ZGallerie MidSize Turnaround

Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org - 1

TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Entry form—Turnaround of the Year Award Category Place an “x” in the appropriate category to the left

Person Submitting the Entry

Name Jeffrey W. Dulberg Company Pachulski Stang Ziehl & Jones LLP Address 10100 Santa Monica Blvd. City, State, Zip, Country Los Angeles, CA 90004 Telephone number (310) 277-6910 Fax number (310) 201-0760 E-mail address [email protected]

Nominee(s) If same as above, indicate “Self Nomination” on the name line below. To the extent applicable, please nominate all contributing team members: at least one attorney, one financial advisor, one turnaround manager, one company leader and/or one investment banker. Please note individual contributions made by each of the contributing team members, and explain why that member's contributions to the team were award-worthy. TMA membership is a requirement for nomination of each team member. (To check current TMA membership status, please visit www.turnaround.org/Default.aspx.)

Name Jeffrey W. Dulberg Company Pachulski Stang Ziehl & Jones LLP Address 10100 Santa Monica Blvd. City, State, Zip, Country Los Angeles, CA 90004 Telephone number (310) 277-6910 Fax number (310) 201-0760 E-mail address [email protected]

Name Teddy M. Kapur Company Pachulski Stang Ziehl & Jones LLP Address 10100 Santa Monica Blvd. City, State, Zip, Country Los Angeles, CA 90004 Telephone number (310) 277-6910 Fax number (310) 201-0760 E-mail address [email protected]

Name Thomas S Paccioretti Company Broadway Advisors, LLC Address 511 30th Street City, State, Zip, Country Newport Beach, CA, 92663 Telephone number (213) 625-2584 Fax number (213) 947-1833 E-mail address [email protected]

Large company Revenue of $300 million USD or greater at onset of turnaround X Mid-size company Revenue between $300 million and $50 million USD at onset of turnaround Small company Revenue of $50 million USD or less at time of transaction International company Company has significant cross-border operations Pro Bono company No payment for services for the turnaround


Nominee(s) (cont’d.)

Name Benjamin F. Cary Company Broadway Advisors, LLC Address 511 30th Street City, State, Zip, Country Newport Beach, CA, 92663 Telephone number (213) 625-2584 Fax number (213) 947-1833 E-mail address [email protected]

Name Robert L. LeHane Company Kelley Drye & Warren LLP Address 101 Park Avenue City, State, Zip, Country New York, NY 10178 Telephone number (212) 808-7573 Fax number (212) 808-7897 E-mail address [email protected]

Reorganized Company Information

Company Name Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena, CA, 90249 Contact name Michael Zeiden Contact telephone (310) 630-1211 Contact E-mail [email protected] Dun & Bradstreet Rating -- SIC Code 5719; 5999 Ownership: Indicate NYSE, NASD, AMEX, or Private. List ticker number if applicable.

Private

Next page for additional questions and information


Key Players Using the enclosed “Key Players Contact Sheet,” please list the contact information requested for the following key players. This contact sheet is a required component of the entry. Members of the awards committee may contact and interview these key players.

CEO COO CRO Chairman of the Board CFO Lead Banker Primary Attorney Primary Financial Advisor Primary Accountant Creditors Committee Counsel Chair of the Creditors Committee Debtors Counsel Lender Major Unsecured Creditor

Narrative Descriptions Each response below should not exceed a maximum of 750 words per question.

1. Describe the company PRIOR TO reorganization. Do not include details about the turnaround. That information will be discussed separately.

Z Gallerie is a family-owned retailer of home furnishings and decorative accessories that was founded by two brothers and a sister in 1979 as a small poster shop in Sherman Oaks, California. Over the next 29 years, they enjoyed steady growth. By 2006 there were 86 locations, 1,000 employees, $236M in annual revenue and $6.4M in EBITDA. In November 2008, the Debtor renewed its long-standing revolving secured financing arrangement with City National Bank that provided the Debtor with a line of credit and other accommodations for financing up to $13 million until January 31, 2009 and $10 million thereafter until April 1, 2009, when the outstanding amount became due and payable (the “Revolving Credit Facility”). As of the Petition Date, April 10, 2009, the Debtor had approximately $25 million of priority and general unsecured obligations that were held by approximately 134,000 creditors. The Debtor owed approximately $1.6 million of unpaid prepetition priority taxes (including payroll withholding, FUTA and sales taxes) to 55 taxing authorities. 16,275 customers had deposits of approximately $4.4 million (of which amount $3.5 million had priority status), and customers held approximately 118,000 gift cards with an outstanding balance of $5.9 million (all of which had priority status). Moreover, the Debtor had no means to identify the customers that held gift cards.

2. What were the company’s problems leading up to the involvement of a turnaround team? As the housing boom turned to bust, Z Gallerie (the “Debtor”) did a belly-flop and in 2008 posted a EBITDA loss of $4.7M, a (173)% swing from 2006. Competitive pricing pressures in the Debtor’s business sector – retail home furnishings – due to wide-spread promotional activity and “going out of business” sales, the maturity of the Revolving Credit Facility and the continued decline of the economy in general put further pressure on the Debtor’s business, making it necessary for it to seek protection under chapter 11 of the Bankruptcy Code. The Debtor engaged an investment banking firm, The Sage Group, LLC and Sage Partners Securities, LLC (“Sage”), in March, 2009 to assist the Debtor pursue a sale of substantially all of its assets as a going concern. Sage contacted more


than 114 parties regarding a potential sale transaction, and indications of interest and letters of intent were submitted by only two potential going concern buyers and two liquidators at valuations below expectations. Sage’s efforts revealed that 363 sale offers left no recovery for general unsecured creditors nor did a straight liquidation – neither was surprising. There had to be a better solution.

3. What actions did the turnaround team take? The Z Gallerie turnaround team performed a perfect Triple Lindy: Rodney Dangerfield’s über difficult high dive in the film Back to School. Confirm a plan of reorganization for a 56-store retail chain, save 865 jobs, and recover 50 cents on the dollar for the unsecured creditors. In less than six months. “Impossible – retail 11s are either sold or liquidated, period” they said. See Circuit City, Linen & Things, Whitehall Jewelers. Z Gallerie was different. Under the direction of Debtor's professionals, 26 underperforming locations and an East Coast warehouse were closed BEFORE a Chapter 11 filing. By creatively utilizing cost-effective in-house resources to monetize inventory, vacate premises and sell assets, Z Gallerie gained staying power and a stronger negotiating position to restructure its balance sheet AND improve its income statement metrics through a bankruptcy filing. Z Gallerie faced three challenges during the bankruptcy: (1) obtaining product and exiting bankruptcy before the holiday season, (2) obtaining exit financing, and (3) working with an uninterested incumbent lender. Seasonal inventory needed to be ordered, delivered and stocked before Thanksgiving. Both domestic and off-shore vendors were hungry to ship but were wary to give credit. The Company needed to conserve its cash to satisfy administrative claims upon the planned September, 2009 exit. No cash, no exit. The Team and Z Gallerie developed a creative plan to assure its vendors of the Company’s long term prospects. They brought vendors “under the tent” and provided unprecedented transparency and access to the company’s plans and performance. Regular meetings and conference calls updated vendors on the Debtor’s performance and provided a forum for Q&A. Management visited vendors’ facilities and the reorganization plan was discussed openly and in great detail. The vendors came around. Credit was extended. Cash was conserved. The prevailing sentiment in the Spring and Summer of 2009 for obtaining financing for a home furnishings retailer exiting bankruptcy was “don’t even think about it.” The current lender was not interested and thrice replaced key contacts, wrecking havoc on exit timing. In response, the Team identified potential new lenders and began the lender/borrower dance. The Team built the story: store closures completed, creditors support plan, rent concessions negotiated, meeting projections, plenty of collateral. What’s not to like? Potential lenders balked at gift card and deposits liabilities. They were showed that the liability was measurable and moderate. Still, lenders took larger reserves. The Team strategized with ownership to assume the $12M in gift card and deposit liabilities from 134,000 claimants, priority claims that if not assumed would be paid before the unsecured creditors. Inventory valuations were argued despite current data from recently closed stores. The inventory that would fuel availability was on the water and not scheduled to land until AFTER the company exited bankruptcy. More availability was needed. And then the unexpected happened. The new lender now required that all landlords sign a rights waiver or it would reserve rights against the inventory value of non-compliant locations. This was a serious challenge as 80% of the inventory was at the store level. As administrative expenses mounted, increasing the cash needed to exit, the Team worked diligently with counsel to get the waivers, but not fast enough. The exit was delayed a month, more availability was required, again. Needing a miracle, the Team made the argument to the owners that as landlords of the HQ/warehouse - why not pledge the real estate? Brilliant. The last financing hurdle was cleared and the Z Gallerie reorganization was completed.


4. What was the outcome of the turnaround in relation to the actions discussed in Number 3? Z Gallerie partnered with its professionals: counsel to landlords, debtor and committee counsels, financial advisors and real estate advisors, to negotiate rent relief and prepare a new business model based on current economic realities. The Team created a climate of trust and cooperation needed to craft an out-of-the-box solution rarely used in retail cases: new value, continued operations, and a 50% recovery to the $16.1M in unsecured claims. In short, a plan of reorganization. A Triple Lindy. For six months Z Gallerie worked diligently with all parties and hit every mark. The plan was approved by 97.7% of the unsecured class. Z Gallerie emerged from Chapter 11 and delivered a 2009 EBITDA of $5.2M, a 211% improvement, a perfect 10. This deal (1) saved 865 jobs and provided a platform to create more jobs, (2) cost effectively refocused Z Gallerie’s geographical footprint, (3) improved business processes, gross margins and increased EBITDA by 200% to $5M, and (4) improved customer service and satisfaction. The successful reorganization helped recapitalize Z Gallerie’s balance sheet and eliminate more than $40 million in long-term liabilities through the surgical rejection of unfavorable leases, closure of an East Coast warehouse and the reduction of lease costs at remaining locations. With the Team’s assistance, Z Gallerie refocused its sourcing, merchandising and pricing efforts to restore gross margins to historical levels (better than 50%) and reduced mark-down dependency. Along with overhead reductions rationalized to the new footprint, these process improvements contributed significantly to the bottom line. This deal left Z Gallerie in the hands of its original owners, something that vendors and landlords found important - they now all have skin in the game. The essence of the Company remains. Its hip but accessible lifestyle continues under the guidance of Carole Malfatti, Z Gallerie’s chief merchandising officer. Carole was named one of the 50 most powerful people in fashion and design in Home Furnishings News’ “Fashion 50 List” outranking Ralph Lauren, Tommy Hilfiger and Vera Wang. Without this turnaround there would be no retailer to fill that niche. Because of this turnaround, Z Gallerie has retained its unique look and feel and special connection to its customers. 5,000 Facebook fans are connected to their lifestyle retailer of choice. The company has continued all of its principal merchandising and customer affinity programs, including its private label credit card used to extend responsible credit to an underserved market. And Z Gallerie continues to enhance its website and social networking capabilities, Twitter and RSS, to inspire its customers with home and lifestyle visions. Without this turnaround, there’s another 56 “dark” retail locations in prime regional malls, another 56,000 square feet of vacant retail space, 865 people added to the unemployment rolls, job losses at more than 600 long-time vendors, no recovery for the unsecured creditors and a consumer left with pedestrian options to improve their living style and attitude. Luckily, and with an impressive collaboration between many interested parties, the turnaround was a success.

5. If applicable, submit a copy of any final disclosure statement and confirmed plan of reorganization, and include a key point summary, such as recovery to each class.

A copy of the confirmed Disclosure Statement and Chapter 11 Plan of Reorganization is enclosed as Exhibit A.


SUMMARY OF CLAIMS AND INTERESTS UNDER THE PLAN

CLASS CLAIM/INTEREST TREATMENT ESTIMATED

AGGREGATE

AMOUNT

ESTIMATED

PERCENTAGE

RECOVERY

n/a Administrative Claims

Allowed Administrative Claims will be paid in full on the later of the Effective Date and the date on which such Administrative Claim becomes an Allowed Claim.

$3,781,020.00 100%

n/a Priority Tax Claims

Allowed Priority Tax Claims will be paid in equal monthly installments with the first installment being made on the Effective Date, or when the Priority Tax Claim becomes an Allowed Priority Tax Claim, whichever is later, and last installment being made on April 10, 2014 as required by 11 U.S.C. § 1129(a)(9)(C).

$0—The Debtor believes that all Priority Tax Claims have been paid pursuant to previous order of the Court

100%

1 Reclamation Claims An Allowed Reclamation Claim will be paid in full on the later of the Effective Date and the date on which such Reclamation Claim becomes an Allowed Claim.

$24,917.46 100%

2 Priority Non-Tax Claims –consisting of employee vacation claims and other Unsecured Claims other than Administrative Claims and Priority Tax Claims that are entitled to priority in payment pursuant to section 507(a) of the Bankruptcy Code.

The Debtor believes that all such vacation claims are being or have been satisfied by the Debtor’s honoring its prepetition policies in the ordinary course of its business pursuant to previous Order of the Court.

To the extent any Allowed Priority Non-Tax Claims exist, the Debtor shall pay the Allowed amount of such Claims on the later of the Effective Date and the date such Claim becomes an Allowed Claim.

$234,421.65 100%

3 CNB Secured Claim The CNB Secured Claim will be paid in full on the later of the Effective Date and the date on which such CNB Secured Claim becomes an Allowed Claim.

$8,531,000.00 100%

4 Other Secured Claims—consisting of all Secured Claims other than the CNB Secured Claim.

The Debtor is not aware of any Other Secured Claims.

$0, none known 100%

5 General Unsecured Claims—consisting of all Claims that are not classified in another Class under the Plan

Subject to the terms of the Subordination Agreement and the Escrow Agreement, each Holder of an Allowed General Unsecured Claim will receive a pro-rata share, based on the amount of the Allowed General Unsecured Claim, of $8.045 million in cash (i.e., the Maximum General Unsecured Distribution), less the amount required to fund the Post-Effective Date Committee Reserve, paid in installments, without interest, as follows: (1) $3.25 million on

$16,107,017.00 50%


January 1, 2010, (2) $3.25 million on January 1, 2011 and (3) $1.545 million on January 1, 2012; provided, however, if the Cash and inventory on the Effective Date exceeds the amounts set forth in the Plan Cash Flow Projections, an amount equal to 50% of such excess shall be held in trust and shall be paid on a pro rata basis with the January 1, 2010 payment and deducted from the January 1, 2012 payment. The Allowed General Unsecured Claims are secured by a lien in the amount of $8.045 million against all of the Reorganized Debtor’s assets that is junior in priority only to any lien securing the Senior Debt and cannot be enforced in any manner whatsoever until such time as the Senior Debt is Paid in Full; provided further, that neither the lien securing the Senior Debt nor the lien securing the Maximum General Unsecured Distributions shall attach to the Reorganized Debtor’s leases, leasehold interests or improvements (i.e., such liens shall attach only to the proceeds of the Reorganized Debtor’s leases and leasehold interests).

6 Insider Unsecured Claims—Unsecured Claims held by the Zeidens

Each Holder of an Allowed Insider Unsecured Claim will receive a pro-rata share of $1.705 million in cash to be distributed only after all distributions to the Holders of Allowed Class 5 Claims have been made. The payment of interest on Allowed Insider Unsecured Claims will be deferred until all Plan Distributions have been made to Holders of Allowed Class 5 Claims.

$3,410,000.00 50%

7 All Interests—Common Stock in Debtor

Common stock in Debtor is cancelled. Holders of Allowed Interests will receive on account of their New Equity Contributions 100% of the stock of the Reorganized Debtor, with each Insider receiving one-third of the stock.

N/A N/A


TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Key Players Contact Sheet (Indicate “N/A” for positions that are not applicable.) You are strongly encouraged to submit a statement from a representative of each key constituency in the case—e.g., lenders, unsecured creditors, equity holders—to enable judges to better understand how the turnaround was viewed by the constituents affected. CEO

Name Joseph Zeiden Company Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena/CA/90249 Telephone number (310) 630-1200 Fax number (310) 527-2955 E-mail address [email protected]

COO

Name N/A Company Address City, State, Zip, Country Telephone number Fax number E-mail address

CRO

Name N/A Company Address City, State, Zip, Country Telephone number Fax number E-mail address

Chairman of the Board

Name Michael Zeiden Company Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena/CA/90249 Telephone number (310) 630-1211 Fax number (310) 527-2955 E-mail address [email protected]


TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central

Key Players Contact Sheet–Page 2 CFO

Name Michael Zeiden Company Z Gallerie Address 1855 West 139th Street City, State, Zip, Country Gardena/CA/90249 Telephone number (310) 630-1211 Fax number (310) 527-2955 E-mail address [email protected]

Lead Banker

Name Frederick Schmidtt Company The Sage Group Address 11111 Santa Monica Boulevard City, State, Zip, Country Los Angeles/CA/90025 Telephone number (310) 478-7899 Fax number (310) 478-6619 E-mail address [email protected]

Primary Attorney

Name Jeffery Dulberg Company Pachulski Stang Ziehl and Jones, LP Address 10100 Santa Monica Boulevard City, State, Zip, Country Los Angeles/CA/90067 Telephone number (310) 772-2355 Fax number (310) 201-0760 E-mail address [email protected]

Primary Financial Advisor

Name Thomas S Paccioretti Company Broadway Advisors, LLC Address 511 30th Street City, State, Zip, Country Newport Beach/CA/92663 Telephone number (213) 625-2584 Fax number (213) 947-1833 E-mail address [email protected]

Primary Accountant

Name Ronald J. Friedman Company Stonefield Josephson Address 2049 Century Park East, Suite 400 City, State, Zip, Country Los Angeles, CA 90067 Telephone number (310) 453-9400 Fax number (310) 453-1187 E-mail address [email protected]


TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central

Key Players Contact Sheet–Page 3

Creditors Committee Counsel

Name Robert L. LeHane Company Kelley Drye & Warren LLP Address 101 Park Avenue City, State, Zip, Country New York/NY/10178 Telephone number (212) 808-7573 Fax number (212) 808-7897 E-mail address [email protected]

Chair of the Creditors Committee

Name Ron Tucker Company Simon Property Group, Inc. Address 225 W. Washington Street City, State, Zip, Country Indianapolis, IN 46204 Telephone number (317) 263-2346 Fax number (317) 263-7901 E-mail address [email protected]

Debtors Counsel

Name Jeffery Dulberg Company Pachulski Stang Ziehl and Jones, LLP Address 10100 Santa Monica Boulevard City, State, Zip, Country Los Angeles/CA/90067 Telephone number (310) 772-2355 Fax number (310) 201-0760 E-mail address [email protected]

Lender

Name Robert A. Willner, Esq. Company Buchalter Nemer, counsel to Wells Fargo, N.A. Address 1000 Wilshire Blvd., Suite 1500 City, State, Zip, Country Los Angeles, CA 90017-2457 Telephone number (213) 891-0700 Fax number (213) 630-5607 E-mail address [email protected]

Major Unsecured Creditor

Name Ivan Gold Company Allen Matkins Leck Gamble Mallory & Natsls LLP,

counsel to Federal Realty Trust Investment Address Three Embarcadero Center, 12th Floor City, State, Zip, Country San Francisco/CA/94111-4074 Telephone number (415) 837-1515 Fax number E-mail address [email protected]

Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org

TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Information Release Form Questions or concerns regarding this release may be directed to Donna Steigerwald at 1-312-242-6040 or [email protected]. Please note: If the person completing the entry form and the nominee are not the same person, each person must submit an information release form. To the best of my knowledge, the information provided on the entry form is true and complete. I understand that all financial information shall remain confidential unless I agree to its release. By submitting this entry, I acknowledge that I accept the Awards Committee’s decision as final. If I am selected as an award recipient, I hereby authorize the use of the following (in connection with the TMA Awards Program): my name; my company/organization name; non-financial information; photographs; video and audio recordings of myself or others related to the award from the awards ceremony or an alternate source. I agree that no compensation shall be due to me or my company for such usage. X By placing an “x” in the box to the left and providing my name and the date below, I

indicate my understanding and compliance with the terms of this information release. Name: Jeffrey Dulberg Date: May 3, 2010 Award category (Turnaround or Transaction): Turnaround of the Year – Midsize Company Award entry (“Nominee for Nominated Company”): Chapter 11 Reorganization of Z Gallerie

Entry Deadline: May 3, 2010, 5:00 P.M. Central www.turnaround.org

TMA 2010 Awards Program Entries Due: Monday, May 3, 2010, 5:00 P.M. Central Key Players Confirmation Letter The award entry must contain at least two completed Key Players Confirmation Letters supporting the nomination from two of the unrelated key parties in the transaction. The letters must be submitted in this provided format. Key parties are: CEO, COO, CRO, Chairman of the Board, CFO, Lead Banker, Primary Attorney, Primary Financial Advisor, Primary Accountant, Creditors Committee Counsel, Chair of the Creditors Committee, Debtors Counsel, Lender, or a Major Unsecured Creditor.

Nominated company: ZGallerie Award category: Turnaround of the Year – Mid-size Company

I have reviewed the nomination of the company listed above for the TMA award category listed above, and I fully support the nomination. My role in this turnaround/transaction was as:

Please place a check next to the appropriate descriptor: CEO COO CRO Chairman of the Board

CFO Lead Banker Primary Attorney Primary Financial Advisor Primary Accountant Creditors Committee Counsel Chair of the Creditors Committee

X Debtors Counsel Lender Major Unsecured Creditor

I was and am aware of the many challenges and circumstances of the turnaround/transaction and that the nominee was the principal architect and/or driving force for this turnaround/transaction. If any member of the TMA Awards Committee has additional questions or would like to discuss this nomination further, I am willing to be contacted.

X By placing an “x” in the box to the left and providing my name and the date below, I indicate my signature of this letter.

Printed name: Jeffrey Dulberg Date: May 3, 2010

X By placing an “x” in the box to the left and providing my name and the date below, I indicate my permission

for TMA to use this application for academic research in its efforts to enhance the practice of corporate renewal.

