FIFTH REPORT TO COURT SUBMITTED BY PRICEWATERHOUSECOOPERS INC.

Court File No. 32-1896275
Court File No. 32-1896278
FIFTH REPORT TO COURT
SUBMITTED BY PRICEWATERHOUSECOOPERS INC.
IN ITS CAPACITY AS TRUSTEE UNDER THE
NOTICES OF INTENTION TO MAKE A PROPOSAL OF
X5 CARGO GP INC. and XS CARGO LIMITED PARTNERSHIP
December
23,2014
Estate Number. 32-1896278
Court File Number. 32-1896278
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE MATFER OF THE NOTICE OF INTENTION TO MAKE A PROPOSAL OF
XS CARGO GP INC.
FIFTH REPORT TO THE COURT
SUBMITTED BY PRICEWATERHOUSECOOPERS INC.
IN ITS CAPACITY AS TRUSTEE UNDER THE NOTICES OF INTENTION OF
XS CARGO GP INC. and XS CARGO LIMITED PARTNERSHIP
December 23, 2014
INTRODUCTION
This report (the "Fifth Report") is filed by PricewaterhouseCoopers Inc. ("PwC"), in its
capacity as proposal trustee (the "Proposal Trustee") in connection with the Notices of
Intention to Make a Proposal ("NOI") filed by XS Cargo GP Inc. ("GP") and XS Cargo
Limited Partnership ("LP") (collectively "XS Cargo" or the "Group") on July 30, 2014
(the "Filing Date") under Section 50.4 (i) of the Bankruptcy and Insolvency Act, R.S.C.
1985, c. B.-3, as amended (the "BIA").
2.
The Proposal Trustee filed its first report with the Ontario Superior Court of Justice
(Commercial List) (the "Court"), dated August 1, 2014, which, among other things,
provided the Proposal Trustee's views on certain relief sought by XS Cargo in respect of a
motion brought by it on August 6, 2014. Included in the relief sought and granted on that
motion was an order of the Court administratively consolidating the NOT proceedings of GP
and LP.
The Proposal Trustee filed its second report (the "Second Report") with the Court on
August 27, 2014, in conjunction with XS Cargo's motion to the Court on August 29, 2014,
which resulted in the Court granting an order (the "Second Court Order"):
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Approving the extension of the time for the Group to file a proposal to October 1o,
2014; and
Granting an order sealing the Confidential Bid Summary and the Baseline Cash
Flow. (Both items as defined in the Second Report.)
4.
The Proposal Trustee filed its third report (the "Third Report") with the Court on
September 17, 2014 in conjunction with XS Cargo's motion to the Court on September 19,
2014, which resulted in the Court granting an order:
Approving the transactions contemplated under an agency agreement (the
"Agency Agreement") entered into between XS Cargo and Tiger Capital Group,
LLC ("Tiger") on September 15, 2014;
Approving the transactions contemplated under an Asset Purchase Agreement (the
"APA") entered into between XS Cargo and 9014454 Canada Inc. ("Newco" or the
"Purchaser") on September 15, 2014;
Vesting in the Purchaser XS Cargo's right, title and interest, if any, in and to the
purchased assets described in the APA;
Assigning to the Purchaser various of the Group's agreements, as described in the
APA;
Sealing the unredacted Agency Agreement and the unredacted APA; and
(vi)
5.
Granting an order sealing the Tiger Cash Flow.
The Proposal Trustee filed its fourth report (the "Fourth Report"), with the Court on
October 6, 2014 (the "Date of the Fourth Report") in conjunction with XS Cargo's
motion to the Court on October 7, 2014, which resulted in the Court granting an order (the
"Fourth Court Order") approving the extension of the time for the Group to file a
proposal to October 31, 2014.
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6.
The Group lodged a proposal with the Proposal Trustee dated October 29, 2014 (the
"Proposal"), which was filed with the Official Receiver on October 30, 2014. A copy of the
Proposal is attached hereto as Exhibit A.
I.
