Court File No. CI 13-01-83654 THE QUEEN’S BENCH WINNIPEG CENTRE

Court File No. CI 13-01-83654
THE QUEEN’S BENCH
WINNIPEG CENTRE
IN THE MATTER OF:
Companies’ Creditors Arrangement Act,
R.S.C.
1985, c. C-36, as Amended
AND IN THE MATTER OF:
A Proposed Plan of Compromise or
Arrangement
Of McDiarmid Lumber Ltd., Superior Truss
Co. Ltd. And WW Doors Inc.
APPLICATION UNDER THE:
Companies’ Creditors Arrangement Act,
R.S.C.
1985, c. C-36, As Amended
FOURTH REPORT OF PRICEWATERHOUSECOOPERS INC.
IN ITS CAPACITY AS MONITOR OF
MCDIARMID LUMBER LTD., SUPERIOR TRUSS CO. LTD. AND WW DOORS INC.
August 23, 2013
Introduction
1.
On May 23, 2013, McDiarmid Lumber Ltd. (“McDiarmid”), Superior Truss Co.
Ltd. (“TrussCo”) and WW Doors Inc. (“WW Doors” and, combined with
McDiarmid and TrussCo, the “Companies”, the “Applicants” or the
“McDiarmid Group”) made an application to the Manitoba Court of Queen’s
Bench (the “Court”) seeking certain relief under the Companies’ Creditors
Arrangement Act, R.S.C., c. C-36, as amended (the “CCAA”). On hearing
submissions for counsel to the Applicants, the Canadian Imperial Bank of
Commerce (“CIBC” or the “Bank”), Superior Builders Ltd. (“Superior”) and
PricewaterhouseCoopers Inc., (“PwC”) as proposed Monitor (the “Proposed
Monitor”), and on reading the affidavits filed by Mr. Richard Hutchings (the
“Hutchings Affidavits”) and Mr. Jim Matthews (the “Matthews Affidavit”)
and on reading the pre-filing report of the proposed monitor (the “Pre-filing
Report”), the Court granted an order (the “Initial Order”) declaring that the
CCAA applied to the Applicants and, inter alia, appointing PwC as monitor of the
Applicants (the “Monitor”) pursuant to the CCAA. The CCAA proceedings are
referred to herein as the “Proceedings”.
2.
This is the fourth report of the Monitor in the Proceedings (the “Fourth Report”).
The first report of the Monitor was filed May 29, 2013 (the “First Report”), the
second report of the Monitor was filed June 13, 2013 (the “Second Report”) and
the third report of the Monitor was filed June 20, 2013 (the “Third Report”).
3.
Unless otherwise stated, all monetary amounts described herein are in Canadian
Dollars.
4.
Capitalized terms not otherwise defined herein are as defined in the Initial Order.
Purpose of Report
5.
The purpose of this report is to provide the Court with the Monitor’s
recommendation with respect to the Applicants’ motion seeking an extension to the
Stay Period to December 7, 2013 and amending and enhancing the Monitor’s
powers;
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6.
In addition, this report is intended to provide the Court with information in respect
of:
a. the Applicants’ business activities since the date of the Third Report, including
ongoing operations, dealings with suppliers and employees;
b. the activities of the Monitor since the date of the Third Report, including the
completion of duties prescribed pursuant to the CCAA;
c. the status of payments to Superior on account of the balance owed to it by the
Applicants and the estimated shortfall to Superior on account of the
indebtedness owed; and
d. the amount of funds determined by the Monitor to be reasonably required
through to the completion of the Proceedings, having regard to the Applicants’
own cash flow requirements and any prior charges or encumbrances (the
“Reserve”).
Restrictions
7.
In preparing this report, conducting its analysis and making the comments herein,
the Monitor has obtained and relied upon certain unaudited, draft and / or internal
financial information of the Applicants, their books and records, discussions with
management and other employees of the Applicants and information from other
sources (collectively, the “Information”).
8.
