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FENNEMORE CRAIG, P.C.
LAS VE GAS

FENNEMORE CRAIG, P.C. Laurel E. Davis (NV Bar No. 3005) Jon T. Pearson (NV Bar No. 10182) 300 South Fourth Street, Suite 1400 Las Vegas, Nevada 89101 Telephone: (702) 692-8000 Email: ldavis@fclaw.com Counsel for Debtor and Debtor in Possession

E-filed July 15, 2008

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEVADA In re XYIENCE INCORPORATED, a Nevada corporation, Debtor. Chapter 11 No. BK-S-08-10474-MKN Date of Hearing: Time of Hearing: [Rule 3016 Motion Pending]

DISCLOSURE STATEMENT TO ACCOMPANY DEBTOR’S PLAN OF REORGANIZATION

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FENNEMORE CRAIG, P.C.
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TABLE OF CONTENTS I. II. Page INTRODUCTION ………………………………………………………………. 3 INFORMATION REGARDING PLAN AND DISCLOSURE STATEMENT…. 3 A. Overview ……………………………………………………………………… 3 B. Admonition ……………………………………………………………………. 4 C. Ballots and Voting …………………………………………………………….. 7 D. Hearings on Confirmation and Objections …………………………………….. 7 REPRESENTATIONS ……………………………………………………………. 9 BACKGROUND AND EVENTS LEADING TO THE CHAPTER 11 FILING …10 A. General Overview of the Debtor and its Business …………………………….. 10 B. Debtor’s Business ……………………………………………………………… 10 C. Industry and Market Trends ……………………………………………………. 10 D. The Debtor’s Historical Difficulties in Raising Sufficient Capital …………….. 11 E. Financial Difficulties …………………………………………………………….13 DESCRIPTION OF THE DEBTOR’S ASSETS AND LIABILITIES …………… 14 A. Debtor’s Assets ………………………………………………………………… 14 B. Debtor’s Liabilities …………………………………………………………….. 15 EVENTS DURING THE BANKRUPTCY CASE ……………………………….. 17 A. Involuntary Petition ……………………………………………………………..17 B. First Day Motions ……………………………………………………………… 17 C. The Sale of Debtor’s Assets …………………………………………………… 20 D. Adversary Proceedings ………………………………………………………… 21 OVERVIEW OF THE PLAN …………………………………………………….. 22 A. General Summary ……………………………………………………………… 22 B. Unclassified Claims ……………………………………………………………. 23 C. Classified Claims, Estimates by Class and Proposed Treatment ……………… 24 D. Creation of Liquidating Trust and Transfer of Assets to Trust ……………….. 25 E. Authority of Liquidating Trust ………………………………………………… 26 F. Authority of the Liquidating Trustee ………………………………………….. 26 G. No Recourse Against the Liquidating Trust and Liquidating Trustee ………… 28 H. Executory Contracts …………………………………………………………… 28 I. Objection to Claims …………………………………………………………….. 29 J. Revesting of Property ………………………………………………………….. 29 K. Discharge, Injunction and Exculpation ……………………………………….. 30 L. Post-Confirmation Management of the Debtor ……………………………….. 31 MEANS FOR IMPLEMENTATION OF THE PLAN …………………………… 32 CERTAIN TAX CONSEQUENCES OF THE PLAN ……………………………. 32 LIQUIDATION ANALYSIS AND ALTERNATIVES TO THE PLAN ………... 34 A. Alternatives to the Plan ………………………………………………………... 34 B. Liquidation Analysis and Best Interests of Creditors Test ……………………. 34 CONCLUSION AND RECOMMENDATION …………………………………. 35 2

III. IV.

V.

VI.

VII.

VIII. IX. X.

XI.

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FENNEMORE CRAIG, P.C.
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XYIENCE INCORPORATED, a Nevada Corporation (“Xyience” or “Debtor”) provides this Disclosure Statement to known creditors for the purpose of voting on the DEBTOR’S PLAN OF REORGANIZATION, dated May 19, 2008, filed as Docket No. 191. I. INTRODUCTION Xyience has prepared this Disclosure Statement in connection with its solicitation of acceptance of its Plan of Reorganization (the “Plan”). The Plan has been filed with the United States Bankruptcy Court for the District of Nevada (the “Bankruptcy Court”) in the Debtor’s Chapter 11 Case filed pursuant to the United States Bankruptcy Code. A copy of the Plan is attached to this Disclosure Statement as Exhibit 1 and it is incorporated herein by this reference. The Debtor filed its voluntary Chapter 11 Petition on January 18, 2008 (“Petition Date”). Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, the Debtor is the Debtor-inPossession representative of its bankruptcy estate. Unless otherwise defined herein, the terms defined in the Plan shall have the same meanings when used in this Disclosure Statement. In addition, unless otherwise defined herein or in the Plan, terms used in this Disclosure Statement shall have the same meaning as in the Bankruptcy Code or the Bankruptcy Rules. II. INFORMATION REGARDING THE PLAN AND DISCLOSURE STATEMENT A. Overview

The objective of a Chapter 11 case is the confirmation of a plan of reorganization by the Bankruptcy Court. A plan describes in detail, and in language appropriate for a legal contract, the means for satisfying the claims against, and equity interests in, a debtor. After a plan has been filed, the holders of such claims and equity interests that are impaired, as defined under Section 1124 of the Bankruptcy Code, are permitted to vote to accept or reject the plan. This Disclosure Statement is submitted in accordance with Section 1125 of the Bankruptcy Code for the purpose of soliciting acceptances of the Plan from holders of certain Claims and Interests. This Disclosure Statement will form the basis of that solicitation. In 3

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determining whether the Plan should be confirmed, the Bankruptcy Court will consider whether the Plan has satisfied the various requirements of the Bankruptcy Code, including whether it is feasible and whether it is in the best interests of holders of Claims and Interests. The Bankruptcy Court will also receive and consider a ballot report prepared by the Plan Proponent concerning the votes for acceptance or rejection of the Plan by Holders of Claims and Interests entitled to vote. The purposes of this Disclosure Statement are: (a) to provide adequate information to enable a hypothetical reasonable investor

typical of the holders of claims or interests in the case to make an informed judgment about the Plan; (b) to set forth information regarding the history of the Debtor, the filing of their

Chapter 11 Petition and the Plan; (c) to advise Creditors and Equity Interest holders of the proposed resolution of their

Claims and Interests; and (d) to assist the Bankruptcy Court in making an informed decision regarding whether

the Plan complies with the requirements of the Bankruptcy Code. No post-petition solicitation of votes on the Plan may be made except pursuant to this Disclosure Statement and no person has been authorized to utilize any information concerning the Debtor other than the information contained in this Disclosure Statement for purposes of solicitation. B. Admonitions THIS DISCLOSURE

THIS DISCLOSURE STATEMENT IS NOT THE PLAN.

STATEMENT AND THE EXHIBITS TO THIS DISCLOSURE STATEMENT, TOGETHER WITH THE PLAN WHICH IS ATTACHED HERETO AS EXHIBIT 1 SHOULD BE READ IN THEIR ENTIRETY. FOR THE CONVENIENCE OF CREDITORS, THE PLAN IS

SUMMARIZED IN THIS DISCLOSURE STATEMENT, BUT ALL SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY THE PLAN ITSELF, WHICH IS CONTROLLING IN 4

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THE EVENT OF ANY INCONSISTENCY. INTERESTED PARTIES MAY ALSO OBTAIN FURTHER INFORMATION FROM THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEVADA, INCLUDING ACCESS TO THE DOCKET FOR THIS CASE, AT THE COURT'S WEBSITE: www.nvb.uscourts.gov. APPROVAL OF THIS DISCLOSURE STATEMENT BY THE BANKRUPTCY COURT DOES NOT MEAN THAT THE BANKRUPTCY COURT RECOMMENDS ACCEPTANCE OR REJECTION OF THE PLAN. THE STATEMENTS AND INFORMATION CONCERNING THE DEBTOR SET FORTH IN THIS DISCLOSURE STATEMENT CONSTITUTE THE ONLY STATEMENTS OR INFORMATION CONCERNING SUCH MATTERS THAT HAVE BEEN APPROVED BY THE BANKRUPTCY COURT FOR THE PURPOSE OF SOLICITING ACCEPTANCES OR REJECTIONS OF THE PLAN. THE STATEMENTS AND INFORMATION ABOUT THE DEBTOR AND THE FINANCIAL INFORMATION OF DEBTOR INCLUDING ALL FINANCIAL PROJECTIONS AND INFORMATION REGARDING CLAIMS CONTAINED IN THE DISCLOSURE STATEMENT HAVE BEEN PREPARED FROM DOCUMENTS AND INFORMATION OBTAINED FROM THE DEBTOR. CERTAIN ESTIMATES,

