Table of Contents Page 1. INTRODUCTION... 4 2. ACTIVITIES OF THE COMPANY SINCE THE CCAA FILING DATE... 8 3. ACTIVITIES OF THE MONITOR SINCE THE CCAA FILING DATE... 9 4. CASH FLOW FORECAST... 10 5. SALE AND INVESTMENT SOLICITATION PROCESS... 12 6. SUMMARY OF KPMG S ACTIVITIES IN THE NOI AND CCAA PROCEEDINGS... 16 7. FEES AND DISBURSEMENTS OF KPMG AND ITS COUNSEL... 18 8. MONITOR S RECOMMENDATIONS... 19 2
Listing of Appendices Appendix A - Appendix B - Appendix C - Appendix D - Appendix E - FIRST REPORT OF THE PROPOSAL TRUSTEE DATED OCTOBER 6, 2017 SECOND REPORT OF THE PROPOSAL TRUSTEE DATED OCTOBER 26, 2017 CCAA APPOINTMENT NOTICE PUBLISHED IN GLOBE AND MAIL ON NOVEMBER 6, 2017 CCAA CREDITOR NOTICE RECEIPTS AND DISBURSEMENTS FOR THE PERIOD OCTOBER 22 NOVEMBER 11, 2017 3
1. INTRODUCTION On October 2, 2017, 1031084 Alberta Ltd. ( Alberta Co ) filed a Notice of Intention to Make a Proposal (the NOI ), pursuant to Section 50.4(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended (the BIA ). On October 3, 2017, 623735 Saskatchewan Ltd. ( Saskatchewan Co, and collectively with Alberta Co, the Company ) filed an NOI pursuant to the same legislation (collectively with Alberta Co s NOI filing, the NOI Proceedings ). KPMG Inc. ( KPMG ) was appointed as proposal trustee (the Proposal Trustee ) in the NOI Proceedings. The NOI provided Alberta Co with a stay of proceedings until November 1, 2017 for Alberta Co and a stay of proceedings for Saskatchewan Co until November 2, 2017 (the Initial Stay Period ). On October 6, 2017, KPMG prepared the first report of the proposal trustee (the First Trustee Report, attached to this Report as Appendix A ) outlining the preliminary activities of the Proposal Trustee following its appointment. On October 10, 2017, pursuant to Section 50.4(2) of the BIA, both the Alberta Co and the Saskatchewan Co filed with the Official Receiver a statement of the projected cash flow (the Cash Flow Statement ) for the 13-week period from October 1 to December 30, 2017 (the Forecast Period ). The Cash Flow Statement was accompanied by a report on the reasonableness of the Cash Flow Statement by the Proposal Trustee and a report containing prescribed representations by Management of the Company on the preparation of the Cash Flow Statement. On October 11, 2017, the Company obtained an order from the Court of Queen s Bench of Alberta (the Court ) approving the Administrative Charge (as defined in the affidavit of Danny Mysak sworn October 5, 2017, the First Mysak Affidavit ) and approving the Administrative Consolidation of the estates of Alberta Co and Saskatchewan Co in the proceedings before this Honourable Court. During the week of October 9, 2017, the Company with the assistance of the Proposal Trustee commenced the marketing of the Company and related business to all potential interested parties pursuant to the Sales and Investment Solicitation Process (the SISP ) as further described herein. On October 26, 2017, KPMG prepared the second report of the proposal trustee (the Second Trustee Report ) outlining and seeking approval for, inter alia the SISP and transition to 4
Company s Creditors Arrangement Act. A copy of the Second Trustee Report is attached as Appendix B. On October 31, 2017, KPMG (herein referred to as the Monitor ) was appointed as Monitor pursuant to the order issued by this Honourable Court (the CCAA Filing Date ) in respect of the motion filed by the Company. On October 31, 2017, this Honourable Court issued the Initial Order (the Initial Order ) granting, inter alia, a stay of proceedings (the Stay ) until November 30, 2017. The proceedings brought by the Company under the CCAA will be referred to herein as the CCAA Proceedings. The Initial Order also provided for the approval of the SISP and the proposed asset purchase agreement dated October 31, 2017 (the Stalking Horse APA ) between the Company and 12033714 Saskatchewan Ltd. (subsequently assigned to 10203678 Saskatchewan Ltd.) (collectively, the Stalking Horse Purchaser ), for the sale of substantially all of Alberta Co s and Saskatchewan Co s business and assets, 12033714 Saskatchewan Ltd. and 10203678 Saskatchewan Ltd. are both entities related to the Company, and their bid was intended to operate as the stalking horse sale agreement (the Stalking Horse Bid ). Purposes of the Report The purpose of this First Report of the Monitor (the First Report or the Report ) is to provide this Honourable Court with the following information: a) The activities of the Company since the CCAA Filing Date; b) The activities of the Monitor since the CCAA Filing Date; c) Variances from the Cash Flow Statement; d) Report on the sales process conducted pursuant to the SISP and Stalking Horse APA; e) Summary of KPMG s work undertaken in the NOI and CCAA Proceedings and approving the activities and fees of KPMG as Proposal Trustee and Monitor; and f) The Monitor's recommendation in respect of the Company's request for an order approving the completion of the sale transaction contemplated by the executed Stalking Horse APA and vesting in the Stalking Horse Purchaser all the purchased assets 5
