The life of an insolvency and restructuring professional is filled with many interesting challenges. The following case studies provide a glimpse into some of the engagements that have been successfully handled by A. Farber & Partners Inc.
Lights. Cameras. Action. - As Trustee in Bankruptcy, A. Farber & Partners Inc. successfully rescued and operated Canada's largest film production studio.
From Incubator to Respirator - During the meltdown of the tech sector, itemus inc., a publicly traded internet company, filed for Bankruptcy with A. Farber & Partners Inc.
Whitewashed - When hundreds of investors lost approximately $100 million in a "tooth whitening scam", A. Farber & Partners Inc. was appointed as court-appointed receiver to trace and recover those funds.
Family Feud - Our turnaround team made sweeping changes and helped to secure financing to save a company.
Diamond in the Rough - A. Farber & Partners filed a proposal for a company to create breathing room to facilitate a partner buy out, refinancing and restructuring.
Lights. Cameras. Action.
When Canada's largest movie production facility in Downtown Toronto fell upon dark times, A. Farber & Partners Inc. was called in as Trustee in Bankruptcy by a major Canadian chartered bank to get the action rolling again. The Toronto film industry generated approximately $500 million of direct production revenues at that time, of which this facility was responsible for approximately 25%. The film industry is an important source of tax revenue, jobs, profile and goodwill for the City of Toronto, which is ranked as the 3rd most important film production centre in North America (after Los Angeles and New York City).
The property comprised approximately 200,000 square feet of leasable space, on approximately nine acres of land. The majority of the facility was subject to short-term rental contracts (three to six months in duration), with only a few long-term leases. Since the existing leases only guaranteed a revenue stream for approximately three months, it was the Trustee's initial plan to administer the property and its leases while attempting to sell the property by tender within a relatively short time-frame.
The Trustee faced a number of challenges that made the administration and sale of the property extremely challenging, including:
- lack of cooperation and hostile competition from existing management;
- environmental concerns arising from prior and adjacent property usage and sub-surface conditions;
- building and fire code deficiencies that had to be remedied in short order;
- substantial realty tax arrears; and
- inherited problems relating to the major long-term tenant.
As a result of the issues highlighted above, the initial tender process did not yield any meaningful offers. The Trustee quickly identified that the business could be operated profitably and embraced the challenge of rebuilding the business and managing the facility as a viable film production facility.
The Trustee successfully and profitably operated the facility for approximately three years, during which time many of the major issues were resolved, paving the way for an eventual sale of the property. Under its current ownership, the facility continues to thrive as one of Canada's premier movie production studios.
From Incubator to Respirator
Double-digit growth. Off-the-chart market valuations. The promise of wealth beyond imagination. These were the hallmarks of the "new economy", one that planned to take high tech companies directly from the incubator and turn them into the powerhouses of the future. However, that was before the markets returned to reason, sending those high tech wonders from the incubator to the respirator.
At least, that's what happened to itemus inc., a company that helped build and manage innovative business models for the Internet. Despite being listed on three major stock exchanges, employing over 300 people in Canada and the USA, and boasting more than 30 companies in its portfolio, itemus suffered from staggering operating losses. When its much-needed cash reserves could not be replenished, the company – like many in the sector – chose to file for bankruptcy and did so with A. Farber & Partners.
Since technology companies like itemus have few tangible assets, their insolvency presented some interesting challenges. Especially when the greatest value within the company existed in the form of intellectual property and human capital. The solution, in this case, revolved around finding strategies to retain the talent and motivate them to bring new ideas to market and/or continue servicing customers' complex needs.
That's why it's so important to turn to professionals who have expertise in dealing with the insolvency of high tech companies. At A. Farber & Partners, our team has the proven ability to assess the strengths and weaknesses of companies in this sector. This enables us to quickly execute strategic plans that have seen us successfully restructure and facilitate the sale of numerous high tech companies. In short, by breathing new life into these businesses, we can help take them off the respirator.
Whitewashed
From June 1999 to April 2002, Salim Damji raised funds of at least $78 million from more than 5,000 individuals to invest in his company, STS Instant White. Damji told people that he had developed a tooth whitening product that was going to be sold to Colgate Palmolive and promised to multiply their investments twenty fold. Damji claimed to have sent much of the money to various Sports Books (internet gambling sites which allow gambling on sporting events).
In May 2002, a class action lawsuit was launched against Damji, resulting in the appointment of A. Farber & Partners Inc. as the Interim Receiver, whose job it was to investigate the fraud and recover as much of the money as possible.
