Bankruptcy_ Reorganization_ and Liquidation by abstraks

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 1                                                                                                                  8/4/2003
 2
 3                            Chapter 24. Tool Kit for Bankruptcy, Reorganization, and Liquidation
 4
 5   Reorganization
 6   Columbia Software Company is a regional firm that specializes in selling, installing, and servicing accounting
 7   software. Table 24-4 gives Columbia's balance sheet as of March 31, 2004. The company had been suffering losses
 8   running to $2.5 million a year, and the asset values in the balance sheet are overstated relative to their market
 9   values. The firm was insolvent, which means that the book values of its liabilities were greater than the market value
10   of its assets, so it filed a petition with a federal court for reorganization under Chapter 11.
11
12   Table 24-3                      Columbia Software Company: Balance Sheets as of March 31, 2004
13
14   Assets
15   Current assets                                                       $3,500,000
16   Net fixed assets                                                    $12,500,000
17   Other assets                                                           $700,000
18   Total assets                                                        $16,700,000
19
20   Liabilities and Equity
21   Accounts payable                                                     $1,000,000
22   Accrued taxes                                                          $250,000
23   Notes payable                                                          $250,000
24   Other current liabilities                                            $1,750,000
25   7.5% first mortgage bonds, due 2012                                  $6,000,000
26   9% subordinated debentures, due 2007                                 $7,000,000
27                                                   Total liabilities   $16,250,000
28   Common stock ($1 par)                                                $1,000,000
29   Paid-in-capital                                                      $3,450,000
30   Retained earnings                                                   ($4,000,000)
31   Total liabilities and equity                                        $16,700,000
32
33 Reorganization Plan

34 Columbia has $10 million in liabilities. Moreland agrees to assume the mortgage bonds and pay the taxes.
   Moreland will pay $3 million (in 40,000 shares of Moreland stock with a value of $75 per share) to the remaining
35 creditors.
36
37 Table 24-4                      Columbia Software Company: Reorganization Plan
38
39 Senior Claims
40 Taxes                                  $250,000 Paid off by Moreland
41 Mortgage bonds                       $6,000,000 Assumed by Moreland
42
43
                                                                                      Number of         Percentage of
                                       Original     30% of Claim     Claim after       Shares of       Original Claim
           Junior Claims                Amount         Amount       Subordination Common Stock            Received
44               (1)                       (2)           (3)              (5)             (5)                (6)
45 Notes payable                          $250,000        $75,000        $250,000             3,333               100%
46 Unsecured creditors                  $2,750,000       $825,000        $825,000           11,000                 30%
47 Subordinated debentures              $7,000,000     $2,100,000      $1,925,000           25,667                 28%
48                                     $10,000,000     $3,000,000      $3,000,000           40,000                 30%
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49
50
51    Liquidation
52    Liquidation should occur when a business is worth more dead than alive, or when the possibility of restoring it to
53    financial health is remote and the creditors are exposed to a high risk of greater loss if operations are continued. In
54    the case of Whitman Inc., Whitman filed for bankruptcy under Chapter 11. Since no fair and reasonable
55    reorganization could be arranged, the trustee is liquidating the firm under Chapter 7.
56
57    Table 24-5                       Whitman Inc.: Balance Sheet at Liquidation
58
59    Assets
60    Current assets                                                        $80,000,000
61    Net fixed assets                                                      $10,000,000
62    Total assets                                                          $90,000,000
63
64    Liabilities and Equity
65    Accounts payable                                                      $20,000,000
66    Notes payable (to banks)                                              $10,000,000
67    Accrued wages (1,400 @ $500)                                             $700,000
68    Federal accrued taxes                                                  $1,000,000
69    State and local accrued taxes                                            $300,000
70      Current liabilities                                                 $32,000,000
71    First mortgage                                                         $6,000,000
72    Second mortgage                                                        $1,000,000
73    Subordinated debentures                                                $8,000,000
74      Total long-term debt                                                $15,000,000
75                                                      Total liabilities   $47,000,000
76    Preferred stock                                                        $2,000,000
77    Common stock                                                          $26,000,000
78    Paid-in-capital                                                        $4,000,000
79    Retained earnings                                                     $11,000,000
80      Total equity                                                        $43,000,000
81    Total liabilities and equity                                          $90,000,000
82
83
84    Amounts realized in liquidiation:
85    Sale of current assets                                $28,000,000
86    Sale of fixed assets                                   $5,000,000
87    Total receipts                                        $33,000,000
88
89
90    Table 24-6                       Whitman Inc.: Distribution of Liquidation Proceeds
91
92    Distribution to Priority Claimants
93    Proceeds from the sale of assets                                      $33,000,000
94    Less:
95     1. First mortgage (paid from sale of FA)                              $5,000,000
96     2. Fees and expenses of bankruptcy                                    $6,000,000
97     3. Wages due to workers within 3 months of bank.                        $700,000
98     3. Taxes due                                                          $1,300,000
99    Funds avaialbe for distribution to general creditors                  $20,000,000
100
101   Pro Rate Distribution                       50%
                     A                       B             C                 D             E         F
                                                                       Distribution
                                                                           after     Percentage of
                                         Amount of      Pro Rata      Subordination Original Claim
        General Creditors' Claims          Claim       Distribution    Adjustment      Received
102                 (1)                     (2)             (3)             (5)           (6)
103   Unsatisfied portion of 1st mort.    $1,000,000       $500,000        $500,000           92%
104   Second mortgage                     $1,000,000       $500,000        $500,000           50%
105   Notes payable                      $10,000,000     $5,000,000      $9,000,000           90%
106   Accounts payable                   $20,000,000    $10,000,000     $10,000,000           50%
107   Subordinated debentures             $8,000,000     $4,000,000               $0           0%
108   Total                              $40,000,000    $20,000,000     $20,000,000
109
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