ASSUMPTIONS AND PROJECTIONS MAY BE MATERIALLY DIFFERENT FROM ACTUAL FUTURE RESULTS. THERE CAN BE NO ASSURANCES THAT ANY

FORECASTED OR PROJECTED RESULTS CONTAINED IN THIS DISCLOSURE STATEMENT WILL BE REALIZED AND ACTUAL RESULTS MAY BE MATERIALLY DIFFERENT FROM THOSE SHOWN. DEBTOR IS UNABLE TO AND DOES NOT

WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS WITHOUT ERROR. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE DATE OF THIS DISCLOSURE STATEMENT UNLESS ANOTHER 5

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TIME IS SPECIFIED. NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT NOR ANY EXCHANGE OF RIGHTS MADE IN CONNECTION WITH THE PLAN SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH IN THE DISCLOSURE STATEMENT SINCE THE DATE OF THIS DISCLOSURE STATEMENT AND THE MATERIALS RELIED UPON IN PREPARATION OF THIS DISCLOSURE STATEMENT WERE COMPILED. THIS DISCLOSURE STATEMENT MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO ASSIST THE COURT IN DETERMINING WHETHER THE PLAN COMPLIES WITH THE REQUIREMENTS OF THE BANKRUPTCY CODE, AND THE DISCLOSURE STATEMENT MAY ALSO BE RELIED UPON FOR THE PURPOSE OF DETERMINING WHETHER TO VOTE IN FAVOR OF OR AGAINST THE PLAN. NOTHING CONTAINED IN THIS DISCLOSURE STATEMENT CONSTITUTES AN ADMISSION OF ANY FACT OR LIABILITY BY ANY PARTY NOR IS IT CONCLUSIVE EVIDENCE OF TAX OR OTHER LEGAL EFFECTS OF THE REORGANIZATION OF THE DEBTOR ON HOLDERS OF CLAIMS OR INTERESTS. THE DEBTOR HAS FILED A MOTION REQUESTING THE COURT TO CONDITIONALLY APPROVE THIS DISCLOSURE STATEMENT. IT IS ANTICIPATED THAT THE COURT WILL GRANT THE MOTION AND ORDER THE HEARING ON THE ADEQUACY OF THIS DISCLOSURE STATEMENT TO BE COMBINED WITH THE HEARING ON CONFIRMATION OF THE PLAN. AT THE CONFIRMATION HEARING, THE BANKRUPTCY COURT WILL CONSIDER WHETHER THE PLAN SATISFIES THE VARIOUS REQUIREMENTS OF THE BANKRUPTCY CODE. THE BANKRUPTCY COURT WILL ALSO RECEIVE A BALLOT SUMMARY WHICH WILL PRESENT A TALLY OF THE VOTES OF CLASSES ACCEPTING OR REJECTING THE PLAN CAST BY THOSE ENTITLED TO VOTE. ONCE CONFIRMED, THE PLAN WILL BE TREATED ESSENTIALLY AS A CONTRACT 6

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BINDING ALL CREDITORS, EQUITY INTEREST HOLDERS AND OTHER PARTIES-ININTEREST IN THE CHAPTER 11 CASES. C. Ballots and Voting

Only Creditors and Equity Interest holders whose Claims or Interests have been allowed for the purposes of voting and are “impaired” by the Plan are entitled to vote on the Plan. According to the designation of Classes of Claims and Interests set forth under the Plan, Classes 2 through 4 are “impaired” by the Plan and entitled to vote on the Plan, and the holders of those Claims shall receive a ballot and be permitted to vote to accept or reject the Plan. Class 1 is not impaired, and the holders of Claims in Class 1 will not be permitted to vote to accept or reject the Plan, because under the Bankruptcy Code they are “deemed” to have accepted the Plan. Class 5 is impaired; however, holders of Interests in Class 5 will not be permitted to vote or reject the Plan, because the Plan does not provide for a distribution to holders of Interests in Class 5, because under the Bankruptcy Code, they are “deemed” to have rejected the Plan. D. Hearings on Confirmation and Objections

The Debtor has filed a Motion for Order: (1) Conditionally Approving Debtor’s Disclosure Statement to Accompany Debtor’s Plan of Reorganization; (2) Setting a Hearing to Determine Adequacy of Disclosure Statement and Confirmation of Debtor’s Plan of Reorganization (the “Rule 3016 Motion”). The Rule 3016 Motion asks the Court to: (1)

conditionally approve this Disclosure Statement in order to permit the Debtor to mail it out to Creditors and Parties in Interest; (2) hold a combined hearing on this Disclosure Statement and the Plan; and (3) establish certain dates with respect to the combined hearing on the Disclosure Statement and Plan. The Debtor’s Rule 3016 Motion has requested the following schedule with respect to the Disclosure Statement and Plan: (a) July 17, 2008, as the last day upon which the Debtor is permitted to mail the

Disclosure Statement and Plan to Creditors and Parties in Interest; mail the Notice of the 7

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Combined Hearings on the Disclosure Statement and Plan; and mail Ballots to Creditors. (b) July 31, 2008 at 4:00 p.m. Pacific Daylight Time as the deadline for the Debtor’s

counsel to receive Ballots from holders of Claims. (c) August 7, 2008 at 4:00 p.m. Pacific Daylight Time as the deadline for creditors to

object to the adequacy of the Disclosure Statement and/or confirmation of the Plan. (d) August 12, 2008 at 4:00 p.m. Pacific Daylight Time as the deadline for the Debtor

to reply to objections to the adequacy of the Disclosure Statement and/or confirmation of the Plan and submit its points and authorities in support of Plan confirmation. (e) August 12, 2008 at 4:00 p.m. Pacific Daylight Time as the deadline for the Debtor

to submit a tabulation of ballots. The Debtor’s Rule 3016 Motion asks that the Court schedule for August 14, 2008, at 9:30 a.m., the hearing on the adequacy of the Disclosure Statement and to Confirm the Plan (the “Combined Hearings”). The Combined Hearings may be continued from time to time without further written notice. Section 1125 of the Bankruptcy Code sets forth the requirements for a Disclosure Statement. Section 1128(b) of the Bankruptcy Code provides that a party-in-interest may object to confirmation of a plan. Any objections to the adequacy of the Disclosure Statement or to confirmation of the Plan must be in writing and specify in detail the name and address of the objector, the grounds for the objection and the amount of the Claim of the objector. Any Plan confirmation objection must be filed with the Bankruptcy Court and served on counsel for the Debtor, Laurel E. Davis of Fennemore Craig, P.C., at the address indicated herein. The

Combined Hearings may be adjourned from time to time by the Bankruptcy Court without further notice except for the announcement of the adjournment date made at the Combined Hearings date or any subsequent adjournment of the Combined Hearings date. The Debtor anticipates that the Bankruptcy Court will conditionally approve this Disclosure Statement and enter the scheduling order requested by the Debtor’s Rule 3016 Motion. Where the Rule 3016 Motion is granted and this Disclosure Statement is conditionally approved 8

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by the Court pursuant to entry of the Rule 3016 Order, at the Combined Hearings, the Bankruptcy Court will: (1) determine whether this Disclosure Statement contains “adequate information” as set forth in Section 1125 of the Bankruptcy Code; and (2) otherwise complies with Section 1125 of the Bankruptcy Code. Regarding the Plan, at the Combined Hearings, the Bankruptcy Court will: (1) determine whether the Plan has been accepted by the requisite majorities of each Voting Class; (2) determine all objections to the Plan and to Confirmation of the Plan; (3) determine whether the Plan meets the requirements for Confirmation of the Plan: (4) determine whether the Plan meets the requirements of the Bankruptcy Code and has been proposed in good faith; and (5) confirm or refuse to confirm the Plan. A separate notice will be served with this Disclosure Statement and the Plan which reflects the Court’s ruling on the Rule 3016 Motion. The notice will also contain a copy of the Court’s Order on the Rule 3016 Motion, if it is available at the time of mailing. III. REPRESENTATIONS Unless otherwise specifically noted, the financial information in this Disclosure Statement has not been subject to audit. Instead, this Disclosure Statement was prepared from information compiled from records maintained in the ordinary course of the Debtor’s business. Debtor has attempted to be accurate in the preparation of this Disclosure Statement. Other than as stated in this Disclosure Statement, Debtor has not authorized any representations or assurances concerning Debtor and its operations or the value of its assets. Therefore, in deciding whether to file an objection to the Plan, or to accept or reject the Plan, you should not rely on any information relating to Debtor or the Plan other than that contained in this Disclosure Statement or in the Plan itself. /// /// /// 9

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IV.