described in the Stalking Horse APA free and clear of all claims, other than permitted encumbrances (the "Transaction"). Restrictions and Scope Limitation In preparing this First Report and making the comments herein, the Monitor has been provided with, and has relied upon certain unaudited, draft and/or internal financial information, Company records, Company prepared financial information and projections, discussions with management and employees of Alberta Co and Saskatchewan Co, doing business as Spareparts, and information from other third party sources (collectively, the Information ). The Monitor has reviewed the Information for reasonableness, internal consistency and use in the context in which it was provided. The Monitor has not audited, reviewed or otherwise attempted to verify the accuracy or completeness of the Information in a manner that would wholly or partially comply with generally accepted assurance standards, and accordingly the Monitor expresses no opinion or other form of assurance in respect of the Information. In view of the purposes of the First Report, some of the financial information herein may not comply with generally accepted accounting principles. Some of the information referred to in this First Report consists of forecasts and projections, which were prepared based on management s estimates and assumptions. Such estimates and assumptions are, by their nature, not ascertainable and as a consequence no assurance can be provided regarding the forecasted or projected results. Indeed, the reader is cautioned that the actual results will likely vary from the forecasts or projections, even if the assumptions materialize, and the variations could be significant. The Monitor has prepared this First Report in its capacity as a Court appointed officer in support of the motion described in section 8 of this Report. The reader is cautioned that this Report may not be appropriate for any other purpose and consequently should not be used for any other purpose. Unless otherwise stated, all monetary amounts noted herein are expressed in Canadian dollars. Capitalized terms note otherwise defined herein are as defined in the Company s application materials, including the First Trustee Report and the Second Trustee Report, the First Mysak Affidavit, CCAA Mysak Affidavit and the second CCCA Mysak Affidavit sworn on November 20, 2017 (the Second CCAA Mysak Affidavit ) filed in support of this application. The First Report 6
should be read in conjunction with the Second CCAA Mysak Affidavit as certain information contained in the Second CCAA Mysak Affidavit has not been included herein to avoid unnecessary duplication. 7
2. ACTIVITIES OF THE COMPANY SINCE THE CCAA FILING DATE Since the CCAA Filing Date, activities of the Company have included: a) Continuing to operate the business as a going concern, undertaking all day to day operational matters with a specific focus on the following: i. Observing and reporting on the Company s inventory levels and product-mixes; ii. Introduction of new product-lines into the stores; and iii. Enhanced cash management; b) Communicating with key suppliers to secure goods and services and address payment terms during the CCAA period; c) Meeting and communicating with the Company s key employees; and d) Weekly reporting to the Monitor on the Company s general operational performance include cash flow matters. 8
3. ACTIVITIES OF THE MONITOR SINCE THE CCAA FILING DATE Since the CCAA Filing Date, the Monitor s activities have included: a) Publishing a notice in the Globe and Mail (National Edition) on November 6, 2017 containing the information prescribed by the CCAA, pursuant to the Initial Order. A copy of the Notice is attached to this Report as Appendix C ; b) Made the Initial Order publicly available by posting it on the Monitor s website at http://www.kpmg.com/ca/spareparts (the Monitor s Website ) within five business days of the Initial Order; c) On November 3, 2017, the Monitor sent a notice to all known creditors (the Notices ) advising them that the Initial Order was publicly available on the Monitor s Website, and the Monitor also posted copies of the Notices on the Monitor s Website. Copies of the Notices are attached to this Report as Appendix D ; d) Preparing a list of known creditors showing their names, addresses and estimated claim amounts and made it publicly available on the Monitor s Website; e) Weekly review of the Company s receipts and disbursements; f) Continuation of the Sale and Investment Solicitation Process commenced by the Proposal Trustee; and g) Preparing this First Report. 9
4. CASH FLOW STATEMENT Cash receipts and disbursements for the three week period ended between October 22, 2017 and November 11, 2017 as compared to the Cash Flow Statement, is attached to this First Report as Appendix E and are summarized in the following table. 1031084 ALBERTA LTD. and 623735 SASKATCHEWAN LTD. (collectively, the "Company") Consolidated Cash Flow Forecast for the period October 22 to November 11, 2017 $' unaudited Forecast Actual Variance Receipts Sales 708,103 390,382 (317,721) Sales tax collected 76,475 36,589 (39,886) Total receipts 784,578 426,971 (357,607) Disbursements Occupation costs 301,049 324,733 23,684 Salaries, wages and benefits 80,077 79,393 (684) Inventory payments 300,000 214,563 (85,437) Source deductions and WCB 57,823 48,933 (8,890) Bank charges 8,880 11,592 2,712 Overhead costs 8,839 5,973 (2,866) Marketing expenses 3,541 3,618 77 Webshop costs 2,250 2,454 204 Contingency 15,000 45,442 30,442 Total disbursements 777,458 736,701 (40,757) Net cash flow before professional fees and payments to secured creditors 7,120 (309,730) (316,850) Professional fees 45,000 - (45,000) Loan repayments - principal and interest - 6,170 6,170 Total professional fees and payments to secured creditors 45,000 6,170 (38,830) Net cash flow after professional fees and payments to secured creditors (37,880) (315,900) (278,020) Opening balance 604,587 604,587 - Ending balance 566,707 288,687 (278,020) As at November 11, 2017, the Company s cash balance was approximately $288,900. The net cash flow during the period was approximately $278,000 lower than projected. The primary reason for the unfavourable net cash flow variance are: a) Total cash receipts during the period were approximately $358,000 lower than projected primarily due to lower than expected sales. Management noted that the actual November 2017 sales results to date were not as favourable as forecasted, mainly due to the delay in the introduction of new product line items to the stores and the general shift of Canadian retail spending in November to focus on Black Friday sales (i.e. last week of November); 10