Printed name: Jeffrey Dulberg Date: May 3, 2010

Z Gallerie Historical Financial Statements (000's)Interim Period Fiscal Years Ended December 31,

3 Months Certified Certified Certified Projected3/31/2010 Year: 2007 Year: 2008 Year: 2009 Year: 2010

Sales - Gross 30,800$ 223,800$ 195,249$ 133,000$ 121,700$ Returns & Allowances - - - - -

Sales - Net 30,800$ 223,800$ 195,249$ 133,000$ 121,700$ Cost of Goods Sold 13,200 106,142 91,800 67,300 60,200

Gross Profit 17,600$ 117,658$ 103,449$ 65,700$ 61,500$ Gross Profit, % 57.14% 52.57% 52.98% 49.40% 50.53%

Operating Expenses 13,900 116,940 105,700 60,200 56,060 Operating Expenses, % 45.13% 52.25% 54.14% 45.26% 46.06%

Operating Profit 3,700$ 718$ (2,251)$ 5,500$ 5,440$ Operating Profit, % 57.14% 52.57% 52.98% 49.40% 50.53%

Interest Expense 90 650 500 400 300 Other Income (Expense) 60 - - (6,000) - Other Income (Expense) 30 - - - -

Pre-Tax Income 3,700$ 68$ (2,751)$ (900)$ 5,140$

Plus: Depr & Amor. - - - - - Net Advances (Payments) on Debt (1,000) - - - - Less: CAPX - - - - - Other (see attachment) (2,500) - - - - Net Cash Flow 200$ 68$ (2,751)$ (900)$ 5,140$

Balance Sheet - AssetsCash & Equivalents 5,800$ 5,300$ 9,860$ 7,500$ 5,000$ Accounts Receivable 1,100 - 200 - - Inventory 13,900 30,800 26,300 14,200 12,600 Prepaid Expenses 300 500 700 - - Deferred Income Taxes - - - - - Other Current Assets - - 100 1,000 - Current Assets 21,100$ 36,600$ 37,160$ 22,700$ 17,600$ PP&E - NBV 20,037 43,700 41,300 22,200 21,000 Intangibles - - - - - Other Assets 3,800 1,000 1,000 3,800 17,000 Other Assets 900 - - - - Other Assets - - - - 400 Total Assets 45,837$ 81,300$ 79,460$ 48,700$ 56,000$

Balance Sheet - LiabilitiesAccounts Payable 6,000$ 21,000$ 14,900$ 15,000$ 10,000$ N/P Bank - - - - - Accrued/Other Current 18,300 10,500 11,000 6,700 2,000 Income Taxes Payable - - - - - Current Portion LTD - 4,500 8,500 2,950 3,000 Current Liabilities 24,300$ 36,000$ 34,400$ 24,650$ 15,000$ Long-Term Debt - - - 4,500 3,000 Deferred Taxes - - - - - Intercompany Loans 1,700 1,570 3,450 2,000 2,000 Other Liabilities 16,500 38,000 40,000 18,000 30,000 Other Liabilities 1,337 730 810 2,550 - Total Liabilities 43,837$ 76,300$ 78,660$ 51,700$ 50,000$ Book Net Worth 2,000 5,000 800 (3,000) 6,000 Total Liab. & NW 45,837$ 81,300$ 79,460$ 48,700$ 56,000$

Book Net Worth 2,000 5,000 800 (3,000) 6,000 Additions - - - - - Subtractions - - - - - Adj.-Tangible N.W. 2,000$ 5,000$ 800$ (3,000)$ 6,000$

Key ratios and metricsWorking Capital (3,200)$ 600$ 2,760$ (1,950)$ 2,600$ Current ratio 0.9 1.0 1.1 0.9 1.2 Debt to Equity 0.9 1.2 14.9 (3.2) 1.3 Number of employees - - - - Sales per employee NA NA NA NA NADays Accounts Receivable 12.85714286 0 0.368759891 0 0Days Inventory 162.4675325 49.54423592 48.49192569 38.43609023 37.27198028Days Accounts Payable 163.6363636 71.22533964 58.43137255 80.23774146 59.80066445Revenue growth -12.8% -31.9% -8.5%Return on Invested Capital 0 0 0 0 0Order Backlog -$ -$ -$ -$ -$

ATTACHMENTS Exhibit A Second Amended Disclosure Statement and Chapter 11 Plan of Reorganization

for Z Gallerie (Dated August 13, 2009) Exhibit B Recent Awards and Distinctions Exhibit C New Chapter -- Z Gallerie, Unlike Many Home Furnishings Chains, Has Bounced

Back, Steve McLinden, Retailing Today, March, 2010

EXHIBIT A

PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9

Jeffrey W. Dulberg (CA Bar No. 181200) Scotta E. McFarland (CA Bar No. 165391) Teddy M. Kapur (CA Bar No. 242486) PACHULSKI STANG ZIEHL & JONES LLP 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100 Telephone: 310/277-6910 Facsimile: 310/201-0760 E-mail: [email protected] [email protected] [email protected]

Attorneys for Z Gallerie, Debtor and Debtor in Possession

UNITED STATES BANKRUPTCY COURT

CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION

In re: Z GALLERIE, Debtor. Fed. Tax I.D. No. 95-3733816

Case No.: 2-bk-09-18400-VZ Chapter 11 SECOND AMENDED DISCLOSURE STATEMENT AND CHAPTER 11 PLAN OF REORGANIZATION FOR Z GALLERIE (DATED AUGUST 13, 2009) Disclosure Statement Approval Hearing Date: August 6, 2009 Time: 1:30 p.m. Place: Courtroom 1368 Edward R. Roybal Federal Building 255 East Temple Street Los Angeles, California 90012 Judge: Vincent P. Zurzolo Plan Confirmation Hearing Date: October 1, 2009 Time: 1:30 p.m. Place: Courtroom 1368 Edward R. Roybal Federal Building 255 East Temple Street Los Angeles, California 90012 Judge: Vincent P. Zurzolo

Case 2:09-bk-18400-VZ Doc 315 Filed 08/13/09 Entered 08/13/09 19:58:25 Desc Main Document Page 1 of 77

PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 i

TABLE OF CONTENTS

Page I INTRODUCTION......................................................................................................................... 1

II DISCLAIMER ............................................................................................................................. 5

III OVERVIEW OF THE PLAN..................................................................................................... 7

IV DESCRIPTION OF THE DEBTOR ........................................................................................ 14

A. Description of the Debtor�’s Past and Future Business........................................... 14

B. The Debtor�’s Recent Financial History ................................................................. 15

C. The Debtor�’s Corporate Structure and Ownership. ............................................... 16

D. The Debtor�’s Principal Pre-Petition Secured Indebtedness. .................................. 16

E. The Debtor�’s Other Indebtedness. ......................................................................... 17

F. The Debtor�’s Management .................................................................................... 18

G. Marketing Efforts................................................................................................... 19

H. Amendments to Non-Residential Real Property Leases........................................ 20

V THE DEBTOR�’S CHAPTER 11 CASE.................................................................................... 20

A. Events Preceding the Chapter 11 Filings ............................................................... 20

B. Events During the Chapter 11 Case ....................................................................... 20

1. Retention of Debtor�’s Professionals .......................................................... 20

2. Appointment of Committee and Retention of Committee Professionals... 21

3. Use of Cash Collateral ............................................................................... 21

4. Rejection of Executory Contracts and Unexpired Leases.......................... 23

5. Summary of Other First Day Orders.......................................................... 23

6. The Claims Bar Dates ................................................................................ 24

C. Investigation and Analysis of Causes of Action. ................................................... 25

VI THE PLAN OF REORGANIZATION .................................................................................... 25

A. Treatment of Unclassified Claims Under the Plan ................................................ 25

1. Treatment of Administrative Claims ......................................................... 25

2. Bar Dates for Administrative Claims......................................................... 26


PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 ii

3. Treatment of Priority Tax Claims .............................................................. 26

B. Classification and Treatment of Claims and Interests Under the Plan .................. 27

1. Class 1 (Reclamation Claims).................................................................... 28

2. Class 2 (Priority Non-Tax Claims). ........................................................... 28

3. Class 3 (CNB Secured Claim). .................................................................. 29

4. Class 4 (Other Secured Claims). ................................................................ 29

5. Class 5 (General Unsecured Claims). ........................................................ 31

6. Class 6 (Insider Unsecured Claims)........................................................... 32

7. Class 7 (Interests)....................................................................................... 32

C. Executory Contracts and Unexpired Leases .......................................................... 33

1. Assumption of Executory Contracts and Leases ....................................... 33

2. Rejection of Executory Contracts or Leases.............................................. 34

D. The Source of Money to Pay Claims. .................................................................... 34

E. Distribution of Property Under the Plan. ............................................................... 35

1. Collateral and Disbursement Agent ........................................................... 35

2. Timing of Distributions.............................................................................. 36

3. Compliance with Tax Requirements.......................................................... 36

4. Manner of Cash Payments ......................................................................... 36

5. Setoffs ........................................................................................................ 36

6. De Minimis Distributions........................................................................... 37

7. No Distributions With Respect to Disputed, Contingent or Unliquidated Claims .................................................................................. 37

8. Delivery of Distributions ........................................................................... 38

9. Undeliverable or Unclaimed Distributions ................................................ 38

F. Objections to and Estimation of Claims ................................................................ 39

G. Litigation................................................................................................................ 40

1. Existing and Potential Causes of Action.................................................... 40

2. Preservation of All Litigation and Causes of Action Not Expressly Settled and Released .................................................................................. 42


PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 iii

H. The Releases .......................................................................................................... 44

VII MODIFICATION AND REVOCATION OF THE PLAN; CONDITIONS TO CONFIRMATION AND THE EFFECTIVE DATE; REQUEST TO CRAM-DOWN PLAN ................................................................................................................................. 45

A. Modification of the Plan ........................................................................................ 45

B. Revocation of the Plan. .......................................................................................... 46

C. Conditions Precedent to Confirmation................................................................... 46

D. The Effective Date ................................................................................................. 46

E. Conditions to the Effective Date............................................................................ 47

F. Confirmation Request ............................................................................................ 47

G. Effect of Failure of the Plan to Become Effective................................................. 47

VIII EFFECT OF CONFIRMATION OF THE PLAN ................................................................. 47

A. Binding Effect of Confirmation ............................................................................. 47

B. Revesting of the Property in the Reorganized Debtor ........................................... 48

C. Good Faith ............................................................................................................. 48

D. Authority to Implement Plan ................................................................................. 48

E. Discharge and Injunction ....................................................................................... 48

F. Post-Confirmation Effectiveness of Proofs of Claim ............................................ 49

G. Post-Effective Date Committee ............................................................................. 49

H. Reorganized Debtor�’s Reports to the Post-Effective Date Committee.................. 51

IX OTHER PLAN PROVISIONS................................................................................................. 51

A. Corporate Action.................................................................................................... 51

B. Reorganized Debtor�’s Board of Directors ............................................................. 52

C. Further Assurances................................................................................................. 52

D. Payment of Statutory Fees ..................................................................................... 52

E. Services by and Fees for Professionals.................................................................. 52

1. Prior to the Effective Date. ........................................................................ 52

2. From the Effective Date............................................................................. 52

F. Post-Confirmation Status Reports.......................................................................... 52


PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 iv

G. No Recourse........................................................................................................... 53

H. Severability of Plan Provisions.............................................................................. 53

I. Entry of a Final Decree .......................................................................................... 53

J. Governing Law ...................................................................................................... 54

K. Retention of Jurisdiction ........................................................................................ 54

L. Successors and Assigns.......................................................................................... 56

M. Saturday, Sunday, or Legal Holiday ...................................................................... 56

N. Headings ................................................................................................................ 56

X CERTAIN RISK FACTORS TO BE CONSIDERED .............................................................. 56

A. Risks that the Debtor Will Have Insufficient Cash for the Plan to Become Effective................................................................................................................. 56

B. Bankruptcy Risks ................................................................................................... 56

C. Business Risks ....................................................................................................... 57

1. Industry Conditions.................................................................................... 58

2. Competition................................................................................................ 58

3. Seasonality ................................................................................................. 58

4. Operating.................................................................................................... 58

XI VOTING PROCEDURES AND REQUIREMENTS .............................................................. 59

A. Parties in Interest Entitled to Vote ......................................................................... 59

B. Classes Impaired and Entitled to Vote Under the Plan.......................................... 60

C. Vote Required for Acceptance by Classes of Claims ............................................ 61

XII CONFIRMATION OF THE PLAN........................................................................................ 61

A. Confirmation Hearing ............................................................................................ 61

B. Who May Object to Confirmation of the Plan....................................................... 61

C. Requirements for Confirmation of the Plan........................................................... 62

1. Acceptance................................................................................................. 62

2. Fair and Equitable Test .............................................................................. 63

3. Feasibility................................................................................................... 64

4. �“Best Interests�” Test .................................................................................. 65


PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 v

XIII FINANCIAL INFORMATION ............................................................................................. 66

XIV ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN ..... 67

XV CERTAIN U.S. FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PLAN ................................................................................................................................. 67

A. Federal Income Tax Consequences to the Creditors.............................................. 68

B. Tax Consequences to the Debtor ........................................................................... 68

XVI RECOMMENDATION......................................................................................................... 69


PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 vi

Index of Exhibits to Z Gallerie Plan and Disclosure Statement

Exhibit “A” - Definitions for capitalized terms

Exhibit “B” - List of Claims that are deemed Allowed for voting purposes because (i) they are listed on the Bankruptcy Schedules and are not shown as disputed, contingent or unliquidated or (ii) a proof of Claim was timely filed to which no objection has yet been filed

Exhibit “C” - Plan Cash Flow Projections

Exhibit “D” - Three types of financial documents, including balance sheets, cash flow statements and income and expense statements for the period including the most recent twelve-month calendar year and all months subsequent thereto

Exhibit “E” - List of the officers of the Reorganized Debtor and the proposed salary effective as of the Effective Date for each

Exhibit “F” - List of the leases of its retail store locations and other designated agreements the Debtor seeks to assume

Exhibit “G” - Liquidation Analysis

Exhibit “H” - List of the Debtor's Assets as of May 31, 2009

Exhibit “I” - List of the liabilities as of May 31, 2009

Exhibit “J” - Schedule of Source of Funds

Exhibit “K�” Exit Financing Term Sheet Agreement between Debtor and Wells Fargo, National Association.


PA

CH

UL

SK

I S

TA

NG

ZIE

HL

& J

ON

ES

LL

P

AT

TO

RN

EY

S A

T L

AW

L

OS

AN

GE

LE

S,

CA

LIF

OR

NIA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319 98002-002\DOCS_LA:206319.9 vii

IMPORTANT DATES Date by which Ballots must be received: September 18, 2009, at 5:00 p.m. Pacific Time Date by which objections to Confirmation of the Plan must be filed and served: September 18,

2009, at 5:00 p.m. Pacific Time Hearing on Confirmation of the Plan: October 1, 2009, at 1:30 p.m. Pacific Time. 11 U.S.C. § 1125(b) PROHIBITS SOLICITATION OF AN ACCEPTANCE OR REJECTION OF THE PLAN UNLESS A COPY OF THE PLAN, OR A SUMMARY THEREOF, IS ACCOMPANIED OR PRECEDED BY A COPY OF A DISCLOSURE STATEMENT APPROVED BY THE BANKRUPTCY COURT. THIS PROPOSED DISCLOSURE STATEMENT HAS NOT YET BEEN APPROVED BY THE BANKRUPTCY COURT, AND, THEREFORE, THE FILING AND DISSEMINATION OF THIS PROPOSED DISCLOSURE STATEMENT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED AS, AN AUTHORIZED SOLICITATION PURSUANT TO 11 U.S.C. § 1125 AND RULE 3017 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE. NO SUCH SOLICITATION WILL BE MADE EXCEPT AS AUTHORIZED PURSUANT TO SUCH LAW AND RULES.

Jeffrey W. Dulberg Scotta E. McFarland Teddy M. Kapur PACHULSKI STANG ZIEHL & JONES LLP 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100 Telephone: 310/277-6910 Counsel to Debtor and Debtor in Possession

Dated: August 13, 2009


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 1

I

INTRODUCTION

Z Gallerie, debtor and debtor in possession herein, filed a bankruptcy petition under chapter

11 of the Bankruptcy Code on April 10, 2009. The document you are reading is both the Debtor�’s

Plan of Reorganization and the Disclosure Statement. The Plan sets forth the proposal of how the

Debtor intends to treat the claims of the Debtor�’s Creditors and Interest Holders. The Disclosure

Statement describes the assumptions that underlie the Plan and how the Plan will be executed. The

Plan and Disclosure Statement contain a number of capitalized terms. The definitions for these

capitalized terms, unless otherwise defined herein, are contained in Exhibit “A” attached hereto.

The Bankruptcy Court has scheduled a hearing on confirmation of the Plan for

October 1, 2009 at 1:30 p.m. Pacific Time at the United States Bankruptcy Court for the

Central District of California, Los Angeles Division, Courtroom 1368, 255 East Temple Street,

Los Angeles, California. Any objections to confirmation of the Plan must be in writing and

filed with the Bankruptcy Court, and served so as to be received by 5:00 p.m. Pacific Time on

September 18, 2009, upon counsel to the Debtor, Pachulski Stang Ziehl & Jones LLP, 10100

Santa Monica Blvd., 11th Floor, Los Angeles, California 90067, Attn: Jeffrey W. Dulberg.

The Disclosure Statement sets forth information (a) regarding the history of the Debtor, its

business, and this chapter 11 case, (b) concerning the Plan and alternatives to the Plan, (c) advising

the Holders of Claims and Interests of their rights under the Plan, (d) assisting the Holders of Claims

and Interests in making an informed judgment regarding whether they should vote to accept or reject

the Plan, and (e) assisting the Bankruptcy Court in determining whether the Plan complies with the

provisions of the Bankruptcy Code, and should be confirmed.

By Order entered August __, 2009 (the �“Disclosure Statement Order�”), the Bankruptcy

Court, after notice and a hearing, approved the Disclosure Statement as containing �“adequate

information�” to permit affected Holders of Claims and Interests to make an informed judgment in

exercising their rights to vote to accept or reject the Plan, and authorized its use in connection with

the solicitation of votes with respect to the Plan. THE BANKRUPTCY COURT�’S APPROVAL OF

THIS DISCLOSURE STATEMENT DOES NOT MEAN THAT THE BANKRUPTCY COURT


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 2

RECOMMENDS EITHER ACCEPTANCE OR REJECTION OF THE PLAN. No solicitation of

votes may be made except pursuant to this Disclosure Statement and section 1125 of the Bankruptcy

Code. In voting on the Plan, Holders of Claims should not rely on any information relating to the

Debtor and its business other than that contained in this Disclosure Statement, the Plan, and all

exhibits hereto and thereto.

The Plan is a reorganization plan in that Joseph Zeiden, Carole Malfatti and Michael Zeiden

(the �“Zeidens�”), the current owners of 100% of the stock of the Debtor, will reorganize the Debtor�’s

business around a core group of stores. The Zeidens will receive, in exchange for the New Equity

Contribution, 100% of the stock of the Reorganized Debtor and will manage and operate the

Reorganized Debtor. The Plan provides for the payment of the CNB Secured Claim, Administrative

Claims, Priority Tax Claims, valid Reclamation Claims, and Priority Non-Tax Claims in full, in

Cash on the Effective Date of the Plan and for satisfaction of the General Unsecured Claims by

payment of annual installment payments over three years. The Allowed Claims will be satisfied

pursuant to the Plan from Available Cash, cash contributed by the Zeidens, the proceeds of the Exit

Financing arranged by the Debtor and income generated by the Reorganized Debtor. The Court has

not yet confirmed the Plan, which means that the terms of the Plan are not yet binding on anyone.

Only Holders of Claims that are Allowed under section 502 of the Bankruptcy Code or

temporarily allowed for voting purposes under Bankruptcy Rule 3018 and whose Claims are in those

Classes of Claims that are �“impaired�” (as defined in section 1124 of the Bankruptcy Code) under the

Plan (with the exception discussed below) are entitled to vote to accept or reject the Plan. A Claim

is defined by the Code to include a right of payment from the Debtor.

A Claim is Allowed if proof of the Claim is properly filed before the applicable bar date and

no party in interest has objected to the Claim, or if the Court has entered an order allowing the

Claim. Please refer to Section V.B.6 below for specific information regarding the bar dates in this

Case. Under certain circumstances a creditor may have an Allowed Claim even if a proof of claim

was not filed and the applicable bar date for filing the proof of claim has passed. A Claim is deemed

allowed if the Claim is listed on the Debtor�’s Bankruptcy Schedules and is not scheduled as

disputed, contingent or unliquidated. Exhibit “B” hereto contains a list of Claims that are deemed


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 3

Allowed for voting purposes because (i) they are listed on the Bankruptcy Schedules and are not

shown as disputed, contingent or unliquidated or (ii) a proof of Claim was timely filed to which no

objection has yet been filed.

A Class of Claims is impaired if the legal, equitable, or contractual rights of the Claims in the

Class are altered. Generally, all Holders of Claims that are impaired are entitled to vote on the Plan,

however, Classes of impaired Claims that are not entitled to receive or retain any property under the

Plan are deemed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy Code and,

therefore, are not entitled to vote on the Plan. Classes of Claims that are not impaired are

conclusively presumed to have voted to accept the Plan pursuant to section 1126(f) of the

Bankruptcy Code and, therefore, are not entitled to vote on the Plan. The following chart

summarizes which Classes of Claims are impaired, which Classes of Claims are not impaired under

the Plan and which Classes are entitled to vote.

CLASS

DESCRIPTION

IMPAIRED/ UNIMPAIRED

VOTING STATUS

Class 1 Reclamation Claims Unimpaired Deemed to have accepted

Class 2 Priority Non-Tax Claims Unimpaired Deemed to have accepted

Class 3 CNB Secured Claim Unimpaired Deemed to have accepted

Class 4 Other Secured Claims Impaired Voting

Class 5 General Unsecured Claims Impaired Voting

Class 6 Insider Unsecured Claims Impaired Voting

Class 7 Interests in Debtor Impaired Voting

To summarize, there are two prerequisites to voting: a Claim must be both Allowed and

impaired under the Plan.

All Holders of Claims, including Holders of Claims in Classes that do not have the right to

vote, have the right to file objections to the Plan if they determine that such objections are warranted.

Also, even if all impaired classes do not accept the Plan, the Plan may nonetheless be confirmed if


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 4

the dissenting class is treated in a manner prescribed by the Code and at least one Class of non-

Insider impaired Claims accepts the Plan. Please refer to Section XII.C.2 below for information

regarding confirmation of the Plan even in the event a class rejects the Plan.

If you are a Holder of a Claim in a Class that is entitled to vote to accept or reject the Plan,

accompanying this Disclosure Statement and Plan is a Ballot for casting your vote on the Plan and a

pre-addressed envelope for the return of the Ballot. BALLOTS FOR ACCEPTANCE OR

REJECTION OF THE PLAN ARE BEING PROVIDED ONLY TO HOLDERS OF CLAIMS IN

CLASSES LISTED IN THE ABOVE CHART WHICH ARE ENTITLED TO VOTE TO ACCEPT

OR REJECT THE PLAN. If you are the Holder of a Claim in such a Class, and (a) did not receive a

Ballot, (b) received a damaged or illegible Ballot, (c) lost your Ballot, or (d) if you are a party in

interest and have any questions concerning the Disclosure Statement, any of the Exhibits hereto, the

Plan, or the voting procedures in respect thereof, please contact the Debtor�’s counsel Jeffrey W.

