A P P E N D I X K

APPENDIX K
FOURTH REPORT TO COURT
SUBMITTED BY PRICEWATERHOUSECOOPERS INC.
IN ITS CAPACITY AS MONITOR OF
COMSTOCK CANADA LTD., CCL REALTY INC., AND CCL EQUITIES INC.
September 20th, 2013
Court File No. CV-13-10181-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE - COMMERCIAL LIST
IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C.
1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF
COMSTOCK CANADA LTD., CCL EQUITIES INC., AND CCL REALTY INC.
Applicants
FOURTH REPORT TO THE COURT
SUBMITTED BY PRICEWATERHOUSECOOPERS INC.
I N ITS CAPACITY AS MONITOR OF
COMSTOCK CANADA LTD., CCL REALTY INC., AND CCL EQUITIES INC.
September 20, 2013
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TARI/R OF rONTKNT
S
I.
INTRODUCTION
2
II.
PURPOSE OF REPORT
3
III.
QUALIFICATIONS ON REPORT
5
IV.
MONITOR'S ACTIVITIES
6
V.
CASH FLOW VARIANCE ANALYSIS
7
VI.
REVISED CASH FLOW FORECAST
10
VII.
SEPTEMBER 16 CONTRACT SUMMARY
13
VIII. SICKKIDS & WOMEN'S HOSPITAL PROJECT UPDATE
16
IX.
ST. JOSEPH'S PROJECT UPDATE
18
X.
ENGAGEMENT OF ALTUS
20
XL
SISP UPDATE
21
XII.
THE SUDBURY PROPERTY
21
XIII. THE INITIAL ORDER
XIV.
RECOMMENDATION
..24
26
APPENDICIES
APPENDIX "A" - Third Report of the Monitor
APPENDIX "B" - September 14, 2013 Revised Forecast
APPENDIX "C" - Sealed Confidential Asset Purchase Aj
Agreement for the Sudbury
Property
I.
INTRODUCTION
1. On June 28, 2013 (the "Filing Date"), Comstock Canada Ltd., ("Comstock"
or the "Company"), CCL Realty Inc. and CCL Equities Inc. (collectively, the
"Companies") each filed a Notice of Intention to Make a Proposal pursuant
to Section 50.4(1) of the Bankruptcy and Insolvency Act (Canada) ("BIA")
and PricewaterhouseCoopers Inc. ("PwC") was named as the trustee
thereunder.
2. On July 2, 2013, the Ontario Superior Court of Justice (Commercial List) (the
"Court") issued an order appointing PwC as interim receiver (the "Interim
Receiver"), without security, in respect of Comstock, pursuant to section 47.1
of the BIA, for the limited purpose of being empowered, authorized and
directed to borrow funds which were immediately required to ensure the
continued operation of Comstock's business.
3. On July 9, 2013, the Court granted an Order (the "Initial Order"), inter alia,
(i) directing that the Companies' BIA proceedings be continued under the
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended
("CCAA")
in
Court
File
No.
CV-13-10181-00CL;
(ii)
staying
the
commencement or continuance of all proceedings against the Companies; (iii)
appointing PricewaterhouseCoopers Inc. as monitor of the Companies (in
such capacity, the "Monitor"); and (iv) discharging PwC as the Interim
Receiver.
4. On July 26, 2013, the Court issued an Amended and Restated Initial Order
(the "Amended & Restated Initial Order") which amended the Initial
Order by providing, inter alia, a specific paragraph to explicitly state that no
Person is permitted to preserve or perfect a lien or deliver any notice of lien
under any prevailing construction lien legislation except with the written
consent of the Companies and the Monitor, or with leave of the Court.
5. On July 26, 2013, this Court also granted an order approving a specific
settlement agreement in connection with the St. Joseph's Hamilton
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Healthcare Redevelopment Project ("St.
Joseph's Project") which
effectively dealt with the construction lien issues on that particular project
thereby allowing the continued flow of funds necessary for the continued
operation of the project towards completion.
6. Also on July 26, 2013, this Court granted a critical supplier order regarding
Refac Industrial Contractors Inc. and compelling them to continue supplying
critical product to a particular Comstock project site.
7. On August 7, 2013, this Court made an order approving and authorizing the
Monitor and the Companies to carry out a sales and investor solicitation
process (the "SISP") in which prospective bidders may make a bid t o
purchase the Companies' property or make in investment in the Companies'
business.
8. Also on August 7, 2013, this Court granted an order to establish a protocol for
addressing liens registered on Comstock projects and the rights of the various
lien claimants (the " l i e n Regularization Order" or "LRO").
II.
PURPOSE OF REPORT
9. In conjunction with the Companies' application for relief under the CCAA, on
July 25, 2013, PwC in its capacity as Monitor filed the First Report with this
Court. On August 1, 2013, the Monitor filed the Second Report with this
Court. On August 6, 2013, the Monitor filed the Third Report with this Court,
which is attached hereto without appendices as Appendix "A".