b) Total cash disbursements during the period were approximately $41,000 lower than projected, mainly due to lower inventory payments; and c) Occupation costs were approximately $24,000 higher than projected, mainly due to an error by the Company in ceasing to terminate the automated withdrawals for lease payments at the disclaimed locations for the month of November 2017. While the Company has not commenced any actions in attempts to recover the amounts paid (after consideration of potential set-off issues), any further rights to pursue the funds will be transferred to the Stalking Horse Purchaser as part of the Stalking Horse APA. The Company has paid, and continues to pay for any goods and services received subsequent to the NOI and CCAA Filing Date, including rent, payroll and related deductions, as well as earned vacation pay. 11
5. SALE AND INVESTMENT SOLICITATION PROCESS As described in the materials filed previously with the Court by the Company and the Proposal Trustee, the primary purpose of the Company's proposal proceedings is to find a purchaser for the business and/or assets of the Company, who has the intention to continue operating the business and employ some or all of the employees of the Company. Pursuant to the terms of the Initial Order, the Court approved the SISP for the sale of the Company s business and/or assets and the form of the Stalking Horse APA between the Company and the Stalking Horse Purchaser. The SISP was administered by the Proposal Trustee, and subsequently, the Monitor (herein collectively referred to as the Monitor or the Court Officer ), in consultation with the Company where appropriate. The SISP was described in detail in the Second Report of the Proposal Trustee. As required by the terms of the SISP, the Court Officer has performed the following up till the LOI Deadline (subsequently defined): a) Gave notice of the SISP by causing an appropriate notice to be published in the Globe and Mail (National Edition) on October 12, 2017; b) Distributed an interest solicitation letter to sixty-five (65) prospective investors and purchasers identified as operating in the same industry as the Company or with investments in the same industry; and c) Established and populated an electronic data room with certain financial and other information with respect to the Company. Interested parties were provided access to the electronic data room following the execution of a confidentiality agreement ( CA ). Of the 65 potential interested parties that the Court Officer contacted, three (3) signed a CA and were provided with access to the electronic data room (the Interested Parties ). One (1) party contacted the Court Officer but did not sign a CA, and four (4) parties responded to the Court Officer confirming they were not interested and did not sign a CA. The SISP timetable provided for a deadline for submission of non-binding letters of intent by 5:00 p.m. (Calgary Time) on November 8, 2017 (the LOI Deadline ). 12
The Court Officer did not receive an offer from any of the Interested Parties or from any other person at or subsequent to the LOI Deadline. Accordingly, the Monitor advised the Company and the Stalking Horse Purchaser of the results of the SISP. Terms of the Stalking Horse APA were detailed in the Second Trustee Report and the Sale Agreement was attached to the Initial Order. For the purposes of this First Report, below is a summary of the key terms of the Stalking Horse APA. All capitalized terms in this section of the First Report not otherwise defined herein shall have the meaning given in the Sale Agreement (as that term is defined in the SISP): Assumed Liabilities The Purchaser shall assume, become responsible for, and agree to discharge and perform when due the Sellers liabilities for Designated Seller Contracts arising after closing, liabilities to the Transferred Employees, Secured Liabilities, and all of the Cure Costs. Purchase Price The Purchaser shall assume the Assumed Liabilities, and pay to the Sellers an amount in cash equal to the Liabilities secured by the Restructuring Charges that are outstanding at Closing. This amount is approximately $5.25 million. Purchased Assets The Company shall sell to the Stalking Horse Purchaser on an as is where is basis the right, title and interest of the Company in and to substantially all the assets of the Company, with the exception of: a) Other than the Designated Seller Contracts, any other Contracts or any rights of the Sellers under any other Contracts; b) All shares of capital stock or other equity interests of any Seller or securities convertible into, exchangeable or exercisable for any such shares of capital stock or other equity interests; c) All rights of the Sellers under the Sale Agreement and all records prepared; and 13