Dulberg, Esq., Pachulski Stang Ziehl & Jones LLP, 10100 Santa Monica Blvd., Suite 1100, Los

Angeles, California 90067; Telephone: (310) 277-6910; e-mail: [email protected].

THE DEBTOR RECOMMENDS THAT THE HOLDERS OF CLAIMS IN ALL CLASSES

ENTITLED TO VOTE SUBMIT A BALLOT TO ACCEPT THE PLAN.

VOTING ON THE PLAN, BY EACH HOLDER OF A CLAIM ENTITLED TO VOTE, IS

IMPORTANT. EACH SUCH CLAIM HOLDER SHOULD READ THIS DISCLOSURE

STATEMENT WITH ITS EXHIBITS, INCLUDING THE PLAN, IN ITS ENTIRETY. AFTER

CAREFULLY REVIEWING THESE DOCUMENTS, PLEASE FOLLOW THE DIRECTIONS

FOR VOTING CONTAINED ON THE BALLOT AND RETURN THE BALLOT IN THE

ENVELOPE PROVIDED. TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED BY

SEPTEMBER 18, 2009, AT 5:00 P.M. (THE �“VOTING DEADLINE�”) AT THE ADDRESS SET

FORTH ON THE ENCLOSED PRE-ADDRESSED ENVELOPE AND IN YOUR BALLOT.

Votes cannot be transmitted orally, by fax or by e-mail. Accordingly, you are urged to return

your signed and completed Ballot promptly. Ballots not received by the Voting Deadline and

unsigned Ballots will not be counted. Any executed Ballots that are timely received, but that do not


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 5

indicate either an acceptance or rejection of the Plan, shall be deemed to constitute an acceptance of

the Plan.

II

DISCLAIMER

THE DISCLOSURE STATEMENT CONTAINS INFORMATION THAT MAY BEAR

UPON YOUR DECISION TO ACCEPT OR REJECT THE PLAN. PLEASE READ THIS

DOCUMENT WITH CARE. THE PURPOSE OF THE DISCLOSURE STATEMENT IS TO

PROVIDE �“ADEQUATE INFORMATION�” OF A KIND, AND IN SUFFICIENT DETAIL, AS

FAR AS IS REASONABLY PRACTICABLE IN LIGHT OF THE NATURE AND HISTORY OF

THE DEBTOR AND THE CONDITION OF THE DEBTOR�’S BOOKS AND RECORDS, THAT

WOULD ENABLE A HYPOTHETICAL REASONABLE INVESTOR, TYPICAL OF HOLDERS

OF CLAIMS OR INTERESTS OF THE RELEVANT CLASS, TO MAKE AN INFORMED

JUDGMENT CONCERNING THE PLAN. SEE 11 U.S.C. § 1125(a). UNLESS OTHERWISE

INDICATED, THE DATE OF ALL OF THE FINANCIAL INFORMATION PROVIDED IN THIS

DISCLOSURE STATEMENT IS AS OF MAY 31, 2009.

FOR THE CONVENIENCE OF CREDITORS, THIS DISCLOSURE STATEMENT

CONTAINS A SUMMARY OF THE TERMS OF THE PLAN, BUT THE PLAN ITSELF

QUALIFIES ANY SUMMARY. IF ANY INCONSISTENCY EXISTS BETWEEN THE PLAN

AND THE SUMMARY OF THE PLAN CONTAINED IN THE DISCLOSURE STATEMENT,

THE TERMS OF THE PLAN CONTROL.

OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT, NO

REPRESENTATIONS CONCERNING THE DEBTOR, ITS FINANCIAL CONDITION, OR ANY

ASPECT OF THE PLAN ARE AUTHORIZED BY THE DEBTOR. ANY REPRESENTATIONS

OR INDUCEMENTS MADE TO SECURE YOUR ACCEPTANCE OR REJECTION OF THE

PLAN, WHICH ARE OTHER THAN AS CONTAINED IN, OR INCLUDED WITH, THIS

DISCLOSURE STATEMENT, SHOULD NOT BE RELIED UPON BY YOU IN ARRIVING AT

YOUR DECISION.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 6

THE FINANCIAL INFORMATION CONTAINED HEREIN, UNLESS OTHERWISE

INDICATED, IS UNAUDITED. THE DEBTOR IS UNABLE TO WARRANT OR REPRESENT

THAT THE INFORMATION CONTAINED HEREIN IS WITHOUT ANY INACCURACIES.

GREAT EFFORT, HOWEVER, HAS BEEN MADE TO ENSURE THAT ALL SUCH

INFORMATION IS PRESENTED FAIRLY.

PACHULSKI STANG ZIEHL & JONES LLP (�“PSZJ�”) COMMENCED REPRESENTING

THE DEBTOR AND DEBTOR IN POSSESSION IN OR ABOUT JANUARY 2009, AS

GENERAL BANKRUPTCY COUNSEL. PSZJ HAS NOT AT ANY TIME IN THE PAST, NOR

DOES IT PRESENTLY, REPRESENT THE DEBTOR IN A GENERAL WAY, OR IN ANY

OTHER WAY, OTHER THAN AS GENERAL BANKRUPTCY COUNSEL.

PSZJ HAS RELIED UPON INFORMATION PROVIDED BY THE DEBTOR�’S

EMPLOYEES IN CONNECTION WITH PREPARATION OF THIS DISCLOSURE

STATEMENT. ALTHOUGH PSZJ HAS PERFORMED CERTAIN LIMITED DUE DILIGENCE

IN CONNECTION WITH THE PREPARATION OF THIS DISCLOSURE STATEMENT, IT HAS

NOT INDEPENDENTLY VERIFIED THE INFORMATION CONTAINED HEREIN.

THIS DISCLOSURE STATEMENT HAS NOT BEEN REGISTERED UNDER THE

SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE

REGULATORY AUTHORITY HAS ASSESSED THE ACCURACY OR ADEQUACY OF THIS

DISCLOSURE STATEMENT, THE EXHIBITS HERETO, OR THE STATEMENTS

CONTAINED HEREIN.

THE CONTENTS OF THIS DISCLOSURE STATEMENT SHOULD NOT BE

CONSTRUED AS LEGAL, BUSINESS, OR TAX ADVICE. ANY TAX INFORMATION

CONTAINED HEREIN WAS NOT INTENDED TO BE USED, AND IT CANNOT BE USED,

FOR THE PURPOSE OF AVOIDING ANY TAX PENALTIES THAT MAY BE IMPOSED ON

ANY PERSON. THERE IS NO LIMITATION IMPOSED ON ANYONE READING THIS

DISCLOSURE STATEMENT ON DISCLOSURE OF THE TAX TREATMENT OR TAX

STRUCTURE OF ANY TRANSACTION. NOTHING IN THIS DISCLOSURE STATEMENT


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 7

MAY BE USED OR REFERRED TO IN PROMOTING, MARKETING OR RECOMMENDING A

PARTNERSHIP OR OTHER ENTITY, INVESTMENT PLAN, OR ARRANGEMENT TO ANY

PERSON. ALL CREDITORS AND/OR INTEREST HOLDERS SHOULD CONSULT THEIR

OWN LEGAL COUNSEL AND/OR ACCOUNTANT(S) AS TO LEGAL, TAX, AND OTHER

MATTERS CONCERNING THEIR CLAIMS OR INTERESTS.

III

OVERVIEW OF THE PLAN

The following is a brief overview of the material provisions of the Plan and is qualified in its

entirety by reference to the full text of the Plan. For a more detailed description of the terms and

provisions of the Plan, see Article VI below, entitled The Plan of Reorganization.

As discussed in more detail below, the Debtor, via Available Cash, a cash infusion from the

Zeidens, Exit Financing and the Debtor�’s ongoing sales, will have sufficient funds to make

distributions to Holders of Allowed Claims and permit the Debtor to reorganize its business around a

core group of approximately 55 stores. The Plan designates a series of Classes of Claims and one

Class of Interests, which include all Claims against, and Interests in, the Debtor. These Classes take

into account the differing nature and priority under the Bankruptcy Code of the various Claims and

Interests, as well as the compromises and settlements among the Classes reflected therein. Pursuant

to the Plan, the CNB Secured Claim, Allowed Reclamation Claims, and Allowed Administrative

Claims will be paid in full, in cash, on the Effective Date or when they become Allowed Claims,

whichever is later. Allowed Priority Tax Claims will be paid over a period ending not later than five

(5) years after the Petition Date. Allowed Non-Priority Tax Claims, which, to the Debtor�’s

knowledge, consist of claims for accrued and unused vacation pay1 will be honored in the ordinary

course of the Debtor�’s business. Holders of Allowed General Unsecured Claims will receive a pro-

rata share of $8.045 million in Cash (the �“Maximum General Unsecured Distribution�”), paid to the

Escrow Agent in three installments on the following dates: (1) January 1, 2010, (2) January 1, 2011

and (3) January 1, 2012; however, if the Debtor�’s Available Cash and inventory on the Effective

1 The customer deposits and gift card obligations are not included in this Class because the Debtor is providing the customers with the property purchased in the ordinary course of business and, therefore, under the terms of section 507(a)(7) of the Bankruptcy Code, these obligations are not Non-Priority Tax Claims.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 8

Date exceeds the amounts set forth in the Plan Cash Flow Projections, attached hereto as Exhibit

“C”, an amount equal to 50% of that excess will be held in trust and distributed on a pro rata basis

the Holders of the Allowed General Unsecured Claims along with the January 1, 2010 payment and

will be deducted from the amount of the January 1, 2012 payment. On the 46th day after the

transfers to the Escrow Agent, if no Blockage Period is in effect, the Escrow Agent shall transfer the

applicable Distribution amount plus any interest that has accrued thereon to the

Collateral/Disbursement Agent who will distribute such amount, subject to the amounts necessary to

fund the Post-Effective Date Committee Reserve, on a pro rata basis to the Holders of Allowed

General Unsecured Claims. The Allowed General Unsecured Claims are secured in the amount of

the Maximum General Unsecured Distribution by a lien against all of the Reorganized Debtor�’s

assets that is junior in priority only to any lien securing the Senior Debt; provided, however, that any

lien securing the Senior Debt and the junior lien securing the Maximum General Unsecured

Distribution shall not attach to the Reorganized Debtor�’s leases, leasehold interests or improvements

(i.e. such liens shall attach only to the proceeds of the Reorganized Debtor�’s leases and leasehold

interests).. The Allowed Insider Unsecured Claims are subordinated in payment to the Allowed

General Unsecured Claims and the Holders of the Allowed Insider Unsecured Claims will receive a

pro-rata share of $1.705 million to be distributed only after all Plan distributions to the Holders of

Allowed General Unsecured Claims in Class 5 of the Plan have been made. Allowed Insider

Unsecured Claims shall not receive interest on such claims until payment of all Plan Distributions to

Holders of Allowed General Unsecured Claims are complete. The stock of the Debtor will be

cancelled and the Holders of Allowed Interests in the Debtor will receive the common stock in the

Reorganized Debtor in exchange for their New Equity Contributions. Further, the Plan includes

releases between various parties.

The following table (the �“Plan Summary Table�”) summarizes the treatment of Claims and

Interests under the Plan with: (a) the Debtor�’s estimates of the Allowed amount of Claims in each

Class that have not previously been satisfied in the ordinary course of the Debtor�’s business or

pursuant to an Order of the Court, and (b) a description of the treatment provided for in the Plan for

each Class of Claims and Interests. The dollar amounts included in the Plan Summary Table have


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 9

been estimated by the Debtor as of May 31, 2009, and do not constitute an admission by the Debtor

as to the validity or amount of any particular Claim or Interest. The Debtor reserves the right to

dispute the validity or amount of any Claim or Interest that has not already been Allowed by the

Bankruptcy Court or by agreement of the parties. Accordingly, no representation can be, or is being,

made with respect to whether (a) the estimated Allowed amount of Claims in each Class is accurate,

or (b) the estimated recoveries that will actually be realized by the Holder of an Allowed Claim in

any particular Class.

SUMMARY OF CLAIMS AND INTERESTS UNDER THE PLAN

CLASS CLAIM/INTEREST TREATMENT ESTIMATED

AGGREGATE

AMOUNT

ESTIMATED

PERCENTAGE

RECOVERY

n/a Administrative Claims-- consisting of accrued and unpaid Professional Fee Claims, fees payable to the Office of the United States Trustee, section 503(b)(9) Claims and other miscellaneous Administrative Claims under section 503(b) of the Bankruptcy Code.

Allowed Administrative Claims will be paid in full on the later of the Effective Date and the date on which such Administrative Claim becomes an Allowed Claim. The Plan describes the bar dates applicable to various types of Administrative Claims.

$3,781,020.00 100%

n/a Priority Tax Claims-- Allowed Claims of governmental units for taxes owed by the Debtor that are entitled to priority in payment pursuant to section 507(a)(8) of the Bankruptcy Code. The Debtor believes that all Priority Tax Claims have been paid pursuant to Order of the Court

Allowed Priority Tax Claims will be paid in equal monthly installments with the first installment being made on the Effective Date, or when the Priority Tax Claim becomes an Allowed Priority Tax Claim, whichever is later, and last installment being made on April 10, 2014 as required by 11 U.S.C. § 1129(a)(9)(C). Each payment shall include interest on the unpaid amount at the rate set forth in 11 U.S.C. § 511.

$0�—The Debtor believes that all Priority Tax Claims have been paid pursuant to previous order of the Court

100%


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 10

1 Reclamation Claims An Allowed Reclamation Claim will

be paid in full on the later of the Effective Date and the date on which such Reclamation Claim becomes an Allowed Claim.

$24,917.46 100%

2 Priority Non-Tax Claims �–consisting of employee vacation claims and other Unsecured Claims other than Administrative Claims and Priority Tax Claims that are entitled to priority in payment pursuant to section 507(a) of the Bankruptcy Code. The Debtor does not believe that any Claim based upon a deposit or gift card is a valid Priority Non-Tax Claim because the property purchased has been or will be delivered or provided in the Debtor�’s ordinary course of business. The Debtor is not aware of any other Priority Non-Tax Claims.

The Debtor believes that all such vacation claims are being or have been satisfied by the Debtor�’s honoring its prepetition policies in the ordinary course of its business pursuant to previous Order of the Court. The Debtor intends to object to any such claim on the grounds that vacation has either been utilized, will be utilized or paid to the employee upon separation from the company in the ordinary course of business. To the extent any Allowed Priority Non-Tax Claims exist, the Debtor shall pay the Allowed amount of such Claims on the later of the Effective Date and the date such Claim becomes an Allowed Claim.

$234,421.65 100%

3 CNB Secured Claim The CNB Secured Claim will be paid

in full on the later of the Effective Date and the date on which such CNB Secured Claim becomes an Allowed Claim.

$8,531,000.00 100%

4 Other Secured Claims�—consisting of all Secured Claims other than the CNB Secured Claim. The Debtor is not aware of any Other Secured Claims

After the Debtor makes its election as set forth below, each Holder of an Allowed Other Secured Claim, except to the extent that the Holder of a particular Claim has agreed to a different treatment, shall receive, at the election of the Reorganized Debtor in its sole discretion, one of the following treatments in full satisfaction, discharge, exchange and release of its Allowed Other Secured Claim: 1. The Reorganized Debtor

shall abandon the collateral

$0, none known 100%


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 11

securing such Allowed Other Secured Claim to the Holder of the Claim in full satisfaction and release of such Claim;

2. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim cash equal to the amount of its Allowed Other Secured Claim, or such lesser amount to which the Holder of such Claim shall agree, in full satisfaction and release of such Claim;

3. The Reorganized Debtor shall reinstate the Other Allowed Secured Claim in compliance with section 1124(2) of the Bankruptcy Code and shall not otherwise alter the legal, equitable, or contractual rights to which such claim entitles the Holder;

4. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim, on account of such Claim, deferred Cash payments, pursuant to section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code, totaling at least the Allowed amount of such Claim, of a present value, as of the Effective Date, of at least the value of such Holder's interest in the Debtor�’s interest in property that serves as collateral for such Claim; or

5. The Reorganized Debtor shall deliver to the Holder of the Allowed Other Secured Claim the indubitable equivalent of such Claim..

5 General Unsecured Claims�—consisting of all Claims that are not classified in another Class under the Plan

Subject to the terms of the Subordination Agreement and the Escrow Agreement, each Holder of an Allowed General Unsecured Claim will receive a pro-rata share, based on the amount of the Allowed General Unsecured Claim, of $8.045

$16,107,017.00 50%


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 12

million in cash (i.e., the Maximum General Unsecured Distribution), less the amount required to fund the Post-Effective Date Committee Reserve (defined below), paid in installments, without interest, as follows: (1) $3.25 million on January 1, 2010, (2) $3.25 million on January 1, 2011 and (3) $1.545 million on January 1, 2012; provided, however, if the Cash and inventory on the Effective Date exceeds the amounts set forth in the Plan Cash Flow Projections, an amount equal to 50% of such excess shall be held in trust and shall be paid on a pro rata basis with the January 1, 2010 payment and deducted from the January 1, 2012 payment. Each of the above described Distributions shall be disbursed to the Escrow Agent on the dates indicated in accordance with the Terms of the Escrow Agreement. The account maintained by the Escrow Agent shall be an interest bearing account. On the 46th day after each Distribution is made, the Escrow Agent shall either (i) disburse the applicable Distribution plus accrued interest to the Collateral/Disbursement Agent if no Blockage Period is in effect, or (ii) if a Blockage Period is in effect, return the applicable Distribution plus accrued interest to the Reorganized Debtor, in either case in accordance with the terms and conditions of the Escrow Agreement.

The Allowed General Unsecured Claims are secured by a lien in the amount of $8.045 million against all of the Reorganized Debtor�’s assets that is junior in priority only to any lien securing the Senior Debt and cannot be enforced in any manner whatsoever until such time as the Senior Debt is Paid in Full; provided further, that neither the lien securing the Senior Debt nor the lien securing the Maximum General Unsecured Distributions shall attach to the Reorganized Debtor�’s leases, leasehold interests or improvements


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 13

(i.e., such liens shall attach only to the proceeds of the Reorganized Debtor�’s leases and leasehold interests).

The Collateral/Disbursement Agent, as agent for the Holders of the Allowed General Unsecured Claims, will enter into the Subordination Agreement with Wells Fargo, which Subordination Agreement will set forth additional terms and conditions governing the payment of Distributions and the priority of the lien securing the Maximum General Unsecured Distributions. Each Holder of an Allowed General Unsecured Claim agrees to be bound by the terms and conditions of the Subordination Agreement as a �“Subordinated Creditor�” thereunder to the same extent as if a signatory thereto. The Subordination Agreement is incorporated herein by reference.

6 Insider Unsecured Claims�—Unsecured Claims held by the Zeidens

Each Holder of an Allowed Insider Unsecured Claim will receive a pro-rata share of $1.705 million in cash to be distributed only after all distributions to the Holders of Allowed Class 5 Claims have been made. The payment of interest on Allowed Insider Unsecured Claims will be deferred until all Plan Distributions have been made to Holders of Allowed Class 5 Claims.

$3,410,000.00 50%

7 All Interests�—Common Stock in Debtor

Common stock in Debtor is cancelled. Holders of Allowed Interests will receive on account of their New Equity Contributions 100% of the stock of the Reorganized Debtor, with each Insider receiving one-third of the stock.

N/A N/A

THE TREATMENT AND DISTRIBUTIONS PROVIDED TO HOLDERS OF

ALLOWED CLAIMS AND ALLOWED INTERESTS PURSUANT TO THE PLAN ARE IN

FULL AND COMPLETE SATISFACTION OF THE ALLOWED CLAIMS AND ALLOWED


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 14

INTERESTS ON ACCOUNT OF WHICH SUCH TREATMENT IS GIVEN AND

DISTRIBUTIONS ARE MADE.

IV

DESCRIPTION OF THE DEBTOR

A. Description of the Debtor’s Past and Future Business.

The Debtor, a privately held California corporation, is a leading specialty home furnishing

retailer selling a variety of high-quality, reasonably priced merchandise for the home and office,

including furniture, artwork, lighting, tabletop items, textiles and decorative accessories from around

the world. Z Gallerie was founded in June 1979 by three siblings, Joseph Zeiden, Carole Malfatti

and Mike Zeiden, as a poster shop located in Sherman Oaks, California.

As of the Petition Date, the Debtor was operating 57 retail stores located in 18 states with the

largest concentration of its stores located in the western and southeastern United States. Since the

Petition Date, the Debtor has ceased operations in two additional retail stores, leaving 55 stores (54

locations and 1 outlet) currently operating. Each of the retail stores that remains open contains

approximately 10,000 square feet of merchandise. The Debtor also operates an e-commerce site at

www.zgallerie.com, allowing customers to shop 24 hours a day.

During this Case, as a result of the elimination of the burdensome store and warehouse

locations, the Debtor has streamlined its retail operations. The Debtor and its professionals have

also negotiated various key amendments to certain leases of the Debtor�’s retail store locations

(subject to definitive documentation) that will further reduce the financial burdens on the

Reorganized Debtor. The Debtor has also executed a term sheet regarding the Exit Financing to

support the Reorganized Debtor�’s obligations under the Plan and its post-Effective Date operations.

(See Article VI for more details of the Debtor�’s Plan obligations.) Based upon these measures in

combination with the restructuring of its indebtedness as provided in the Plan, the Debtor believes

that the Reorganized Debtor will be able to successfully operate the remaining retail store locations

and perform under the Plan.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 15

B. The Debtor’s Recent Financial History

The Debtor experienced uninterrupted sales growth through 2006 when sales peaked at $236

million out of 74 nationwide locations. Sales decreased 5.6% and 15.2% for the years 2007 and

2008, respectively, and the Debtor�’s net income declined from a $56,530 gain in 2007 to a loss of

$4.7 million in 2008. The sales decline continued in 2009. January 2009 sales decreased to $12.3

million as compared to $15.3 million for the same period a year earlier, which was a decrease of

19.4% and 23.7% when compared to the previous year�’s performance in both total sales and

comparable store sales, respectively. As a result, the Debtor�’s management took several corrective

steps to resize the business to fit the current market environment. These steps included:

Performing an extensive analysis of all store locations, resulting in the closing of 23

locations and rejection of three additional locations under development. These

actions reduced outstanding lease liabilities by $40.5 million. In addition, these

stores were projected to deliver EBITDA losses in excess of $1.3 million on an

annualized basis.