BACKGROUND AND EVENTS LEADING TO THE CHAPTER 11 FILING A. General Overview of the Debtor and Its Business

Xyience was in the business of marketing and distributing a unique line of nutrition related products targeted to active life style enthusiasts, including nutritional supplements and the energy drink, Xenergy™ (“Business”). The company, its logo and the names of its products are registered trademarks of Xyience. Since its formation, Xyience has associated its brand with health, fitness, mixed martial arts (“MMA”), and other forms of extreme sports. Among other things, Xyience had been a longtime sponsor of the ULTIMATE FIGHTING

CHAMPIONSHIP® (the “UFC”), a United States based MMA organization. B. Debtor’s Business

There are three core components of the Business that are critical to its continued operations: (a) product production; (b) marketing; and (c) distribution. Xyience does not own manufacturing facilities or operate a production line. Rather, Xyience outsources manufacturing. For the Xenergy™ beverage, Xyience obtains syrups from Allan Flavors and provides those syrups to bottlers, such as Cott Corporation, to be processed and packaged as a final product (i.e., the company’s energy drink). With respect to marketing, Xyience’s relationship with the UFC is vital. By maintaining its longstanding sponsorship of the UFC, Xyience can preserve its visibility with extreme sport enthusiasts. This close affiliation with the MMA community gives Xyience a unique position in the market and distinguishes the Xenergy™ brand from similar products in an otherwise crowded industry (e.g., Red Bull, Monster, RockStar, Adrenaline, Full Throttle, etc.). Xyience has maintained valuable distributor relations throughout the United States and Canada. It is essential that these distributors continue to carry and promote Xyience products. C. Industry And Market Trends

Xyience’s supplements business has deteriorated from a high of $14.2 million in sales in 2006 to $6.1 million in 2007. This segment of the business is, again, highly competitive and 10

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requires substantial investment in research, development and marketing. Nevertheless, Xyience owns valuable trademarks and goodwill in the supplements industry and it will continue to service this segment of the market. Xyience’s energy drink business has shown signs of moderate and sporadic strength in certain markets, but it has never had the opportunity to operate in an environment where management could focus on operating the Business. The energy drink business; however, is a critical component of Xyience’s success because the energy drink industry is rapidly expanding and it is projected to increase from sales of approximately 3.8 billion in 2006 to sales of over 7.6 billion in by 2011. Due to negative blogs and adverse information posted about Xyience on the internet, Xyience suffered a public relations backlash within the beverage industry resulting in new challenges with suppliers and distributors. Employee morale is not good, and some Xyience critics have emerged among the UFC community. As a result, Xyience experienced a slump in existing sales. D. The Debtor’s Historical Difficulties in Raising Sufficient Capital

From its inception, although Xyience experienced brisk growth in sales, one challenge was finding the capital to support the company’s expansion and to fully exploit the growing nutritional supplements and energy drink markets. Historically, Xyience has made significant efforts to raise capital, but with mixed results. Although Xyience’s efforts have attracted sporadic investment, it has not been able to achieve the financial backing needed to meet the demands of its business. Initially, Xyience hired TLC Consulting, LLC to assist in raising capital. Those initial efforts, however, netted little financial benefit for Xyience. Nonetheless, by May of 2006, Xyience had secured an equity investment of $21 Million through the Brush Monroe Fund, a private equity fund operated by AA Capital Partners, Inc. (“AA Capital”). Shortly thereafter, the Brush Monroe Fund infused an additional $10 Million in the form of convertible debt. 11

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From May 2006 through the end of that year, Xyience raised additional capital, among other things, through private placements and the fundraising efforts of the company’s founder and then Chief Executive Officer (“CEO”), Russell Craig Pike. During the fourth quarter of 2006, Xyience retained ARC Investments to assist in raising capital, resulting in a $5 Million secured convertible loan from Darlis Investments. Shortly thereafter, Mr. Pike resigned as CEO and Adam Roseman, the principal of ARC Investments, assumed management. Under Mr. Roseman’s leadership, Xyience entered into a sponsorship agreement with the UFC for the year 2007. The company continued to explore financing options and presented the investment opportunity to numerous investment banks and private equity funds. Unfortunately, none of the prospects agreed to invest. In February of 2007, a receiver, previously appointed by the United States Securities and Exchange Commission to take control of AA Capital’s assets, liquidated AA Capital’s investment in Xyience. That investment was ultimately acquired by Key Management. In early 2007, following the resignation of Mr. Pike, Xyience brought in new management, with a focus on maximizing top-line revenue. Respected restaurant entrepreneur, Bill Underhill, became CEO and former Coca-Cola executive, Jan Hall, served as President and Chief Operating Officer. Under the leadership of Mr. Underhill and Ms. Hall, Xyience embarked on an effort to roll out the company’s new energy drink, Xenergy™, on a national basis. The anticipated cost of the company’s marketing plan was approximately $29 Million. In order to finance the national rollout of Xenergy™, Mr. Underhill and Ms. Hall worked to secure capital investment from a variety of investment banks and private equity funds. Unfortunately, their efforts were not successful. In May of 2007, Mr. Underhill and Ms. Hall resigned. On June 1, 2007, Adam Frank and Kirk Sanford were appointed to lead the company, Mr. Frank as Interim General Manager, and Mr. Sanford as Special Advisor to Management. At that point, Xyience had liabilities to trade creditors of approximately $25 Million and obligations to noteholders of $18 Million. Based on prior management’s plan for a nationwide rollout of the 12

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company’s energy drink, Xyience had staffed up to 88 employees, and was operating with a breakeven sales requirement of approximately $8,500,000 per month. Mr. Frank and Mr. Sanford acted quickly to address the financial crises they were faced with. They immediately reduced the number of Xyience employees from 88 to 53 and dramatically scaled back the scope of the previous business plan. In addition, they succeeded in restructuring Xyience’s existing trade debt and amounts due noteholders by negotiating workout arrangements with Xyience vendors and noteholders, resulting in a reduction of amounts due and establishing workable repayment plans. Additionally, Mr. Frank and Mr. Sanford actively sought capital support from a number of potential financial partners, none of whom were ultimately willing to provide a financing commitment to Xyience at the time. In fact, the only entity willing to lend funds to Xyience at the time was an affiliate of the UFC known as Zyen, LLC. (“Zyen”). Zyen was only willing to provide a loan to Xyience if all of the other secured creditors agreed to subordinate their security interests to Zyen. On October 4, 2007, Zyen provided $12 Million in exchange for a senior secured convertible note and warrants for ten percent (10%) of the company. The transaction was approved unanimously by the board of directors and by over sixty percent (60%) of Xyience shareholders. A key covenant of the Zyen loan required Xyience to remain current on the repayment plans that it had negotiated with its noteholders and vendors. In addition, the proceeds of the Zyen loan could only be used to finance ongoing business as opposed to meeting the company’s commitments to noteholders and vendors. E. Financial Difficulties

Having secured the funding required to meet ongoing business expenses, Xyience management moved forward to seek an additional $7.5 Million in subordinate financing. Xyience needed those funds to satisfy the negotiated repayment obligations to Xyience noteholders and vendors. At that time, Xyience was in the final stages of negotiations with a group of

shareholders who had agreed to provide the required financing. Those negotiations, however, 13