d) Any deposits held in trust accounts to secure payment of the reasonable professional fees and disbursements of counsel to the Sellers, the Court Officer and its respective counsel. Employees Prior to, but contingent on the occurrence of the Closing, Purchaser shall extend an offer of employment to those Employees of Sellers, to whom Purchaser has determined to offer employment, with such employment to take effect under the terms stated herein as of the Closing Date. Such offers shall be for employment on terms and conditions substantially similar in the aggregate with respect to their annual compensation and benefits as was in effect immediately prior to the Closing. Substantive Conditions It is a condition required of Closing, that the transaction contemplated by the Stalking Horse APA have been approved by this Honourable Court. The Monitor recommends that the Court approve the Sale Agreement and Transaction for the following reasons: a) The Court Officer carried out the Court-approved SISP with good faith efforts made to sell the assets to persons in accordance with the terms approved by the Court; b) The Court Officer s efforts in carrying out a fair and reasonable sales process did not result in any offers; c) The Sale Agreement is not conditional on due diligence; d) There is the prospect of preserving employment for some of the Company s employees (approximately 80 employees will be retained by the Stalking Horse Purchaser); e) The senior secured creditors of the Company support the transaction contemplated by the Sale Agreement; and f) If the Company is forced to liquidate on a forced liquidation basis (e.g. through a bankruptcy or receivership), the secured creditors will likely sustain a significant loss, whereas the Stalking Horse Purchaser is assuming the secured creditors debt in full as 14
per the Sale Agreement. As a result, the Monitor is of the opinion that the sale under the Stalking Horse APA is more beneficial to creditors than a sale under a bankruptcy (i.e. liquidation sale). 15
6. SUMMARY OF KPMG S ACTIVITIES IN THE NOI AND CCAA PROCEEDINGS In its prior reports to this Honourable Court, KPMG, in its capacity as Proposal Trustee, has described many of the activities that it has been engaged in since the commencement of the NOI Proceedings. A summary of the Monitor s more significant activities during the NOI and CCAA Proceedings to date include: a) Reviewed all pleadings, affidavits and other materials in preparation for the various court hearings; b) Complied with all the statutory requirements as the Proposal Trustee and the Monitor under the BIA and CCAA, respectively; c) Established a website and posted updates and court materials with respect to the NOI and CCAA Proceedings; d) Assisted the Company with the preparation of their NOI and CCAA cash flow forecasts; e) Monitored the Company s cash flow and business affairs, in accordance with the BIA and the terms of the Initial Order; f) Provided ongoing consultation and input to Management with respect to various matters through the period of the NOI and CCAA Proceedings; g) Conducted the sale process in accordance with the SISP; h) Dealt with inquiries from various of the Company s creditors and other stakeholders with respect to matters pertaining to the NOI and CCAA Proceedings; i) Prepared various reports to this Honourable Court in its capacity as Proposal Trustee and Monitor, and attended at related hearings to respond to its inquiries about a number of matters; and j) Attended to various other matters which are normal and customary in proceedings of this nature. 16
The Monitor is of the view that the majority of the duties of the Monitor have been substantially completed, and upon the execution of the Sale Agreement and certain administration matters, the Monitor will be in a position to discharge its duties in relation to the CCAA Proceedings. 17
7. FEES AND DISBURSEMENTS OF KPMG AND ITS COUNSEL The KPMG s fees and disbursements and those of its counsel in relation to the NOI and CCAA Proceedings to discharge (including estimated fees to the end of the CCAA Proceedings) are summarized in the table below: Summary of the Professional Fees and Disbursements KPMG Inc. Service Period Invoice # Fees and Disbursements GST Total Amount up to October 31, 2017 8001767950 97,329.68 4,866.48 102,196.16 November 1, 2017 to discharge 1 N/A 33,181.98 1,659.10 34,841.08 Total KPMG Inc. 130,511.66 6,525.58 137,037.24 Torys LLP up to October 31, 2017 1413354 26,730.00 1,335.50 28,065.50 November 1, 2017 to discharge 1 N/A 24,247.50 1,212.38 25,459.88 Total Torys LLP 50,977.50 2,547.88 53,525.38 Note 1: Estimated costs until discharge with the assumption that the discharge date on or around November 30, 2017. The Monitor s fees for the NOI and CCAA Proceedings total approximately $137,000 and its counsel s fees and disbursements to discharge total approximately $54,000 including an estimated amount to the end of the CCAA Proceedings. The fees charged by counsel to the Company total approximately $120,000, before taxes and disbursements. At the November 28, 2017 hearing the Company will be seeking approval of the fees of KPMG, in its capacity as Court Officer (Proposal Trustee and Monitor), and those of its counsel for the NOI and CCAA Proceedings. Copies of the invoices described therein, including detailed time analysis, will be made available to the Court at the November 28, 2017 hearing if requested. 18
8. MONITOR S RECOMMENDATION Based on the foregoing, the Monitor respectfully recommends that this Honourable Court make an order approving the following: a) the completion of the sale transaction contemplated by the executed Stalking Horse APA; b) vesting in the Stalking Horse Purchaser all the purchased assets described in the Stalking Horse APA; c) the activities of KPMG as Proposal Trustee and the Monitor, and its counsel, Torys LLP, during the NOI and CCAA Proceedings, as set out in this report; d) the fees and disbursements of KPMG as Proposal Trustee and the Monitor, and its counsel, Torys LLP, during the NOI and CCAA Proceedings; and e) the discharge of KPMG in its capacity of Court Officer of 1031084 Alberta Ltd. and 623735 Saskatchewan Ltd. (upon the execution of the Monitor s Certificate). This Report is respectfully submitted this 21 st day of November, 2017. KPMG Inc. In its capacity as Court-Appointed Monitor of 1031084 Alberta Ltd. and 623735 Saskatchewan Ltd., and not in its personal or corporate capacity Per: Neil Honess Per: Pinky Law Senior Vice President Vice President 19