Actively renegotiating lease terms for the remaining 54 retail locations. These efforts

are being achieved through internal and external resources, at a minimum reducing

annual projected rent expenses at the store level from $18.9 million to $11.7 million.

The Debtor is in the process of negotiating definitive documentation memorializing

these lease amendments.

Refocused sourcing, merchandising and pricing efforts to restore gross margins to

historical levels, which were in excess of 50%, resulting in projected EBITDA

improvements of $1.2 million on an annualized basis.

Reduced corporate overhead and expenses through increased efficiency and

rationalization of staff. These efforts resulted in $5.4 million in annualized cost

savings and are expected to increase as additional efficiencies are identified as a

result of the Debtor�’s reduced retail footprint

Attached hereto as Exhibit “D” are three types of financial documents, including balance

sheets, cash flow statements and income and expense statements for the calendar years of 2007


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 16

(audited) and 2008 (unaudited), for January 1, 2009 through April 9, 2009 and for April 10, 2009

through May 31, 2009 (both unaudited) (collectively, the �“Financial Statements�”). The Debtor has

also prepared cash flow projections through the life of the Plan that are attached hereto as Exhibit

“C”. For detailed information about the Debtor�’s financial projections, see Section XII.C.3 below.

C. The Debtor’s Corporate Structure and Ownership.

The Debtor is a privately held California corporation. As of the Petition Date the Debtor was

owned 40% by Joseph Zeiden, 30% by Carole Malfatti and 30% by Michael Zeiden. The Debtor

will remain a California corporation after the Effective Date. In exchange for the New Equity

Contribution, the Zeidens each will receive one-third of the stock of the Reorganized Debtor.

D. The Debtor’s Principal Pre-Petition Secured Indebtedness.

In November 2008, the Debtor renewed its long standing revolving secured financing

arrangement with CNB that provided the Debtor with a line of credit and other accommodations for

financing up to $13 million until January 31, 2009 and $10 million thereafter until April 1, 2009,

when the outstanding amount became due and payable (the �“Revolving Credit Facility�”). The

outstanding balance under the Revolving Credit Facility as of the Petition Date was approximately

$10,563,000.00, including approximately $2,063,000.00 held as collateral for various letters of

credit. The Debtor pledged substantially all of its assets to CNB as security for the repayment and

performance of the terms of the Revolving Credit Facility. The Revolving Credit Facility is also

secured by real estate owned by Zeiden Properties, LLC (the members of which are the Zeidens) and

personal guarantees from each of the Zeidens. After the Petition Date, the Debtor entered into a

Cash Collateral Stipulation that was approved by the Court whereby the Debtor is utilizing CNB�’s

cash collateral, pursuant to an agreed upon budget, to operate its business. For more information on

the Cash Collateral Stipulation, see Section V.B.3 below. It also has been paying CNB interest and

account fees. The outstanding balance under the Revolving Credit Facility, therefore, has remained

substantially the same and will be paid in full pursuant to the terms of the Plan.

The Debtor and Wells Fargo, National Association (�“Wells Fargo�”), have entered into a term

sheet (the �“Term Sheet�”) regarding proposed terms of the Debtor�’s Exit Financing. A copy of the

Term Sheet is attached hereto as Exhibit “K”. Such Exit Financing is subject to, among other


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 17

things, due diligence to be conducted by Wells Fargo and the execution and delivery of a Landlord

Disclaimer and Consent on Wells Fargo�’s standard form (or another form acceptable to Wells Fargo

in its sole discretion) from each of the Reorganized Debtor�’s landlords. The Debtor expects to enter

into a binding Exit Financing agreement with Wells Fargo that formally documents the provisions of

the financing as set forth in the Term Sheet, subject to Court approval as part of the Confirmation

Order. This Exit Financing will be utilized, in part, to pay the Revolving Credit Facility in full.

E. The Debtor’s Other Indebtedness.

As of the Petition Date, the Debtor had approximately $25 million of priority and general

unsecured obligations that were held by approximately 134,000 creditors, including holders of gift

cards that the Debtor has no means to identify and the customers who had made deposits for

purchases. Pursuant to various orders entered by the Court at the beginning of this Case, as

discussed in more detail in Article V below, the Debtor has honored or paid some of these

obligations in the ordinary course of its business and will continue to do so.

On the Petition Date, the Debtor owed approximately $1.6 million of unpaid prepetition

priority taxes (including payroll withholding, FUTA and sales taxes) to 55 taxing authorities.

However, pursuant to the Order Authorizing the Debtor to Pay (i) Prepetition Sales and Use and Similar

Taxes in the Ordinary Course of Business and (ii) Directing Banks and Financial Institutions to Honor and

Process Checks and Transfers Related Thereto (Docket No. 48), the Debtor has paid these taxes in the

ordinary course of its business pursuant to the Tax Order. The Debtor does not believe any amount of

prepetition taxes remains outstanding.

As of the Petition Date, 16,275 customers had deposits of approximately $4.4 million (of

which amount $3.5 million had priority status) and customers held approximately 118,000 gift cards

with an outstanding balance of $5.9 million all of which had priority status. Pursuant to the Order

Authorizing the Debtor to Honor Certain Prepetition Obligations to Customers and to Otherwise

Continue Customer Programs and Practices (Docket No. 44), the Debtor has been honoring these

obligations in the ordinary course of its business and intends to continue doing so. As of May 31,

2009, 15,158 customers had deposits of approximately $1,160,599. In addition, 114,804 gift cards

with an approximate balance of $5,536,633 remained outstanding. Because these obligations,


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 18

pursuant to section 507(a)(7) of the Bankruptcy Code, are Priority Claims only in the event that the

property purchased is not delivered or provided and the Debtor is providing the purchased property

to the customers in the ordinary course of the Debtor�’s business, these obligations are not included

as Non-Priority Tax Claims under the Plan.

Additionally, approximately $12,576,810 in unsecured claims is held by 26 landlords under

leases that the Debtor has rejected during the course of this Case. The Debtor owed other landlords

approximately $2,957,015.00 for prepetition rent as of the Petition Date, but the Debtor is assuming

the leases related to those Claims and will cure the defaults thereunder. For a list of contracts and

leases to be assumed and the amounts that the Debtor asserts are due to cure defaults under those

contracts and leases, see Exhibit “F”. Further, the Debtor owed its vendors approximately

$2,137,529 as of the Petition Date and that amount remains due.

F. The Debtor’s Management

Joseph Zeiden, the Debtor�’s Chief Executive Officer and President, Michael Zeiden, the

Debtor�’s Chief Financial Officer and Secretary, and Carole Malfatti, the Debtor�’s Senior Vice

President of Merchandising, started the Debtor when they were all young adults. Since that time,

they have jointly operated the business, each holding a variety of positions with the company,

including, but not limited to, purchasing inventory, selling inventory, leasing retail and warehouse

locations, and performing accounting, operational, human resource and information technology

functions.

Today, in addition to overseeing the daily operations of the business, each of the Zeidens

primarily focuses on a different critical component of the Debtor�’s operations: Joseph Zeiden

focuses on all real estate matters including negotiations with landlords, identification of new

locations, and management of tenant improvement projects; Michael Zeiden focuses on all financial

matters including financial reporting, cash management, budget projections and financing; and

Carole Malfatti, who was named one of the 50 most powerful people in fashion and design in Home

Furnishings News�’ �“Fashion 50 List�”, outranking such well-known designers as Ralph Lauren,

Tommy Hilfiger and Vera Wang, concentrates on the merchandizing function of the business,

including the identification of merchandise that best reflects the buying habits and style of the


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 19

Debtor�’s customer base, the procurement of merchandise from local, national and off-shore vendors

and the management of vendor relations. It is anticipated that the Reorganized Debtor�’s

management will be substantially the same as the Debtor�’s.

The Plan places a cap on shareholder compensation equal to two times the current

shareholder salaries, excluding dividends or draws required for tax purposes (Debtor is an S Corp)

and interest on shareholder debt, until all Plan Distributions have been made to Holders of Allowed

General Unsecured Claims. Attached hereto as Exhibit “E” is a list of the officers of the

Reorganized Debtor and the proposed salary effective as of the Effective Date for each. The

amounts shown on Exhibit “E” do not include accrued, unpaid interest on shareholder debt.

Payment of interest on shareholder debt will be deferred until all distributions to Holders of allowed

General Unsecured Claims are made and interest shall not be used to calculate the cap on

shareholder compensation under the Plan.

The Debtor, prior to filing this Case, retained the services of a turnaround consultant,

Broadway Advisors, LLC (�“Broadway�”), a boutique management consulting firm focused solely on

advising and assisting financially and operationally troubled companies. The firm consists of

seasoned professionals with over fifty years of combined turnaround, restructuring and crisis

management experience. Thomas Paccioretti, a principal and founder of Broadway, and Benjamin

F. Cary, a senior associate, have assisted the Debtor with (among other things) cash flow forecasting,

identification and implementation of cost reduction initiatives, store closure analysis, and the

management and completion of the reorganization process in the Case.

G. Marketing Efforts

The Debtor has been pursuing a �“right-sizing�” strategy to reorganize its business around its

strongest performing stores and eliminate burdensome locations and related assets unnecessary to the

Debtor�’s reorganization. In addition to this effort, the Debtor also engaged an investment banking

firm, The Sage Group, LLC and Sage Partners Securities, LLC (�“Sage�”), in March, 2009 to assist the

Debtor in pursuing a sale of substantially all of its assets as a going concern. Sage contacted more

than 114 parties regarding a potential sale transaction, and indications of interest and letters of intent


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 20

have been submitted by only two potential going concern buyers and two liquidators at valuations

below expectations.

H. Amendments to Non-Residential Real Property Leases

The Debtor and its professionals have negotiated amendments to various of the Debtor�’s

leases of its retail store locations. The Debtor is in the process of documenting these amendments.

In each case, the amendments provide for reduced lease obligations for the Debtor. The Debtor

seeks to assume each of the leases of its retail store locations and other designated agreements as set

forth on Exhibit “F”.

V

THE DEBTOR’S CHAPTER 11 CASE

A. Events Preceding the Chapter 11 Filings

The Debtor experienced a severe drop in sales beginning in 2006, with this decline

accelerating in the last quarter of 2008 and continuing unabated in the first quarter of 2009.

Competitive pricing pressures in the Debtor�’s business sector �– retail home furnishings �–

due to wide-spread promotional activity and �“going out of business�” sales, the maturity of the

Revolving Credit Facility and the continued decline of the economy in general put further pressure

on the Debtor�’s business, making it necessary for it to seek protection under chapter 11 of the

Bankruptcy Code.

B. Events During the Chapter 11 Case

1. Retention of Debtor�’s Professionals

Prior to the commencement of the Case, the Debtor retained PSZJ as bankruptcy counsel and

Broadway Advisors, LLC as its financial advisor. The Bankruptcy Court approved the retention of

those professionals effective as of the Petition Date, pursuant to orders entered on May 1, 2009

(Docket Nos. 81 and 83, respectively).

The Debtor also has retained (i) The Abernathy McGregor Group, Inc. as its corporate

communications consultant, approved by Order of the Bankruptcy Court entered May 1, 2009

(Docket No. 82); (ii) The Sage Group LLC, and Sage as investment bankers, approved by Order of

the Bankruptcy Court entered May 4, 2009 (Docket No. 91); (iii) Retail Consulting Services, Inc.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 21

d/b/a RCS Real Estate Advisors as real estate advisor, approved by Order of the Bankruptcy Court

entered May 4, 2009 (Docket No. 92); (iv) Salmon, Lewis & Weldon, PLC as special real estate

counsel, approved by Order of the Bankruptcy Court entered June 5, 2009 (Docket No. 158); and (v)

Omni Management Group, LLC as claims and noticing agent, approved by Order to the Bankruptcy

Court entered April 14, 2009 (Docket No. 38).

2. Appointment of Committee and Retention of Committee Professionals

On May 4, 2009, the United States Trustee formed the Official Committee of Unsecured

Creditors (the �“Committee�”) to represent the interest of the general unsecured creditors of the Estate,

and appointed four (4) members thereto: (i) Simon Property Group, Inc., (ii) Oakbrook Shopping

Center, LLC, (iii) World Wide Fabric, Inc., and (iv) Portfolio Productions, Inc. dba Sitcom. Since

the formation of the Committee, the Debtor has consulted extensively and cooperated with the

Committee concerning various aspects of the Case. The Committee has employed (i) Kelley Drye &

Warren LLP as its bankruptcy counsel, approved by the Bankruptcy Court by Order entered June 23,

2009; (ii) Landsberg Margulies LLP as its local California and conflicts counsel, approved by the

Bankruptcy Court by Order entered June 22, 2009; (iii) and Scouler & Company LLC as its financial

advisor, as approved by the Bankruptcy Court by Order entered July 7, 2009.

3. Use of Cash Collateral

At the commencement of the Case, as a result of discussions between the Debtor and CNB,

the parties entered into the Stipulation Between Creditor City National Bank and Debtor-in-

Possession Z Gallerie re Interim Use of Cash Collateral (the �“Initial Stipulation�”) (Docket No. 8).

The Court approved the Debtor�’s use of CNB�’s cash collateral in accordance with the Initial

Stipulation, on a short term basis, pursuant to the Interim Order Granting Emergency Motion of

Debtor (A) Authorizing Use of Cash Collateral Pursuant to Stipulation, (B) Granting Adequate

Protection for Use of Prepetition Collateral, and (C) Granting Related Relief entered by the Court

on April 15, 2009 (the �“Interim Cash Collateral Order�”) (Docket No. 43).2

2 The Debtor and CNB entered into an (Amended) Stipulation Between Secured Creditor City National Bank and Debtor-in-Possession Z Gallerie Re Use of Cash Collateral (the �“Stipulation�”) in connection with the Interim Cash Collateral Order.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 22

During the term of the Interim Cash Collateral Order, the Debtor, CNB and the Committee

entered into the (Amended) Stipulation Between Secured Creditor City National Bank and Debtor-

in-Possession Z Gallerie re Use of Cash Collateral (the �“Final Stipulation�”) (Docket No. 128). On

May 20, 2009, the Court entered the Final Order (A) Authorizing Use of Cash Collateral Pursuant

to Stipulation, (B) Granting Adequate Protection for Use of Prepetition Collateral, and (C) Granting

Related Relief (the �“Final Cash Collateral Order�”) (Docket No. 132) approving the Final Stipulation.

Under the terms of the Final Stipulation and Final Cash Collateral Order, the Debtor is

authorized to utilize, through July 10, 2009, CNB�’s Cash Collateral, pursuant to an agreed upon

budget, to operate its business and to pay the approved fees of the Professionals. Any funds

generated by the Debtor�’s business in excess of the amounts available to the Debtor pursuant to the

budget are held in an account and cannot be disbursed to the Debtor or to CNB absent further order

of the Court or agreement between the Debtor and CNB. The Final Stipulation also contains

provision for the payment of the Professionals after the term of the Final Stipulation expires.

No further advances under the Revolving Credit Facility have been made to the Debtor

postpetition. On a monthly basis during the Case, the Debtor is paying CNB a $31,000 interest

payment, $20,000 towards CNB�’s legal fees and $6,000 for account services.

As adequate protection of CNB�’s interest in its Cash Collateral that the Debtor is using and

any diminution in the value of CNB�’s collateral as a result of the imposition of the automatic stay in

the case, the Debtor granted CNB liens and first priority security interests (collectively, the

�“Replacement Liens�”) in any and all assets and property of the Debtor now owned or hereafter

acquired, (excluding Avoidance Actions and the Debtor�’s leasehold interests (but including the

proceeds of the Debtor�’s leasehold interests). The Replacement Liens are (i) senior and superior to

any and all other mortgages, liens, claims and security interests existing on the Petition Date (except

for creditors, if any, with valid, binding, enforceable, unavoidable and perfected liens and security

interests on the Post-Petition Collateral existing on the Petition Date and that were senior in priority

to the security interests of CNB immediately prior to the Petition Date) and (ii) second priority liens

in such assets and property to the extent that the assets and property were subject to valid, binding,

enforceable, unavoidable and perfected mortgages, liens and security interests held by other parties


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 23

at the time of the Petition Date. CNB was also granted a super priority claim for the amount of its

Cash Collateral used by the Debtor and an administrative expense claim under Section 507(b), with

priority, superior to all other costs and expenses of administration of the kinds specified in, or

ordered pursuant to, Sections 105, 326, 327, 328, 330, 331, 503, 506(c), 507, 726, or 1114 of the

Code to protect any claim arising from the deterioration of the value of CNB�’s collateral during the

term of the Final Stipulation.

4. Rejection of Executory Contracts and Unexpired Leases

As part of its �“First Day�” motions, the Debtor filed a motion to (i) reject 24 store leases and

the lease for its Atlanta warehouse, all of which had been surrendered to the respective landlords

prior to the Petition Date, (ii) abandon any personal property that remained at those locations after

the Debtor vacated the premises, and (iii) establish a procedure for the future rejection of leases and

abandonment of personal property. On April 16, 2009, the Court entered an order approving the

rejection of the leases and the abandonment of such personal property effective as of the Petition

Date (Docket No. 51) but continued consideration of the rejection procedures to a later hearing. The

Court approved the procedures for the future rejection of leases and abandonment of personal

property pursuant to an order entered on May 21, 2009 (Docket No. 136).

After the Petition Date, the Debtor determined that two other retail store locations were

burdensome to the Estate. It surrendered these locations to the respective landlords and by order

entered on June 16, 2009 (Docket No. 175), the Court approved the rejection of the related leases

effective as of May 31, 2009.

As part of its efforts to consolidate its operations, the Debtor filed a motion to reject various

of its equipment schedules with GE Capital Corporation, Crown Credit Company and Celtic Leasing

Corporation. The Court entered an order approving the rejection of those equipment schedules

effective as of April 30, 2009 (Docket No. 133).

5. Summary of Other First Day Orders

Soon after the commencement of the Case, the Bankruptcy Court entered certain orders

designed to minimize disruption of the Debtor�’s operations, and to facilitate its chapter 11 case (the

�“First Day Orders�”). In addition to the Interim Cash Collateral Order and the lease rejection orders


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 24

discussed above, the Debtor also obtained orders: (a) authorizing the Debtor to pay certain pre-

petition employee wage claims, to reimburse employee expenses and to maintain employee benefit

payments and policies (the �“Wage Order�”) (Docket Nos. 42 and 137); (b) authorizing the Debtor to

honor customer refunds, deposits and other programs that existed prior to the Petition Date (the

�“Customer Practices Order�”) (Docket No. 44); (c) authorizing the Debtor to continue using its cash

management system to manage cash receipts and disbursements as it had done prior to the Petition

Date (Docket No. 46); (d) authorizing the Debtor to pay prepetition shipping and warehousing

charges (Docket No. 47); (e) authorizing the Debtor to pay prepetition taxes and regulatory fees in

the ordinary course of business (the �“Tax Order�”) (Docket No. 48); (f) approving limited notice

procedures (Docket No. 49); and (g) prohibiting utilities from altering, refusing, or discontinuing

service, and establishing procedures for determining adequate assurance of payment for future utility

services (Docket No. 50).

6. The Claims Bar Dates

On May 20, 2009, the Court entered its Order Granting Motion (A) Establishing the

Procedures and Deadlines for Filing (i) Proofs of Claim and Interests and (ii) Requests for Payment

of Administrative Expense Pursuant to 11 U.S.C. § 503(b)(9); (B) Approving Form and Manner of

Notice of Bar Dates; (C) Granting Related Relief (Docket No. 131) establishing the Claims Bar

Dates. This Order established July 31, 2009 as the last date to file all Claims that arose before the

Petition Date (including all Claims under section 503(b)(9) of the Bankruptcy Code), except as set

forth below:

a. Rejection Bar Date: the deadline to file claims arising from the rejection

pursuant to section 365 of the Bankruptcy Code of executory contracts or unexpired leases,

including, without limitation, claims for prepetition arrearages or other asserted prepetition defaults,

is the later of (a) thirty (30) days after the effective date of the rejection of the executory contract or

unexpired lease, or (b) July 31, 2009;

b. Avoided Transfer Bar Date: the deadline to file a proof of claim arising from

the avoidance of a transfer under chapter 5 of the Bankruptcy Code is the later of (a) thirty (30) days

after the entry of judgment avoiding the transfer or (b) July 31, 2009; and


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 25

c. Governmental Units Bar Date: the deadline to file a proof of claim of

governmental units (which shall include all entities defined as such in section 101(27) of the

Bankruptcy Code, including any such entities that hold a Claim arising from prepetition tax years or

periods or prepetition transactions to which the Debtor was a party) that arose before the Petition

Date, is October 7, 2009, 180 days after the date of the Order for Relief in this case.

C. Investigation and Analysis of Causes of Action.

The Debtor has not yet completed an analysis of potential Causes of Action that may be

asserted by the Estate. The Plan contemplates that the Reorganized Debtor will conduct such

analysis after the Effective Date and pursue Causes of Action it deems appropriate.

VI

THE PLAN OF REORGANIZATION

A. Treatment of Unclassified Claims Under the Plan

1. Treatment of Administrative Claims

Administrative Claims include Claims for the actual, necessary costs and expenses of

preserving the Estate, Professional Fee Claims, Claims arising under section 503(b)(9) of the

Bankruptcy Code, which are Claims for the value of any goods sold to the Debtor in the ordinary

course of the Debtor�’s business that were received by the Debtor within the twenty (20) day period

before the Petition Date, all of the foregoing as determined by the Bankruptcy Court after notice and

hearing, and statutory fees or charges assessed against the Estate under 28 U.S.C. § 1930. Except to

the extent the Holder of an Allowed Administrative Claim agrees otherwise, each Holder of an

Allowed Administrative Claim shall be paid in Cash the full amount of such Allowed Administrative

Claim, without interest, as soon as practicable after the later of (a) the Effective Date and (b) the date

on which such Administrative Claim becomes an Allowed Administrative Claim. Professionals

having Professional Fee Claims that have not already been paid pursuant to the interim

compensation procedures approved by the Court during the Case will be paid only upon Court order

pursuant to section 330 of the Bankruptcy Code.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 26

2. Bar Dates for Administrative Claims

Requests for payment of Administrative Claims, except as provided below, must be filed and

served on the Reorganized Debtor�’s counsel and the Office of the United States Trustee no later than

forty-five (45) days following the Effective Date. Excluded from this requirement are (i)

Administrative Claims that arose under section 503(b)(9) of the Bankruptcy Code (the bar date for

these Claims was July 31, 2009), (ii) Claims resulting from ordinary course of business transactions

with the Debtor, (iii) Professional Fee Claims, and (iv) statutory fees. An Administrative Claim that

must be filed in accordance with this provision is referred to as a �“General Administrative Claim.�”

Any objection to a General Administrative Claim must be filed within sixty (60) days from the date

such General Administrative Claim is filed and served on the Reorganized Debtor�’s counsel.