10. This fourth report of the Monitor to the Court (the "Fourth Report") has
been prepared:
a) to provide this Court with a summary of the following:
i. An update on the activities of the Companies and the Monitor
activities since the date of the Third Report;
3
ii. The Companies' cash flow forecast for the period from September 4
to December 13, 2013;
iii. A summary of Comstock's contracts as at September 16, 2013 (the
"September 16 Contract ,Sllmmary
)
iv. An update on the Hospital for Sick Children project (the "SickKids
Project");
v. An update on the Winnipeg Women's Hospital project (the
"Women's Hospital Project");
vi. An update on the St. Joseph's Project;
vii. An update on the Monitor retaining Altus Group Limited ("Altus")
as a mechanical and electrical engineering advisor to the Monitor;
viii. An update on the SISP; and
ix. Update on the Sudbury Property and Sale Agreement (defined
herein).
b) to recommend that this Court issue the following orders (collectively, the
"Orders"):
i. An order approving, recognizing and vesting title in certain lands
(the "Sudbury Property"), to R.F. Walker Holdings Inc. pursuant
to an Agreement of Purchase and Sale between Comstock and R.F.
Walker Holdings Inc. made as of September 16, 2013 (the "Sale
Agreement"); and
ii. An order amending and restating the Initial Order to clarify that
paragraph 12(c) thereof is intended to apply to all pre-filing project
payables.
III.
QUALIFICATIONS ON REPORT
11. In preparing this Fourth Report, the Monitor has relied upon certain
unaudited financial information of the Companies, the Companies' books and
records, information obtained from personnel of the Companies and other
sources (collectively, the "Information").
12. In accordance with industry practice, except as described in this Fourth
Report:
a) The Monitor has not audited, reviewed or otherwise attempted to verify
the accuracy or completeness of the Information in a manner that would
comply with Generally Accepted Assurance Standards pursuant to the
Canadian Institute of Chartered Accountants Handbook;
b) The Monitor has not examined or reviewed financial forecasts and
projections referred to in this report in a manner that would comply with
the procedures described in the Canadian Institute of Chartered
Accountants Handbook; and
c) Future oriented financial information reported or relied on in preparing
this Fourth Report is based on assumptions regarding future events.
Actual results may vary from forecast, even if the assumptions materialize,
and such variations may be material.
13. Unless otherwise stated, all monetary amounts contained herein are
expressed in Canadian dollars.
Capitalized terms not otherwise defined
herein shall have the meaning ascribed thereto in the Initial Order or the
Third Report.
IV.
MONITOR'S SACTIVITIE
Monitor's activities s i n c e August 6 , 2 0 1 3
14. Since the Third Report, the Monitor has continued to work and assist the
Companies in stabilizing its business operations, including, among other
things:
a) Attending at the Companies' Burlington office to monitor the Companies'
receipts and disbursements;
b) Numerous discussions, meetings, correspondence with management of the
Company and their project personnel on various issues ranging from
accounts receivable collections, liens, creditors, inventory and other
matters relevant to day-to-day operations;
c) Weekly attendance on conference calls organized by PCL (the general
contractor on the St. Joseph's Project) with Comstock and its sub-trade,
Honeywell Limited;
d) Continued discussions and correspondence with Rio Tinto Alcan Inc.
("RTA") on the cost reimbursement agreement between RTA and
Comstock (the "RTA Agreement") and the weekly reconciliation of the flow
of funds related to this project;
e) Discussions and correspondence with Bechtel Corporation, RTA's project
manager, on various document reviews and accounting reconciliations;
f) Continued discussions and correspondence with specific customers and
their respective counsel on project issues ranging from accounts receivable
collections, project deficiency reporting, creditor concerns and other
matters related to ongoing projects;
g) Discussions and correspondence with counsel to Comstock on numerous
matters including various settlements on outstanding accounts receivable,
vacating of liens by creditors on projects, claims made by Comstock on
projects and the LRO process;
h) Discussions with various lien claimants, creditors and their respective
counsel;
i) Discussions with various interested parties on various matters, including
the proposed SISP and other matters; and
j) Discussions with various stakeholders on the status of these CCAA
proceedings and questions they may have.
V.
CASH FLOW VARIANCE ANALYSIS
15. A summary of the Companies' actual versus forecasted cash flow for the
period ended September 13, 2013 as compared against the revised cash flow
forecast filed in the Third Report is summarized as follows.
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C o m s t o c k C a n a d a Ltd., CCL R e a l t y Inc. a n d CCL Equities Inc.