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were derailed by a campaign of intimidation and threats lead by company founder and former Xyience CEO, Mr. Pike, Terry Cardenas, Ronald Solomon and Ric Klingenberg. Litigation between Xyience and Mr. Pike soon followed. Because of the turmoil generated by this campaign of intimidation and threats – as well as the resulting litigation – Xyience was not able to secure the necessary $7.5 Million investment to fund the restructuring, resulting in significant adverse consequences to Xyience. Although

Xyience had successfully negotiated a substantial reduction of amounts due its trade creditors, Xyience was not able to make the payments that it agreed to make as part of the workout arrangement. As a result, Xyience’s accounts payable reverted back to the full amounts due prior to the workout negotiations and immediately went into default. In addition, because payment of the restructured obligations owed by Xyience to noteholders and vendors was also a covenant of the loan from Zyen, this situation triggered a cross-default of the Zyen obligation. Xyience

therefore was in default of Zyen obligation, Zyen provided notice of default and its intention to proceed with a UCC sale of its collateral, and Xyience had no alternative but to file for chapter 11 relief. V. DESCRIPTION OF THE DEBTOR’S ASSETS AND LIABILITIES A. Debtor’s Assets

Most of the Debtor’s assets were sold free and clear of liens at a Sale Hearing which occurred April 1, 2008. The Debtor’s remaining assets consist of: (a) all Litigation Claims, and any rights (including indemnification), setoffs, recoupment, claims and recoveries of Debtor against third parties arising out of or relating to events prior to April 16, 2008; (b) the formation documents of Debtor (including any corporate charter, bylaws or certificates of organization or formation), qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, transfer books, equity interest certificates, and 14

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other documents relating to the organization, maintenance, and existence of Debtor as a corporation; (c) the Books and Records of Debtor; (d) all claims of Debtor for refunds of Taxes, deposits and premiums; (e) all agreements, leases and contracts entered into by the Debtor; (f) all life insurance policies of officers, directors and other employees of the Debtor and all other insurance policies relating to the operation of the Business; and (g) the Two Hundred Twenty-Five Thousand Dollar ($225,000) “Carve Out” for payment of allowed administrative expenses. B. Debtor’s Liabilities 1. Zyen, LLC

Zyen, LLC (“Zyen”) made a secured loan (“Zyen Loan”) to Xyience in a principal sum not to exceed $12,000,000 on October 4, 2007, evidenced by a Convertible Senior Secured Note (“Zyen Note”), with a non-default interest rate equal to fifteen percent (15%) per annum and a default interest rate of eighteen percent (18%) (“Default Rate”) and payable in full on the Maturity Date as provided for in the Note. Repayment of the Zyen Note is secured by a Security Agreement dated as of October 4, 2007, perfected by: (a) a UCC-1 recorded with the Secretary of State of Nevada on October 16, 2007; (b) a Restricted Account and Securities Account Control Agreement (“Control Agreement”); and (c) a United States Patent and Trademark Office Notice of Recordation of Assignment Document recorded October 31, 2007 (“Trademark Assignment”), as a result of which Zyen maintains a first priority lien against all of the assets of the Debtor’s Business, including but not limited to, goods, equipment, inventory, accounts, other personal property, development rights, cash funds, deposit accounts, general intangibles, leases, licenses, trademarks, including those related to Xenergy™, concessions, contracts, accounts receivable, instruments, accounts, and all accessions to, substitutions for, and replacements, products, and 15

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proceeds thereof. 2. Key Management

Key Management holds the Brush Monroe, L.P. note in the original amount of $10,000,000 dated July 7, 2006, evidenced by a Revolving Loan Note (“Key Management Note”), with a non-default interest rate equal to twelve percent (12%) per annum and a default interest rate of fourteen percent (14%) and payable in full on the Maturity Date as provided for in the Note. Pursuant to a February 21, 2007 Agreement, Key Management received 6,750,000 shares of Xyience stock, 3,500,000 Xyience Warrants and agreed to accept $5,000,000 in full satisfaction of the unpaid principal and interest. The Key Management Note is secured by a Revolving Loan and Security Agreement dated July 7, 2006, and a UCC-1 recorded with the Secretary of State of Nevada on June 29, 2005. Pursuant to a UCC Financing Statement Amendment and letter agreement, Key

Management has agreed to subordinate its security interest to that of Zyen. 3. Pacific Investment Network, LLC and Prosperity Investment Alliance, LLC

Pacific Investment Network, LLC and Prosperity Investment Alliance, LLC1 (“Pacific and Prosperity”) each hold loan agreements dated as of July 19, 2005, as amended by that certain Option to Purchase or Retire Secured Convertible Loans dated April 26, 2007. Pacific and Prosperity recorded UCC-1 with the Nevada Secretary of State asserting a security interest in Inventory November 9, 2005; however, there does not appear to be a security agreement which supports this UCC filing. Pursuant to a UCC Financing Statement Amendment and letter agreements, Pacific and Prosperity have agreed to subordinate their security interests to that of Zyen. 4. Darlis Investments

Darlis Investments holds a Senior Convertible Note dated December 20, 2006, in the
1

Pacific, Prosperity and their principal, Brent Hucks, each signed the Involuntary Petition. 16

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original principal amount of $6,000,000. The note bears interest at the rate of 15%. The Darlis Investments Note is supported by a Security Agreement dated November 20, 2006, and a UCC-1 recorded with the Nevada Secretary of State on December 21, 2006. Pursuant to a UCC Financing Statement Amendment and letter agreements, Darlis Investments has agreed to subordinate its security interests to that of Zyen. 5. Unsecured Claims

Schedule F contains Unsecured Claims against Xyience in the total amount of $14,924,412.28. Additionally, many of these creditors have also filed proofs of claim against Xyience. See, Claims Register which indicates unsecured claims in the amount of $9,562,618. VI. EVENTS DURING THE BANKRUPTCY CASE A. Involuntary Petition

An involuntary Chapter 11 petition was filed on January 3, 2008 as Case No. 08-10049MKN. The Debtor filed its voluntary Chapter 11 petition on January 18, 2008. A Stipulation and Order was entered on January 31, 2008, providing that the involuntary petition was dismissed with prejudice, and that the date of January 3, 2008 shall be used as the Petition Date for the purpose of all actions preserved for the Estate as set forth in Sections 542, 543, 544, 545, 547, 548, 549, 550, 553(b) and 724(a) of the Bankruptcy Code (“Avoidance Actions”). B. First Day Motions

On January 18, 2008, the Debtor filed the following Motions: 1. Motion to Designate Responsible Individual. The Debtor filed this Motion

seeking to designate Omer Sattar, President, Chief Executive Officer and Board Member as the Debtor’s designated representative under Federal Rules of Bankruptcy Procedure 9001(5). This Motion came on for hearing on January 23, 2008, at which time the Motion was approved. 2. Emergency Motion for Order Authorizing Maintenance of Debtor’s Existing Bank

Accounts and Business Forms. The Debtor filed this Motion seeking permission to maintain the Debtor’s existing bank accounts and business forms, including preservation of existing bank 17

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accounts subject to a Control Agreement with Zyen. This Motion came on for hearing on January 23, 2008, at which time the Motion was approved as follows: (1) that the Debtor’s existing bank accounts at Wells Fargo Bank (the “Accounts”) were deemed to be debtor-in-possession accounts; (2) that the Debtor was authorized to honor pre-petition checks issued from its Accounts; (iii) that the Debtor is authorized to continue to use all correspondence, business forms (including, but not limited to, letterhead, purchase orders, invoices, et cetera), and checks existing immediately prior to the Petition Date (collectively, “Business Forms”), without reference to its status as debtor-in-possession; and (iv) that, to the extent possible, the Debtor should obtain and use generic Business Forms and/or place the designation of “debtor in possession” on Business Forms. 3. Emergency Motion for Order: (A) Prohibiting Utility Companies from Altering,