An Administrative Claim, other than a Professional Fee Claim or an Administrative Claim

arising under 503(b)(9), incurred in the ordinary course of the Debtor�’s business will be treated as an

Allowed Administrative Claim in accordance with the terms and conditions of the particular

transaction that gave rise to the Claim without requiring the entity holding such Administrative

Claim to file a request for payment.

Professionals or other entities seeking payment with respect to a Professional Fee Claim must

file and serve on all parties entitled to notice thereof an application for final allowance of

compensation and reimbursement of expenses no later than the sixtieth (60th) day following the

Effective Date. All such requests for payment of Professional Fee Claims will be subject to the

authorization and approval of the Bankruptcy Court. Any objection to Professionals Fee Claims

shall be filed on or before the date specified in the application for final compensation.

Holders of General Administrative Claims, Professional Fee Claims and Administrative

Claims arising under 503(b)(9), that do not timely file the appropriate requests for payment will be

forever barred from asserting such Claims against the Debtor, the Debtor�’s Estate, the Reorganized

Debtor, or its property.

3. Treatment of Priority Tax Claims

Priority Tax Claims are Allowed Claims of governmental units for taxes owed by the Debtor

that are entitled to priority in payment pursuant to section 507(a)(8) of the Bankruptcy Code. The


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 27

taxes entitled to priority are (a) taxes on income or gross receipts that meet the requirements set forth

in section 507(a)(8)(A) of the Bankruptcy Code; (b) property taxes meeting the requirements of

section 507(a)(8)(B) of the Bankruptcy Code; (c) taxes that were required to be collected or withheld

by the Debtor and for which the Debtor is liable in any capacity as described in section 507(a)(8)(C)

of the Bankruptcy Code; (d) employment taxes on wages, salaries, or commissions that are entitled

to priority pursuant to section 507(a)(3) of the Bankruptcy Code, to the extent that such taxes also

meet the requirements of section 507(a)(8)(D) of the Bankruptcy Code, (e) excise taxes of the kind

specified in section 507(a)(8)(E) of the Bankruptcy Code; (f) customs duties arising out of the

importation of merchandise that meet the requirements of section 507(a)(8)(F) of the Bankruptcy

Code; and (g) pre-petition penalties relating to any of the foregoing taxes to the extent such penalties

are in compensation for actual pecuniary loss as provided in section 507(a)(8)(G) of the Bankruptcy

Code. The Debtor is unaware of any Priority Tax Claim that remains unpaid. The Priority Tax

Claims were paid pursuant to the Tax Order (Docket No. 48).

To the extent any Allowed Priority Tax Claim exists, except to the extent the Holder of an

Allowed Priority Tax Claim agrees otherwise, each Holder of an Allowed Priority Tax Claim shall

be paid in respect of such Allowed Claim the full amount thereof, in Cash, in the form of equal

monthly payments commencing on the later of the Effective Date and the date such Claim becomes

an Allowed Claim, with the last payment to be made on or before April 10, 2014 pursuant to section

1129(a)(9)(C) of the Bankruptcy Code. Each payment shall include interest on the unpaid Allowed

amount of the Priority Tax Claim at the rate set forth in section 511 of the Bankruptcy Code. The

Reorganized Debtor may, without penalty, prepay any amount or the entire amount of an Allowed

Priority Tax Claim at any time.

B. Classification and Treatment of Claims and Interests Under the Plan

The following is a detailed description of the Claims and Interests and their treatment under

the Plan.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 28

1. Class 1 (Reclamation Claims).

a. Classification

Class 1 consists of Reclamation Claims, as such Claims are defined in section 546(c) of the

Bankruptcy Code.

b. Treatment

To the extent any Allowed Reclamation Claims exist, and unless otherwise mutually agreed

upon by the Holder of an Allowed Reclamation Claim and the Debtor, each Holder of an Allowed

Reclamation Claim will receive Cash in an amount equal to such Allowed Reclamation Claim

(which has not already been satisfied) on the later of the Effective Date (or as soon as practicable

thereafter) and the date such Reclamation Claim becomes an Allowed Reclamation Claim pursuant

to a Final Order, or as soon thereafter as is practicable. Class 1 is unimpaired under the Plan and

pursuant to section 1126(f) of the Bankruptcy Code, each Holder of an Allowed Reclamation Claim

is conclusively presumed to have accepted the Plan, and may not vote with respect thereto.

2. Class 2 (Priority Non-Tax Claims).

a. Classification

Class 2 consists of unsecured Claims that are priority claims under section 507 (a)(4), (5), or

(7), which are Claims for wages, salaries, commissions (including vacation) and benefits up to a

maximum of $10,950.00 that accrued within the 180 days before the Petition Date (the �“Wage and

Benefit Claims�”) and Claims, up to a maximum of $2,425.00 per person, for deposits of money

made before the Petition Date in connection with the purchase of property, for personal, family or

household use, that was not delivered or provided (the �“Deposit and Gift Card Claims�”).

b. Treatment

The Debtor has satisfied or will satisfy all Wage and Benefit Claims in the ordinary course of

its business in accordance with its prepetition policies pursuant to the Wage Order (Docket No. 42).

The Debtor has delivered or will deliver or provide the persons who have made deposits or hold gift

cards with the property that has been or is purchased in the ordinary course of its business pursuant

to the Customer Practices Order (Docket No. 44). Because the Debtor is honoring its obligations

related to the deposits and gift cards in the ordinary course of its business, the outstanding


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 29

prepetition deposit and gift card amounts do not qualify under section 507(b)(7) of the Bankruptcy

Code as priority Deposit and Gift Card Claims. As a result, the Debtor is unaware of any Deposit

and Gift Card Claims. To the extent any Priority Non-Tax Claims exist, other than the Wage and

Benefit Claims that have been or are being satisfied in the Debtor�’s ordinary course of business, and

unless otherwise mutually agreed upon by the Holder of an Allowed Priority Non-Tax Claim and the

Debtor, each Holder of an Allowed Priority Non-Tax Claim will receive Cash in an amount equal to

such Allowed Priority Non-Tax Claim (which has not already been paid) on the later of the Effective

Date (or as soon as practicable thereafter) and the date such Priority Non-Tax Claim becomes an

Allowed Priority Non-Tax Claim pursuant to a Final Order, or as soon thereafter as is practicable.

Class 2 is unimpaired under the Plan and pursuant to section 1126(f) of the Bankruptcy Code, each

Holder of an Allowed Priority Non-Tax Claim is conclusively presumed to have accepted the Plan,

and may not vote with respect thereto.

3. Class 3 (CNB Secured Claim).

a. Classification

Class 3 consists of the CNB Secured Claim.

b. Treatment

Unless otherwise mutually agreed upon by the CNB and the Debtor, CNB will receive Cash

in an amount equal to the unpaid amount of the Allowed CNB Secured Claim (which has not already

been paid) on the later of the Effective Date (or as soon as practicable thereafter) and the date such

CNB Secured Claim becomes an Allowed CNB Secured Claim pursuant to a Final Order, or as soon

thereafter as is practicable. Class 3 is unimpaired, and pursuant to section 1126(f) of the Bankruptcy

Code, CNB is conclusively presumed to have accepted the Plan, and may not vote with respect

thereto.

4. Class 4 (Other Secured Claims).

a. Classification

Class 4 consists of all Other Secured Claims.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 30

b. Treatment

The Debtor is unaware of any Other Secured Claims. If Other Secured Claims are filed, as

soon as practicable after the Debtor makes its election as set forth below, each Holder of an Allowed

Other Secured Claim, except to the extent that the Holder of a particular Claim has agreed to a

different treatment, shall receive, at the election of the Reorganized Debtor in its sole discretion, one

of the following treatments in full satisfaction, discharge, exchange and release of its Allowed Other

Secured Claim:

1. The Reorganized Debtor shall abandon the collateral securing such Allowed Other Secured

Claim to the Holder of the Claim in full satisfaction and release of such Claim;

2. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim Cash

equal to the amount of its Allowed Other Secured Claim, or such lesser amount to which the

Holder of such Claim shall agree, in full satisfaction and release of such Claim;

3. The Reorganized Debtor shall reinstate the Other Allowed Secured Claim in compliance with

section 1124(2) of the Bankruptcy Code and shall not otherwise alter the legal, equitable, or

contractual rights to which such claim entitles the Holder;

4. The Reorganized Debtor shall pay the Holder of the Allowed Other Secured Claim, on

account of such Claim, deferred Cash payments, pursuant to section 1129(b)(2)(A)(i)(II) of

the Bankruptcy Code, totaling at least the Allowed amount of such Claim, of a present value,

as of the Effective Date, of at least the value of such Holder's interest in the Debtor�’s interest

in property that serves as collateral for such Claim; or

5. The Reorganized Debtor shall deliver to the Holder of the Allowed Other Secured Claim the

indubitable equivalent of such Claim.

The Reorganized Debtor shall have ten (10) business days after the later of the Effective Date

or the date upon which the Other Secured Claim becomes and Allowed Other Secured Claim to elect

which treatment to provide to the Holder of such Allowed Other Secured Claims but may make the

election at any such earlier date as the Debtor deems appropriate.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 31

5. Class 5 (General Unsecured Claims).

a. Classification

Class 5 consists of all General Unsecured Claims, other than the Unsecured Claims held by

the Zeidens.

b. Treatment.

Subject to the terms of the Escrow Agreement and the Subordination Agreement, each

Allowed General Unsecured Claim will receive a pro rata share of the following cash distributions,

less the amount required to fund the Post-Effective Date Committee Reserve (defined below): (a) a

distribution of $3.25 million to be made on January 1, 2010; (b) a distribution of $3.25 million, to be

made on January 1, 2011; and (c) a distribution of $1.545 million, to be made on January 1, 2012;

provided however, if the value of the Debtor�’s total Cash plus projected inventory determined as of

the Effective Date exceeds the total value of such assets set forth in the Plan Cash Flow Projections

attached hereto as Exhibit “C”, fifty percent (50%) of that excess amount (the �“Excess Amount

Payment�”) will be set aside in a trust account on the Effective Date and will be distributed on a pro

rata basis to the Holders of Allowed General Unsecured Claims along with the distribution of $3.25

million to be made on January 1, 2010. The amount of the Excess Amount Payment will be

deducted from the $1.545 million distribution to be made on January 1, 2012. Each of the above

described Distributions shall be disbursed to the Escrow Agent on the dates indicated in accordance

with the terms of the Escrow Agreement. The Escrow Agent shall hold the funds in an interest

bearing account in accordance with the Escrow Agreement. On the 46th day after each Distribution

is made, the Escrow Agent shall either (i) disburse the applicable Distribution plus accrued interest

to the Collateral/Disbursement Agent if no Blockage Period is in effect, or (ii) if a Blockage Period

is in effect, return the applicable Distribution plus accrued interest to the Reorganized Debtor, in

either case in accordance with the terms and conditions of the Escrow Agreement. The Allowed

General Unsecured Claims are secured by a lien in the amount of the Maximum General Unsecured

Distribution against all of the Reorganized Debtor�’s assets junior in priority only to any lien securing

the Senior Debt required under the Plan (the �“Unsecured Creditor Lien�”). The Unsecured Creditor

Lien shall not be enforced in any manner whatsoever until such time as the Senior Debt has been


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 32

Paid in Full. Neither the lien securing the Senior Debt nor the Unsecured Creditor Lien attach to the

Reorganized Debtor�’s leases, leasehold interests or improvements (i.e. such liens shall attach only to

the proceeds of the Reorganized Debtor�’s leases and leasehold interests).

Any payment to the Holder of an Allowed General Unsecured Claim as provided herein shall

commence with respect to each Allowed General Unsecured Claim on the later of (a) the January 1,

2010 distribution and (b) the date such Claim becomes an Allowed General Unsecured Claim.

The Collateral/Disbursement Agent, as agent for the Holders of the Allowed General

Unsecured Claims, will enter into the Subordination Agreement with Wells Fargo, which

Subordination Agreement will set forth additional terms and conditions governing the payment of

Distributions and the priority of the lien securing the Maximum General Unsecured Distributions.

Each Holder of an Allowed General Unsecured Claim agrees to be bound by the terms and

conditions of the Subordination Agreement as a �“Subordinated Creditor�” thereunder to the same

extent as if a signatory thereto. The Subordination Agreement is incorporated herein by reference.

6. Class 6 (Insider Unsecured Claims)

a. Classification

Class 6 consists of all Unsecured Claims held by the Zeidens.

b. Treatment

After all of the Distributions to the Holders of Allowed Class 5 Claims have been completed,

the Reorganized Debtor shall distribute, on a pro rata basis, $1.705 million to the Holders of the

Allowed Insider Unsecured Claims. Interest on Allowed Insider Unsecured Claims shall accrue but

not be paid until all Plan Distributions have been made to Holders of Allowed Class 5 Claims. Until

all such Distributions have been made, the salaries payable to Holders of Allowed Insider Unsecured

Claims by the Reorganized Debtor shall be capped at two times such Holders�’ current salaries it

being understood that accrued interest on Allowed Insider Unsecured Claims is not to be included in

the amount of current salaries for the Insiders shown on Exhibit “E”.

7. Class 7 (Interests).

a. Classification

Class 7 consists of all Interests in the Debtor.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 33

b. Treatment.

The common stock of the Debtor will be cancelled. The Holders of Allowed Interests in the

Debtor will receive on account of their New Equity Contributions 100% of the stock of the

Reorganized Debtor that will be distributed to the three of them in equal percentages.

C. Executory Contracts and Unexpired Leases

1. Assumption of Executory Contracts and Leases

Attached hereto as Exhibit “F” is a list of all Assumed Agreements. Each Assumed

Agreement listed on Exhibit “F” as of September 4, 2009, a date that is fourteen (14) days prior to

the Ballot Date, shall be assumed by the Debtor on the Effective Date. Any monetary amounts

required as cure payments on any Assumed Agreements will be satisfied, pursuant to section

365(b)(1) of the Bankruptcy Code, by payment of the cure amount in Cash on the Effective Date, or

upon such other terms as the parties to such Assumed Agreement otherwise may agree. Exhibit “F”

contains the Debtor�’s calculation of the cure amount for each applicable Assumed Agreement. Any

party to an Assumed Agreement who disputes (i) the amount of any cure payment set forth in

Exhibit “F”, (ii) the ability of the Reorganized Debtor to provide �“adequate assurance of future

performance�” (within the meaning of section 365 of the Bankruptcy Code) under the applicable

Assumed Agreement, or (iii) any other matter pertaining to assumption of an Assumed Agreement

shall be required to file an objection on or before September 18, 2009, the date set for objections to

be filed to the Plan. Failure to file an objection shall be deemed consent to the cure amount set forth

on Exhibit “F” and a waiver of any and all rights to challenge such cure amount or of the ability of

the Reorganized Debtor to provide �“adequate assurance of future performance�” of the terms of the

Assumed Agreement and consent to the assumption of the Assumed Agreement. A dispute

regarding the Debtor�’s assumption of any Assumed Agreement shall be subject to the jurisdiction of

the Bankruptcy Court.

The Debtor reserves the right to add any executory contract or unexpired lease to Exhibit

“F” until September 4, 2009, which is fourteen (14) days prior to the Ballot Date or to delete any

Assumed Agreement from Exhibit “F” until the earlier of fourteen (14) days prior to the Ballot Date

and the date the Court otherwise enters an order approving the assumption of such Assumed


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 34

Agreement. Creditors should be aware that, if the Debtor removes any agreements from Exhibit �“F�”

as provided, the counterparties to such agreements may assert claims for rejection damages against

the Debtor resulting from the rejection of their agreements. Such claims may dilute and reduce the

projected fifty percent (50%) recovery to Holders of Allowed General Unsecured Claims.

2. Rejection of Executory Contracts or Leases

Any and all executory contracts or unexpired leases that (i) have not expired by their own

terms on or prior to the Effective Date, (ii) that have not been assumed, assumed and assigned, or

rejected with the approval of the Bankruptcy Court or by operation of law prior to the Effective

Date, (iii) that are not the subject of a motion to assume or assume and assign pending as of the

Effective Date, or (iv) that are not among the Assumed Agreements listed on Exhibit “F” on

September 4, 2009, the date that is fourteen (14) days prior to the Ballot Date (collectively, the

�“Rejected Contracts�”) are rejected by the Debtor effective on the Effective Date. The entry of the

Confirmation Order by the Bankruptcy Court will constitute approval of such rejections effective on

the Effective Date pursuant to sections 365(a) and 1123 of the Bankruptcy Code.

IF THE REJECTION OF AN EXECUTORY CONTRACT OR UNEXPIRED LEASE

RESULTS IN DAMAGES TO THE OTHER PARTY OR PARTIES TO SUCH CONTRACT OR

LEASE, ANY CLAIM FOR SUCH DAMAGES, IF NOT HERETOFORE EVIDENCED BY A

FILED PROOF OF CLAIM, WILL BE FOREVER BARRED AND WILL NOT BE

ENFORCEABLE AGAINST THE DEBTOR, THE REORGANIZED DEBTOR, ITS PROPERTIES

OR AGENTS, OR SUCCESSORS OR ASSIGNEES, UNLESS A PROOF OF CLAIM IS FILED

WITH THE BANKRUPTCY COURT AND SERVED UPON COUNSEL FOR THE

REORGANIZED DEBTOR ON OR BEFORE THIRTY (30) DAYS AFTER THE DATE OF

ENTRY OF AN ORDER BY THE BANKRUPTCY COURT AUTHORIZING AND APPROVING

THE REJECTION OF A PARTICULAR EXECUTORY CONTRACT OR UNEXPIRED LEASE.

D. The Source of Money to Pay Claims.

The Plan cannot be confirmed unless the Court finds that it is �“feasible,�” which means that

the Debtor has timely submitted evidence establishing that the Reorganized Debtor will have

sufficient funds available to satisfy all of its expenses, including the payments to creditors as


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 35

discussed above. The sources of all Distributions and payments under the Plan are Available Cash,

which is expected to be approximately $8,384,608.00, the New Equity Contribution by the Debtor�’s

Insiders in the amount of $2,000,000.00, the income from the operation of the Reorganized Debtor�’s

business and the Exit Financing. See the Plan Cash Flow Projections attached hereto as Exhibit

“C”.

The Debtor and Wells Fargo have entered into the Term Sheet regarding proposed terms of

the Debtor�’s Exit Financing. A copy of the Term Sheet is attached hereto as Exhibit “K”. Such

Exit Financing is subject to, among other things, due diligence to be conducted by Wells Fargo and

the execution and delivery of a Landlord Disclaimer and Consent on Wells Fargo�’s standard form

(or another form acceptable to Wells Fargo in its sole discretion) from each of the Reorganized

Debtor�’s landlords.. The Debtor expects to enter into a binding Exit Financing agreement with

Wells Fargo that formally documents the provisions of the financing as set forth in the Term Sheet,

subject to Court approval as part of the Confirmation Order.

The Plan Cash Flow Projections, which are the projections for the duration of the Plan, are

attached hereto as Exhibit “C”. The feasibility of the Plan and the assumptions and details

surrounding the Plan Cash Flow Projections are discussed more fully in Article XIII below.

E. Distribution of Property Under the Plan.

1. Collateral and Disbursement Agent

Ten days prior to the Confirmation Hearing, the Committee will file with the Court the name

of the party that it has selected, with the advice and consent of Wells Fargo, to serve as the collateral

and disbursement agent (the �“Collateral/Disbursement Agent�”) under the Plan. The

Collateral/Disbursement Agent will hold the Unsecured Creditor Lien on behalf of all Holders of

Allowed General Unsecured Claims and will have the authority, among other things, to enter into an

inter-creditor agreement with Wells Fargo that provides, among other things, for the subordination

of the Unsecured Creditor Lien to the lien that secures the Senior Debt. The

Collateral/Disbursement Agent will also make all Distributions to the Holders of Allowed General

Unsecured Claims as provided in this Plan. Any fees of the Collateral/Disbursement Agent shall be

paid out of the Post-Effective Date Committee Reserve, as defined below.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 36

2. Timing of Distributions

The timing of Distributions will be as provided in the provisions of the Plan that specify the

treatment of each Class of Claims. Whenever any Distribution to be made under the Plan is due on a

day other than a Business Day, such Distribution will instead be made, without interest, on the

immediately succeeding Business Day, but will be deemed to have been made on the date due. The

Reorganized Debtor, unless it has received a Blockage Notice, shall wire transfer the funds needed

to make each of the Plan Distributions to the Holders of Allowed General Unsecured Claims to the

Collateral/Disbursement Agent five (5) business days prior to the date each of the Plan Distributions

is to be made.

3. Compliance with Tax Requirements

To the extent applicable, the Reorganized Debtor will comply with all tax withholding and

reporting requirements imposed on it by any governmental unit, and all Distributions pursuant to this

Plan will be subject to such withholding and reporting requirements.

4. Manner of Cash Payments

Unless the entity receiving a payment agrees otherwise, cash payments to domestic entities

holding Allowed Claims will be denominated in U.S. dollars and will be made by checks drawn on a

domestic bank selected by the Reorganized Debtor or, at the Reorganized Debtor�’s option, by wire

transfer from a domestic bank. Cash payments to foreign entities holding Allowed Claims may be

paid, at the Reorganized Debtor�’s option, either in the same manner as payments to domestic entities

or in any funds and by any means that are necessary or customary in the particular foreign

jurisdiction.

5. Setoffs

The Reorganized Debtor, pursuant to sections 502 and 553 of the Bankruptcy Code or

applicable nonbankruptcy law, may set off against any Allowed Claim, and the Distributions to be

made pursuant to the Plan on account thereof (before any Distribution is made on account of such

Claim), the claims, rights, and causes of action of any nature that the Debtor or Reorganized Debtor

may have against the Holder of such Allowed Claim; provided, however, that neither the failure to

effect such a setoff, nor the allowance of any Claim under the Plan, shall constitute a waiver or


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 37

release by the Reorganized Debtor of any such claims, rights, and causes of action that the Debtor

may possess against such Holder; and, provided, further, that nothing contained in the Plan is

intended to compromise the rights of any Creditor to effectuate a setoff prior to the Effective Date in

accordance with the provisions of sections 362 and 553 of the Bankruptcy Code.