C a s h Flow V a r i a n c e A n a l y s i s
For p e r i o d J u l y 2 7 , 2 0 1 3 t o S e p t e m b e r 1 3 , 2 0 1 3
Variance
Favourable /
(Unfavourable)
(1
>
Actual
Forecast
(%)
($)
Receipts
Collection o f a c c o u n t s receivable
Collection o f h o l d b a c k s
3,781,142
7,520,307
3,739,165
118,929
573,234
454,305
99%
100%
7,241,715
9,992,967
2,751,252
38%
17,508,188
17,362,525
(145,663)
-1%
28,649,975
35,449,034
6,799,058
24%
30,066,761
26,855,808
3,210,953
11%
1,100,000
649,203
450,797
815,000
1,744,601
(929,601)
1,250,000
779,662
470,338
56,651
17,106
39,545
70%
33,288,412
30,046,380
3,242,032
10%
(4,638,437)
5,402,653
10,041,090
DIP a d v a n c e (repayment)
5,288,000
1,554,922
5,288,000
2,512,000
(957,078)
-62%
Ending b a l a n c e
6,842,922
7,800,000
(957,078)
14%
R e c e i p t s o n n e w invoices
R e c e i p t s u n d e r c o s t r e i m b u r s e m e n t pl a n
Total R e c e i p t s
Disbursements
Project c o s t s
Corporate payroll & benefits
SG&A
Professional fees
DIP Interest
Total D i s b u r s e m e n t s
N e t C a s h Flow
41%
-114%
38%
216%
DIP L o a n Facility
Opening b a l a n c e
-
0%
Cash
Beginning C a s h
N e t c a s h flow
DIP a d v a n c e (repayment)
Subtotal
L e s s : Restricted C a s h
Ending Available C a s h
3,083,515
3,083,515
(4,638,437)
5,402,653
1,554,922
2,512,000
10,998,168
(?
)
-
-
10,041,090
.
957,078
10,998,168
(7,292,659)
(7,292,659)
3,705,509
3,705,509
0%
216%
62%
100%
-100%
100%
Notes:
(1) As c o m p a r e d t o R e v i s e d F o r e c a s t f i l e d w i t h t h e M o n i t o r ' s Third R e p o r t d a t e d A u g u s t 6 , 2 0 1 3 .
(2) R e p r e s e n t s e x c e s s r e c e i p t s u n d e r RiTAcost r e i rn b u r s e m e n t a g r e e m e n t a s w e l l a s p r o j e c t r e c e i v a b l e s c o l e c t e d
a n d n e e d e d t o r e p a y r e l a t e d p r o j e c t p a y a b l e s in a c c o r d a n e e w i t h t h e I n i t i a 1 O r d e r .
16.As indicated above, the Companies have a favourable net cash inflow of
approximately $5.4 million for the period ended September 13, 2013. The
Companies have fully drawn on its DIP Credit Facility of approximately $7.8
million, which is slightly higher than the previous forecasts provided by the
Companies but consistent with the needs of the Companies given the
Company's involvement in 44 ongoing contracts.
17. The Companies' overall net receipts are approximately $7 million favourable
compared to the forecast in the Third Report. This favourable variance is
attributed to the fact that (i) the Company has been able to continue more
8
contracts than previously forecasted, (ii) the actual numbers include HST
whereas the forecasted amounts do not, and (iii) the Company has been able
to secure receipts on accounts receivable sooner than planned as the forecast
conservatively assumed collections would occur over a longer period on a pro­
rated basis.
Item (iii) has had the most significant impacted on this
favourable variance. The Company has been able to complete projects sooner
than forecasted which has allowed them to pull those receipts in sooner. The
Monitor expects with the passage of time, that the Company may see this
favourable variance decrease.
The Companies net disbursements have a
favourable variance as at September 13, 2013 mainly due to timing; however
the following should be noted:
a) Project costs have a favourable variance of $3.2 million; however the
Monitor expects this variance to substantially decrease with the passage of
time as funds received by the Companies (some of which are held as
restricted cash) are applied to accounts payable and accrued liabilities.
Furthermore, as discussed below, there is the potential that the
Companies' future variances on "project costs" could be unfavourable if
labour costs on fixed price contracts, such as the St. Joseph's Project
continue to increase.
b) The Companies' corporate payroll and benefits have a favourable variance
which is a result of the Company's ability to cut overhead costs faster than
planned coupled with not replacing individuals that had decided to leave
the Company.
c) SG&A has an unfavourable variance; however this is mainly attributed to
the fact that this line item includes HST, which as noted above, was not
part of the Companies' forecast.
d) The professional fees favourable variance is a timing issue and this
variance is expected to reverse itself and has the potential to be an
unfavourable variance.
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e) The favourable variance related to DIP interest is a timing issue and will
reverse itself.
Accrued Costs
18. As detailed in our Third Report, the Companies continue to manage its
accrued costs (i.e., wages and salaries).
Furthermore, the Companies are
deferring the payment of 50% of the costs associated with all professionals
such as the Companies' legal counsel, the Monitor and its counsel and the fees
of PwC Corporate Finance LLP. It is the intention of the Companies to true
up these outstanding fees when the Company is in receipt of future funds
from customers and sufficient liquidity.
VI.
REVISED CASH FLOW FORECAST
19. The Companies have prepared a revised cash flow forecast for the period
September 14 to December 13, 2013 (the "September 14 Revised
Forecast"). A copy of the September 14 Revised Forecast is included in
Appendix "B".