Except as otherwise described in this 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 wholly or
partially comply with Generally Accepted Assurance Standards pursuant to the
Canadian Institute of Chartered Accountants Handbook;
b. the Monitor has not conducted an examination or review of the financial
forecast and projections in a manner that would comply with the procedures
described in the Canadian Institute of Chartered Accountants Handbook.
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9.
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.
Applicants’ Activities since the date of the Third Report
Operations
10.
The Companies continue to provide the Monitor with their full co-operation and
access to their premises, books and records.
11.
The closing of the purchase and sale transaction (the “Transaction”) to McMunn
& Yates Building Supplies Ltd. (“McMunn”) was finalized on Monday, June 10,
2013, with the effective date of the closing being June 7, 2013 at 6:00 pm. Certain
post-closing matters related to the Transaction are ongoing.
12.
McDiarmid’s store operations in the Sioux Lookout, Winnipeg (Nairn store and
Nairn clearance centre) and Yorkton locations have now been wound down.
Remaining assets are being centralized at McDiarmid’s Headingly location with the
intent of a final auction in mid-September.
13.
McDiarmid’s RTM division is in the final stages of being wound down, with the
majority of remaining RTM units in inventory having been sold, with payments due
at the time of delivery of the units.
Suppliers
14.
The Companies’ need for ongoing supply of goods and services has declined
significantly with the closing of the Transaction and the closure of remaining
locations.
Employees
15.
McDiarmid continues to employ approximately 18 employees related to finalizing
the dispositions of remaining assets as well as certain head office functions,
including collection of accounts receivable and accounting functions. This total is
expected to decrease to 6 employees by August 31, 2013.
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16.
The next payroll is to be issued on August 29, 2013 in the approximate amount of
$30,000.
17.
The Monitor is aware of recent claims advanced by Manitoba Employment
Standards on behalf of seven former employees of the Companies, which claims
relate to unpaid wages ($4,500), unpaid pay in lieu of notice ($33,389.86) and
unpaid vacation pay ($3,610.78). Six of the seven employees were terminated or
provided with temporary lay-off notices during the March 2013 to May 2013 period,
prior to the McMunn Transaction. The seventh employee was terminated in July
2013.
18.
McDiarmid is currently reviewing related payroll records and consulting with legal
counsel to determine the validity of the claims advanced. The Monitor is also
reviewing with its legal counsel the extent to which any valid claims would represent
Prior Charges to Superior’s security.
Yorkton Unfinished Condominium Development Project
19.
On June 18, 2013, the Court ordered that the proposed sale of the unfinished
condominium project located at 334 Morrison Drive, in Yorkton, Saskatchewan be
approved and that the CRO be authorized to execute such documents as required to
complete the transaction;
20.
The Monitor advises that this transaction was completed on the terms set out in the
Residential Contract of Purchase and Sale attached as Appendix “E” to the Third
Report.
Monitor’s Activities
21.
On May 23, 2013, the Monitor activated its website at www.pwc.com/carmcdiarmid. All prescribed materials filed and / or sent by the Companies and the
Monitor relating to the Proceedings are available to creditors and other interested
parties in electronic format on the Monitor’s website. The Monitor continues to
make updates to the website and will add prescribed materials as they become
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available to ensure creditors and interested parties are kept current with respect to
the Proceedings.
22.
In addition, on May 23, 2013, the Monitor activated a toll free hotline (1-855-4199606 or 1-416-687-8649) for creditors, stakeholders and other interested parties in
the Proceedings to make enquiries. This hotline continues to be active.
23.
Since the closing of the Transaction, the Monitor has worked with the Companies
and McMunn to deal with post-closing matters related to finalizing the Transaction.
24.
The Monitor can confirm that the post-closing condition related to the
determination of the inventory valuation is complete and related holdback funds
have been disbursed to the Vendor and the Purchaser.
25.
The Monitor continues to be involved in dealing with other post-closing matters, in
particular monitoring the collection of McDiarmid’s accounts receivable by
McMunn, which is a continuing obligation of McMunn to December 7, 2013.