6. De Minimis Distributions

Any other provision of the Plan notwithstanding, the Reorganized Debtor shall not be

required to make Distributions to any creditor in an amount less than $20.00. Cash allocated to an

Allowed Claim but withheld from a Distribution pursuant to this subsection shall be held by the

Reorganized Debtor for the account of and future Distribution to the Holder of such Allowed Claim,

if any, provided, however, that if the Distribution is the final Distribution to the Holder of such

Claim, then such Distribution shall be made to such Holder.

7. No Distributions With Respect to Disputed, Contingent or Unliquidated Claims

No payments or other Distributions will be made to a Holder of a Disputed Claim unless and

until such Disputed Claim becomes an Allowed Claim; provided, however, a Holder of a Disputed

Claim may receive payment on the Effective Date or any other date on which Distributions are made

on account of any portion of the Disputed Claim that is undisputed. If a Disputed Claim is not an

Allowed Claim on the Effective Date or when payment is otherwise due under the Plan, payments

equal to the amount of Distribution that would have been made to the Holder of such Claim had such

Claim been an Allowed Claim as of the Effective Date will be paid to the Holder of such Claim

within ten (10) days of the entry of a Final Order allowing such Disputed Claim. At the time of any

Distributions to Holders of Allowed Claims, an amount sufficient to have paid each Holder of a

Disputed Claim its pro rata share of such Distribution, calculated according to the Face Amount of

such Claim, shall be reserved for the potential benefit of the Holder of the Disputed Claim, and

thereafter an amount based upon the Allowed Amount of the Claim shall be distributed as set forth

above, but in the event that a creditor asserts duplicative, overlapping or multiple Claims, the total

amount reserved shall not exceed the total amount subject to Distribution to such Creditor on

account of such Claim.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 38

Until such time as a contingent or unliquidated Claim or a contingent or unliquidated portion

of a Claim become fixed or is disallowed, such claim will be treated as a Disputed Claim for all

purposes related to Distributions under the Plan, including the calculation of the required reserve, if

any. The Holder of a contingent or unliquidated Claim will only be entitled to receive Distributions

under the Plan when and if such contingent or unliquidated Claim becomes any Allowed Claim.

8. Delivery of Distributions

For purposes of all Distributions under the Plan, the Reorganized Debtor will be entitled to

rely on the name and address of the Holder of each Allowed Claim as shown on any timely filed

proof of Claim and, if none, as shown on the Schedules as of the date of the hearing on Confirmation

of the Plan, except to the extent that the Reorganized Debtor receives written notice of a name

change, transfer or change of address (including such a notice filed with the Court and served on the

Reorganized Debtor), properly executed by the Holder or its authorized agent, at least ten (10) days

before the Distribution date. If such notice is received after ten (10) days before the Distribution

Date and the Distribution is returned to the Reorganized Debtor, such Distribution will be re-sent on

the next Distribution date in accordance with the information contained on the notice. Notices

should be served on the Reorganized Debtor at the following address:

Z Gallerie Michael G. Zeiden Chief Financial Officer and Secretary 1855 West 139th Street Gardena, California 90249

With copies to:

Jeffrey W. Dulberg Pachulski Stang Ziehl & Jones LLP 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100

9. Undeliverable or Unclaimed Distributions

Unclaimed Property, which includes any Cash or other property that is returned to the

Reorganized Debtor after a Distribution and remains unclaimed for one hundred and eighty (180)

days after such Distribution is sent by mail to the last known mailing address for the Person entitled

thereto, will be deemed paid to the Person entitled thereto, and such Person will not be entitled to


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 39

any future Distributions under this Plan. Any Unclaimed Property shall revest in the Reorganized

Debtor; provided, however, that Unclaimed Property that is returned to the Reorganized Debtor on

account of an undeliverable or unclaimed Distribution to a Holder of an General Unsecured Claim

will be distributed pro rata to the Holders of the other Allowed General Unsecured Claims.. Nothing

in the Plan requires the Reorganized Debtor to attempt to locate any entity holding an Allowed

Claim whose Distribution is undeliverable.

F. Objections to and Estimation of Claims

The Reorganized Debtor or the Post-Effective Date Committee (defined below), as

applicable, may object to the allowance of Claims or Interests filed with the Bankruptcy Court

where the Reorganized Debtor or the Post-Effective Date Committee disputes liability or allowance

in whole or in part. All objections will be litigated to Final Order; provided, however, that the

Reorganized Debtor or the Post-Effective Date Committee, as applicable, will have the authority to

file, settle, compromise, or withdraw any objections to Claims, in its sole and absolute discretion,

without approval of the Bankruptcy Court. The Reorganized Debtor or the Post-Effective Date

Committee, as applicable, will file and serve all objections to Claims as soon as practicable, but no

later than one-hundred twenty (120) days after the Effective Date, unless upon motion of the

Reorganized Debtor or the Post-Effective Date Committee, as applicable, the Bankruptcy Court

extends such deadline. Objections to Claims filed after the Debtor distributes Ballots to Holders of

Claims entitled to vote on the Plan shall not disenfranchise such Claims from voting on the Plan.

The Reorganized Debtor or the Post-Effective Date Committee, as applicable, at any time

may request that the Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to

section 502(c) of the Bankruptcy Code, regardless of whether the Reorganized Debtor or the Post-

Effective Date Committee previously objected to such contingent or unliquidated Claim or whether

the Bankruptcy Court ruled on any such objection. The Bankruptcy Court will retain jurisdiction to

estimate any contingent or unliquidated Claim at any time during litigation concerning any objection

to any contingent or unliquidated Claim, including, without limitation, an objection during the

pendency of any appeal relating to any such objection. Subject to the provisions of section 502(j) of

the Bankruptcy Code, in the event that the Bankruptcy Court estimates any contingent or


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 40

unliquidated Claim, the amount so estimated will constitute the allowed amount of such contingent

or unliquidated Claim. If the estimated amount constitutes a maximum limitation on the amount of

such contingent or unliquidated Claim, the Reorganized Debtor or the Post-Effective Date

Committee, as applicable, may pursue supplementary proceedings to object to the allowance of such

contingent or unliquidated Claim. All of the aforementioned objection, estimation, and resolution

procedures are intended to be cumulative and not necessarily exclusive of one another. Claims may

be estimated and subsequently compromised, settled, withdrawn, or resolved by the parties with no

further order of the Court.

G. Litigation

1. Existing and Potential Causes of Action

Due to the size and scope of the Debtor�’s business operations and the multitude of business

transactions therein, there may be Causes of Actions that currently exist, or may subsequently arise,

in addition to the matters identified below. The Debtor does not intend, and it should not be

assumed, that because any existing or potential claims or Causes of Action have not yet been

pursued by the Debtor, or do not fall within the list below, that any such claims or Causes of Action

have been waived. Under the Plan and as more specifically discussed below, the Reorganized

Debtor retains all rights to pursue any and all Causes of Action to the extent the Reorganized Debtor

deems appropriate (under any theory of law or equity, including, without limitation, the Bankruptcy

Code and any applicable local, state, or federal law, in any court or other tribunal, including, without

limitation, in an adversary proceeding filed in the Case), provided, however, the Debtor, upon

Confirmation of the Plan, will be deemed to have waived any claim or Cause of Action to avoid (i) a

preferential transfer under section 547 of the Bankruptcy Code or any state law or (ii) any fraudulent

conveyance pursuant to section 544 or 548 of the Bankruptcy Code or any state law that it may hold

against a Holder of an Allowed General Unsecured Claim (the �“Waived Avoidance Actions�”).

Existing or potential claims or Causes of Action that may be pursued by the Reorganized

Debtor after the Effective Date, include, without limitation, (i) any and all Causes of Action pursuant

to any applicable section of the Bankruptcy Code, including, but not limited to, (a) any claims of the

Debtor arising under section 362 of the Bankruptcy Code; (b) turnover claims arising under sections


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 41

542 or 543 of the Bankruptcy Code and (c) any avoidance actions arising under sections 544, 547 or

548 of the Bankruptcy Code, except for the Waived Avoidance Actions. (ii) objections to Claims;

(iii) claims that the Estate is entitled to set off or recoup against parties with claims against the

Estate; and (iv) any action for equitable subordination of any Claim against the Estate. Moreover,

the Reorganized Debtor may pursue existing or potential claims or Causes of Action related to any

other litigation or Causes of Action, whether legal, equitable, or statutory in nature, arising out of, or

in connection with, the Debtor�’s business, assets, or operations, or otherwise affecting the Debtor,

including without limitation, possible claims against the following types of parties for the following

types of claims: (a) possible claims against vendors, customers, or suppliers for warranty, indemnity,

charge back/set-off issues, overpayment or duplicate payment issues, and collections/accounts

receivable matters; (b) possible claims against persons or parties for wrongful or improper

termination of services to the Debtor; (c) failure of any persons or parties to fully perform under

contracts with the Debtor before the assumption or rejection of such contracts; (d) possible claims

for deposits or other amounts owed by any creditor, lessor, supplier, vendor, factor, or other person;

(e) possible claims for damages or other relief against any party arising out of environmental, or

product liability matters; (f) actions against insurance carriers relating to coverage, indemnity, or

other matters; (g) counterclaims and defenses relating to notes or other obligations; (h) possible

claims against local, state, and federal taxing authorities (including, without limitation, any claims

for refunds of overpayments, challenges to audits, assessments, penalties, interest or any other

obligations imposed by governmental agencies); (i) possible claims against Secured Creditors,

including, without limitation, claims relating to the inclusion of improper charges, fees, interest,

penalties in any alleged Secured Claim and the nature, extent, priority and validity of any lien; and

(j) contract, tort, or equitable claims that may exist or subsequently arise.

The Debtor�’s investigation of potential causes of action is ongoing and will occur in large

part after the Effective Date. As a result, Holders of Claims and other parties in interest should be,

and are pursuant to the terms of the Plan, specifically advised that, notwithstanding that the existence

of any particular Causes of Action may not be listed, disclosed, or set forth in this Plan, Causes of

Action may be brought against the Holder of any Claim at any time, except for the Waived


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 42

Avoidance Actions or as otherwise provided in this Plan and subject to the bar-date limitations set

forth in the Plan and/or the Bankruptcy Code.

THE REORGANIZED DEBTOR WILL MAKE THE DECISION OF WHETHER OR NOT

TO PURSUE CAUSES OF ACTION. THE REORGANIZED DEBTOR MAY SEEK TO RETAIN

COUNSEL ON A CONTINGENCY BASIS TO PROSECUTE SOME OR ALL OF SUCH

CLAIMS OR MAY DECIDE NOT TO PURSUE SUCH CLAIMS AT ALL. AS SET FORTH IN

THE PLAN, THE REORGANIZED DEBTOR, ITS EMPLOYEES, CONTRACTORS, OFFICERS,

DIRECTORS, SUCCESSORS, AND ASSIGNS AND THE EMPLOYEES OF THE DEBTOR

AND ITS RESPECTIVE PROFESSIONALS AND REPRESENTATIVES SHALL NOT HAVE

ANY LIABILITY ARISING OUT OF THE REORGANIZED DEBTOR'S GOOD FAITH

DETERMINATION OF WHETHER OR NOT TO PURSUE PROSECUTION OF THE

FOREGOING CLAIMS.

2. Preservation of All Litigation and Causes of Action Not Expressly Settled and Released

The Reorganized Debtor retains all rights on behalf of the Debtor, the Reorganized Debtor,

and the Estate to commence and pursue, as appropriate, any and all claims or Causes of Action,

whether arising before or after the Petition Date, in any court or other tribunal, including, without

limitation, a adversary proceeding filed in the Case, except for the Waived Avoidance Actions. The

Reorganized Debtor has the exclusive right, authority, and discretion to institute, prosecute,

abandon, settle, or compromise any and all such claims, rights, and Causes of Action without the

consent or approval of any third party, and without any further order of the Court, except for the

Waived Avoidance Actions.

While the Debtor has attempted to identify claims or Causes of Action that may be pursued

in the preceding section and the Disclosure Statement, the failure to list any potential or existing

claims or Causes of Action is not intended to limit the rights of the Reorganized Debtor to pursue

any claims or Causes of Action not listed or identified, except for the Waived Avoidance Actions.

After the Effective Date, the Reorganized Debtor may continue to prosecute any litigation or Causes

of Action, whether legal, equitable, or statutory in nature, arising out of, or in connection with, the


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 43

Debtor�’s business, assets, or operations, or otherwise affecting the Debtor, except as otherwise

provided herein.

Unless a claim or Cause of Action against a Creditor or other person or entity is expressly

waived (i.e. the Waived Avoidance Actions), relinquished, released, compromised, or settled in the

Plan or any Final Order, the Reorganized Debtor expressly reserves such claim or Cause of Action

for later adjudication (including, without limitation, claims and Causes of Action not specifically

identified, of which Debtor may presently be unaware, or that may arise or exist by reason of

additional facts or circumstances unknown to the Debtor at this time, or facts or circumstances that

may change or be different from those that Debtor now believes to exist) and, therefore, no

preclusion doctrine, including, without limitation, the doctrines of res judicata, collateral estoppel,

issue preclusion, claim preclusion, waiver, estoppel (judicial, equitable, or otherwise), or laches shall

apply to such claims or Causes of Action upon, or after, the Confirmation or consummation of the

Plan based on the Disclosure Statement, the Plan, or the Confirmation Order, except where such

claims or Causes of Action have been expressly released in the Plan or other Final Order (i.e. the

Waived Avoidance Actions).

Except as otherwise provided in the Plan or in any contract, instrument, release, indenture, or

other agreement entered into in connection with the Plan, the Reorganized Debtor is authorized to

exercise and perform the rights, powers, and duties held by the Estate, including without limitation

the authority under Bankruptcy Code section 1123(b)(3) to provide for the settlement, adjustment,

retention, and enforcement of Claims and Interests of the Estate, including, but not limited to, all

Causes of Action and the authority to exercise all rights under sections 1106, 1107, and 1108 of the

Bankruptcy Code, including, but not limited to, those Causes of Action listed in the preceding

section, shall vest in the Reorganized Debtor, except for the Waived Avoidance Actions.

Any person to whom Debtor has incurred an obligation (whether on account of services,

purchase, sale of goods, or otherwise), or who has received services from the Debtor or a transfer of

money or property of the Debtor, or who has transacted business with the Debtor, or leased

equipment or property to the Debtor should assume that such obligation, transfer, or transaction may

be reviewed by the Reorganized Debtor subsequent to the Effective Date and may, if appropriate, be


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 44

the subject of an action after the Effective Date, whether (i) such person has filed a proof of claim

against Debtor in this Case; (ii) such person�’s proof of claim has been objected to by the Estate; (iii)

such person�’s Claim was included in the Debtor�’s Bankruptcy Schedules; (iv) such person�’s

scheduled Claims have been objected to by the Estate or have been identified by the Estate as

disputed, contingent, or unliquidated; or (v) such action falls within the list of Causes of Action in

the preceding section.

H. The Releases

In consideration for the New Equity Contribution made by the Zeidens, the Debtor on

behalf of the Estate hereby fully and unconditionally releases and forever discharges Joseph

Zeiden, Carole Malfatti and Michael Zeiden and their attorneys, agents, advisors, professionals,

representatives and assigns (the “Zeiden Releasees”) from and against any and all claims, causes

of action, damages, losses, liabilities, obligations, expenses, debts, dues, sums of money, accounts,

reckonings, contracts, controversies, known or unknown, fixed or contingent, direct or indirect,

accrued or not accrued, liquidated or unliquidated or suspected or unsuspected, in contract or in

tort or otherwise, that the Debtor or the Estate ever had, now have or hereafter can, shall or may

have, or may claim to have, whether directly or indirectly, or by assignment or succession, against

the Zeiden Releasees, or any of them, for, upon, or by reason of any matter relating to the

ownership, management or operation of the Debtor through the Effective Date. This release shall

be effective as of the Effective Date.

The Zeidens acknowledge that they are aware of and have read Section 1542 of the

California Civil Code, which provides as follows:

“A general release does not extend to claims which the creditor does not know or suspect

to exist in his or her favor at the time of executing the release, which if known by him or her must

have materially affected his or her settlement with the debtor.”

Except to the extent arising from willful misconduct or gross negligence, any and all

Claims, liabilities, causes of action, rights, damages, costs and obligations held by any party

against the Debtor and its attorneys, accountants, agents and other professionals, and its officers,

directors and employees, whether known or unknown, matured or contingent, liquidated or


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 45

unliquidated, existing, arising or accruing, whether or not yet due, in any manner related to the

Post-Petition administration of the Case or the formulation, negotiation, prosecution or

implementation of the Plan, shall be deemed fully waived, barred, released and discharged in all

respects, except as to rights, obligations, duties, claims and responsibilities preserved, created or

established by terms of the Plan; provided, however, that, notwithstanding the foregoing, this

provision does not limit the nature of any objection to the allowance and payment of (i) any

Professional Fees, (ii) any Insider Claims other than the Allowed Insider Unsecured Claims in

Class 6 or (iii) or any Insider compensation.

Pursuant to section 1125(e) of the Bankruptcy Code, the Reorganized Debtor, the

Committee and their respective present and former members, ex-officio members, officers,

directors, trustees, employees, agents, designees, successors or assigns, and the Debtor and any

Professional Persons (acting in such capacity) employed by any, of the foregoing entities, will

neither have nor incur any liability to any Person for any act or omission occurring after the

Petition Date and in connection with, relating to or arising out of the Case, formulation,

negotiation or implementation of the Plan, solicitation of acceptances of the Plan, the pursuit f

Confirmation of the Plan, the consummation of the Plan, Confirmation of the Plan or the

administration of the Plan or the property to be distributed under the Plan. Nothing in this

section shall be construed to exculpate any entity from liability for their willful misconduct or

gross negligence..

VII

MODIFICATION AND REVOCATION OF THE PLAN; CONDITIONS TO

CONFIRMATION AND THE EFFECTIVE DATE; REQUEST TO CRAM-DOWN PLAN

A. Modification of the Plan

In accordance with section 1127 of the Bankruptcy Code, the Debtor reserves the right to

alter, amend or modify the Plan or any Plan exhibit or schedule, prior to Confirmation including

amending or modifying it to satisfy the requirements of the Bankruptcy Code. The Bankruptcy

Court may require a new disclosure statement and/or revoting on the Plan if the Debtor materially

modifies the Plan subsequent to the solicitation of votes regarding the Plan but before Confirmation.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 46

The Debtor or the Reorganized Debtor may modify the Plan at any time after confirmation

and before substantial consummation of the Plan, but only if circumstances warrant such

modification and after notice and hearing.

B. Revocation of the Plan.

The Debtor reserves the right to withdraw or revoke the Plan at any time before the entry of

the Confirmation Order.

At the option of the Debtor, the Plan shall be deemed null and void if any of the following

events occur: (i) the Plan is revoked or withdrawn; (ii) the Confirmation Order is not entered; (iii)

the Effective Date does not occur; (iv) consummation of the Plan is not substantially achieved; or (v)

the Confirmation Order is reversed or revoked. Nothing contained in the Plan shall be deemed to

constitute a waiver of any claim by the Debtor, or to prejudice in any manner the rights of the Debtor

in any further proceedings.

C. Conditions Precedent to Confirmation

The Confirmation of the Plan shall be subject to the following conditions precedent:

(1) the Clerk of the Bankruptcy Court shall have entered an order granting approval of

the Disclosure Statement and finding that it contains adequate information pursuant to section 1125

of the Bankruptcy Code and that order shall have become a Final Order; and

(2) the Confirmation Order shall have been signed by the Bankruptcy Court and duly

entered on the docket for the Case by the Clerk of the Bankruptcy Court.

D. The Effective Date

The Plan will not be consummated or become binding unless and until the Effective Date

occurs. Provided that the conditions to the Effective Date, as set forth below, have been fulfilled, the

Effective Date will be the later of:

(1) the first (1st) business day after the eleventh (11th) day following the Confirmation

Date; and

(2) the first business day after such date under clause (a) on which there is not in force

any stay or injunction against the enforcement of the Plan or the Confirmation Order.

The Debtor expects the Effective Date to be on or about October 12, 2009.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 47

E. Conditions to the Effective Date

The Effective Date shall be subject to the following conditions precedent:

(1) the conditions to Confirmation have been met; and

(2) the Exit Financing shall be fully funded and in place.

F. Confirmation Request

In the event that all of the applicable requirements of section 1129(a) are met other than

section 1129(a)(8), the Debtor requests confirmation of the Plan notwithstanding the requirements of

such paragraph under 11 U.S.C. § 1129(b).

G. Effect of Failure of the Plan to Become Effective

Notwithstanding anything to the contrary in the Plan, if the Confirmation Order is not entered

or is vacated or if the Effective Date does not occur, the Plan will be null and void, and nothing

contained in the Plan shall (i) be deemed to be an admission by the Debtor with respect to any matter

discussed in the Plan, including liability on any Claim or the propriety of any Claim�’s classification;

(ii) constitute a waiver, acknowledgment, or release of any Claims, Interests, or any claims held by

the Debtor; or (iii) prejudice in any manner the rights of the Debtor in any further proceedings.

VIII

EFFECT OF CONFIRMATION OF THE PLAN

A. Binding Effect of Confirmation

Confirmation will bind the Debtor, all Creditors, Interest Holders, and other parties in interest

to the provisions of the Plan, whether or not the Claim or Interest of such Creditor or Interest Holder

is impaired under the Plan, and whether or not such Creditor or Interest Holder has accepted the

Plan. If the Confirmation Order is not entered or is vacated, the Plan shall be null and void in all

respects and nothing contained in the Plan or the Disclosure Statement shall (a) constitute a waiver

or release of any Claims against, or any Equity Interest in, the Debtor or any claim by, or right of,

the Debtor; (b) prejudice in any manner the rights of the Debtor; or (c) constitute an admission,

acknowledgment, offer, or undertaking by the Debtor in any respect.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 48

B. Revesting of the Property in the Reorganized Debtor

Except as otherwise set fort in the Plan, on the Effective Date, title to all Assets and property

of the Debtor, and all property of the Estate, including, pursuant to section 1123(b)(3)(b) of the

Bankruptcy Code, each and every claim, demand, or cause of action that the Debtor had or had

power to assert immediately prior to Confirmation (except for the Waived Avoidance Actions), will

revest in the Reorganized Debtor free and clear of all liens, Claims, and Interests. Thereafter, the

Reorganized Debtor will hold these assets without further jurisdiction, restriction, or supervision of

the Court.

C. Good Faith

Confirmation of the Plan shall constitute a finding that (i) the Plan has been proposed in good

faith and in compliance with applicable provisions of the Bankruptcy Code; and (ii) the solicitation

of acceptances or rejections of this Plan by all Persons and, to the extent applicable, the offer,

issuance, sale, or purchase of any security offered or sold under the Plan has been in good faith and

in compliance with applicable provisions of the Bankruptcy Code.