20.The September 14 Revised Forecast is consistent with the assumptions in the
Third Report, and are based on the following:
a) Receipts are based on the Company's backlog of orders and work-inprogress reports. Collections of these amounts are subject t o timing and
can be impacted by a number of factors such as set-off issues, potential or
actual liens, to waiting on sign-offs.
b) Receipts on new business do not take into account set-offs by customers
on pre-filing liabilities and assumes that customers continue to pay and
honour time and material contracts in normal course as per contract
terms.
c) Receipts are based on project completion schedules forecasted by the
Company.
In the event project milestones are not met and/or actual
10
revenue is lower than planned and/or actual costs are higher than
forecasted, net cash receipts and their timing could be unfavourably
impacted.
d) The September 14 Revised Forecast assumes a cost reimbursement from
the RTA Agreement to November 30, 2013 and that RT will continue to
reimburse these costs consistent with past practice.
e) Forecast takes into account a continued focus by management on cost
reduction strategies.
21. The Companies are forecasted to continue to use the DIP Credit Facility for
some time and this DIP Credit Facility is expected to be substantially drawn
given the Companies' ongoing projects and working capital needs.
The
Companies will require the support of its customers and creditors during this
revised forecast period. Furthermore, as detailed below, Comstock requires
that customers who have not readily settled amounts owed to Comstock work
with the Companies and the Monitor to find commercially reasonable
solutions to address these amounts owed to Comstock.
Collection o f Accounts Receivable Owing t o Comstock
22. The Monitor would like to bring to the Court's attention that there are a
number of accounts receivable and/or accounts receivable holdback collection
issues that are unfavourably impacting Comstock, and in certain instances,
potentially appear to be in violation of the previous Orders of this Court.
Certain customers are withholding payments for a variety of reasons such as:
a) Notices of liens - Certain customers continue to set-off amounts owed to
Comstock when they receive notice of a potential lien. The Company and
the Monitor continue to advise these customers of the LRO process;
however, certain customers continue to ignore the LRO process.
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b) Global set-offs - Certain customers have chosen to apply a global set-off t o
amounts owed to Comstock. For example, one particular customer has
chosen to offset potential amounts owed to Comstock for deficiencies or
defaults that Comstock has, or may have, on unrelated projects pre and
post filing. In certain of these cases, the amounts being withheld are for
accounts receivable holdbacks owed to Comstock on projects in different
provinces.
c) Set-offs for Damages / Deficiencies - Certain customers have chosen to
offset accounts receivable holdbacks owed to Comstock for pre-filing
damages/deficiencies that they have advised are related to Comstock's
performance pre-filing. Furthermore, certain customers are withholding
payment on post-filing work performed by Comstock and its trades so as
to offset for these deficiencies.
d) Set-offs for Potential Warranty / Deficiency Issues - There are certain
customers that have chosen to implement a set-off against accounts
receivable and accounts receivable holdback aimounts owed to Comstock
when in fact there may not be a warranty provision, the warranty term has
expired, or there may not be any actual deficiencies associated with the
work done by Comstock.
e) Customer not providing account reconciliations - There are customers
that since July 9, 2013, have been unable to provide Comstock with any
reconciliation of amounts owed to Comstock and/or details on set-offs
applied against payments made to Comstock.
In some of these instances,
amounts owed to Comstock date back to work invoiced in March 2013.
23.The above collection issues impacting Comstock are material and have the
potential to impact the Company's liquidity, its ability to repay its DIP Lender
on a timely basis and allow for the Company to pay its project trade creditors
amounts duly owed to them. The Monitor is taking a more active role in
making contact with these customers in order to resolve these issues and if
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12
possible, find commercially reasonable solutions to address both Comstock's
need to collect these funds and the customer's potential issues.
24. The Monitor understands that the Company's counsel is in active discussions
with certain of these customers but the Monitor is concerned that these
customers have no sense of urgency in dealing with these outstanding
accounts, nor do they provide sufficient support and/or rationale for why such
payments are not being made as per previous Orders or based on contract
terms Comstock may have with them.
25. It is the intention of the Monitor to be back in front of this Court in the near
future if these issues continue and/or the Company and the Monitor cannot
make progress with customers who are not making timely payments of
amounts owed to Comstock.
VII.
SEPTEMBER 16 CONTRACT SUMMARY
26. In the Third Report, the outstanding contracts were classified as (i)
Ongoing, (ii) Reviewable and (iii) Abandoned. Since the date of the Initial
Order, the Company has reclassified certain of the "Ongoing" and
"Reviewable" projects based on project completions, updated information
and/or discussions with its customers. For purposes of this Fourth Report,
below is a discussion of the outstanding contracts a t September 16, 2013
based on the following five classifications.
(i)
Ongoing Contracts
27. As noted in the Third Report, Ongoing Contracts are generally those contracts
that are cash-flow positive for the Company. This summary excludes any of
the work under the RTA Agreement. As at September 16, the Company has 44
Ongoing Contracts.
28. The 44 ongoing contracts are not disclosed in this report so as not to put at
risk the SISP.
