ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) (COMMERCIAL LIST)

Transcription

1 ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) (COMMERCIAL LIST) Court File No. : Estate No.: IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED AND IN THE MATTER OF THE PROPOSAL OF TALON SYSTEMS INC. AFFIDAVIT OF DEREK OKADA (SWORN JULY, 2013) I, Derek Okada of the Town of Oakville, in the Province of Ontario, SOLEMNLY SWEAR AND SAY: 1. I am the President, sole Director and indirect equity holder of Talon Systems Inc. ( Talon Canada ), Talon USA Inc. ( Talon USA ) and Talon Systems America, Inc. ( Talon America, and collectively with Talon Canada and Talon USA, the Debtors ) and as such I have personal knowledge of the matters to which I hereinafter dispose. Where I do not possess such personal knowledge, I have stated the source of my information and, in all such cases, I verily believe such information to be true. 2. The affidavit is sworn in support of the Debtors motion for orders procedurally consolidating the Debtors proposal proceedings, authorizing BDO Canada Limited in its capacity as proposal trustee (the Proposal Trustee ) to act as the foreign representative of the Debtors in respect of the NOI Proceedings (as defined herein), and approving both the SISP and the DIP Facility (each as defined herein) and for no other or improper purpose. Background 3. The Debtors manufacture ready-to-assemble furniture (the Products ) which is sold to end consumers through large international retailers. The Debtors main third party

2 - 2 - customers are Loews, Canadian Tire, Home Depot Canada, Ikea and Menards. Their two manufacturing facilities are located at 6525 Northwest Drive, Mississauga, Ontario (the Head Office ) and 607 Meacham Road, Statesville, North Carolina (the North Carolina Property ). The Head Office is leased and the landlord is Orlando Corporation. 4. Talon Canada, through its predecessor company, was originally incorporated in the 1950s. It is a privately-held family run business operating out of the Head Office in Mississauga, Ontario. Talon Canada is 100% owned by Ontario Inc. ( 609 ), which is in turn 100% owned by Ontario Inc., and ultimately owned by Okada family members as follows: (a) Derek Okada (through Ontario Ltd.) 30%; (b) William Okada (through Ontario Ltd.) 30%; (c) Anita Okata (through Ontario Ltd) 30%; and (d) Harry Okada (through Ontario Inc.) 10%. 5. Talon USA is a Delaware corporation and Talon America is a North Carolina corporation. Talon Canada is the sole shareholder of Talon USA and Talon USA is the sole shareholder of Talon America. 6. A copy of the corporate organization chart is attached hereto as Exhibit. 7. Talon USA owns the North Carolina Property on which the manufacturing facility in Statesville, North Carolina is located. Talon USA and Talon America each own bank accounts located in Canada. 8. The Debtors have recently encountered financial difficulties due to, (a) the loss of certain key customer contracts, and (b) an increase in the cost of direct materials required to manufacture the Products. These financial difficulties culminated in the Debtors filing Notices of Intention to Make a Proposal (the NOIs ) under the Bankruptcy and Insolvency Act (Canada) (the BIA ) on July, Copies of the NOIs filed with the Office of the

3 - 3 - Superintendent of Bankruptcy, and the certificates of filing, are attached hereto as Exhibit. 9. BDO Canada Limited was appointed as Proposal Trustee in respect of the proceedings commenced by the filing of the NOIs (the NOI Proceedings ). 10. The Debtors will be seeking recognition of their respective NOI Proceedings pursuant to Chapter 15 of the United States Bankruptcy Code (the Bankruptcy Code ). The Debtors request that for this purpose the Proposal Trustee be appointed as the foreign representative for each of the Debtors. Employees 11. Talon Canada currently employs 29 employees, with approximately 50 employees currently on temporary layoff (but subject to the right of recall). All of Talon Canada s employees are non-unionized. 12. Talon USA currently employs no employees as its only assets are the shares in Talon America and the North Carolina Property. Talon America currently employs 28 employees, none of which are unionized. Centre of Main Interest ( COMI ) 13. The Debtors operations are fully integrated. The restructuring of the Debtors can be administered most efficiently through a single restructuring process. A single plenary restructuring proceeding will minimize the cost of the restructuring and maximize value for the benefit of all of the Debtors stakeholders. 14. The Debtors contemplate that the NOI Proceedings in Canada will be the primary court supervised process for the restructuring of the Debtors. As noted above, the Debtors will be seeking recognition of the NOI Proceedings pursuant to Chapter 15 of the Bankruptcy Code. 15. The Debtors COMI is Ontario. All corporate and strategic decision making for the Debtors occurs at the Head Office in Mississauga, Ontario. I am the President and sole