D. Authority to Implement Plan

Upon the entry of the Confirmation Order by the Bankruptcy Court, all matters provided

under the Plan shall be deemed to be authorized and approved without further approval from the

Bankruptcy Court. Debtor and the Reorganized Debtor shall be authorized, without further

application to or order of the Bankruptcy Court, to take whatever action is necessary to achieve

consummation and carry out the Plan and to make the contemplated Distributions.

E. Discharge and Injunction

Except as otherwise provided in the Plan, (i) the rights afforded in the Plan and the treatment

of all Claims and Interests therein, are in exchange for and in complete satisfaction, discharge, and

release of Claims and Interests of any nature whatsoever against the Debtor and the Reorganized

Debtor, or any of their assets or properties, except as set forth herein; (ii) on the Effective Date, all

such Claims against the Debtor shall be satisfied, discharged and released in full; and (iii) all Persons

and entities shall be precluded from asserting against the Reorganized Debtor, its successors, or its

assets or properties any other or further Claims based upon any act or omission, transaction, or other


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 49

activity of any kind or nature that occurred prior to the Confirmation Date.

Unless otherwise provided, all injunctions or stays provided for in the Case under sections

105 and 362 of the Bankruptcy Code or otherwise in effect on the Confirmation Date shall remain in

full force and effect until the Effective Date.

Nothing in this Section VIII.E shall impair (i) the rights of any Holder of a Disputed Claim to

establish its Claim in response to an objection filed by the Debtor, Reorganized Debtor or Post-

Confirmation Committee, as applicable; (ii) the right of any defendant in an Avoidance Action to

assert defenses in such action; or (iii) the right of any counterparty to an assumed executory contract

or unexpired lease to enforce the terms of such contact or lease.

F. Post-Confirmation Effectiveness of Proofs of Claim

Proofs of Claim shall, upon the Effective Date, represent only the right to participate in the

Distributions contemplated by the Plan and otherwise shall have no further force or effect.

G. Post-Effective Date Committee

On the Effective Date, the Committee shall be dissolved and all members of the Committee

and its professionals shall be discharged from their duties as members of, and professionals retained

by, the Committee. Notwithstanding the dissolution of the Committee, the members of the

Committee retain the right to seek reimbursement of expenses (in the case of members of the

Committee) and final compensation (as to professionals retained by the Committee).

As of the Effective Date, there shall be formed a post-Effective Date committee (the �“Post-

Effective Date Committee�”). The members of such Post-Effective Date Committee will be those

members of the Committee who wish to continue to serve. Ten days prior to the Ballot Date, the

Committee shall file with the Bankruptcy Court a notice of selection of the Post-Effective Date

Committee�’s members, which notice will name the members of the Post-Effective Date Committee.

The Post-Effective Date Committee shall have the right to object to Claims, excluding the

Insider Unsecured Claims, and shall further have the right and authority to take all actions the Post-

Effective Date Committee may deem necessary in its business judgment to enforce the Reorganized

Debtor�’s obligations to Holders of General Unsecured Claims under the Plan, including without


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 50

limitation any actions it may deem necessary in connection with the issuance of any Blockage

Notice to the Reorganized Debtor.

The Post-Effective Date Committee shall have the authority to retain counsel and other

professionals of its choosing.

The expenses of the Collateral/Disbursement Agent and the Post-Effective Date Committee,

including, but not limited to, the expenses of the members and the fees and expenses of any

professionals employed by the Post-Effective Date Committee and/or the Collateral/Disbursement

Agent shall be paid out of the $8.045 million Cash available for the Maximum General Unsecured

Distribution. Specifically, an amount shall be reserved and set aside from the initial Distribution of

Cash from the Maximum General Unsecured Distribution (and, as necessary, from subsequent

Distributions of Cash from the Maximum General Unsecured Distribution) to pay the reasonable

fees and expenses of Post-Effective Date Committee members and professionals retained by the

Post-Effective Date Committee (the �“Post-Effective Date Committee Reserve�”), which fees and

expenses may be paid from the Post-Effective Date Committee Reserve without further order of the

Court. The Post-Effective Date Committee (or its designee) shall hold the Post-Effective Date

Committee Reserve in a segregated account to be used exclusively to pay the reasonable fees and

expenses of Post-Effective Date Committee members and professionals retained by the Post-

Effective Date Committee. Any unused amounts deposited in the Post-Effective Date Committee

Reserve shall be distributed to Holders of Allowed General Unsecured Claims in accordance with

the Plan.

Neither the Collateral/Disbursement Agent, members of the Post-Effective Date Committee,

the Post-Effective Date Committee nor any of its retained professionals, employees or agents shall

be liable for any act taken, suffered or omitted to be taken in their capacity as members of the Post-

Effective Date Committee or in reliance on any provision of the Plan, except for acts of gross

negligence or willful misconduct (which gross negligence or willful misconduct must be determined

by a Final Order in a court of competent jurisdiction), in the performance of duties for the Post-

Effective Date Committee. Notwithstanding anything herein to the contrary, in no event shall the

Collateral/Disbursement Agent or any member of the Post-Effective Date Committee be liable to


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 51

any party on account of the performance of duties for the Post-Effective Date Committee in an

amount that exceeds the fees and expenses such Collateral/Disbursement Agent, Post-Effective Date

Committee member or professional has received for its service on or to the Post-Effective Date

Committee.

Neither the Collateral/Disbursement Agent or the Post-Effective Date Committee shall not

be required to give any bond or surety for the performance of its duties.

The Post-Effective Date Committee will dissolve and the Collateral/Disbursement Agent will

be discharged upon the completion of all distributions to General Unsecured Creditors in accordance

with the terms of the Plan.

H. Reorganized Debtor’s Reports to the Post-Effective Date Committee

Until the last Distribution to the Holders of Allowed General Unsecured Claims occurs on

January 1, 2012 pursuant to the terms of the Plan, the Reorganized Debtor will provide the Post-

Effective Date Committee with quarterly reports, including consolidated financial statements and

supporting schedules, in advance of the meetings between the Board of Directors of the Reorganized

Debtor and the Post-Effective Date Committee that will take place quarterly until January 1, 2012

and that are to be scheduled on reasonable notice and to last no more than one (1) business day.

IX

OTHER PLAN PROVISIONS

A. Corporate Action

The Reorganized Debtor shall be empowered and authorized to put into effect and carry out

the Plan and any orders of the Court relative thereto and take any proceeding and do any act

provided in the Plan or directed by such orders without further action by any directors or

shareholders of the Debtor. Such power and authority may be exercised and such proceedings and

acts may be taken as may be directed by such orders with like effect as if exercised and taken by

unanimous action of all such directors or stockholders, as the case may be. In general and subject to

the protective provisions in the Plan, the Reorganized Debtor shall act for the Debtor and the Estate

in a fiduciary capacity as applicable to a board of directors.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 52

B. Reorganized Debtor’s Board of Directors

The members of the Reorganized Debtor�’s Board of Directors will be Joseph Zeiden, Carole

Malfatti and Michael Zeiden.

C. Further Assurances

The Debtor, the Reorganized Debtor, and all Holders of Claims receiving Distributions under

the Plan and all other parties in interest shall, from time to time, prepare, execute, and deliver any

agreements or documents and take any other actions as may be necessary or advisable to effect the

provisions and intent of the Plan.

D. Payment of Statutory Fees

All fees payable pursuant to 28 U.S.C. § 1930 shall be paid on or before the Effective Date.

The Reorganized Debtor shall pay fees that accrue under 28 U.S.C. § 1930 until a final decree is

entered in the Case, or the Bankruptcy Court otherwise orders. The Reorganized Debtor shall

submit U.S. Trustee status reports with each quarterly fee paid after Confirmation.

E. Services by and Fees for Professionals

1. Prior to the Effective Date. Fees and expenses for the Professionals retained by the

Committee or the Debtor for services rendered and costs incurred after the Petition Date and prior to

the Effective Date will be fixed by the Bankruptcy Court after notice and a hearing, and such fees

and expenses will be paid (less deductions for any and all amounts thereof already paid to such

Persons) after approval by the Bankruptcy Court to the extent so approved and as provided in the

Plan.

2. From the Effective Date. Fees owing for services rendered and costs incurred and

owing on and after the Effective Date by the Professionals retained by the Debtor will be paid by

Reorganized Debtor from the funds held by the Reorganized Debtor without further order of the

Court.

F. Post-Confirmation Status Reports

Within 120 days of the entry of the order confirming the Plan, the Reorganized Debtor shall

file a status report with the Court explaining what progress has been made toward consummation of


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 53

the confirmed Plan. The status report shall be served on the United States Trustee, the Post-

Effective Date Committee and those parties who have requested special notice in the Case pursuant

to Bankruptcy Rule 2002. Further status reports shall be filed every 120 days and served on the

same entities until the Plan has been substantially consummated.

G. No Recourse

No entity other than an entity entitled to receive a payment or Distribution under the Plan or

the Holders of Allowed Interests will have any recourse against the Debtor, its Estate, or the

Reorganized Debtor or its Assets. Recourse against such parties shall be limited to enforcement of

the terms of the Plan.

H. Severability of Plan Provisions

If, before Confirmation, the Court holds that any Plan term or provision is invalid, void, or

unenforceable, the Court may alter or interpret that term or provision so that it is valid and

enforceable to the maximum extent possible consistent with the original purpose of that term or

provision. That term or provision will then be applicable as altered or interpreted. Notwithstanding

any such holding, alteration, or interpretation, the Plan�’s remaining terms and provisions will remain

in full force and effect and will in no way be affected, impaired, or invalidated. The Confirmation

Order will constitute a judicial determination providing that each Plan term and provision, as it may

have been altered or interpreted in accordance with this section, is valid and enforceable under its

terms. Should any provision in the Plan be determined to be unenforceable after Confirmation, such

determination shall in no way limit or affect the enforceability and operative effect of any and all

other provisions of the Plan.

I. Entry of a Final Decree

Once the Plan has been consummated, a final decree may be entered upon motion of the

Reorganized Debtor. The effect of the final decree is to close the Case. After such closure, a party

seeking any type of relief relating to a Plan provision can seek such relief in a state court of general

jurisdiction.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 54

J. Governing Law

The rights and obligations arising under the Plan and any agreements, contracts, documents,

or instruments executed in connection with the Plan will be governed by, and construed and enforced

in accordance with, California law without giving effect to California conflict-of-law principles,

unless a rule of law or procedure is supplied by (i) federal law (including the Bankruptcy Code and

the Bankruptcy Rules); or (ii) an express choice-of-law provision in any document provided for, or

executed under or in connection with, the Plan.

K. Retention of Jurisdiction

The Bankruptcy Court shall retain and have exclusive jurisdiction over any matter arising

under the Bankruptcy Code, arising in or related to the Case or the Plan, to the fullest extent

permitted by law including, but not limited to, the following matters:

(1) resolution of any matters related to the assumption, assumption and assignment, or

rejection of any executory contract or unexpired lease to which the Debtor is a party or with respect

to which the Debtor may be liable, and to hear, determine, and, if necessary, liquidate, any Claims

arising therefrom, including those matters related to the amendment after the Effective Date of the

Plan, and to add or delete any executory contracts or unexpired leases to the list of executory

contracts and unexpired leases to be assumed;

(2) entry of such orders as may be necessary or appropriate to implement or consummate

the provisions of the Plan and all contracts, instruments, releases, and other agreements or

documents created in connection with the Plan;

(3) Determination of any and all motions, adversary proceedings, applications, and

contested or litigated matters that may be pending on the Effective Date or that, pursuant to the Plan,

may be instituted by the Debtor, the Reorganized Debtor or the Post-Effective Date Committee after

the Effective Date;

(4) Ensuring that Distributions to Holders of Allowed Claims are accomplished as

provided in the Plan, including without limitation jurisdiction over any claims or disputes regarding

the issuance of a Blockage Notice;


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 55

(5) Hearing and determining any timely objections to Administrative Claims or to proofs

of Claim filed, both before and after the Confirmation Date, including any objections to the

classification of any Claim and to allow, disallow, determine, liquidate, classify, estimate, or

establish the priority of secured or unsecured status of any Claim, in whole or in part;

(6) Entry and implementation of such orders as may be appropriate in the event the

Confirmation Order is, for any reason, stayed, revoked, modified, reversed, or vacated;

(7) Issuance of such orders in aid of execution of the Plan, to the extent authorized by

section 1142 of the Bankruptcy Code;

(8) Consideration of any modifications of the Plan, to cure any defect or omission, or

reconcile any inconsistency in any order of the Bankruptcy Court, including the Confirmation Order;

(9) Hearing and determining all applications for awards of compensation for services

rendered and reimbursement of expenses incurred prior to the Effective Date;

(10) Hearing and determining disputes arising in connection with, or relating to, the Plan

or the interpretation, implementation, or enforcement of the Plan, or the extent of any Person�’s

obligations incurred in connection with or released or exculpated under the Plan;

(11) Issuance of injunctions or other orders as may be necessary or appropriate to restrain

interference by any Person with consummation or enforcement of the Plan;

(12) Determination of any other matters that may arise in connection with, or are related

to, the Plan, the Disclosure Statement, the Confirmation Order, or any contract, instrument, release,

or other agreement or document created in connection with the Plan or the Disclosure Statement;

(13) Hearing and determining matters concerning state, local, and federal taxes in

accordance with sections 346, 505, and 1146 of the Bankruptcy Code;

(14) Hearing any other matter or for any purpose specified in the Confirmation Order that

is not inconsistent with the Bankruptcy Code;

(15) Entry of a final decree closing the Case; and

(16) Interpreting and enforcing Orders entered by the Bankruptcy Court.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 56

If the Bankruptcy Court abstains from exercising jurisdiction, or is without jurisdiction, over

any matter, this section will not effect, control, prohibit, or limit the exercise of jurisdiction by any

other court that has jurisdiction over that matter.

L. Successors and Assigns

The rights, benefits, and obligations of any Person or entity named or referred to in the Plan

shall be binding on, and shall inure to the benefit of, any heir, executor, administrator, successor, or

assign of such Person or entity.

M. Saturday, Sunday, or Legal Holiday

If any payment or act under the Plan should be made or performed on a day that is not a

Business Day, then the payment or act may be completed on the next succeeding day that is a

Business Day, in which event the payment or act will be deemed to have been completed on the

required day.

N. Headings

The headings used in the Plan are inserted for convenience only, and neither constitutes a

portion of the Plan nor in any manner shall affect the provisions or interpretation(s) of the Plan.

X

CERTAIN RISK FACTORS TO BE CONSIDERED

Holders of impaired Claims should read and consider carefully the factors set forth below, as

well as other information set forth in this Disclosure Statement and the documents delivered together

herewith and/or incorporated by reference herein, prior to voting to accept or reject the Plan.

A. Risks that the Debtor Will Have Insufficient Cash for the Plan to Become Effective

The Plan cannot be confirmed by the Bankruptcy Court unless the Debtor has sufficient

funds by the Effective Date to pay all Allowed Administrative Claims and Allowed Priority Claims,

unless particular Holders of such Claims agree to a deferred payment of their Claims. The Debtor

believes that at the time of Confirmation it will have sufficient Cash to satisfy all such Claims.

B. Bankruptcy Risks

Section 1122 of the Bankruptcy Code provides that a plan may place a claim or an interest in

a particular class only if such claim or interest is substantially similar to the other claims or interests


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 57

of such class. The Debtor believes that the classification of Claims and Interests under the Plan

comply with the requirements set forth in the Bankruptcy Code. However, there can be no assurance

that the Bankruptcy Court would reach the same conclusion.

Even if all Classes of Claims that are entitled to vote accept the Plan, the Plan might not be

confirmed by the Bankruptcy Court. Section 1129 of the Bankruptcy Code sets forth the

requirements for confirmation and requires, among other things, that the confirmation of a plan is

not likely to be followed by the liquidation or the need for further financial reorganization, and that

the value of distributions to dissenting creditors and equity security holders not be less than the value

of distributions such creditors and equity security holders would receive if the Debtor were

liquidated under chapter 7 of the Bankruptcy Code. The Debtor believes that the Plan satisfies all

the requirements for confirmation of a plan and that the Bankruptcy Court would also conclude that

the requirements for Confirmation of the Plan have been satisfied.

C. Business Risks

While the Plan Cash Flow Projections incorporate certain assumptions, there are events that

could occur and risks associated with the Reorganized Debtor�’s reorganization that would hinder the

Reorganized Debtor�’s ability to meet its Plan obligations. For example, the Debtor will not be able

to consummate the Plan if it does not obtain the Exit Financing, and its ability to successfully

implement the Plan will be compromised if it is unable to enter into binding agreements with its

landlords memorializing the various rent reductions it has negotiated in principle. Moreover, the

successful implementation of the Reorganized Debtor�’s business plan is dependent on the interaction

of many other variables, including the Reorganized Debtor�’s ability to exploit and maintain its

current market niche, the effects of changing industry conditions and competition, the effects of

general economic trends influencing consumers' discretionary expenditures and the Reorganized

Debtor�’s marketing plan. Even though the Plan Cash Flow Projections are reflective of the Debtor�’s

reasonable judgment in assessing those risks, factors or events not foreseen or anticipated by the

Debtor could adversely affect the ability of the Reorganized Debtor to execute its business-plan

strategies. Specifically, the Reorganized Debtor�’s ability to meet its Plan Cash Flow Projections is

subject to the following risks, among others:


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 58

1. Industry Conditions

There can be no assurance that the industry conditions under which the Reorganized Debtor

will operate will enable it to achieve the revenues, or the gross margins thereon, that the Reorganized

Debtor has relied upon to project future business prospects. Industry-wide demand is subject to

fluctuations in consumer tastes. Moreover, the industry in which the Reorganized Debtor

participates is highly competitive. As other retailers selling similar products vie for market share,

the relative market share enjoyed by the Reorganized Debtor may be adversely affected.

2. Competition

The Debtor�’s industry is highly competitive and is affected by changes in the public's habits

and preferences, demographic and sociocultural patterns, and local and national economic conditions

affecting consumer spending habits. The retail stores operated by the Debtor compete directly and

indirectly with a large number of national and regional operations. Other retailers may open new

stores in close proximity to the Debtor�’s existing stores. There are other companies engaged in the

retail sale of goods that are identical or similar to the goods sold by the Reorganized Debtor that

have substantially greater financial resources and a higher volume of sales than the Debtor. In

response to competition, the Reorganized Debtor may need to develop and implement new concepts

in order for its business to remain viable.

3. Seasonality

Sales in the Debtor�’s stores are subject to some seasonal fluctuation. As with many retail

operations, the Debtor may have higher sales during the holiday season between Thanksgiving and

Christmas and lower sales in first quarter of the year which will result in variable income in the

weeks immediately following these sales periods.

4. Operating

Ongoing Plan payments will be funded by internal operations. Although the Debtor has

made every effort, based upon its knowledge of its business and the current state of the economy, to

accurately project its future cash flow as reflected in the attached Plan Cash Flow Projections, there

can be no assurance that the operating cash flow of the Reorganized Debtor, after giving effect to


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 59

operating requirements, will be adequate to fund fully the payment of its Plan obligations, as and

when due.

XI

VOTING PROCEDURES AND REQUIREMENTS

IT IS IMPORTANT THAT HOLDERS OF CLAIMS EXERCISE THEIR RIGHT TO

VOTE TO ACCEPT OR REJECT THE PLAN. All known Holders of Claims entitled to vote on the

Plan have been sent a Ballot together with this Disclosure Statement. Such Holders should read the

Ballot carefully and follow the instructions contained therein. Please use only the Ballot (or Ballots)

that accompanies this Disclosure Statement.

FOR YOUR VOTE TO COUNT, YOUR BALLOT MUST BE ACTUALLY RECEIVED

BY THE DEBTOR�’S BALLOT AGENT, OMNI MANAGEMENT, LLC, 16161 VENTURA

BLVD., STE. C, ENCINO, CA 91436 NO LATER THAN 5:00 P.M., PACIFIC TIME, ON

SEPTEMBER 18, 2009.

ANY BALLOT THAT IS EXECUTED AND RETURNED BUT WHICH DOES NOT

INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN WILL BE DEEMED AN

ACCEPTANCE OF THE PLAN. IF YOU HAVE ANY QUESTIONS CONCERNING VOTING

PROCEDURES OR IF A BALLOT IS DAMAGED OR LOST, YOU MAY CONTACT

DEBTOR�’S COUNSEL, PACHULSKI STANG ZIEHL & JONES LLP, 10100 SANTA MONICA

BOULEVARD, SUITE 1100, LOS ANGELES, CA 90067; TELEPHONE: (310) 277-6910; FAX:

(310) 201-0760; EMAIL: [email protected].

A. Parties in Interest Entitled to Vote

As previously discussed, in order for a Holder of a Claim to be entitled to vote, the Claim

must be both (i) Allowed and (ii) Impaired. Any Claim against the Debtor as of the Petition Date is

Allowed for voting purposes if (i) either such Holder�’s Claim has been scheduled by the Debtor (and

such Claim is not scheduled as disputed, contingent, or unliquidated) or the Holder of such has filed

a proof of claim on or before the applicable bar date and (ii) as of September 4, 2009, a date that is

fourteen (14) days prior to the Ballot Date, there is no objection to the Claim pending or no order


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 60

disallowing the Claim has been entered. Such Claim is Impaired under the Plan if the legal,

equitable, and contractual rights of the Holder of such Claim are altered with respect to such Claim.

Unless otherwise permitted in the Plan, the Holder of any Claim that is the subject of a

pending objection is not entitled to vote with respect to such Claim unless such Holder files and

prosecutes an application with the Bankruptcy Court, pursuant to Bankruptcy Rule 3018 to

temporarily allow such Claim for the limited purpose of voting to accept or reject the Plan.

A vote on the Plan may be disregarded if the Bankruptcy Court determines, after notice and a

hearing, that such vote was not solicited or procured in good faith or in accordance with the

provisions of the Bankruptcy Code.

B. Classes Impaired and Entitled to Vote Under the Plan

The following chart summarizes which Classes of Claims are impaired and which Classes of

Claims are not impaired under each of the Plan.