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(ii)
Complete Contracts w i t h Outstanding Accounts Receivable
29.There are 23 contracts that are complete and Comstock is awaiting receipt of
outstanding amounts owed to the Company. These funds will first be used to
repay pre-filing and post-filing construction lien and trust claimants before
such funds are available for general operations. Details on the 25 contracts
are not disclosed in this report so as not to put at risk the SISP.
(iii)
Completed Contracts a n d All Outstanding Accounts Receivable
Paid
30.There are 12 contracts that have been completed in full and all accounts
receivable and accounts receivable holdbacks have been paid to the Company.
The Company is now going through the process of examining their pre and
post filing construction lien and trust claims associated with these completed
contracts. Below is a summary of these completed contracts.
(iv)
Job
Customer
Job
No.
Name
Description
0330181
0850637
1330305
1330310
1330308
0330184
0820588
0820652
1310001
0520066
0160511
0760517
Nitta Casings (Canada)
Manitoba Hydro
Vale C a n a d a Limted
Vale C a n a d a Limted
Vale C a n a d a Limted
Purina C a n a d a
Winnipeg Airport Authority
Rakowski Cartage & Wrecking Limited
Transcanada Pipeline
K&L Construction
Canadian Natural R e s o u r c e s
Canadian Natural R e s o u r c e s
Line 11 & 12
Kettle Generation
CM003 S M P General
Conveyor Roof
Vale A E R Tie-in
Purina T & M - 2 0 1 3
Various Clients
T-54 Air Terminal
Control Valve
Stegh-Ambulator
CNRL C W P Building
Tailing Plant
Contracts Under R e v i e w
31. There are 5 contracts that are still under review by Comstock. The Monitor is
working with the Company to best determine the reclassification of these
contracts. In certain of these cases, due to the dollar value of the outstanding
contract(s), the Company just has not had the time to address the matter;
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however in certain of these cases, as noted above in the discussion of accounts
receivable, the Company has not been provided with any appropriate
information from customers or customers have chosen to set-off against
proposed deficiencies on other Comstock contracts.
For one of these
contracts, the Monitor understands that the majority of the amount relates to
accounts receivable holdbacks due to Comstock that the customer will not
release because of deficiencies on another project in a different province. As
noted above, the Monitor will continue to work with the Company and its
counsel to affect a collection on this particular amount. A summary of the
contracts under review are the following:
Job
Customer
Job
No.
Name
Description
0120515
0520051
1320235
0820572
0830623
Ellis -Don Corporation
Ellis -Don Corporation
Ellis -Don Corporation
Ellis -Don Corporation
Gerdau Ameristeel
Edm Inter. Airport
W o o d s t o c k Hospital
Sud. Reg. Hospital
Winnipeg Airport
Gerdau C o st Plus
Abandoned Contracts
.There are 6 contracts now that are classified as abandoned as at September
16. It is important to note that of the 6 contracts 4 of them were customer
requested or forced abandonments (Chrysler and Ellis Don). A summary of
the contracts abandoned are as follows.
Job
Customer
Job
No.
Name
Description
0320235
0520064
0440114
0440117
0320233
0820662
J.J. McGuire
K&L Construction
Chrysler Canada Ltd.
Chrysler C a n a d a Ltd.
Ellis -Don Corporation
Ellis -Don Corporation
Hulmark Centre
King's College
Chrysler BAP
Chrysler Etobicoke
SickKids R e s e a r c h
W o m e n ' s Hospital
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VIII. SICKKIDS & WOMEN'S HOSPITAL PROJECT UPDATE
33. As this Court is aware, Comstock was forced by Ellis Don to abandon their
involvement in the SickKids and Women's Hospital Projects due to non­
payment.
The following is a brief overview of the outstanding issues
associated with these two contracts.
SickKids Project
34. Subsequent to Comstock's abandonment of the SickKids Project, the Monitor
understands that Honeywell Limited and Cofely Adelt Ltd. requested from
Comstock that they have their contracts with Comstock disclaimed.
Furthermore, the Monitor understands that Cofely Adelt Ltd. engaged in
settlement discussions with Ellis Don in connection with the motion brought
by Cofely Adelt Ltd. ("Adelt") to remove the SickKids Project from the
application of the Lien Regularization Order.
The motion by Adelt has since
been withdrawn. Honeywell Limited brought a motion to compel Comstock
to disclaim its contract or otherwise lift the stay in order to permit Honeywell
Limited to terminate its contract with Comstock on this project. This motion
was opposed by Comstock, the DIP Lender and the Monitor and was heard on
September 16, 2013. A decision on that motion has yet to be released.
35. The Monitor has also been advised by counsel to Ellis Don and through letters
received from SickKids directly by the Monitor that Ellis Don and SickKids
have requested receipt of certain information from Comstock related t o
commissioning and other project matters that SickKids and Ellis Don require
for completion of this project. The Monitor provided this information request
to the Company. In letters dated September 10, 2013 to both SickKids and
Ellis Don, counsel to Comstock provided certain details to both parties as to
the respective consultants and trades related to the SickKids Project from
which this information can be retrieved.