Refusing, or Discontinuing Service; (B) Authorizing Payment of Pre-Petition Ordinary Course Claims of Utility Companies; and (C) Deeming Utility Companies Adequately Assured. The Debtor filed this Motion seeking permission to pay utility company invoices for amounts accrued pre-petition in lieu of posting additional deposits, and requesting relief that is necessary to avoid immediate and irreparable harm. This Motion came on for initial hearing on January 23, 2008, and it was continued to February 12, 2008, at which time the Motion was approved. 4. Emergency Application for Authorization to Pay Salaries, Commissions,

Employee Benefits, Accrued Vacation and Reimbursable Employee Expenses. The Debtor filed this Application seeking permission to pay payroll, benefits and reimbursable expenses which will be included in the January 25, 2008 payroll, and requesting relief that is necessary to avoid immediate and irreparable harm. This Application came on for hearing on January 23, 2008, at which time the Bankruptcy Court approved the Application with respect to the Payroll and Benefits and the Bankruptcy Court required the Debtor to file an Application to Approve Salaries in Excess of $100,000 Per Year (“Application to Approve Salaries”). On February 2, 2008, the Debtor filed its Application to Approve Salaries, which came on for hearing on February 12, 18

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2008, at which time the Application to Approve Salaries was approved. On January 19, 2008, the Debtor filed the following Motions: 1. Emergency Motion for Entry of an Order Approving Stipulation With Zyen, LLC

for: (A) Use of Cash Collateral by Debtor Pursuant to Section 363(c)(2); (B) Granting Adequate Protection Pursuant to Sections 361 and 363(e); (C) Authorizing Post-Petition Financing on a Secured Basis Pursuant to Section 364(d)(1); and (D) Setting Final Hearing. The Debtor filed this Motion seeking permission to enter into a cash collateral and financing agreement (“Agreement”) including a debtor-in-possession loan for a total amount not to exceed $2,690,620.14, and an emergency loan advancing $1 Million at the initial hearing pending final approval of the Agreement, seeking relief that is necessary to avoid irreparable harm and to provide funds to acquire post-petition goods and services from Debtor’s most critical vendors, Allen Flavors and Cott. The Motion came on for hearing on January 23, 2008, at which time the Bankruptcy Court approved the Motion on an interim basis and authorized the Debtor to borrow from, and incur secured indebtedness to, Zyen, in the amount of $1 Million. The Motion came on for hearing for final approval on February 12, 2008, at which time the Bankruptcy Court approved the Motion on a final basis and authorized the Debtor to borrow from, and incur secured indebtedness to, Zyen, in a maximum aggregate principal not to exceed $2,690,620.14, pursuant to the terms of the Zyen Stipulation. 2. Emergency Motion to Approve Agreement with Zuffa Marketing, LLC. The

Debtor filed this Motion seeking approval of a post-petition nonexclusive limited licensing agreement between the Debtor and Zuffa Marketing, pursuant to which Xenergy™ will continue its status as the official energy drink of the ULTIMATE FIGHTING CHAMPIONSHIP® (the “UFC”). The Motion came on for hearing on January 23, 2008, at which time the Bankruptcy Court approved the Motion on an interim basis and authorized the Debtor to continue to collect and use Zuffa Marketing Trademarks pursuant to the Zuffa Agreement. The Motion came on for hearing for final approval on February 12, 2008, at which time the Motion was approved on a 19

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final basis. 3. Emergency Motion to Reject Non-Residential Lease. The Debtor filed this Motion

to reject the Real Estate Lease entered into between the Debtor, as Lessee, and Howard Hughes Properties IV, LLC, as Lessor, with respect to the premises located at 10650 West Charleston Blvd., Suite 110, Las Vegas, Nevada (“Lease”). The Motion came on for hearing on January 23, 2008, at which time the Debtor’s Motion was approved. 4. the Debtor. Application to Employ Sierra Consulting Group, LLC as Valuation Consultant for The Debtor sought to employ Sierra Consulting Group, LLC as the Business

Valuation Consultant and Financial Consultant to the Debtor. The application came on for initial hearing January 23, 2008, and it was continued. The Application was supplemented to expand the scope of the engagement to include services as Financial Consultant, and the Amended Application was heard and granted on February 12, 2008. 5. Application to Employ Fennemore Craig as Counsel for the Debtor. The Debtor

sought to employ Fennemore Craig, P.C. regarding reorganization and litigation matters. This Application came on for initial hearing on January 23, 2008, and it was continued to February 12, 2008, at which time the Application was approved. C. The Sale of the Debtor’s Assets

On February 22, 2008, the Debtor’s board of directors approved the execution of the Term Sheet Regarding Purchase and Sale of Assets (“Term Sheet”) with Manchester Consolidated Corp., or its assignee. The Term Sheet and related Asset Purchase Agreement were subject to a competitive bidding process. The Term Sheet provided, in part, that Manchester would acquire the Assets for total consideration of $15,017,000, consisting of a cash payment to the Debtor in the amount of $200,000, assumption of more than $14.8 Million in secured debt (the secured claim held by Zyen, including the Zyen DIP Loan). On February 22, 2008, the Debtor filed a Motion for Order (1) Approving Sales Protections to Manchester Consolidated Corp.; (2) Approving Procedures for Soliciting Higher 20

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and Better Offers, and Determining Highest and Best Offer; (3) Setting Hearing to Select Highest and Best Offer, and to Approve Sale of Assets; and (4) Granting Other Relief (“Sale Procedures Motion”). The Sale Procedures Motion came on for hearing on March 6, 2008, at which time the Bankruptcy Court approved the Sale Procedures Motion. On March 6, 2008, the Debtor filed a Motion for Order Approving the Sale of Property Free and Clear of Liens, Claims, et al. (“Sale Motion”). The Sale Motion came on for hearing on April 1, 2008, at which time there was no qualified Overbidder, the Bankruptcy Court approved the Sale Motion and Manchester acquired the Debtor’s Assets free and clear of all liens and claims. D. 1. Adversary Proceedings Bergeron Adversary.

On July 18, 2007, the Debtor filed a Complaint against Richard Bergeron in the Eighth Judicial District Court, Clark County, Nevada, as Case No. A544781, seeking damages for defamation, tortuous interference with prospective economic advantage, and intentional interference with contract. In addition to filing the Complaint, the Debtor obtained an injunction against Mr. Bergeron enjoining him, inter alia, from posting defamatory remarks on the internet concerning the Debtor and requiring him to remove certain defamatory articles that he had posted on the internet. On February 19, 2008, Mr. Bergeron filed an Answer to Complaint and

Counterclaim for Declamatory [sic] Relief against the Debtor. On March 20, 2008, the Debtor removed the lawsuit to Bankruptcy Court where it now remains, pending as Adversary No. 08-1082-MKN. The Debtor has filed a Motion to Dismiss Mr. Bergeron’s Counterclaims, which the Bankruptcy Court has taken under submission, and the Debtor awaits the Bankruptcy Court’s decision on its Motion to Dismiss. 2. Shareholder Derivative Action.

On December 7, 2007, approximately sixteen (16) alleged shareholders of the Debtor filed an Individual and Verified Derivative Complaint (the “Complaint”) in the Eighth Judicial District 21

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Court, Clark County, Nevada, as Case No. A553116. The Complaint asserted claims on behalf of the shareholder plaintiffs individually, and derivatively on behalf of the Debtor, who was named as a nominal defendant. The Complaint was filed against four (4) entities who were allegedly involved with Debtor, and six (6) of the Debtor’s former officers and/or directors. On March 13, 2008, approximately fifty-seven (57) alleged shareholders of the Debtor (the “Shareholders”), which included all of the plaintiffs in the Complaint (the “Shareholders”), filed an Amended Complaint (the “Amended Complaint”) asserting claims on behalf of the Shareholders individually, and derivatively on behalf of the Debtor. On April 4, 2008, Zyen and Fertitta Enterprises, Inc., who were named as defendants in the Amended Complaint, removed this case to Bankruptcy Court where the matter now remains pending as Adversary No. 08-1107-MKN. Various Motions to Dismiss and the Debtor’s Motion to Substitute the Estate as Real Party in Interest were heard by the Bankruptcy Court and taken under submission, and the parties await the Bankruptcy Court’s decision on these motions. 3. The Official Committee of Unsecured Creditors’ Action.