On November 10, 2014 the Proposal Trustee mailed to the Group, the Superintendent in
Bankruptcy and to all known creditors a creditors' package notifying the recipients of the
Meeting of Creditors scheduled for November 20, 2014 and enclosing, among other things,
a copy of the Proposal Trustee's Report to Creditors on the Proposal dated November 9,
2014 (the "Trustee's Report"). The Trustee's Report contains a summary of the terms of
the Proposal and the Trustee's comments on the Proposal. A copy of the Trustee's Report is
attached hereto as Exhibit B.
8.
On November 13, 2014 the Court made an order (the "Receivership Order") appointing
PricewaterhouseCoopers Inc. as receiver (the "Receiver") of GP and LP. The Receivership
Order, inter a/ia, directed the Receiver to do the following:
Pursue, for and on behalf of XS Cargo, approval and implementation of the
Proposal; and
(ii)
Perform the obligations of XS Cargo, and exercise the rights and benefits of XS
Cargo, under the Agency Agreement.
9.
A copy of the Receivership Order is attached hereto as Exhibit C.
10.
The purpose of the fifth report is to update the Court on the results of the Meeting of the
Creditors.
11.
Copies of the Proposal Trustee's previous reports and the Orders made in these proceedings are
available
on
the
Proposal
htt:!!w
Trustee's
at
Unless otherwise stated, all
monetary amounts contained herein are expressed in Canadian Dollars.
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website
DISCLAIMER AND TERMS OF REFERENCE
12,
In preparing this report and conducting its analysis, the Proposal Trustee has obtained and
relied upon certain unaudited, draft and/or internal financial information of the Group, the
Group's books and records and discussions with various parties including the Group's
employees and certain of its directors (collectively, the "Information").
13.
Except as otherwise described in this report:
The Proposal Trustee has not audited, reviewed or otherwise attempted to verif the
accuracy or completeness of the Information in a manner that would wholly or
partially comply with Generally Accepted Assurance Standards pursuant to the
Canadian Institute of Chartered Accountants Handbook; and
(ii)
The Proposal Trustee has not conducted an examination or review of any financial
forecast and projections in a manner that would comply with the procedures
described in the Canadian Institute of Chartered Accountants Handbook.
14.
Future oriented financial information referred to in this report is based on estimates and
assumptions. Actual results may vary from forecast, even if the assumptions materialize,
and such variations may be significant.
Unless otherwise stated, all monetary amounts contained herein are expressed in Canadian
Dollars and exclude harmonized sales tax ("HST"). Capitalized terms not otherwise
defined are as defined in the Reith Affidavit.
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UPDATE REGARDING XS CARGO SINCE THE DATE OF THE FOURTH REPORT
16,
Pursuant to the Third Court Order, the liquidation sale contemplated by the Agency Agreement
commenced on September 20, 2014. Tiger and XS Cargo have performed the following with
respect to the Agency Agreement:
Completed the inventory taking with a qualified service provider;
Liquidated and closed all 50 stores within the XS Cargo network;
Liquidated and closed both distribution centres;
Completed the sale of all furniture, fixtures and equipment;
Completed the sale of all residual assets;
Calculated the Guaranteed Amount to be $7,796,801, based on the aggregate cost
value of merchandise as determined by the final certified report of the inventory
taking service, a portion still payable to XS Cargo by Tiger;
Calculated the Merchant's Sharing Recovery Amount from the sale of merchandise
to be $1,796,761, payable to XS Cargo by Tiger;
Calculated the Additional Merchandise Recovery Amount from the sale of Tiger
merchandise to be $31,512, payable to XS Cargo by Tiger;
Determined the Merchant's share of proceeds from the sale of furniture, fixtures
and equipment to be $513,464, a portion payable to XS Cargo by Tiger; and
(x)
Determined the total amount of expenses that Tiger is responsible to reimburse to
XS Cargo as a result of the sale.
17.