36. The Monitor understands that as at the date of this Fourth Report, Comstock
has $804,950 in accounts receivable owed to them for work performed onsite
after the date of the Initial Order.
This includes direct labour costs of
$341,635 (funded by the DIP Credit Facility) on the SickKids Project since the
date of the Initial Order. Furthermore, Comstock has also incurred direct
costs of approximately $391,487 associated with sub-trades, materials, etc.
supporting Comstock on this project prior to Comstock having to abandon the
project. The Monitor understands that these amounts remain unpaid as at
the date of the Fourth Report as the Company is not in receipt of post-filing
amounts owed to it by Ellis Don to pay these post-filing creditors.
The
Monitor also understands that the direct costs related to the project may
change as additional invoices are received.
37. The Monitor will continue to work with the Company and its counsel to get
these costs paid; however, the Monitor understands that Ellis Don is not
intending to repay Comstock for these post filing costs.
W o m e n ' s Hospital Project
38.Subsequent to Ellis Don requesting that Comstock abandon the Women's
Hospital Project, Comstock received a letter on August 30, 2013 from Ellis
Don in which Ellis Don asserted that Comstock had failed to perform its
obligation on the Women's Hospital Project and Ellis Don needed to mitigate
these issues and risks. Ellis Don asserted a right to set-off on amounts owed t o
Comstock i n relation to the Women's Hospital Project and that it had the right
to set-off in relation to other projects in which Comstock was the
subcontractor.
39. Comstock responded, through its counsel, to this letter on September 10, 2013
disagreeing with the assertions made by Ellis Don as to the defaults or issues
caused by Comstock. Furthermore, in this same letter, Comstock advised Ellis
Don that there was approximately $6,600 in amounts owing to third parties
on Comstock's accounts payable ledger.
40.The Monitor is also aware that there is approximately $190,395 in post filing
labour costs incurred by Comstock on the Women's Hospital Project that has
been funded and paid using Comstock's DIP Credit Facility.
41. The Monitor will continue to work with the Company and its counsel to get
these costs paid; however, the Monitor understands that Ellis Don is not
intending to repay Comstock for these post filing costs.
IX.
ST. JOSEPH'S PROJECT UPDATE
42. The profitability forecast for the St. Joseph's Project materially changed in
August 2013. The Monitor has been working with the Company over the past
few weeks to ascertain the reasoning for the material changes, reforecasting
the project costs and timelines, understanding the impact cash flow and
ensuring that additional oversight is implemented by the Company and the
Monitor on this specific project.
43. The revisions in the profit margins in August 2013, management advised,
were attributed to factors including, among others:
a) The actual labour costs for mechanical and electrical services are
forecasted to be higher than originally planned.
This unfavourable
variance is attributed to labour productivity being lower than planned over
the past two months, the push by Comstock to meet upcoming project
deadlines as best they can which includes finishing all required electrical
and mechanical installations and required commissioning.
b) The need to hire "out of town" labour and hire sub-contractors. Given the
upcoming project milestones for project completion and occupancy,
Comstock has supplemented its local labour pool with out-of-town travel
labour and third party sub-contractors in order to increase the overall
percentage of completion on electrical and mechanical work. These costs
are attributed to labour productivity being lower than planned and the
inability to source required local labour that had the appropriate
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experience and/or was willing to work the shifts (i.e., nights) that
Comstock requires in order to complete the project as best they can under
the timelines they are facing.
c) Impact of construction delays, deficiencies and/or other trades being
behind schedule. There are instances i n which Comstock is being delayed
by other trades and/or could be impacted by sub-trades being behind
schedule; however, given the upcoming project deadlines, Comstock is not
in a position yet to materially decrease its head-count on this project.
d) Impact of CCAA proceedings on Comstock's ability to obtain appropriate
supply of inventory and/or credit terms. This challenge created supply
interruptions and furthered impacted labour productivity and overall
profit margins.
44. As noted above, the unfavourable variances on the profit margins associated
with the St. Joseph's Project relate to labour and the need for Comstock to be
substantially complete on this project in the next two months. Comstock
provides frequent updates to PCL on these matters and the Monitor has been
advised that Comstock has also advised the respective local unions of their
concerns related to productivity. Comstock is also in active and continuous
discussions with the various trades of Comstock as to their ability to complete
their required work.
45. In order to assist the Monitor in understanding the revised forecast, the
Monitor has engaged the services of Altus (discussed below) in order to
provide the Monitor with specialized construction advisory on this project so
that the Monitor can better understand and examine the revised forecast
profit margin.
46. As noted above, this decrease in overall profit margin has negatively impacted
cash flows on two fronts: (i) monthly liquidity and (ii) extended the timeframe
for the repayment of the DIP loan.
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47- From a monthly liquidity perspective, the increase in labour and inventory
costs for the period August 2013 to December 2013 was not originally
forecasted when the Companies were in discussions with its DIP Lender in
July 2013. As in all construction projects, Comstock must incur the costs in
advance of being paid for them. With an increase in actual and forecasted
labour costs, Comstock needs to find room on its fixed DIP Credit Facility in
order to address an increase in project costs that were not planned for and at
the same time meet its obligations on other projects. As noted above, the
Companies have been able to address this timing issue with actual favourable
variances to date and is forecasting that they will be able to continue to meet
the revised forecasted costs on this project, and others, under its current DIP
availability as shown on the September 14 Revised Forecast.