Accounts receivable are the largest remaining asset of McDiarmid.
26.
Other post-closing matters include: final determination of the holdback related to
McMunn severance payments; final determination of the holdback related to
customer deposits; and final adjustments related to open purchase orders at the
time the Transaction was closed.
Superior Indebtedness and Distribution
27.
As reported on in the Monitor’s Third Report, the balance due to CIBC was paid in
full from realizations arising from the McMunn Transaction, other net proceeds
arising from ongoing activities and a final pay-out amount of $2,865,736.65 from
Superior pursuant to an Assignment Agreement.
28.
Details of McDiarmid’s indebtedness to Superior at the time of the Initial Order are
set out in the May 21, 2013 Hutchings Affidavit filed in support of the application for
the Initial Order. As set out in paragraph 42 of the Hutchings Affidavit, the
indebtedness totalled $31.1 million, representing original loans of $27.8 million and
Rescue Financing of $3.3 million.
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29.
Since that time, a further $500,000 of Rescue Financing was advanced and this
amount, along with the Assignment Agreement purchase amount of $2.865 million,
resulted in the overall indebtedness, before accruing interest and costs, increasing to
approximately $34.5 million.
30.
The Monitor has continued to review the ongoing receipts and disbursements of the
Companies. Attached hereto as Appendix “A” is the Companies’ Cash Flow Variance
Analysis reflecting actual receipts and disbursements from the commencement of
the Proceedings to August 9, 2013.
31.
As noted in the Companies Cash Flow Variance Analysis, net cash flow relating to
ongoing activities up to August 9, 2013 have allowed for the repayment to Superior
of $5,500,000.
Monitor’s Recovery Analysis
32.
The Monitor has prepared an updated Recovery Analysis reflecting estimated
realizations and disbursements subsequent to August 9, 2013, which is attached
hereto as Appendix “B”.
33.
Based on the remaining estimated net proceeds set out in the Recovery Analysis and
the outstanding indebtedness net of repayments noted above, the estimated shortfall
to Superior approximates $23 million.
34.
As described in the Pre-filing Report, the Proposed Monitor had arranged for an
independent, written legal opinion (the “Security Opinion”) from Thompson
Dorfman Sweatman LLP (“Thompson”), with respect to the validity, enforceability
and priority of the security held by CIBC and by Superior (collectively, now the
“Superior Security”).
35.
Subject to the customary qualifications and limitations, it was Thompson’s opinion
that CIBC has a first priority and Superior has second priority over personal
property of the Applicants in Ontario, Manitoba and Saskatchewan subject only to
the interests of creditors holding perfected purchase money security interests and
certain other statutory priorities that may exist.
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36.
Given the pay-out of the CIBC and the related June 14, 2013, Assignment
Agreement, the first priority position now resides with Superior.
37.
With regard to the real property situated in Saskatchewan, a further opinion from
Saskatchewan counsel on the enforceability of Superior’s claim to be a secured
creditor against the Saskatchewan real property has been received by Thompson, a
copy of which is attached hereto as Appendix “C”.
38.
The further opinion notes in the Executive Summary that “it is our view that while
McDiarmid did not grant a legal mortgage in favour of CIBC, it is arguable that
McDiarmid granted an equitable mortgage in favour of CIBC. As such, it is our view
that the most prudent course of action for the Monitor is to treat Superior Builders
Limited, in its capacity as successor in interest to CIBC, as a secured creditor”. In
addition, Thompson has advised that, even if Superior was not entitled to rank as an
equitable mortgagee, by virtue of other security held by it, upon completion of the
sale of the Saskatchewan real property, Superior would have a first charge on the net
proceeds of disposition.
Priority
39.
The Superior Security is subject to prior charges or security interests (the “Prior
Charges”), which may include:
a. The Administration Charge;
b. The Director and Officer Charge; and
c. The security of any other secured party who may have perfected a security
interest in the Property prior to Superior.
Reserve Considerations
40.