On March 31, 2008, the Official Committee of Unsecured Creditors of the Debtor filed a Complaint against Zyen, which is currently pending as Adversary No. 08-1094-MKN. The Committee’s Complaint against Zyen alleges the following claims for relief: (1) equitable

subordination pursuant to Section 510(c) of the Bankruptcy Code and/or recharacterization of debt as equity; (2) lender liability; and (3) breach of fiduciary duty. Zyen filed a Motion to Dismiss Adversary Proceeding, which came on for hearing on June 11, 2008. The Bankruptcy Court has taken the motion under submission, and the parties are await the Bankruptcy Court’s decision on Zyen’s Motion. VII. OVERVIEW OF THE PLAN A. General Summary

The following is a general summary of the Plan, which is qualified in its entirety by reference to the provisions of the Plan. Pursuant to Section 1123(a)(1) of the Bankruptcy Code, 22

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Administrative Claims and Priority Claims are not designated as Classes. There are five Classes of Claims and Interests under the Plan. Three of the five Classes – Classes 2 through 4 – are impaired and entitled to vote on the Plan. Class 1 is not impaired, and the holders of Claims in Class 1 will not be permitted to vote to accept or reject the Plan, because under the Bankruptcy Code they are “deemed” to have accepted the Plan. Class 5 is impaired; however, holders of Interests in Class 5 will not be permitted to vote or reject the Plan, because the Plan does not provide for a distribution to holders of Interests in Class 5, under the Bankruptcy Code, they are “deemed” to have rejected the Plan. As a result, it is necessary to solicit acceptances of the Plan by sending out ballots to Classes 2 through 4. B. Unclassified Claims

Priority Tax Claims set forth on Schedule E total $98,902.40. Additionally, the IRS has filed a proof of claim in the amount of $40,017.69. Each Allowed Priority Tax Claim shall be paid (a) the Distribution Date; (b) the tenth (10th) Business Day after the date on which an order allowing such Claim becomes a Final Order; (c) a date when such Allowed Priority Tax Claims become due and owing; and (d) such other time as is agreed to by the holder of such Claim and the Debtor prior to the Effective Date or the Liquidating Trustee after the Effective Date. From and after the Effective Date and until any Allowed Priority Tax Claim is paid in full, the unpaid balance, if any, of such Allowed Priority Tax Claim shall accrue interest fixed at the rate per annum equal to the rate provided for by Internal Revenue Code sections 6621 and 6622, in effect on the Effective Date. Administrative Expenses exist in three forms: (1) Professional fees and costs of

Fennemore Craig, P.C.; (2) Professional fees and costs of local and Chicago counsel for the Official Committed of Unsecured Creditors; and (3) Professional fees and costs of Sierra Consulting Group, LLC. On June 25, 2008, the Bankruptcy Court heard and approved fees and costs in the total amount of $245,700. Additionally, on July 30, 2008, the Bankruptcy Court will hear the continued Fee Application of Bell Boyd & Lloyd, LLP, counsel for the Official 23

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Committee of Unsecured Creditors, which seeks fees and costs in the total amount of $199,394.20; however, there are objections to the Application. Allowed Professional Fees

presently exceed the $225,000 Administrative Carve Out by $25,700, and it is estimated that on the Confirmation Date, Allowed Administrative Expenses will be in excess of $350,000. Administrative Expenses shall be paid by the Liquidating Trust (or otherwise satisfied in accordance with its terms) from Available Cash upon the latest of: (a) the Initial Distribution Date; (b) such date as may be fixed by the Bankruptcy Court, or as soon thereafter as practicable; (c) the tenth (10th) Business Day after such Claim is Allowed, or as soon thereafter as practicable; and (d) such date as the holder of such Claim and the Debtor or Liquidating Trustee shall agree upon. C. 1. Classified Claims, Estimates by Class and Proposed Treatment Class 1 – Zyen Secured and Zyen Secured DIP Financing Claim: Class 1 consists

of the Zyen Secured Claim and Zyen Secured DIP Financing Claim, which have been satisfied in full by the Manchester Sale Transaction, pursuant to which the Zyen Secured Claim and Zyen Secured DIP Financing Claim were assigned to Manchester based upon the Bankruptcy Court’s Final Orders. 2. Class 2 – Zuffa Agreement Claim: If the Court permits the Debtor to do so

pursuant to the Plan, the Debtor will impose a Section 506(c) surcharge of the Manchester Sale Proceeds and pay the Allowed Zuffa Agreement Claim with an Initial Distribution in the amount of the Manchester Sale Proceeds on the Initial Distribution Date. The remaining Allowed Zuffa Agreement Claim (or the entire Zuffa Agreement Claim if the surcharge is not permitted) shall be paid from subsequent Distributions of Available Cash with priority over all administrative expenses of the kind specified in Section 503(b) or 507(b) to the extent of additional Available Funds on subsequent Distribution Dates. Class 2 is impaired under the Plan and, therefore, it is entitled to vote on the Plan. 3. Class 3 – Key Management Secured Claim: If the Bankruptcy Court permits the 24

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Debtor to do so pursuant to the Plan, the Key Management Secured Claim shall be surcharged pursuant to Section 506(c) to the extent of the Manchester Sale Proceeds. As a result, the Key Management Secured Claim would become a Class 4 General Unsecured Claim. Alternatively, if the Court does not approve the proposed surcharge of the Key Management Secured Claim, the Allowed Key Management Secured Claim will be satisfied by payment of the Manchester Sale Proceeds to Key Management. Class 3 is impaired under the Plan and, therefore it is entitled to vote on the Plan. 4. Class 4 – General Unsecured Claims: Except to the extent that a Creditor with an

Allowed Claim agrees to less favorable treatment, each Creditor with an Allowed Claim in Class 4 shall receive Distributions from the Liquidating Trustee as follows: (a) Initial Distribution. There is no Available Cash for an Initial Distribution to

General Unsecured Claims, and there will be none. (b) Subsequent Distributions. On each Distribution Date after the Initial Distribution

Date, to the extent of Available Cash after satisfaction of the Allowed Zuffa Agreement Claim, Administrative Claims and Priority Claims, the Liquidating Trustee shall distribute Available Cash on a Pro Rata basis to all Creditors with Allowed General Unsecured Claims. Class 4 is impaired under the Plan and, therefore, it is entitled to vote on the Plan. 5. Class 5 – Equity Interests. Each holder of record as of the Record Date of Xyience

Incorporated stock shall receive nothing for their Class 5 Equity Interest under the Plan. Class 5 is deemed to have rejected the Plan and holders of Class 5 Equity Interests are not entitled to vote on the Plan. D. Creation of Liquidating Trust and Transfer of the Debtor’s Assets to the Liquidating Trustee

A Liquidating Trust shall be organized pursuant to the terms of the Liquidating Trust Agreement. A copy of the Liquidating Trust Agreement is attached to this Disclosure Statement

25
as Exhibit 2 and it is incorporated herein by this reference. Upon the Effective Date of the Plan,

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the Liquidating Trustee shall be the representative of the Estate as that term is used in Section 1124(b)(3)(B) of the Bankruptcy Code and shall have the rights and powers provided for in the Bankruptcy Code in addition to any rights and powers granted herein. In its capacity as the representative of the Estate, the Liquidating Trustee shall be the successor-in-interest to Debtor with respect to any action commenced by or against Debtor or on behalf of Debtor prior to the Confirmation Date. All such actions and any and all other claims or interests constituting Assets, and all claims, rights and interest thereunder shall be retained and enforced by the Liquidating Trustee as the representative of the Estate pursuant to Section 1123(b)(3)(B) of the Bankruptcy Code. The Debtor has selected Omer Sattar to act as the Liquidating Trustee. E. The Authority of the Liquidating Trust

In selling or otherwise liquidating the Assets, the Liquidating Trust shall use its best efforts to maximize the amount of proceeds derived therefrom. The Liquidating Trust shall cause all Assets to be liquidated by the fifth anniversary of the Effective Date; however, with the approval of the Bankruptcy Court this time limit may be extended. The Liquidating Trust shall also establish and maintain any Reserve required by the Plan (which need not be in separate accounts). The Liquidating Trust shall maintain a record of the names and addresses of the holders of General Unsecured Claims as of the Effective Date for the purpose of mailing Distributions to Allowed General Unsecured Claims and making objections to Claims. The Liquidating Trustee may rely on the name and address set forth in the Debtor’s Schedules and/or proofs of Claim for the holders of General Unsecured Claims and holders of Equity Interests as being true and correct unless and until notified in writing. Moreover, the Liquidating Trust shall file all tax returns and other filings with governmental authorities on behalf of the Liquidating Trust and the assets it holds. Furthermore, the Liquidating Trust shall be entitled to seek such orders, judgments, injunctions and rulings as it deems necessary to carry out the intentions and purposes, and to give full effect to the provisions of, the Plan.