48. The repayment of the DIP Credit Facility has now been extended given the
increase in costs and the DIP Lender's risks associated with repayment have
also increased given the decline in the St. Joseph's Project's profit margin.
This risk could increase if the Companies were to continue to incur increased
costs over forecast. The Monitor has kept the DIP Lender fully apprised of the
changes and impact on its DIP loan, timeframes and overall recovery.
X.
ENGAGEMENT OF ALTUS
49.As noted above, given the significant change in the profit margin on the St.
Joseph's Project, the Monitor has retained the services of Altus. Altus is a
globally recognized real estate and construction advisory firm.
50.Altus has only been retained by the Monitor to review the St. Joseph's
Project's mechanical and electrical contract status and go forward cost
estimates and timelines provided by management and how such estimates
and timelines line up with previously provided forecasts and project
milestones. The Monitor has requested that Altus provide its preliminary
review on or about September 27, 2013 so that the Monitor can be in a
position to provide such update to the DIP Lender, any potential bidder on
20
the Comstock business that may include the St. Joseph's Project and this
Court, if need be.
XI.
SISP UPDATE
51. With the assistance of the Monitor, Comstock is currently proceeding with the
SISP as approved by this Court on August 7, 2013. To date, there have been a
number of strategic and financial parties that have signed non-disclosure
agreements ("NDA's") and have received a Confidential Information
Memorandum and/or access to the secure data-room.
The Monitor will
undertake to provide further details on the SISP when the Companies and the
Monitor come back before this Court for any such approvals required under
the SISP in the near future.
52. Any offers contemplated by a prospective purchaser need to be received by the
Bid Deadline of noon (Toronto) on September 27, 2013. To date, the Monitor
has received an advance offer on the Sudbury Property as is discussed below.
53. On September 12, 2013, management notified the Monitor that 3 members of
the management team will be participating in the SISP. The 3 management
members have been excused from any further SISP update meetings.
XII.
THE SUDBURY PROPERTY
54. The Sudbury Property is Comstock owned property located at 2766 Belisle
Drive in the City of Greater Sudbury in the Province of Ontario. The Sudbury
Property is approximately 5,000 square feet of industrial space on
approximately 4 acres of land.
55. The Sudbury Property is no longer being used by Comstock and was
essentially shut-down prior to these CCAA proceedings as the Company has
no active contracts or business in the Greater Sudbury area. The Sudbury
Property is included as an asset to be sold as part of the SISP previously
approved by the Court.
21
56. The Monitor understands that Comstock holds the bare legal title to the
Sudbury Property and that pursuant to a transfer of the beneficial interest
dated July 29, 2011, made between Comstock and CCL Realty, Comstock
transferred its beneficial interest in the Sudbury Property to CCL Realty,
together with the operating assets and liabilities relating thereto. The Monitor
understands that CCL Realty consents to the sale of the Sudbury Property.
57. As at the date of this Fourth Report, the Companies and the Monitor are not
aware of any other parties interested in the Sudbury Property, nor do the
Companies and the Monitor expect any parties to come forth at September 27,
2013, the deadline for all offers under the SISP, to put forth an offer on the
Sudbury Property.
58. The potential purchaser of the Sudbury Property approached the Companies
prior to the approval of the SISP process and made a firm offer on the
Sudbury Property. At that time the Companies and Monitor advised the
potential buyer Of the SISP process, requirement to sign an NDA and provided
them with access to the data room.
59. After the approval of the SISP process, the Companies and the Monitor had
subsequent discussions with the potential purchaser and this party was
willing to increase their initial offer by 12% if they could close this purchase
immediately with approval of the Court. The Companies and the Monitor both
support the approval of the Sale Agreement prior to the completion of the
SISP based on the following:
a) the sale provides certainty of value and allows the Companies to terminate
the overhead costs associated with carrying the Sudbury Property (i.e.,
utilities, property taxes)
b) The Sudbury Property was appraised in January 2012. The Companies
and the Monitor have not updated the appraised value, but the purchaser
is willing to purchase the Sudbury Property for an amount that materially
exceeds the previously appraised value.
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c) The potenti
al
purchaser has increased their initial offer by 12% in order to
facilitate a transaction in advance of the SISP concluding.
d) The Sudbury Property would not add any material value for any potential
bidder looking to bid for the Companies as a going concern.
e) The DIP Lender supports the Sale Agreement and having the transaction
conclude prior to the SISP deadline of offers.
f) The offer provided by the potential purchaser otherwise meets the
requirements of the SISP and the potential purchaser has advanced the
deposit that is being held by the Monitor.