In an effort to wind down the XS Cargo business, XS Cargo and/or the Receiver have completed
the following:
(i)
Disclaimed the Edmonton distribution centre lease effective October 19, 2014;
(ii)
Disclaimed all store leases effective November 9, 2014;
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Terminated and paid out all remaining store, distribution centre and head office
employees (including amounts owing for the Key Employee Retention Plan) by
November 14, 2014;
Relocated IT infrastructure and re-established access to systems on November 28,
2014;
Terminated the Mississauga distribution and head office lease effective November
30, 2014; and
Terminated all open contracts and agreements with service provider
In accordance with the Agency Agreement and the Third Court Order, the Group made an
interim distribution on September 22, 2014 to CIBC (the "Interim Distribution") in the
amount of $,ooo,ooo. The Interim Distribution represented the indefeasible payment to CIBC
from the Initial Guaranty Payment. On October 23, 2014 the Group made a distribution of
$891,067.03 to CIBC to repay their loan, interest and fees in full. This distribution was made
from receipt of $1,500,000 in partial payment from Tiger.
UPDATE ON THE PROPOSAL
19.
On the 10th day of November, 2014, in accordance with the requirements of the BLk, the
Trustee gave notice (the "Notice") to the Group, to the Superintendent of Bankruptcy (the
"Superintendent") and to every known creditor affected by the Proposal, whose names
and addresses are shown in Exhibit D to this report, of the calling of a meeting of creditors
(the "Meeting of Creditors") to be held on the 20th day of November, 2014 to consider
the Proposal.
20.
With the Notice was included a copy of the Proposal, the Group's Statement of Affairs, a list
of creditors affected by the Proposal who have claims of $250 or more, a form of Proof of
Claim and Proxy in blank, a Voting Letter and the Trustee's Report. A copy of the Notice,
the list of creditors, and the Statement of Affairs are attached and marked as Exhibits El,
E2, E3, respectively.
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21.
Prior to the Meeting of Creditors, the Proposal Trustee conducted and caused to be made
enquiry into the liabilities of the Group, the Group's assets and the value thereof, the
Group's conduct, and the causes of the Group's insolvency. A discussion of that review,
along with a summary of the Proposal and the Proposal Trustee's comments thereon are
included in the Trustee's Report.
MEETING OF CREDITORS
22.
The Meeting of Creditors was held on November 20, 2014 and was presided over by Mrs.
Tracey Weaver ("Chairman") and Mr. Philippe Jordan of PwC.
23.
At the Meeting of Creditors the Chairman tabled, among other documents, the Trustee's
Report which reported on the Proposal Trustee's findings related to its review of:
(i)
The Group's financial records to identify any transactions that may be considered
preferences and/or transfers at undervalue, and
(ii)
24.
The amount reported as owing to creditors of the Group in the Proposal.
At the Meeting of Creditors, the Proposal was accepted by the requisite number and dollar
value of the Group's unsecured creditors present and voting (in person or by proxy) at the
Meeting of Creditors. The results of the vote taken at the Meeting of Creditors are as set out in
the tables below:
In favour
Against
Abstain
Total
#Voting in favour
$ Value represented by "in favour" votes
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215
4,470,827
14
1,595,451
-
229
93.9%
73.7%
-
$
6,066,278
25.
At the Meeting of Creditors the Chairman declared the Proposal accepted, but noted to the
creditors present that there were three contingent claims filed and voted by landlords whose
leases had been disclaimed, with a total value of $1,639,693 (the "Landlord Claims"). All
three Landlord Claims were voted in favour of the Proposal at the Meeting.
z6.
Following the conclusion of the Meeting, the Proposal Trustee reviewed the quantum of the
Landlord Claims with the relevant landlords, particularly in respect to the amount claimed for
damages resulting from the disclaimer of their leases. The Proposal provides that landlords
may claim for actual damages suffered with respect to leases that were repudiated by XS Cargo.
Two of the landlords had claimed the entire unexpired portion of the term of the lease (three
years and three years and two months, respectively) without providing any reduction for the
landlord's duty to mitigate by attempting to re-let the premises.
27.
The Proposal Trustee requested and obtained further documentation from the landlords as to
the nature of the leases, the monthly rents, the square footage and details on the general
location/neighbourhood of each of the premises. All three landlords provided the Proposal
Trustee with evidence of time frames for leasing comparable properties, within a similar
location.
28.