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F.

The Authority of the Liquidating Trustee

Subject to the limitations contained herein, the Liquidating Trustee shall have the following powers, and authorities, and duties, by way of illustration and not of limitation: (a) Manage, sell and convert all or any portion of the Assets to Cash and distribute

Liquidation Proceeds and Available Cash as specified in the Plan; (b) Release, convey or assign any right, title or interest in or about the Assets or any

portion thereof; (c) Pay and discharge any cost, expense, fee or obligation deemed necessary to

preserve or enhance the value of the Assets, discharge duties under the Plan or perform the purpose of the Plan; payment of such fees and expenses shall not require approval of the Bankruptcy Court; (d) Open and maintain bank accounts and deposit funds and draw checks and make

disbursements in accordance with the Plan; (e) Engage and pay from Liquidation Proceeds such attorneys, including attorneys

engaged pursuant to a contingent fee agreement, accountants, engineers, agents, tax specialists, financial advisors, appraisers, investment bankers, other professionals and clerical and stenographic assistance as may, in the discretion of the Liquidating Trustee, be deemed necessary; (f) Sue and be sued and file or pursue objections to Claims and Equity Interests and

seek to estimate them; (g) (h) Enforce, waive or release rights, privileges or immunities of any kind; In general, without in any manner limiting any of the foregoing, deal with the

Assets or any part or parts thereof in all other ways as would be lawful for any person owning the same to deal therewith, whether similar to or different from the ways herein specified; (i) Institute or continue actions which were or otherwise could have been brought by

the Estate, and prosecute or defend all appeals on behalf of the Estate and, when appropriate, settle such actions and claims with the approval of the Bankruptcy Court after hearing on notice; 27

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provided, however, that the Liquidating Trustee may settle actions and claims involving an original amount of less than $25,000 without Bankruptcy Court approval; (j) Act in the place and stead of Debtor and represent the Estate with regard to all

matters for which the jurisdiction of the Bankruptcy Court is reserved under Section 10 of the Plan; (k) Law; (l) As soon as is practicable after the Final Distribution Date, ask the Bankruptcy Oversee the dissolution and winding up of Debtor in accordance with applicable

Court to enter the Final Decree; and (m) the Plan. The Liquidating Trustee shall be authorized to pay obligations or expenses of or relating to the Assets or to Claims against the Estate when the Liquidating Trustee, in its reasonable discretion, deems to be in the best interest of the holders of Allowed General Unsecured Claims or necessary to effectuate the Plan. Moreover, the Liquidating Trustee shall be responsible for making Distributions required by the Plan. The Liquidating Trustee may make such Distributions before the allowance of each Claim if the Liquidating Trustee has a good faith belief that the Disputed Claims Reserve is sufficient for Disputed Claims. G. No Recourse Against the Liquidating Trust and Liquidating Trustee Without limitation, do any and all things necessary to accomplish the purposes of

No recourse shall ever be had, directly or indirectly, against the Liquidating Trust or Liquidating Trustee or against any agent, attorney, accountant or other professional for the Liquidating Trust, by legal or equitable proceedings or by virtue of any statute or otherwise, nor upon any promise, contract, instrument, undertaking obligation, covenant or agreement whatsoever executed by the Liquidating Trust under the Plan, or by reason of the creation of any indebtedness by the Liquidating Trust under the Plan for any purpose authorized by the Plan, it being expressly understood and agreed that all such liabilities, covenants and agreements of the 28

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Liquidating Trust, whether in writing or otherwise, shall be enforceable only against and be satisfied only out of the Assets or such part thereof a shall under the terms of any such agreement be liable therefore or shall be evidence only of a right of payment out of the Assets. H. Executory Contracts

All executory contracts and unexpired leases shall be rejected on the Effective Date without any further action on the part of the Debtor. All proofs of Claim with respect to Claims arising from the rejection of any executory contract or unexpired lease shall be filed with the Clerk of the Bankruptcy Court, 300 Las Vegas Boulevard South, Las Vegas, Nevada 89101, not later than the earlier of the 30th day after entry of an order approving rejection of an executory contract or unexpired lease or the 30th day after the Effective Date. Any Claim not filed within such time shall be forever barred. I. Objections to Claims

After the Effective Date, objections to Claims shall be made and objections to Claims made previous thereto shall be pursued by the Liquidating Trustee or any other party properly entitled to do so after notice to the Liquidating Trustee and approval by the Bankruptcy Court. Any objection made after the Effective Date shall be filed and served not later than one hundred twenty (120) days after the Effective Date; provided, however, that such period may be extended by order of the Bankruptcy Court for good cause shown. In order to facilitate Payments to holders of Allowed Claims, and if and to the extent there are Disputed Claims in any Class, Liquidating Trustee shall set aside in a Disputed Claim Reserve the payments or payments applicable to such Disputed Claims as if such Disputed Claims were Allowed Claims, pending the allowance or disallowance of such Disputed Claims. J. Revesting of Property

Except as otherwise provided in the Plan or in any contract, instrument, release, indenture, or other agreement entered into in connection with the Plan, in accordance with section 1123(b)(3) of the Bankruptcy Code, the Assets any Litigation Claims that the Debtor, Estate, or 29

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post-Confirmation Estate may hold against any Person, shall vest and be automatically transferred to the Liquidating Trust, and the Liquidating Trustee may exclusively enforce, as the authorized representative of the Estate and post-Confirmation Estate, any and all such Litigation Claims. The Liquidating Trustee: (a) may pursue any and all such Litigation Claims, as appropriate, in accordance with the best interests of the Estate; and (b) shall have the exclusive right, authority, and discretion to institute, prosecute, abandon, settle, or compromise (in accordance with the terms of the Plan) any and all such Litigation Claims without the consent or approval of any third party and without any further order of Bankruptcy Court. K. Discharge, Injunction and Exculpation 1. Discharge

As a result of Debtor’s Assets being liquidated with the proceeds of liquidation distributed in the Plan, the Debtor will not receive a discharge. 2. Injunction

From and after the Effective Date, except for the shareholder derivative action presently pending as Adv. No. 08-1107-MKN, the Bergeron matter presently pending as Adv. No. 081082-MKN, the Committee Action presently pending as Adv. No. 08-1094-MKN, and except as provided in the Plan and the Confirmation Order, all entities that have held, currently hold or may hold a Claim or an Equity Interest or other right of a Equity Interest holder that is terminated pursuant to the terms of the Plan are permanently enjoined from taking any of the following actions on account of any such Claims or Equity Interests or rights: (a) commencing or continuing in any manner any action or other proceeding against the Liquidating Trust or its respective property; (b) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against the Liquidating Trust or its respective property; (c) creating, perfecting or enforcing any Lien or encumbrance against the Liquidating Trust or its respective property; 30

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(d) asserting a setoff, right of subrogation or recoupment of any kind against any debt, liability or obligation due to the Liquidating Trust or its respective property; and (e) commencing or continuing any action, in any manner or any place, that does not comply with or is inconsistent with the provisions of the Plan or the Bankruptcy Code. Nothing in the Plan shall affect, release, enjoin or impact in any way the prosecution of the Claims of Creditors treated by the Plan or the Litigation Claims transferred to the Liquidating Trust pursuant to the Plan. The Debtor reserves its right to file all appropriate pleadings or actions that may be necessary to preserve its rights and protect the Estate’s interest in Claims or Litigation Claims. 3. Exculpation