The Monitor has considered the Reserve amount to ensure sufficient proceeds are
on hand for necessary expenditures relating to the Proceedings. Such expenditures
may include the following amounts:
a. amounts required to pay enforceable Prior Charges;
b. utilities, lease payments, operating expenses;
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c. employee related expenses (including but not necessarily limited to costs,
workers’ compensation and health benefits);
d. required remittances to Her Majesty in right of Canada or a Province,
particularly with respect to the collection of GST, RST and HST on sales made
by the Companies;
e. an amount equal to the amounts employees would have received pursuant to
section 136(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as
amended;
f. all wages and compensation owing to employees from the date of the Initial
Order, as set out in section 6(5)(a)(ii) of the CCAA; and
g. other expenses associated with the Proceedings.
41.
In considering the factors impacting the Reserve amount, the following information
is provided:
a. At the present time, the Monitor is not aware of any material Prior Charge
related matters, except as may be determined from a further review of the
employee claims noted previously;
b. Ongoing operating expenses are now limited and now relate primarily to the
Headingly location;
c. Ongoing purchases related to the store operations have ceased;
d. Payroll and related remittances are current and are after August 31, 2013, are
expected to be limited to approximately 6 employees;
42.
In assessing the Reserve amount, the Monitor has also considered future
realizations and disbursements as estimated in the Recovery Analysis. Given the
estimated net proceeds yet to be realized, the Monitor is satisfied that ongoing
operating expenses, required remittances, ongoing wages and vacation pay for
remaining employees do not require a specific Reserve amount.
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43.
The Monitor is of the view that a reasonable reserve for Prior Charges is $250,000,
which would provide for potential employee claims.
44.
A reserve for the Administration Charge in the amount of $250,000 remains.
45.
The need for the Director and Officer Charge is now significantly diminished and
legal counsel for the Directors and Officers have advised they are agreeable to
limiting the cash amount in support of the Director and Officer Charge to $250,000.
46.
Based on the foregoing, the Monitor would intend to retain an overall Reserve
amount of $750,000.
Request for Extension of Stay
47.
There continues to be outstanding matters related to the Transaction, including
certain provisions that extend out for a six month period from the date of closing.
48.
The disposition of remaining assets is ongoing and McDiarmid continues to employ
a number of people for purposes of dealing with these remaining assets as well as
ensuring necessary filing and reporting requirements are met.
49.
The Monitor believes the extension of the Stay Period will facilitate the matters set
out above.
Request for Amending the Monitor’s Powers
50.
We understand that the current engagement of the Applicants’ Chief Restructuring
Officer (“CRO”) is set to expire on August 30, 2013.
51.
We have reviewed the additional powers sought in the Applicants’ motion and are
satisfied that the Monitor can provide the necessary assistance and that such will
effectively compensate for the absence of a CRO.
52.
The Monitor is agreeable to taking on the addition powers set out in the motion.
Conclusion and Recommendation
53.
The Monitor is of the view that the request for an extension of the Stay Period is
reasonable and will facilitate the orderly completion of outstanding matters. The
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Monitor is of the view that the expansion of the scope of the Monitor’s duties and
powers will effectively deal with the expiry of the Chief Restructuring Officer role.
Accordingly, the Monitor supports the Applicant’ motion to extend the Stay Period
and to amend the Monitor’s powers.
All of which is respectfully submitted this 23rd day of August, 2013
PricewaterhouseCoopers Inc.
Monitor of McDiarmid Lumber Ltd.,
Superior Truss Co. Ltd. and WW Doors Inc.
and not in its personal capacity
B. Jeffrey Johnson
Senior Vice President
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Index of Appendices
Appendix “A”
Appendix “B”
Appendix “C”
Variance Analysis
Recovery Analysis
Saskatchewan Legal Letter
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Appendix A
McDiarmid Lumber Ltd.