4 - 4 - director of each of the Debtors and I reside in Oakville, Ontario. I am involved in all material decisions regarding the operations of the Debtors, and such decisions are directed from, made in or monitored from the Head Office. A copy of the corporate profile report in respect of Talon Canada, dated July 16, 2013, is attached hereto as Exhibit. 16. In support of the Debtors position that the Debtors COMI is in Ontario, the Debtors also rely on the following: (a) (b) (c) (d) (e) (f) all marketing activities and decisions occur at the Head Office; all production forecasting and furniture design is undertaken and directed by the Head Office; accounting functions for the Debtors, including all budgeting, are performed at the Head Office; the books and records are maintained at the Head Office; financial reporting of the Debtors is done on a consolidated basis and the financial statements are prepared in Ontario at the Head Office; and Talon Canada acts as the primary interface with the customers of the Debtors and is responsible for the majority of the supply-side ordering for the Debtors. 17. In addition, HSBC Bank Canada ( HSBC ) located in Toronto, is the Debtors principal lender. All banking functions, with the exception of cash bank accounts held by Talon USA and Talon America in the United States, are conducted by the Head Office at HSBC. 18. Talon Canada is the principal obligor in respect of the pre-filing Credit Facilities with HSBC. All funds available under the Credit Facilities were loaned to Talon Canada, and then loaned by Talon Canada to Talon USA and Talon America. Talon Canada is the largest creditor of Talon USA and is owed approximately $9.5 million.

5 - 5 - Secured Creditors 19. Pursuant to the Facility Letter dated November 1, 2006, as amended and restated, HSBC provided certain credit facilities (the Credit Facilities ) to Talon Canada. The obligations of Talon Canada to HSBC are secured by, among other security, a General Security Agreement dated November 13, On November 9, 2006, HSBC registered a financing statement under the Personal Property Security Act (Ontario) ( PPSA ) against Talon Canada over all classes of collateral except consumer goods. A copy of the certified PPSA search results in respect of Talon Canada, with a file currency date of July 14, 2013, are attached hereto as Exhibit. 20. Talon USA and Talon America each guaranteed the obligations of Talon Canada to HSBC, and provided to HSBC security in the form of, among other security, General Security Agreements each dated December 15, HSBC registered UCC financing statements against Talon USA and Talon America. Copies of the Delaware UCC search results in respect of Talon Systems America Inc. and North Carolina UCC search results in respect of Talon America (together the UCC Search Results ), each dated July 15, 2013, are attached hereto as Exhibits and, respectively. 21. Talon USA also executed and delivered to HSBC a deed of trust, dated December 16, 2009, in respect of the North Carolina Property. HSBC registered liens over the North Carolina Property on December 18, A copy of the online lien search in respect of the North Carolina Property, dated July 17, 2013 (the Real Property Search Report ), is attached hereto as Exhibit. 22. As at July 10, 2013, Talon Canada was indebted to HSBC in connection with the Credit Facilities in the amount CAD$1,414, and USD$3,853, By letter dated July 12, 2013, HSBC demanded repayment in full of the total indebtedness owing to it by Talon Canada. On that same date, HSBC also issued demands for payment to Talon USA and Talon America and served on each of the Debtors Notices of Intention to Enforce Security under Section 244 of the BIA (the BIA Notices ). The Debtors executed and delivered to HSBC the consents attached to the BIA Notices.

6 Pursuant to the Forbearance Agreement dated July, 2013, entered into by HSBC and the Debtors, HSBC has agreed to forbear from enforcing its security until that date which is the earlier of four calendar weeks from the filing of the NOIs and August 18, is a related company owed approximately $3,700,000 by Talon Canada. The debt owed to 609 by Talon Canada is secured by a General Security Agreement dated November 28, 2006, executed and delivered by Talon Canada. Pursuant to a Subordination and Postponement Agreement dated November 13, 2006, 609 subordinated its interest in the property of Talon Canada in favour of HSBC. 26. As disclosed by the PPSA search results, the other secured creditors of Talon Canada include: (a) Key Equipment Finance Canada Ltd., (b) WS Leasing Ltd. (registration expired March 25, 2013), (c) CBSC Capital Inc., (d) Toyota Credit Canada Inc., (d) Nissan Canada Inc., (e) BMW Canada Inc., (f) Canadian Dealer Lease Services Inc. and (g) Bank of Nova Scotia-DLAC. 27. As disclosed by the UCC Search Results, Talon USA has no other secured creditors and the other only secured creditor of Talon America is Iredell County. The registration in favour of Iredell County was made in respect of a grant program offered by the State of North Carolina. As condition of the grant, the Debtors were required to generate a certain number of jobs. As this condition was met, I believe there are no funds currently owed to Iredell County. The Debtors are currently in process of filling out the necessary paperwork to close out the program. 28. As disclosed by the Real Property Search Report, the only liens registered against the North Carolina Property are in favour of HSBC. 29. Talon Canada is current with respect to wages and vacation pay obligations to its employees, source deduction obligations owing to Canada Revenue Agency and sales tax obligations owing in respect of Product sales. 30. Talon America is current with respect to wages and vacation pay obligations to its employees, payroll withholdings owing to Internal Revenue Service and sales tax obligations owing in respect of Product sales.