From and after the Effective Date, the Debtor, the Liquidating Trust, the Liquidating Trustee, the Statutory Committee, the Professionals nor any of their respective present or former members, directors, officers, managers, employees, advisors, attorneys or agents, shall have or incur any liability to any holder of a Claim or Equity Interest or any other party-in-interest, or any of their respective agents, employees, representatives, financial advisors, attorneys or Affiliates, or any of their successors or assigns, for any act or omission in connection with, relating to, or arising out of (from the Petition Date forward), the Bankruptcy Case, Liquidating Trust, the pursuit of confirmation of the Plan or the consummation of the Plan, except for gross negligence and willful misconduct, and in all respects shall be entitled to reasonably rely upon the advice of counsel with respect to their duties and responsibilities under the Plan or in the context of the Case. L. Post-Confirmation Management of the Debtor

On the Effective Date, the Liquidating Trustee shall be the representative of the Estate as that term is used in section 1124(b)(3)(B) of the Bankruptcy Code and shall have the rights and powers provided for in the Bankruptcy Code in addition to any rights and powers granted herein. The Debtor’s officers and directors shall be deemed to have resigned and will cease in their 31

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functions upon the Effective Date of the Plan. VIII. MEANS FOR IMPLEMENTATION OF THE PLAN The Debtor’s Plan contemplates that the following will occur once the Confirmation Order is final (based upon an August 14, 2008 Confirmation Hearing, this date is estimated as August 30, 2008): 1. From and after the Effective Date, the Liquidating Trust shall act in the place and

stead of the Debtor, its directors, officers and employees. 2. Xyience Incorporated shall be dissolved pursuant to Section 78.622 of the Nevada

Revised Statutes without action on the part of the Debtor’s directors, Debtor’s officers or holders of Xyience Incorporated Equity Interests; however, the Liquidating Trustee may delay that dissolution to the extent that it is necessary to do so to pursue Claims, continue or commence litigation. 3. resigned. 4. The Cash and other Assets shall be delivered to the Liquidating Trustee to be held All of the officers and directors of Xyience Incorporated shall be deemed to have

and preserved pursuant to the Liquidating Trust Agreement as property of the Estate to be paid in accordance with the Plan. 5. The Liquidating Trust Agreement shall be executed and the Liquidating Trust shall

be deemed effective. The Debtor shall settle the Liquidating Trust by irrevocably delivering, assigning and conveying all Assets to the Liquidating Trust, including all rights to prosecute Litigation Claims. 6. The Xyience Incorporated Equity Interests shall be deemed cancelled and

extinguished without further act or action under any applicable agreement, law, regulation, order or rule. 7. All Assets received by the Liquidating Trust shall be applied and Distributed in

accordance with the Liquidating Trust Agreement and the Plan. 32

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IX.

CERTAIN TAX CONSEQUENCES OF THE PLAN THE FOLLOWING SUMMARY DOES NOT CONSTITUTE TAX ADVICE TO ANY

PERSON. NO REPRESENTATIONS REGARDING THE EFFECT OF IMPLEMENTATION OF THE PLAN ON INDIVIDUAL CREDITORS ARE MADE HEREIN OR OTHERWISE. ALL CREDITORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE PLAN TO THEM, TO THE DEBTOR AND TO THE BANKRUPTCY ESTATE. THE DEBTOR, GENERAL PARTNER OF THE DEBTOR, LIMITED PARTNERS OF THE DEBTOR, CREDITORS AND ANY PERSON, ENTITY, TRUST, OR ORGANIZATION AFFILIATED WITH THE FOREGOING (THE "PARTIES") ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM WHICH MAY RESULT FROM THE PROPOSED REORGANIZATION. THIS DISCLOSURE STATEMENT SHALL NOT IN

ANY WAY BE CONSTRUED AS MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX CONSEQUENCES OF CONFIRMATION AND CONSUMMATION OF THE PLAN TO THE PARTIES. THIS DISCLOSURE STATEMENT IS GENERAL IN

NATURE AND IS MERELY A SUMMARY DISCUSSION OF POTENTIAL TAX CONSEQUENCES TO THE PARTIES AND IS BASED UPON THE INTERNAL REVENUE CODE, AND PERTINENT REGULATIONS, RULINGS, COURT DECISIONS, AND TREASURY DECISIONS. Under the Internal Revenue Code of 1986, as amended (the "IRC"), there may be federal income tax consequences to the Parties as a result of confirmation and consummation of the Plan described in the Disclosure Statement. The federal income tax consequences to Creditors and their affiliates arising from the Plan will vary depending upon, among other things, the type of consideration received by the Creditor in exchange for its Claim, whether the Creditor reports income using the cash or accrual method, 33

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whether the Creditor has taken a “bad debt” deduction with respect to its Claim, whether the Creditor receives consideration in more than one tax year of the Creditor, whether the Creditor is a resident of the United States, and whether the Creditor's Claim is classified as a "security" or “debt” for federal income tax purposes. If a Creditor's claim is characterized as a loss from a security, then the loss will be treated as a sale or exchange of a capital asset under IRC § 165, and whether it is a long term or short term capital loss will depend on the Creditor's holding period. If a Creditor's claim is characterized as a loss resulting from a debt, then the extent of the deduction will depend on whether the debt is deemed wholly worthless or partially worthless, and whether the debt is construed to be a business or non-business debt as determined under IRC § 166. X. LIQUIDATION ANALYSIS AND ALTERNATIVES TO THE PLAN A. Alternatives to the Plan

In general, to determine what holders of Allowed Claims in each Class would receive if Debtor was liquidated, the Bankruptcy Court must determine what funds would be generated from liquidation of the Debtor’s assets. Such liquidation funds would be reduced by the costs and expenses of the liquidation and by such additional Administrative Claims and the use of the Chapter 7 for the purpose of liquidation. Those funds from liquidation would be further reduced by any commission payable to the Chapter 7 trustee and the trustee’s attorney’s and accounting fees, as well as the costs of the Chapter 11 estate (such as the compensation for Chapter 11 Professionals). In a Chapter 7 case, the Chapter 7 trustee would be entitled to seek a sliding scale commission based upon the funds distributed by the Trustee to Creditors. In contrast, this Trustee Commission is not paid in a Chapter 11 case. In light of the fact that this is a Liquidating Plan which creates a Liquidating Trust to reduce all Assets to cash for distribution to creditors, the liquidation analysis here is not as significant as it would be for in chapter 11 case which reorganizes. Additionally, pursuant to the Liquidating Trust, the Liquidating Trustee will be compensated by payment of three percent (3%) 34

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of Liquidation Proceeds. Despite these similarities to Chapter 7 liquidation, the Debtor believes that the Liquidating Trust will be more cost effective and efficient than a Chapter 7 liquidation, and the liquidation analysis therefore favors confirmation of the Debtor’s Plan. B. Liquidation Analysis and Best Interest of Creditors Test

Pursuant to section 1129(a)(7) of the Bankruptcy Code, for the Plan to be confirmed it must provide that creditors and holders of equity interests will receive at least as much under the Plan as they would receive in a liquidation of the Debtor under Chapter 7 of the Bankruptcy Code (the “Best Interest Test”). The Best Interest Test with respect to each impaired class requires that each holder of a claim or equity interest of such class either (a) accepts the plan or (b) receives or retains under the Plan property of a value, as of the Effective Date, that is not less than the value such holder would receive or retain if the Debtors were liquidated under Chapter 7 of the Bankruptcy Code. The Court will determine whether the value received under the Plan by the holders of claims in each class of creditors or equity interests equals or exceeds the value that would be allocated to such holders in liquidation under Chapter 7 of the Bankruptcy Code. The Debtor believes that the Plan meets the Best Interest Test and provides value that is not less than the value that which would be recovered by each holder in a proceeding under chapter 7 of the Bankruptcy Code. XI. CONCLUSION AND RECOMMENDATION The Debtor believes that confirmation of the Plan provides the most cost effective and timely method of liquidating Debtor’s Assets for Distribution to Creditors. The Debtor therefore recommends that you vote to accept the Plan. DATED this 14th day of July, 2008. XYIENCE INCORPORATED, a Nevada Corporation /s/ Omer Sattar By: ______________________________ Omer Sattar Its: President 35

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1
Prepared and submitted by:

2
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/s/ Laurel E. Davis By______________________________ Laurel E. Davis

Attorneys for Debtor and Debtor-in-Possession

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EXHIBIT 1

37


				
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