APPENDIX A FIRST REPORT OF THE PROPOSAL TRUSTEE DATED OCTOBER 6, 2017
COURT FILE NUMBER 25-2299607 COURT COURT OF QUEEN S BENCH OF ALBERTA JUDICIAL CENTRE CALGARY APPLICANTS IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT, RSC 1985, c B-3 AND IN THE MATTER OF THE DIVISION I PRPOSAL 1031084 ALBERTA LTD. FIRST REPORT OF THE PROPOSAL TRUSTEE TO COURT SUBMITTED BY KPMG INC. DATED OCTOBER 6, 2017 ADDRESS FOR SERVICE AND CONTRACT INFORMATION OF PARTY FILING THIS DOCUMENT: PROPOSAL TRUSTEE KPMG Inc. Suite 3100, Bow Valley Square II 205-5th Ave SW, Calgary, Alberta T2P 4B9 Ryan Adlington Tel: (403) 691-8504 radlington@kpmg.ca COUNSEL Torys LLP 525 8th Avenue SW, 46th Floor Eighth Avenue Place East Calgary, Alberta T2P 1G1 Kyle Kashuba Tel: (403) 776-3744 kkashuba@torys.com 24285366.1
Table of Contents Page 1. INTRODUCTION... 4 2. BACKGROUND... 5 3. CASH FLOW FORECAST... 8 4. LEASE DISCLAIMER... 10 5. ADMINISTRATIVE CONSOLIDATION... 10 6. ADMINISTRATION CHARGE... 11 7. PROPOSAL TRUSTEE S RECOMMENDATION... 11 24285366.1 2
Listing of Appendices Appendix A - Appendix B - Cash Flow Statement Management s Representation Letter 3 24285366.1
1. INTRODUCTION On October 2, 2017, 1031084 Alberta Ltd. ( Alberta Co ) filed a Notice of Intention to Make a Proposal (the NOI ), pursuant to Section 50.4(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 as amended (the BIA ). On October 3, 2017, 623735 Saskatchewan Ltd. ( Saskatchewan Co, and collectively with Alberta Co, the Company ) filed an NOI pursuant to the same legislation (collectively with Alberta Co s NOI filing, the NOI Proceedings ). KPMG Inc. ( KPMG ) was appointed as proposal trustee (the Proposal Trustee ) in the NOI Proceedings. The NOI provides Alberta Co with a stay of proceedings until November 1, 2017 and a stay of proceedings for Saskatchewan Co until November 2, 2017 (the Initial Stay Period ). Purposes of the Report The purpose of the First Report of the Proposal Trustee (the First Report or this Report ) is to provide this Honourable Court with the Proposal Trustee s views on the following matters: a) A summary of certain background information about the Company; b) The objectives of the NOI Proceedings and the creditors of the Company; c) The Company s statement of projected cash flow for the 13-week period from October 1, 2017 to December 30, 2017 (the Cash Flow Forecast ); d) The Company s request for Administrative Consolidation of the estates of Alberta Co and Saskatchewan Co; and e) The Company s request for the approval of an Administrative Charge as defined in Affidavit #1 of Danny Mysak (the Mysak Affidavit ). Restrictions and Scope Limitation 24285366.1 In preparing this First Report and making the comments herein, the Proposal Trustee has been provided with, and has relied upon certain unaudited, draft and/or internal financial information, Company records, Company prepared financial information and projections, discussions with management and employees of Alberta Co and Saskatchewan Co, doing business as Spareparts, and information from other third party sources (collectively, the Information ). Except as described in this Report: 4
The Proposal Trustee has reviewed the information for reasonableness, internal consistency and use in the context in which it was provided. The Proposal Trustee has not audited, reviewed or otherwise attempted to verify the accuracy or completeness of the Information in a manner that would wholly or partially comply with generally accepted assurance standards, and accordingly The Proposal Trustee expresses no opinion or other form of assurance in respect of the Information. In view of the purpose of the First Report, some of the financial information herein may not comply with generally accepted accounting principles. Some of the information referred to in this First Report consists of forecasts and projections, which were prepared based on management s estimates and assumptions. Such estimates and assumptions are, by their nature, not ascertainable and as a consequence no assurance can be provided regarding the forecasted or projected results. Indeed, the reader is cautioned that the actual results will likely vary from the forecasts or projections, even if the assumptions materialize, and the variations could be significant. The Proposal Trustee has prepared this First Report in its capacity as a court appointed officer in support of the motion described in section 7 of this Report. The reader is cautioned that this Report may not be appropriate for any other purpose and consequently should not be used for any other purpose. Unless otherwise stated, all monetary amounts noted herein are expressed in Canadian dollars. Capitalized terms not otherwise defined herein are as defined in the Company s application materials, including the Mysak Affidavit filed in support of this application. The First Report should be read in conjunction with the Mysak Affidavit as certain information contained in the Mysak Affidavit has not been included herein to avoid unnecessary duplication. 2. BACKGROUND Spareparts is a private sunglasses, watch, and accessories store with national presence (with 21 locations across Canada as at the dates of the filing of the NOI Proceedings). Of the 21 stores nationwide, 4 locations are operating under Saskatchewan Co and the remaining 17 stores are under Alberta Co. All of Spareparts 21 store locations are leased. 24285366.1 5