7 - 7 - DIP Financing 31. HSBC, in its capacity as Talon Canada s senior secured creditor, has demanded repayment in full of the total pre-filing indebtedness owing by Talon Canada to HSBC, demanded on the guarantees executed and delivered by Talon USA and Talon America in respect of Talon Canada s indebtedness to HSBC, and terminated any further availability under the Credit Facilities. 32. HSBC has agreed to provide interim financing (the DIP Facility ) to the Debtors, on a joint and several basis, up to the maximum amount of [$1,000,000,] pursuant to the terms and conditions of the DIP Facility Term Sheet, dated July, 2013 (the Term Sheet ). A copy of the Term Sheet is attached hereto as Exhibit. 33. The proposed DIP Facility is to be provided to enable the Debtors to commence the proposed sales and investor solicitation process (the SISP ), under the supervision of the Proposal Trustee. 34. Pursuant to the Term Sheet, provision of the DIP Facility is subject to certain conditions precedent, including the Debtors obtaining the following orders: (a) (b) (c) an order of this Honourable Court (the DIP Facility Approval Order ) granting a charge in favour of HSBC (the DIP Charge ) over all of the assets, properties and undertakings of the Debtors (collectively, the Property ) to secure all advances under the DIP Facility, which charge shall rank in priority to all other charges against the Property, save and except for validly perfected purchase money security interests and certain equipment subject the prior ranking charge in favour of Key Equipment Financing Canada Ltd.; an order of this Honourable Court approving the proposed SISP (the Sales and Investor Solicitation Process Order ); and an order of the U.S. Bankruptcy Court for the District of Delaware pursuant to Chapter 15 of the Bankruptcy Code recognizing and giving effect to the DIP Facility Approval Order and the Sales and Investor Solicitation Process Order.

8 The Debtor delivered its Consolidated Cash Flow for the period from [July 5, 2013 to August 17, 2013] (the Initial Cash Flow Projections ) to HSBC. A copy of the Initial Cash Flow Projections is attached hereto as Exhibit. 36. The Debtors are bound by the Term Sheet to obtain the DIP Facility Approval Order [and seek recognition of the NOI Proceedings, including the DIP Facility Approval Order,] by Friday, July 19, Without the proposed DIP Facility, the Debtors will be unable to fund their ongoing business operations and restructuring efforts and would be forced to immediately liquidate. SISP 38. The Debtors are concurrently pursuing, (a) new investment in the Debtors, whether in the form of an equity or debt injection or refinancing of the Debtors current debt facilities, and (b) a sale of their assets, whether as a going concern or on piecemeal or liquidation basis. 39. The SISP will be carried out by the Debtors, with the assistance of and under the supervision of the Proposal Trustee. The SISP, which is set out in detail in Exhibit, will include the following main steps: SISP Step Court Approval of SISP July 19, 2013 Creation of Teaser, Marketing to Interested Parties and Execution of Confidentiality Agreements Date July 19 to August 12, 2013 Due Diligence July 19 to August 12, 2013 Bid Deadline August 12, 2013 Selection of Successful Bid No later than August 15, 2013 Negotiation and Execution of Definitive Documentation Approval Motion Closing To be determined in consultation with Successful Bidder, Proposal Trustee and HSBC

9 The Debtors reserve the right to shorten any of the above deadlines, in consultation with the Proposal Trustee, as they may deem appropriate. In addition, the Debtors reserve the right to accept any bid received at any time, terminate the marketing process and immediately enter into discussions with such party with a view to finalizing the transaction contemplated by such bid. 41. Both HSBC and the Proposal Trustee are in favour of the SISP. 42. The Debtors will return to this Honourable Court to seek approval of the sale of their assets or any other form of transaction as well as the definitive documentation with respect to same. Counsel to the Proposal Trustee 43. The Proposal Trustee requests authorization to retain and receive legal advice from the same legal counsel as HSBC, unless and until any conflict or issue of potential conflict arises between the Proposal Trustee and HSBC. This request is made in the interests of minimizing the overall costs of administering the NOI Proceedings. 44. I have been advised by Thornton Grout Finnigan LLP, HSBC s legal counsel, that HSBC has obtained an independent opinion on HSBC s security. SWORN BEFORE ME at the City of Toronto, in Ontario on July, Commissioner for Taking Affidavits DEREK OKADA

10 IN THE MATTER OF THE PROPOSAL OF TALON SYSTEMS INC. Court File No: Estate No.: ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) [COMMERCIAL LIST] Proceeding commenced at Toronto AFFIDAVIT OF DEREK OKADA (Sworn, 2013) Heenan Blaikie LLP Bay Adelaide Centre 333 Bay Street, Suite 2900 P.O. Box 2900 Toronto, Ontario M5H 2T4 Kenneth D. Kraft LSUC #31919P John Salmas LSUC# 42336B Sara-Ann Van Allen LSUC# 56016C Tel: , , Fax: , Lawyers for Talon Systems Inc., Talon Systems USA Inc. and Talon Systems America, Inc. HBdocs v3