American Television Time Inc., the bankrupt DRTV media agency in Austin, TX, is seeking creditor approval for the restructuring plan it detailed in a disclosure statement sent to creditors Aug. 27.
The deadline for creditors to file written acceptances or rejections of the plan is Monday, Sept. 20. A hearing on the confirmation of the plan is set for Sept. 27 in the U.S. Bankruptcy Court for the Western District of Texas in Austin.
The restructuring plan consists of two main parts. The first part would create a creditors’ trust that would seek to maximize the amount paid to creditors on allowed claims. The second part would seek to complete a transaction that is known in financial circles as a “reverse merger.”
A reverse merger works like this: Create a shell company that has almost no assets and no debt, but can be classified as a public company under the bankruptcy code. Issue stock in the newly formed company to creditors. Merge the company with another one that is seeking to go public, but without the higher transaction costs and regulatory hurdles of a traditional Initial Public Offering. If the stock rises in value, the creditors who own stock may break even or realize some gains. If the stock tanks, creditors would lose the amount of any outstanding claim.
While reverse mergers are a perfectly legal method of going public, they carry a stigma because they are often associated with companies that want all the advantages of being a public company – greater liquidity for shareholders, recognized market value for capital-raising and lending transactions – but face difficulty in finding investors for one reason or another. Stories have recently appeared in the media describing reverse merger deals that involve online casinos and Internet pornography distributors.
A letter sent to creditors from Gregory Sarnow, president of American Television Time, and the company’s financial adviser, Gary Spencer, vice president of Strategic Alternatives Inc., acknowledged that creditors may have doubts about a reverse merger.
“You may wonder who in their right mind would merge with such an entity [a shell company],” the letter said. “In fact, many entities want to merge with a clean entity with hundreds of shareholders who have stock that has been issued under the equivalent of a public offering.”
An attorney for American Television Time said it appears creditors will support the restructuring plan.
“Everyone so far has indicated they approve the plan,” said Paul Kieffer, an attorney with Hance Scarborough Wright in Dallas.
He said that because a media agency such as American Television Time has few fixed assets, the company may have more value after a merger or acquisition deal with a private company that seeks to go public.
According to its disclosure statement, American Television Time’s debts are greater than its assets, which include claims that may be unrecoverable.
The agency has two secured creditors that are owed about $21,000, and more than 1,100 unsecured creditors owed about $5.1 million. It also owes about $48,000 to employees and more than $50,000 in legal and administrative fees.
Its assets are mostly tied up in claims against other companies. The agency disclosed it had about $100,000 in its bank account on July 27 and is in the process of collecting outstanding receivables from former clients.
It has a claim of about $880,000 against former client Tower Entertainment Inc., although it is not guaranteed that the company will collect on that full amount, the statement said.
American Television Time also has a promissory note for $300,000 from former client Kent & Spiegel Direct Inc., Culver City, CA, that is in a Chapter 7 bankruptcy liquidation proceeding. Other assets include various office equipment and the right to a commission percentage from Fast Media LLC., a DRTV media agency that was formed by two former American Television Time employees.
The reverse merger plan is detailed in American Television Time’s disclosure statement, which indicates that unsecured creditors would receive 35 percent of the stock in a newly created shell company, American Media Acquisitions Corp., stripped of all its assets except $2,500. The remaining 65 percent would be held by Strategic Alternatives.
The 35 percent interest in the new company would be split among creditors pro rata, according to the disclosure statement. A reverse merger or acquisition transaction would be completed no later than 18 months from the plan’s consummation. Creditors would have the right to vote to approve a merger or acquisition deal.
The letter to creditors also said that such a deal is not guaranteed.
“What you [creditors] will be relying on is Strategic’s inherent desire to make a merger happen and for it to make a profit on its time and money it has and will put into this process,” the letter said. “”If Strategic succeeds, you will derive a benefit. If Strategic fails, you are not out a red cent.”