While the Company s head office is located in a leased premises at 213 Avenue C S, Saskatoon, Saskatchewan, the locality of both Alberta Co and Saskatchewan Co, based on the analysis provided in the Mysak Affidavit, is Alberta. Although there are two entities that were set up for the operations of Spareparts, the Company operates as a single, integrated economic unit. As described in the Mysak Affidavit, the growing competition in the market and the general challenges in the retail marketplace have led the Company into challenges in its working capital management. The Company has defaulted on various financial and other covenants with their secured creditors, Royal Bank of Canada ( RBC ) and BDC Capital Inc. ( BDCC ). Both RBC and BDCC have agreed to forbear from enforcing their rights and remedies, subject to certain terms and conditions, to permit the Company to pursue a restructuring. On October 2, 2017 and October 3, 2017, respectively, Alberta Co and Saskatchewan Co each filed an NOI, to allow the Company to downsize its store footprint through disclaimers of certain leases at its underperforming stores, and to restructure its business, potentially through the completion of a Sales and Investment Solicitation Process (the SISP ). The Company s business affairs, financial performance and position, as well as the causes of its insolvency, are detailed in the Mysak Affidavit and are hence not repeated in the First Report. The Proposal Trustee has reviewed the Mysak Affidavit, has discussed the same with Mr. Mysak, and is of the view that the Mysak Affidavit provides a fair summary thereof. OBJECTIVES OF THE NOI PROCEEDINGS The primary objectives of the NOI Proceedings are to: a) Ensure the on-going operations of the Company; b) Restructure the Company s operations, including the proposed closure of the underperforming stores and lease disclaimers in respect thereof; c) Restructure the debts of the Company to ensure the Company has adequate working capital to continue its operations; and 24285366.1 6
d) Complete a transaction arising from a SISP to be proposed and approved by this Honourable Court. It is anticipated that the proposed SISP will contemplate a stalking horse credit bid by a party related to the Company. CREDITORS Secured creditors The Proposal Trustee understands the following: a) The Company entered into a secured revolving operating loan (the Operating Loan ) and several non-revolving term loans (the Non-Revolving Loans ) with RBC in October 2016 (the RBC Facilities ), whereby RBC has provided the Operating Loan and a Non-Revolving Loan to Saskatchewan Co and 11 Non-Revolving Loans to Alberta Co. The Operating Loan is used to support daily working capital requirements for both Saskatchewan Co and Alberta Co. b) The outstanding loan balance, as at October 2, 2017, was approximately $3.92 million. c) The RBC Facilities are secured by a first charge over all the assets of Saskatchewan Co, Alberta Co and 101268550 Saskatchewan Ltd. ( 101, shareholder of Saskatchewan Co and owned by Mrs. Terra Mysak), with cross-guarantees between Alberta Co and Saskatchewan Co, and additional guarantees from 101 and the ultimate owners, Mr. Danny Mysak and Mrs. Terra Mysak. d) Alberta Co also entered into a financing agreement with BDCC (a wholly owned subsidiary of BDC) on October 4, 2016 (the BDCC Facility ). The BDCC Facility was for the purpose of tenant leasehold improvements in 2016 and 2017, working capital growth, and replenishment of working capital. The outstanding loan balance for the BDCC Facility, as at October 2, 2017, was approximately $960,000. e) The BDCC Facility is secured by a general security agreement over all the assets of Saskatchewan Co, Alberta Co and 101, with cross-guarantees between the two primary entities and additional guarantees from 101 and the owners. f) According to the personal property registry searches conducted in respect of the two primary companies, other secured creditors include Steelcase Financial Services Ltd. (for Saskatchewan Co and Alberta Co) and Element Financial Corporation (for 24285366.1 7
Saskatchewan Co). Management advised that these registrations were related to the various equipment leased by the Company. Unsecured creditors According to the Company s books and records, as at October 2, 2017, Management estimates that accrued and unpaid unsecured obligations totalled approximately $2,243,154.08, which consists of $2,243,154 in trade payables, $123,879 in professional fees and $1,180,048 in tenant leasehold improvements payables. 3. CASH FLOW FORECAST The Company, with the assistance of the Proposal Trustee, has prepared a cash flow forecast of its receipts and disbursements for the period from October 1, 2017 to December 30, 2017. The detailed Cash Flow Forecast is attached as Appendix A to this Report and is summarized below: 1031084 ALBERTA LTD. and 623735 SASKATCHEWAN LTD. Consolidated 13-week Cash Flow Forecast For the period October 1 to December 30, 2017 $' unaudited 13 Weeks Receipts Sales 5,623,318 Sales tax collected 607,318 Total receipts 6,230,637 Disbursements Occupation costs 1,026,603 Salaries, wages and benefits 810,385 Inventory payments 2,620,000 Source deductions and WCB 252,403 Tax remittances 67,657 Bank charges 47,447 Insurance 4,540 Telephone and utilities 18,534 Overhead costs 37,217 Marketing expenses 28,117 Webshop costs 9,750 Contingency 65,000 Total disbursements 4,987,651 Net cash flow before professional fees and payments to secured creditors 1,242,986 Professional fees 235,000 Loan repayments - principal and interest - Total professional fees and payments to secured creditors 235,000 Net cash flow after professional fees and payments to secured creditors 1,007,986 Opening balance 939,723 Ending balance 1,947,709 24285366.1 8