Cash Flow Variance Analysis
Period Ended August 9, 2013
Cash Inflows
Store receipts
AR receipts
AR receipts (old and FN accounts)
RTM receipts
HO receipts (post-frame, rebates and other)
Recovery from lawsuits
Proceeds from sale of assets and inventory
Funds from escrow
Total Cash Inflows
Appendix A
Cumulative varaince analysis for the twelve weeks
ended August 9, 2013
Initial
Actuals
Forecast
Variance
5,574,699
3,024,530
2,550,169
5,591,812
6,747,075
(1,155,263)
300,000
(300,000)
3,504,886
2,048,162
1,456,724
710,030
78,437
631,593
300,000
(300,000)
15,102,489
18,642,055
(3,539,566)
500,000
(500,000)
30,483,916
31,640,259
(1,156,343)
Cash Outflows
Purchases under CCAA
Payroll
Benefits
Rent
Operating expenses
GST/PST remittances
Employee retention bonus
Principal payments/ bank charges
Restructuring costs
Payment to Superior
Total Cash Outflows
2,541,744
1,517,764
147,723
207,433
1,261,991
1,064,824
2,453,406
399,123
5,500,000
15,094,008
3,250,000
1,463,256
108,657
425,475
1,008,704
822,630
115,000
150,000
795,000
8,138,722
(708,256)
54,508
39,066
(218,042)
253,287
242,194
(115,000)
2,303,406
(395,877)
5,500,000
6,955,286
Net Cash flow
15,389,908
23,501,537
(8,111,629)
(13,976,055)
15,389,908
1,413,853
(13,976,055)
23,501,537
9,525,483
(8,111,629)
(8,111,629)
Opening Bank Position (excluding LC)
Net Cash Flow
Ending Bank Position (excluding LC)
Appendix B
McDiarmid Lumber Ltd, Superior Truss Co. Ltd, and WW Doors Inc.
Appendix B
Monitor's Recovery Analysis
For the period subsequent to August 9, 2013
Realizations
Cash on Hand - August 9, 2013
AR Receipts - McMunn and Yates
AR Receipts - Other McDiarmid Accounts
Recoveries Related to Litigation Matters
RTM Receipts - Sold Units
RTM Inventory - Unsold Units
Yorkton Land
Final Proceeds from McMunn and Yates Sales Transaction
Final Auction - Yorkton & Narin Remaining Assets
Reserve Holdback in Trust
Moneris - Letter of Credit
Expenditures
RTM Related Expenses
Payroll
Benefits
Rent
Operating Expenses
GST/PST Remittances
Professional Costs
Contingency
Net Realizations
Projected
Realizations ($)
1,413,853
2,215,000
50,000
200,000
1,610,000
500,000
650,000
250,000
125,000
260,000
400,000
7,673,853
300,000
240,000
20,000
110,000
390,000
250,000
250,000
1,560,000
Note
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
6,113,853
Notes
1) Certain accounts receivable are being the collected with the assitance of McMunn and Yates Building Supplies, as provided for
in the Sale Transaction. The adjusted book value of these receivables approximates $4,430,000. It is assumed that 50% of
these accounts will be collected.
2) Estimated recoveries for certain First Nation and other delinquent accounts.
3) Estimated recoveries from unresolved litigation matters.
4) Estimated collections from RTM inventory sold prior to August 9, 2013.
5) Estimated recoveries from the liquidation on RTM inventory on hand as at August 9, 2013.
6) Yorkton Land represents land located in Yorkton, Saskatchewan for development purposes.
7) Final proceeds include estimated amounts for prepaid purchase orders and holdback adjustments.
8) Remaining assets from the Yorkton and Nairin locations are expected to be auctioned in mid-September.
9) Certain amounts of the Monitor's Reserve are held in trust.
10) Letter of credit expected to be released with the termination of Moneris' services.
11) RTM expenses relate to setup, stiching, and commissions under Consignment Agreement.
12) Projected payroll includes actual August 15 payroll of $92,000.
13) Per agreement with landlord, no further rent payments are being made.
14) Operating expenses currently relate to Yorkton and Headingley locations.
15) GST/PST remittances includes remittances for July in the amount of $290,000 and estimated future remittances.
Appendix C