60.Included as Appendix "C", is a sealed and confidential copy of the signed
Sale Agreement. The Companies have requested that the purchase price be
kept confidential until the closing of the Sale Agreement so as not to prejudice
the process if the Sale Agreement is not approved by this Court or otherwise
fails to close. The Monitor supports the request of the Companies to keep the
Sale Agreement confidential until after closing.
Upon closing of the Sale
Agreement, the Monitor will post on its website the Confidential Appendix
"C".
61. It is the intention of the Monitor to hold these proceeds in a separate trust
account until the Monitor's counsel can provide a security opinion.
Furthermore, the Monitor was made aware that prior to the date of the NOI,
on June 12, 2103, the Ontario Superior Court of Justice issued a Writ of
Seizure and Sale in favour of the plaintiff Moran Mining & Tunnelling Ltd.
,
("Moran Clainl
)
to sell and seize the property to settle amounts owing of
approximately $345,000.
62. The Monitor will update the Court accordingly as to the Monitor's counsel
review of security over the Sudbury Property and the Moran Claim; however
the Monitor is requesting that this court approve the Sale Agreement and to
have such funds held by the Monitor pending the Monitor's review of security.
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Subject to the Monitor receiving an opinion that the Bank of Montreal's
security over the Sudbury Property is valid and enforceable, the Monitor will
request permission to release such funds to the Bank of Montreal as required
under the DIP Credit Facility by way of subsequent motion to the Court.
XIII. THE INITIAL ORDER
63. Paragraph 12(c) of the Initial Order provides that subject to certain
requirements, Comstock shall have the right to, among other things:
pay no more than ninety percent (90%) of any amounts owing
for certain pre-filing project payables in respect of related
accounts receivable of the Applicants collected subsequent to
June 28, 2013, as deemed necessary by the Applicants, and
consented to by the Monitor, for the purpose of maintaining
the going concern potential of the Applicants;
64.This paragraph was included in the Initial Order for two principal reasons: (1)
to provide Comstock with the ability to pay its suppliers and subcontractors
and encourage them to continue to supply to ongoing projects; and (2) the
process of collecting and administering accounts payable and receivable is
time-consuming and costly while under CCAA proceedings and Comstock
should be entitled to retain a portion of the receivables to offset its costs and
fund its restructuring efforts.
65. Pursuant to paragraph 12(c) of the Initial Order, Comstock would only pay
90% of the pre-filing project payables in respect of a particular project to the
extent that the receivable in respect of such project exceeds the pre-filing
payables (essentially statutory trust amounts); where there is a shortfall, the
pre-filing project payables are paid out on a p r o rata basis.
66. Given the post-filing experience, the process of collecting and administering
the accounts payable and receivables on any project has proven to be time
consuming and costly, the Monitor believes that it should be clarified that
24
paragraph 12(c) of the Initial Order applies to all pre-filing project payables
regardless of whether or not any particular supplier or subcontractor
continued to supply to Comstock post-filing or asserted lien rights in respect
of a project. In fact, if paragraph 12(c) was interpreted as only applying to
suppliers/subcontractors
who continued to supply post-filing,
those
suppliers/subcontractors would be gaining an advantage over others because
they could be entitled to be paid 100% of their pre-filing project payables t o
the extent that funds are available whereas someone who continued to supply
would be limited to 90%.
67. Accordingly, it is proposed that paragraph 12(c) of the Initial Order be
amended to provide as follows:
pay no more than ninety percent (90%) of any amounts owing
for certain pre-filing project payables in respect of related
accounts receivable of the Applicants collected subsequent to
June 28, 2013, as deemed necessary by the Applicants, and
consented to by the Monitor, for the purpose of maintaining
the going concern potential of the Applicants and, for clarity,
this shall apply to all pre-filing project payables regardless of
whether the pre-filing project payable relates to an ongoing,
completed, or abandoned project and regardless of whether
the claimant continues, or does not continue to provide
materials, goods, or services to such project post June 28,
2013;
68.The proposed clarification will provide certainty to Comstock's pre-filing
project payables as to how their trust claims will be treated and will ensure
that suppliers and subcontractors who continue to supply to ongoing projects
are not left worse off than those supplier/subcontractors who are no longer
supplying.
Furthermore, given the professional time being spent by the
Monitor, its counsel, and counsel to the Companies to administer the
collection of receivables for the benefit of all pre-filing project payables, this
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clarification is warranted. Therefore, the Monitor supports the clarification t o
paragraph 12(c) of the Initial Order and believes the effect of 12(c), as
clarified, remains fair and reasonable under the circumstances.
XIV. RECOMMENDATION
69. The Monitor recommends that this Court issue an Order approving, inter alia;
a) The activities of the Monitor as set out in the Fourth Report;
b) Approve the Sale Agreement; and
c) Approve the clarification to paragraph 12(c) of the Initial Order.
All of which is respectfully submitted at Toronto, Ontario, this 20th day of September,
2013.
Paul v a n Eyk, CA CIRP, CA IFA
Senior Vice-President
PricewaterhouseCoopers Inc.
in its capacity as Monitor of
Comstock Canada Ltd., CCL Reality Inc. and CCL Equities Inc.
and not in its personal capacity
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