CLASS

DESCRIPTION

IMPAIRED/ UNIMPAIRED

VOTING STATUS

Class 1 Reclamation Claims Unimpaired Deemed to have accepted

Class 2 Priority Non-Tax Claims Unimpaired Deemed to have accepted

Class 3 CNB Secured Claim Unimpaired Deemed to have accepted

Class 4 Other Secured Claims Impaired Voting

Class 5 General Unsecured Claims Impaired Voting

Class 6 Insider Unsecured Claims Impaired Voting

Class 7 Interests in Debtor Impaired Voting


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 61

C. Vote Required for Acceptance by Classes of Claims

The Bankruptcy Code defines acceptance of a Plan by a Class of Claims as acceptance by

holders of at least two-thirds in dollar amount and more than one-half in number of the Claims of

that Class that actually cast ballots for acceptance or rejection of the Plan. Thus, acceptance by a

Class of Claims occurs only if at least two-thirds in dollar amount and a majority in number of the

Holders of such Claims voting cast their Ballots in favor of acceptance. A Class of Holders of

Claims shall be deemed to accept the Plan in the event that no Holder of a Claim within that Class

submits a Ballot by the Ballot Date.

CREDITORS AND OTHER PARTIES IN INTEREST ARE CAUTIONED TO REVIEW

THE DISCLOSURE ORDER FOR A FULL UNDERSTANDING OF VOTING

REQUIREMENTS, INCLUDING WITHOUT LIMITATION, USE OF BALLOTS.

XII

CONFIRMATION OF THE PLAN

Under the Bankruptcy Code, the following steps must be taken to confirm the Plan.

A. Confirmation Hearing

Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold

a hearing on confirmation of a Plan. By order of the Bankruptcy Court, the Confirmation Hearing

has been scheduled for August 6, 2009 at 1:30 p.m. Pacific Time. The Confirmation Hearing may

be adjourned from time to time by the Bankruptcy Court without further notice except for an

announcement made at the Confirmation Hearing or any adjournment thereof.

B. Who May Object to Confirmation of the Plan

Section 1128(b) of the Bankruptcy Code provides that any party in interest may object to

confirmation of a Plan, whether or not such party is entitled to vote on the Plan. Any objection to

confirmation of the Plan must be in writing, conform to the Federal Rules of Bankruptcy Procedure

and the Local Rules of the Bankruptcy Court, set forth the name of the objecting party, the nature

and amount of the Claim or Interest held or asserted by the objecting party against the Debtor�’s

Estate, the basis for the objection, and the specific grounds therefor. The objection, together with

proof of service thereof, must then be filed with the Bankruptcy Court by September 18, 2009, with


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 62

a copy to chambers, and served upon (i) counsel to the Debtor, Pachulski Stang Ziehl & Jones LLP,

10100 Santa Monica Boulevard, 11th Floor, Los Angeles, California 90067, Attn: Jeffrey W.

Dulberg, Esq. and (ii) counsel to the Committee, Kelley, Drye & Warren LLP, 101 Park Avenue,

New York, New York 10178, Attn: Eric R. Wilson, Esq., and Landsberg Margulies LLP, 16030

Ventura Boulevard, Suite 470, Encino, California 10178, Attn: Ian S. Landsberg, Esq.

Objections to confirmation of the Plan are governed by Federal Rule of Bankruptcy

Procedure 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY AND

PROPERLY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY

COURT.

C. Requirements for Confirmation of the Plan

At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan only if all of the

requirements of section 1129 of the Bankruptcy Code are met. Among the requirements for

confirmation are that the Plan (1) is accepted by all impaired Classes of Claims and Interests or, if

rejected by an impaired Class, that the Plan is accepted by at least one Impaired Class of Claims and,

as to the rejecting Class, �“does not discriminate unfairly�” and is �“fair and equitable�” as to such Class,

(2) is feasible, and (3) is in the �“best interests�” of Holders of Claims and Interests impaired under the

Plan.

1. Acceptance

Claims in Classes 4, 5 and 6 and Interests in Class 7 are impaired. The Holders of such

Claims and Interests are entitled to vote on the Plan and, therefore, Classes 4, 5, 6 and 7 must accept

the Plan in order for it to be confirmed without application of the �“fair and equitable test,�” described

below. As stated above, Classes 4, 5, 6 and 7 will have accepted the Plan if the Plan is accepted by

at least two-thirds in dollar amount, and a majority in number of the Claims of the voting Classes

(other than any Claims of creditors designated under section 1126(e) of the Bankruptcy Code) that

have actually voted to accept or reject the Plan.

Claims in Classes 1, 2 and 3 are unimpaired by the Plan, and the Holders thereof are

conclusively presumed to have accepted the Plan.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 63

2. Fair and Equitable Test

The Debtor will seek to confirm the Plan notwithstanding the non-acceptance of the Plan by

any impaired Class of Claims, as long as one non-insider Class of Claims that is impaired under the

Plan accepts the Plan. To obtain such confirmation, it must be demonstrated to the Bankruptcy Court

that the Plan �“does not discriminate unfairly�” and is �“fair and equitable�” with respect to such

dissenting impaired Class. A Plan does not discriminate unfairly if the legal rights of a dissenting

class are treated in a manner consistent with the treatment of other classes whose legal rights are

substantially similar to those of the dissenting class, and if no class receives more than it is entitled

to for its claims or interests. The Debtor believes that the Plan satisfies this requirement.

The Bankruptcy Code establishes different �“fair and equitable�” tests for secured claims and

unsecured claims, as follows:

a. Secured Claims

Either the Plan must provide (i) that the holders of such claims retain the liens securing such

claims, whether the property subject to such liens is retained by the debtor or transferred to another

entity, to the extent of the allowed amount of such claims, and each holder of a claim receives

deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the

effective date of the Plan, of at least the value of such holder�’s interest in the estate�’s interest in such

property; (ii) for the sale of any property that is subject to the liens securing such claims, free and

clear of such liens, with such liens to attach to the proceeds of such sale; or (iii) for the realization by

such holders of the indubitable equivalent of such claims.

b. Unsecured Claims

Either (i) each holder of an Impaired unsecured claim receives or retains under the Plan

property of a value equal to the amount of its allowed claim, or (ii) the holders of claims and

interests that are junior to the claims of the dissenting class will not receive or retain any property

under the Plan on account of their Claims or Interests. Under the Plan, the Zeidens are not retaining

their Interest in the Debtor or receiving the stock of the Reorganized Debtor �“on account of their

Interests in the Debtor�” but are receiving the stock of the Reorganized Debtor due to the New Equity

Contribution they are making to the Reorganized Debtor.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 64

THE DEBTOR BELIEVES THAT THE PLAN MAY BE CONFIRMED ON A

NONCONSENSUAL BASIS. ACCORDINGLY, THE DEBTOR WILL DEMONSTRATE AT

THE CONFIRMATION HEARING THAT THE PLAN SATISFIES THE REQUIREMENTS OF

SECTION 1129(b) OF THE BANKRUPTCY CODE AS TO ANY NON-ACCEPTING CLASS.

3. Feasibility

The Bankruptcy Code requires that confirmation of a plan is not likely to be followed by the

liquidation, or the need for further financial reorganization of a debtor. The Plan contemplates that

all Allowed Claims except for Allowed General Unsecured Claims and Allowed Insider Unsecured

Claims will be paid in full pursuant to the terms of the Plan and that the Debtor will reorganize

around a core group of existing stores. Because the Debtor seeks to reorganize around a core group

of profitable stores, the Debtor believes that no liquidation or further reorganization will be

necessary and that the Plan meets the feasibility requirement. In addition, the Debtor believes that

sufficient funds will exist at Confirmation to make all payments required by the Plan on the

Effective Date (see Exhibit “J”) and, subject to the discussion of �“Risk Factors�” set forth above,

that the Reorganized Debtor will have sufficient funds from its sales income, the New Equity

Contribution and the Exit Financing to meet all of the payment requirements in the Plan.

The Plan Cash Flow Projections for the Reorganized Debtor, which demonstrate the

feasibility of the Plan, are attached hereto as Exhibit “C”. The Debtor's management, with the

assistance of its financial advisors, prepared the financial projections using a methodology focused

on store level operations. Management developed an analysis of each individual store location to

determine its financial viability on a stand alone basis. This analysis used assumptions for sales,

gross margin, payroll and other related operating expenses based on historical data and current

operations. These efforts particularly focused on current sales trends realized in the first five months

of 2009 and input from store operations personnel. Management made additional assumptions

related to occupancy expense based on guidance from outside consultants, conversations with

current landlords and assessment of the current retail real estate market. This process was repeated to

develop projections on a monthly basis by store through December 2012.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 65

Upon completion of this process, management reviewed current corporate expenses and

adjusted projections to reflect efficiencies that could be realized due to a reduced store footprint. In

addition, management reviewed corporate expenses with corporate department management to

identify opportunities for cost rationalization and increased efficiency on a line-by-line basis. This

projection was combined with store level data to create monthly consolidated income statement

projections through December 2012.

Management then created projected balance sheets by combining the results of the

aforementioned income statement projections, historical trends for assets and liabilities and

corresponding adjustments to reflect changes in the reorganized entity. In particular, management

focused on recent customer deposit and gift card trends to adequately project those liabilities through

December 2012 on a monthly basis. In addition, management used recent discussions with lenders to

determine a potentially feasible debt structure with respect to type, rate and amortization necessary

to meet the cash needs of the business. Finally, management combined the results of the projected

income statement and balance sheet to develop a cash flow statement on a monthly basis through

2012.

To further assist you in determining whether the Plan is feasible, attached as Exhibit “D” are

the �“Financial Statements.

4. �“Best Interests�” Test

With respect to the impaired Classes of Claims, confirmation of the Plan requires that each

Holder in such Classes either (a) accepts the Plan, or (b) receives or retains under the Plan property

of a value, as of the Effective Date of the Plan, that is not less than the value such holder would

receive or retain if the Debtor were liquidated under chapter 7 of the Bankruptcy Code.

This analysis requires the Bankruptcy Court to determine what the Holders of Allowed

Claims in each impaired class would receive from the liquidation of the Debtor�’s Assets in the

context of a chapter 7 liquidation case. If the Plan were not confirmed and the Debtor�’s Assets were

liquidated under chapter 7, proceeds from the liquidation would be used to pay Unsecured Claims

(including the Insider Unsecured Claims) only after all of the following Claims and expenses were

paid in full and in the following order: (a) CNB�’s Claim, (b) the administrative costs of the chapter 7


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 66

case, including, but not limited to the chapter 7 trustee�’s fees and the fees of his professionals, (c)

any unpaid chapter 11 administrative expenses, and (d) all Priority Claims, including taxes,

employee Wage and Benefit Claims and Customer Deposit and Gift Card Claims. An analysis of the

recovery by Holders of Allowed Claims in the event of a chapter 7 liquidation as compared to the

recoveries by such Holders under the Plan (the �“Liquidation Analysis�”) is attached hereto as Exhibit

“G”. As demonstrated by the Liquidation Analysis, in the event of a chapter 7 liquidation, Holders

of Allowed Claims, except for CNB, which is paid in full even under a liquidation scenario, would

receive a significantly smaller distribution than they will received pursuant to the Plan.

A liquidation under chapter 7 would result in the incurrence of administrative costs in excess

of those projected under the Plan because a chapter 7 trustee would be entitled to fees and he would

likely retain counsel and perhaps other professionals who would have to expend substantial time and

effort to become acquainted with the Debtor�’s assets and liabilities. The amount of Priority Claims

would be substantially greater than anticipated under the Plan because a chapter 7 trustee who is

liquidating the Debtor�’s assets would not be able to honor the accrued vacation of employees or the

deposits and gift cards of customers. Also, a new time period for the filing of Claims would

commence under Bankruptcy Rule 1019(2), possibly resulting in the filing of additional Claims

against the Estate. Conversion of the Case to a case under Chapter 7 and appointment of a trustee

for administration of the Estate also would significantly delay distributions to creditors because the

chapter 7 trustee and his professionals would have to familiarize themselves with the Debtor�’s assets

and liabilities, complete the liquidation of all assets (including the prosecution to conclusion of any

avoidance actions), and review all Claims and resolve any objections thereto.

In order to further assist you in your analysis of what would be recovered under s chapter 7

liquidation, attached hereto as Exhibit “H” and Exhibit “I” are lists of the Debtor�’s assets and

liabilities, respectively, as of May 31, 2009.

XIII

FINANCIAL INFORMATION

As discussed above, attached hereto as Exhibit “D” are the Financial Statements. Also,

attached as Exhibit “C” is the Plan Cash Flow Projections.


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 67

XIV

ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN

The Debtor has thoroughly evaluated various alternatives to the Plan, including sale of the

Debtor�’s assets as a going concern and on an orderly liquidation basis and conversion of the Case to

a chapter 7 liquidation. As stated above, the Debtor employed an investment banker to market its

business. After an analysis of the offers received and studying the other alternatives, the Debtor has

concluded that the Plan is the best alternative, and will maximize recoveries by parties in interest,

assuming confirmation of the Plan. Specifically, the contribution being made by the Insiders makes

it possible for the Debtor to pay more to Holders of Allowed Claims than such Holders would

receive under any alternative reviewed by the Debtor.

XV

CERTAIN U.S. FEDERAL AND STATE INCOME

TAX CONSEQUENCES OF THE PLAN

THE FOLLOWING IS INTENDED TO BE ONLY A SUMMARY OF SELECTED

FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PLAN AND IS NOT A

SUBSTITUTE FOR CAREFUL TAX PLANNING WITH, AND RECEIPT OF TAX ADVICE

FROM, A TAX PROFESSIONAL. THE SELECTED FEDERAL AND STATE TAX

CONSEQUENCES THAT ARE DESCRIBED HEREIN AND OTHER FEDERAL, STATE AND

LOCAL TAX CONSEQUENCES THAT ARE NOT ADDRESSED HEREIN ARE COMPLEX

AND, IN SOME CASES, UNCERTAIN. SUCH TAX CONSEQUENCES MAY ALSO VARY

BASED ON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF AN ALLOWED

CLAIM OR EQUITY INTEREST IN THE DEBTOR. ACCORDINGLY, AS NOTED ABOVE,

EACH HOLDER OF AN ALLOWED CLAIM OR EQUITY INTEREST IS STRONGLY

ADVISED TO CONSULT WITH ITS OWN TAX ADVISOR REGARDING THE FEDERAL,

STATE AND LOCAL TAX CONSEQUENCES OF THE PLAN. THE BELOW SUMMARY OF

TAX CONSEQUENCES IS NOT INTENDED TO BE AND IS NOT TAX ADVISE.

THE DEBTOR DOES NOT INTEND TO REQUEST A TAX RULING FROM THE

INTERNAL REVENUE SERVICE OR ANY OTHER TAXING AUTHORITY WITH RESPECT


P

AC

HU

LS

KI

ST

AN

G Z

IEH

L &

JO

NE

S L

LP

A

TT

OR

NE

YS

AT

LA

W

LO

S A

NG

EL

ES

, C

AL

IFO

RN

IA

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98002-002\DOCS_LA:206319.9 68

TO ANY OF THE TAX CONSEQUENCES OF THE PLAN. CONSEQUENTLY, THE

INTERNAL REVENUE SERVICE OR ANOTHER TAXING AUTHORITY MAY DISAGREE

WITH AND MAY CONTEST ONE OR MORE OF THE TAX CONSEQUENCES DESCRIBED

HEREIN TO THE DEBTOR, INTEREST HOLDERS OR TO THE EQUITY HOLDERS.

A. Federal Income Tax Consequences to the Creditors

The character, amount and timing of income, gain or loss the Holders of Allowed Claims

recognize as a consequence of the distributions under the Plan will depend upon, among other

things, (i) the manner in which the Claim or Interest was acquired, (ii) the length of time the Claim

was held, (iii) whether the Claim was acquired at a discount, (iv) whether the Holder of an Allowed

Claim has taken a bad debt deduction for the Claim, (v) whether the Holder has previously included

accrued but unpaid interest with respect to the Claim, (vi) the Holder�’s method of tax accounting,

(vii) whether the Claim is an installment obligation under the tax laws, and (viii) the type of

consideration received or deemed received by the Holder in exchange for its Claim. In addition, in

the event interest is paid on the Claim, the Holder may have interest income. Therefore, Holders of

Allowed Claims should consult their tax advisors for information that may be relevant to their

particular situations and circumstances and the particular tax consequences to such Holders as a

result thereof.

Depending on the nature of the claim, the Debtor may be required to file information returns

with the appropriate taxing agencies to report payments to the Holders of Allowed Claims. In order

to make Distributions, the Debtor will require that Holders of Allowed Claims provide certain

federal income taxpayer information, such as the Holder�’s taxpayer identification number. Should

the Holder fail to do so within six months of the request, the Debtor may withhold and bar any

Distribution to that Holder, and the other Holders�’ proportionate shares of the amount to be

distributed will be recalculated.

B. Tax Consequences to the Debtor

Based upon preliminary discussions with its accountants, the Debtor�’s initial impression is

that the Plan, as currently configured, does not result in any significant tax consequences to the

Debtor.



EXHIBIT B

Recent Z Gallerie Awards and Distinctions

2010 Chapter 11 Reorganization of the Year (Below $100 mm), awarded by The M&A

Advisor, www.maadvisor.com/page/turnaround-awards

2010 Distressed M&A Turnaround Atlas Awards (www.globalmanetwork.com) Finalist in the following categories:

o Chapter 11 Reorganization o Retail Products & Services o Turnaround Deal of the Year

EXHIBIT C

R T L N G T o D y

New ch apter Z GALLERIE, UNLIKE MANY HOME FURNISHINGS CHAINS , HAS BOUNCED BACK By Steve Mclinden

RETAILER STRUGGLING

toem.erge from bankruptcy these Jays staggers beneath a starkly Her-

culean load. And this may be especially true of home furnishings

chains, because the furniture segment, much like automotive sales,

has endured an inordinate amount of fiscal pain through every phase

of this downturn. Constrained by the armed with a vote of confidence in the nation's housing woes, tight consumer form of $22 million in new financ ing spending, mounting debt to suppliers, from Wells Fargo Business Cred it. The and competition from mass merchandis-ers and consolidators, most of the furni-ture chains that have gone down over these past few years have stayed down.

But Los Angeles-based Z Gallerie, a seller of moderately priced furnishings and decor that filed for Chapter 11 last spring, appears to have done something very right. The chain has re-emerged gracefully after shedding 25 unprofit-able and poorly located stores, merging its two distribution centers into one and otherwise leaving no stone unturned in it:.<; efforts to uncover what needs fixing.

"We reviewed every department, ev-ery expense line, our merchandise price points, transportation, everything," said Z Gallerie co-founder and C FO Mike Zeiden. The result: Z Gallerie officially climbed out of bankruptcy in October,

26 SCT I MAR C H 20 1 0

leaner chain now operates 54 stores ac ross 18 s ta tes , plus an outlet store in Gardena, Calif. "And we continue to look for ways in which we can be more efficient," said Zeiden.

Mike Zeid e n cq-owns Z Gallerie with his brother, Joe , and his sis-ter , Carole Mal-fatti. The chain was founded as a poster-art shop in a Sherman Oaks, Ca-lif., garage in 1979.

Eliminating its Atlanta distribution

center allowed Z Gallerie to carry less inventory, reduce shipping damage and improve shipping times to its stores east of the Miss issippi, Zeiden says. The re-tailer now ships from its main distribu-tion facility in Gardena.

Post-bankmptcy, Z Gallerie has pared back many price points, added several new shopper promotions and launched a Facebook page. The private company declines to disclose sales numbers, but Zeiden did say that Christmas sales met management's expectations. "Running leaner enabled us to have one of our best fourth quarters in years," he said.

Z Gallerie ranked No. 39 on the Fur-niture Today top 100 last year. And yet, the chain's bankruptcy filing last April chronicled a quick descent. T hough Z Gallerie enjoyed uninterrupted growth through 2006, with sales peaking at $236 million in the aggregate at 74 10-

Z GALLERIE SUCCESSFU LLY EMERGED FROM BANKRUPTCY PROTECTION - A RARITY THESE DAYS.

cations nationwide, it experienced a severe decline in 2007, which acceler-ated in the fourth quarter of 2008 and continued in the first quarter of 2009.

The retai ler's January 2009 sa les were down 19.4 percent from J anu-ary 2008, prompting the chain to be-gin eliminating what it described as "burdensome leases" and to reorganize around its strongest stores. "We were able to close stores which were no lon-ger performing due to the economic downturn, [allowing us to) rightsize our business," Zeiden said.

Lots of home furnishers have been cons iderably less fortunate. Indus try bankruptcies since the fall of 2007 include Bombay & Co. (September 2007), Seasonal Concepts (October 2007), Levitz (November 2007), Scan International (December 2007), Sofa Express (December 2007), Domain Home (January 2008), Fortunoff (Feb-ruary 2008), Wickes Furniture (Febru-ary 2008), Room Source (June 2008), American Home (November 2008) and Z Gallerie (April 2009). Bernie's, a New England-based flllTIiture, appliances and

big-box chain, filed Chapter

"Furniture remains one of the most distressed categories, with some very strong trends working against it ," said

values and home sales is going to remain a serious drain on furniture sales. People are deciding they can live with that old couch awhile longer." And though the smaller, niche furnish-ers may have repositioned themselves more nimbly in the downturn, this does not make them immune, she says. Ad-ditionally, the rise of Ashley Furniture,

which Brouwer describes as a bm ;;lIld low-priced OperaTOr, continues to wrest significant share from national and local furnishers, she says.

The housing crisis has affected Z Gallerie's sales significantly, Zeiden concedes. "But as far as our target shopper, it is difficult to measure," he said. The company did close all four of its Ohio stores. "We were disap-pointed that the [Ohio) economics did not work out for us," said Zeiden. "While we no longer have a presence there, we continue to see strong sales to individuals in Ohio through our Web site." All of Z Gallerie's customer programs were continued following the bankruptcy, including its private-label credit card.

And Z Gallerie chose the right bankruptcy advisory firm, says Zeiden, namely, Los Angeles-based turn-around manager Broadway Advisors. "They did a great job in the prepara-tion leading up to our filing," he said. Zeiden also lauds bankruptcy counsel

Pachulski Stang Ziehl & Jones. "We were able to get through the process , albeit a smaller company, but one in which the family ownership stayed in-tact," he said.

About 350 of the retailer's pre-bankruptcy total of 900 workers were laid off or transferred as a resu lt of the store closures. Zeiden declines to com-ment on the lease terms that come out of the bankruptcy, but notes th at Z Gallerie thanks its landlords for their support. Similarly, Malfatti, who is Z Gallerie's vice president, told the trade press that vendors have been support-ive of the company's retrenchment, though she cited no specifics.

"We can now spend the time n ecessary to focus on our custom-ers , employees and strengthening the Z G allerie brand," Zeiden said. When the retail real estate landscape changes, he says, the chain will again look at new markets or areas where it performed well in the past, but only given the right economics. seT

MAR C H20 1 0 I SCT 27

Date post:	18-Aug-2015
Category:	Documents
Upload:	thomas-paccioretti
View:	14 times
Download:	1 times

ZGallerie MidSize Turnaround

Documents