total of unsecured Claims filed is just over
$16.6 million. In addition to those claims, the Debtors have incurred additional obligations post
filing, including DIP loans of $800,000, legal fees and deferred management compensation and
expenses.
At this time, current management’s best estimates are that the net realizable value of
collateral will be $2.2 million. The vast majority of any recovery would be dependent on the
success of complex litigation at the parent level involving the improper issuance of securities by
former management.
In Chapter 7 liquidation, management estimates that the unsecured creditors of all of the
subsidiaries will not receive any recovery, as they may have no entitlement to litigation claims at
the parent level. Further, as most of the Debtors’ creditors are trade creditors of PPO, if current
management is successful in pursuing fire and other claims and reopens the Creighton facility,
such trade creditors may benefit from future business.
The ability of the holders of the remaining unsecured Claims at the parent level, which
total just under $13.4 million, to recover is dependent on recovery in the securities litigation.
Current management also disputes the vast majority of these claims.
At this juncture, it is still too early for the Debtors to provide operating projections which
have any degree of certainty. The Debtors also believe that the probability of inaccuracy at this
time is not slight and therefore do not express any opinion as to a re-start date. Any re-start of
operations depends heavily on the assessment and recovery of damages from the fire that
occurred at the Creighton facility on September 3, 2009. The amount of damage and the
recovery of damages, either from the insurance company or from GSL, et al., are a critical
element of the Debtors’ ability to re-start operations at the Creighton facility. To a large extent,
the Debtors’ ability to fund operations and to pay Claims is also highly dependent on the success
of various adversary and other plenary actions.
The Debtors have filed a motion to retain the services of Thomas Alexander and
Forrester, LLP (“TAF”) to act as lead trial counsel in recovering claims. That retention
application was approved by the Bankruptcy Court on February 16, 2010. Although TAF has a
broad understanding of the Causes of Action against third parties, the Debtors are currently in the
process of determining the litigation and negotiating strategy with respect to the Causes of
Action. It has been, and continues to be, the intention of current management to advise potential
defendants of the underlying facts and request the return of the proceeds of any and all
improperly issued shares. One of the purposes in retaining TAF was to expedite this process and
enhance the prospect of recovery.
In sum, the Debtors believe that the Plan offers their creditors more money sooner, and
that the creditors should accordingly vote to accept the Plan.