The documentation submitted to the Proposal Trustee by the landlords indicated that a
reasonable expectation of the length of time it would take to re-let these premises was between
six and i8 months, depending on the premises. Following discussion with the Proposal Trustee,
two of the landlords revised their claim to reflect an eight month vacancy period, while the
third claimed i8 months. The result of the Proposal Trustee's discussions with the landlords,
who had Landlord Claims, resulted in a reduction in the amount of the Landlord Claims from
$1,639,693 to
693,854.
The Proposal Trustee has accepted the revised Landlord Claims.
30.
The results of the vote on the Proposal taking into account the amount of the revised Landlord
Claims is set out in the following table:
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In favour
Against
Abstain
Total
#Voting in favour
$ Value represented by "in favour" votes
215
3,524,988
14
1,595,451
229
$
5,120,439
93.9%
68.8%
31.
A copy of the minutes of the Meeting of Creditors is attached hereto as Exhibit F.
32.
At the Meeting of Creditors, no creditor brought a motion to elect an inspector. As such, no
inspectors were appointed.
OPINION OF PROPOSAL TRUSTEE
33.
The Proposal Trustee is of the opinion that:
(i)
The assets of the Group and their fair realizable value are as reflected on the
Statement of Affairs (see Exhibit E3); and
(ii)
The liabilities of the Group are as reflected on the Statement of Affairs (see Exhibit
E3).
34.
The Proposal Trustee is also of the opinion that:
(i)
Based on the information provided by the Group, the cause of XS Cargo's financial
difficulties were increased competition, the declining value of the Canadian dollar
and lower spending by price-conscious consumers;
(ii)
Based on the Proposal Trustee's investigations, as detailed in the Trustee's Report,
the Proposal Trustee did not identify payments that may qualify as preferences
pursuant to Section 95(1) of the BIA; and
(iii)
The Proposal Trustee is not aware of any facts, pursuant to Section 173 of the BIA,
which may be proved against the Group, and therefore, is of the view that section
59(3) should apply.
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35,
At the Meeting of Creditors, the Canada Revenue Agency ("CRA") voted against the Proposal.
The Proposal Trustee understands that CRA also intends to oppose the sanctioning of the
Proposal. The Proposal Trustee will ensure that CRA is served with notice of the motion on
January 14, 2015, for the sanctioning of the Proposal, by the Court.
36.
Despite providing only a modest return to creditors, the Proposal Trustee believes that the
Proposal is advantageous to the Group's creditors for the following reasons:
If the Proposal fails to be sanctioned by the Court, pursuant to section 61(2) of the
BIA, there will be a deemed assignment into bankruptcy;
The amount being made available for distribution to the Creditors under the
Proposal is subject to the security interest of secured creditors, notably the
Mezzanine Loan Lenders (as such term is defined in the Trustee's Report). The
Mezzanine Loan Lenders have indicated that they are only willing to make such
funds available in the Proposal and will not agree to make any funds available to
the unsecured creditors in a bankruptcy;
The amount owing to secured creditors exceeds the proceeds from the liquidation
and all other realizations available. Accordingly, there will be no recovery for
unsecured creditors in a bankruptcy. As such, the Proposal provides a distribution
to the Group's unsecured creditors in excess of that which would be available in a
bankruptcy; and
The Proposal is calculated to benefit the general body of the creditors.
37.
On the 9t1 day of December, 2014, the Proposal Trustee caused to be sent to the
Superintendent, the Group, and to every creditor of the Group, a notice of the time and place of
the hearing of the application to the Court to approve the Proposal. A copy of the above-noted
notice is attached hereto as Exhibit G.
38.
The Proposal Trustee will forward a copy of this Fifth Report to the Superintendent as soon as
possible following its issuance.
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CONCLUSION
39.
In accordance with section 58 of the BIA and paragraph 4 of the Receivership Order the
Proposal Trustee is seeking the approval of the Court for the Proposal.
40.
The Proposal Trustee respectfully submits to the Court this, its Fifth Report.
Dated this 23rd da of December, 2014.
PricewaterhouseCoopers Inc.
In its capacity as Proposal Trustee of
XS Cargo GP Inc. and XS Cargo Limited Partnership
Greg Prince
Senior Vice President
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