The Cash Flow Forecast estimates that the Company will be generating approximately $1 million during the period of projection. The Proposal Trustee has reviewed the Cash Flow Forecast to the standard required by section 50.4(2) of the BIA. Section 50.4(2) requires the Proposal Trustee to review the debtor s cash flow statement as to its reasonableness and to file a report with the Office of the Superintendent of Bankruptcy on the Proposal Trustee s findings. The Canadian Association of Insolvency and Restructuring Professional s Standards of Professional Practice include a standard for proposal trustees fulfilling their statutory responsibilities under the BIA in respect of a proposal trustee s report on the Cash Flow Forecast. Our review consisted of inquiries, analytical procedures and discussion related to information supplied to us by certain of the management and employees of the Company. Since hypothetical assumptions need not be supported, our procedures with respect to them were limited to evaluating whether they were consistent with the purpose of the Cash Flow Forecast. We have also reviewed the support provided by management of the company for the probable assumptions, and the preparation and presentation of the Cash Flow Forecast. Based on our review, nothing has come to our attention that causes us to believe that, in all material respects: a) the hypothetical assumptions are not consistent with the purpose of the cash-flow statement; b) as at the date of this Report, the probable assumptions developed by management are not suitably supported and consistent with the plans of the Company or do not provide a reasonable basis for the cash-flow statement, given the hypothetical assumptions; or c) the cash-flow statement does not reflect the probable and hypothetical assumptions. 24285366.1 Since the Cash Flow Forecast is based on assumptions regarding future events, actual results will vary from the information presented even if the hypothetical assumptions occur, and the variations may be material. Accordingly, we express no assurance as to whether the Cash Flow Forecast will be achieved. The Cash Flow Forecast has been prepared solely for the purpose described on the face of the Cash Flow Forecast, and readers are cautioned that it may not be appropriate for other purposes. 9
Management s representation on the Company s Cash Flow Forecast is attached to this Report as Appendix B. In its representations, the Company has indicated that the assumptions underlying the Cash Flow Forecast are appropriate in the circumstances. 4. LEASE DISCLAIMER The Company, with the assistance of its advisors and in consultation with the Proposal Trustee, has concluded that a restructuring focusing on profitable stores, while vacating unprofitable locations, will maximize value for all stakeholders. To date, Alberta Co, with the assistance of the Proposal Trustee, has identified seven stores that are to be closed (the Closing Stores ). Management has disclaimed the leases at the Closing Stores as at October 2, 2017. Management is in the process of redistributing all the inventory from the Closing Stores to the stores that will remain opened. In addition to the Closing Stores, Saskatchewan Co has also disclaimed the two leases of the Company s warehouse on October 4, 2017. 5. ADMINISTRATIVE CONSOLIDATION As noted in the Mysak Affidavit, Alberta Co and Saskatchewan Co operate as a single, integrated economic unit, and it will not be in the Company s interest to segregate the operations of each of the entity for the purpose of the NOI Proceedings. The Proposal Trustee agrees that it would be in the best interest of the restructuring process and all stakeholders affected thereby if the estates are consolidated administratively for the purposes of efficiency and cost optimization. The Proposal Trustee has reviewed the Mysak Affidavit and is also of the view that the analysis of the locality of the debtors provided in the Mysak Affidavit, stating that the locality of the Company is in Alberta, is a fair summary thereof. 24285366.1 10
6. ADMINISTRATION CHARGE The Company is seeking approval of an Administration Charge over all of the property, assets and undertakings of Alberta Co and Saskatchewan Co in priority to all other security interests, trusts, liens, charges and encumbrances, claims of secured creditors, statutory or otherwise, in an amount not to exceed $300,000, in favour of the Proposal Trustee, Torys LLP and McCarthy Tétrault LLP s in order to secure payment of their respective reasonable fees and disbursements incurred at their standard rates and charges. In the event that the Company does not file proposals or if the proposals filed are not approved by the Company s creditors or the Court, then Alberta Co and Saskatchewan Co will be deemed to have made assignments in bankruptcy. KPMG would be named Trustee in Bankruptcy and would have to comply with certain statutory duties. If the assets of the Company are fully encumbered by secured claims, then without the benefit of the Administration Charge, KPMG would be at risk of non-payment of its fees. The secured creditors, most directly impacted by the proposed charge, either consent to or do not oppose the granting of the charge. 7. PROPOSAL TRUSTEE S RECOMMENDATION Based on the foregoing, the Proposal Trustee respectfully recommends that this Honourable Court issue an order: a) Approving the transfer of the estate of Saskatchewan Co from Saskatchewan to Alberta and approving the Administrative Consolidation of Alberta Co and Saskatchewan Co; and b) Approving the Administration Charge. 24285366.1 11
This Report is respectfully submitted this 6th day of October, 2017. KPMG Inc. In its capacity as Trustee under the Notice of Intention to Make a Proposal of 1031084 Alberta Ltd. and 623735 Saskatchewan Ltd., and not in its personal capacity Per: Ryan J. Adlington Per: Pinky Law Senior Vice President Vice President 12 24285366.1