The Interim Receiver deployed a core team of insolvency and fraud specialists, accountants (including forensic accountants) and investigators. In addition, forensic computer specialists and experts in gambling analysis were retained.
It was determined that Damji, either personally or through entities or agents that he controlled, used the facilities of the five major chartered banks in Canada to deposit and move monies that he had obtained – typical of someone deliberately attempting to commit a fraud and take part in money laundering activities.
The Interim Receiver successfully recovered numerous assets including five real estate properties, various luxury vehicles, a charitable donation and cash. Investigations and tracing efforts also confirmed that Damji had sent $64 million to Sports Books, which were located in Jamaica and Costa Rica.
With the assistance of Costa Rican legal counsel, senior money laundering and other law enforcement officials, police raids were conducted at the premises of two Sports Books in Costa Rica. The Minister of Public Security went on national television while one of the raids was in progress to announce the government’s assistance to the Interim Receiver and the freezing of bank accounts. The Interim Receiver’s team participated in these raids and provided forensic computer specialists to the Costa Rican authorities and also consulted regularly with Canadian Embassy officials on this matter.
Since the Interim Receiver was involved in activities across Canada, Costa Rica and other countries, complex legal issues had to be dealt with in conjunction with legal counsel in various foreign jurisdictions. Together with its lawyers, the Interim Receiver, as part of its ongoing investigations, conducted numerous examinations under oath, including several examinations of Damji, conducted at the jail.
Damji was convicted of fraud and sentenced to jail for seven years, a period of incarceration longer than the Crown was requesting. The Interim Receiver’s investigator was interviewed as part of a CTV Television Network documentary program aired nationally on W-Five. At this time, the Interim Receiver’s investigations and activities continue.
Family Feud
At the top of list of reasons for business failure are often issues relating to management and leadership. Challenging dynamics often present themselves when control is placed in the hands of second and third generation family members. These dynamics played out in the case of XYZ Limited, a company that had a 50 year successful history as manufacturer and distributor of a seasonal line of clothing. The relationship between two brothers who co-managed the company that had flourished under their father and grandfather had become so strained that it affected their ability to reach consensus and make day-to-day business decisions. Interpose into this situation, the challenges of an industry where a trend to sourcing product offshore was threatening the core of their business and you have a formula for disaster.
When we were called in as advisors, the Company’s bankers had already issued demand and had allowed the Company a short forbearance period to find a replacement lender. Given the Company’s poor financial results and toxic management, options were extremely limited. At the insistence of their external accountants, management engaged turnaround professionals from the Farber Financial Group to assume responsibility for righting the ship. This dramatic intervention is what was required to save their business.
Farber’s turnaround team immediately implemented sweeping changes in personnel, manufacturing, financial reporting and controls and cash management. A refocus of marketing efforts was also necessary to respond to changing market realities. The involvement of professional management helped bridge the credibility gap with the Bank and allowed the Company to buy some more time on its forbearance arrangement.
The Farber Financial Group went to the financial marketplace to find a new lender. Given the time constraints, the best option was to bring in an asset-based lender who would provide the necessary funding to pay out the Bank, which was poised to appoint a Receiver at the end of the peak season so as to maximize the Bank’s recoveries.
The asset-based lender provided necessary bridge financing to pay of the Bank. With a more tolerant lender in place, we were able to assist the Company to re-finance with longer-term lender at more favourable interest rates. The Company’s restructuring efforts, particularly as they relate to their changing market conditions, are ongoing but financial disaster was averted by employing proactive professional management.
Diamond in the Rough
Our client, a manufacturer of consumer goods, merged with a larger competitor in the same industry. On paper, the merger made lots of sense. It was an opportunity to move up-market, enjoy the economies of scale associated with combining the two manufacturing plants, and an opportunity to benefit from a very well-known brand name that was licensed to its new merger partner. However, shortly after the merger, it became evident to our client that the financial wellness of its partner had been significantly over-stated. In fact, the company was on the verge on the insolvency. There were other divergences in culture and management style that made it impossible for them to live together. A capital injection was essential, but our client who had access to the funds, was not willing to invest further without addressing the core problems facing the company. The Company filed a Notice of Intention to Make a Proposal under the Bankruptcy and Insolvency Act. This provided the much needed to protection against its creditors and kept the valuable license intact. Given some breathing room and with our assistance, our client was able to formulate a proposal acceptable to its creditors; buy out his partner; refinance and restructure the operations. Under the entrepreneurial leadership of our client, the company was significantly improved and was sold 5 years later for many multiples of the original investment.