APPENDIX A Cash Flow Forecast 13 24285366.1
APPENDIX B Management s Representation Letter 14 24285366.1
APPENDIX B SECOND REPORT OF THE PROPOSAL TRUSTEE DATED OCTOBER 26, 2017
APPENDIX C CCAA APPOINTMENT NOTICE PUBLISHED IN THE GLOBE AND MAIL ON NOVEMBER 6, 2017
APPENDIX D CCAA CREDITOR NOTICE
KPMG Inc. 205 5th Avenue SW Suite 3100 Calgary AB T2P 4B9 Tel 403-691-8000 Fax 403-691-8008 www.kpmg.ca November 3, 2017 TO THE CREDITORS OF 1031084 ALBERTA LTD. and 623735 SASKATCHEWAN LTD., carrying on business as SPAREPARTS Further to 1031084 Alberta Ltd. and 623735 Saskatchewan Ltd. s (collectively, the Company ) filing of a Notice of Intention to Make a Proposal (the NOI ), pursuant to Section 50.4(1) of the Bankruptcy and Insolvency Act on October 2 and October 3, 2017, respectively, please be advised that on October 31, 2017, the Company filed a motion pursuant to the Companies' Creditors Arrangement Act (the CCAA ) before the Court of Queen s Bench of Alberta (the Court ) under court file number 1701-14466. The Court issued an order (the Initial Order ) on October 31, 2017 (the Filing Date ) granting a stay of proceedings (the Stay Period ) against the Company until November 30, 2017. The Court also appointed KPMG Inc. as monitor (the Monitor ) of the Company. In accordance with the terms of the Initial Order, the Company is continuing to operate in the ordinary course while under protection from their creditors. Pursuant to the Initial Order, all persons having verbal or written agreements with the Company or statutory or regulatory mandates for the supply of goods or services are restrained until further order of the Court from discontinuing, altering, interfering with or terminating the supply of such goods or services as may be required by the Company provided in each case that the normal prices or charges for all such goods or services received after the Filing Date are paid by the Company in accordance with the normal payment practices of the Company or such other practices as may be agreed upon by the supplier or service provider and the Company, with the Consent of the Monitor, or as may be ordered by the Court. During the Stay Period, no proceeding against or in respect of the Company or their assets, shall be commenced or continued except with leave of the Court. No procedure for the calling of claims against the Company has been approved by the Court as at this date. The Monitor may, at a later date subject to further order of the Court, invite creditors to submit proofs of claim in order to prove a claim against the Company. KPMG Inc. is a subsidiary of KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.
November 3, 2017 The Initial Order and lists of the names and addresses of the Company s creditors and the estimated amounts of their claims, as well as copies of other materials filed in the CCAA proceedings, are available on the Monitor s website at www.kpmg.com/ca/spareparts. The Monitor will post additional documents, including its reports to the Court, on its website as they become available, and interested parties are encouraged to refer to the Monitor s website frequently for updates on the status of the Company s CCAA proceedings. If you are unable to access the documents posted on the Monitor s website, or wish to speak with a representative of the Monitor, please contact Pinky Law at 604-691-3051 or by email at plaw@kpmg.ca. Yours very truly KPMG Inc., In its capacity as the Court-appointed Monitor of 1031084 Alberta Ltd. and 623735 Saskatchewan Ltd., and not in its personal capacity Per: Ryan J Adlington Senior Vice President Spareparts CCAA letter to creditors.docx 2
APPENDIX E RECEIPTS AND DISBURSEMENTS FOR THE PERIOD OCTOBER 22 NOVEMBER 11, 2017
1031084 ALBERTA LTD. and 623735 SASKATCHEWAN LTD. (collectively, the "Company") Consolidated Cash Flow Forecast for the period October 22 to November 11, 2017 $' unaudited Week 1 Week 2 Week 3 Forecast Actual Variance Forecast Actual Variance Forecast Actual Variance For the week: Oct 22 28 Oct 29 Nov 4 Nov 5 11 Receipts Sales 140,709 126,458 (14,251) 244,700 119,299 (125,401) 322,694 144,625 (178,069) Sales tax collected 15,197 11,486 (3,711) 26,428 12,348 (14,080) 34,851 12,755 (22,096) Total receipts 155,905 137,944 (17,961) 271,128 131,647 (139,481) 357,545 157,380 (200,165) Disbursements Occupation costs 301,049 324,733 23,684 Salaries, wages and benefits 80,077 79,393 (684) Inventory payments 25,000 27,793 2,793 115,000 47,408 (67,592) 160,000 139,362 (20,638) Source deductions and WCB 29,626 25,612 (4,014) 80 80 28,117 23,241 (4,876) Tax remittances Bank charges 90 90 8,880 9,820 940 1,682 1,682 Insurance Telephone and utilities Overhead costs 1,350 875 (475) 6,139 4,391 (1,748) 1,350 707 (643) Marketing expenses 704 1,343 639 1,224 1,498 274 1,613 777 (836) Webshop costs 750 1,839 1,089 750 615 (135) 750 (750) Contingency 5,000 1,836 (3,164) 5,000 25,928 20,928 5,000 17,678 12,678 Total disbursements 62,430 59,388 (3,042) 518,198 493,866 (24,332) 196,830 183,447 (13,383) Net cash flow before professional fees and payments to secured creditors 93,476 78,556 (14,920) (247,070) (362,219) (115,149) 160,715 (26,067) (186,782) Professional fees 45,000 (45,000) Loan repayments principal and interest 6,170 6,170 Total professional fees and payments to secured creditors 6,170 6,170 45,000 (45,000) Net cash flow after professional fees and payments to secured creditors 93,476 72,386 (21,090) (292,070) (362,219) (70,149) 160,715 (26,067) (186,782) Opening balance 604,587 604,587 (0) 698,063 676,973 (21,090) 405,992 314,754 (91,238) Ending balance 698,063 676,973 (21,090) 405,992 314,754 (91,238) 566,707 288,687 (278,020)