Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 333-71091*
IBF FUND LIQUIDATING LLC
----------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 06-1708882
--------------------------------- -------------------
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
c/o Arthur Steinberg, as ICA Trustee
Kaye Scholer LLP
425 Park Avenue
New York, New York 10022
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 836-8564
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ ] Not applicable
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] Not applicable
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common
equity held by nonaffiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. Not applicable
DOCUMENTS INCORPORATED BY REFERENCE
None
*IBF Fund Liquidating LLC (the "Company") is the transferee of the assets
and certain liabilities of IBF Collateralized Finance Corporation ("CFC"), IBF
VI - Secured Lending Corporation ("SLC") and IBF Premier Hotel Group, Inc. ("IBF
Hotel") pursuant to the First Amended Joint Liquidating Plan of Reorganization
(the "Plan") with Respect To InterBank Funding Corp. ("IBF"), SLC, CFC and IBF
Hotel (collectively, the "Debtor") that was confirmed by order of the United
States Bankruptcy Court for the Southern District of New York dated August 14,
2003 and approved in all respects by order dated September 5, 2003 of the United
States District Court for the Southern District of New York. On December 10,
2003, the Plan went effective with respect to CFC, SLC and IBF Hotel. Pursuant
to oral no-action relief provided by the Office of Chief Counsel, Division of
Corporate Finance of the Commission on August 12, 2003 (the "No-Action Relief"),
the Company is submitting this Annual Report under cover of Form 10-K under
SLC's former Commission file number. Pursuant to the No-Action Relief, this
Annual Report need not and does not comply with all of the requirements of Form
10-K and is not deemed filed pursuant to Section 13 of the Securities Exchange
Act of 1934.
2
PART I
ITEM 1. BUSINESS.
As reported to the ICA Trustee (as herein defined), InterBank Funding
Corp. ("IBF") was formed in and around 1995 to make investments in operating
businesses, operating hotels, real estate development and properties,
securitization assets and other investments by raising investment capital
through offerings of debt and equity securities - typically, unsecured
high-yield notes sold in private placements through registered broker-dealers.
By January 31, 2002, the various funds established by IBF had raised
approximately $187 million in investment capital. IBF Collateralized Finance
Corporation ("CFC") and IBF VI - Secured Lending Corporation ("SLC" and,
together with CFC, the "Funds") were two such funds that survived a series of
merger transactions in 2001. The Funds were owned by IBF. All of the issued and
outstanding equity capital of IBF was owned by Simon A. Hershon.
On June 7, 2002, IBF and the Funds each filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the Southern District of New
York. IBF Premier Hotel Group, Inc. ("IBF Hotel") filed its voluntary petition
for relief under Chapter 11 of the Bankruptcy Code in the Southern District of
New York on November 4, 2002. The Debtors' (as defined below) Chapter 11 cases
were consolidated and were jointly administered.
On July 23, 2002, the United States Securities and Exchange Commission
(the "Commission") filed a complaint against IBF, the Funds and Mr. Hershon (the
"Parties") in the United States District Court for the Southern District of New
York (the "District Court") commencing a proceeding entitled Securities and
Exchange Commission v. IBF Collateralized Finance Corp., et al., No. 02-CV-5713
(JSM) (the "SEC Litigation"). Generally, the Commission alleged that the Funds
were operated as unregistered investment companies in violation of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
that certain disclosures made by IBF and the Funds to investors in various debt
financings were misleading. On motion of the Commission in the SEC Litigation,
on December 5, 2002, the District Court granted summary judgment and appointed
Arthur J. Steinberg as trustee ("Mr. Steinberg," the "ICA Trustee," the
"Manager" or the "Liquidating Agent") under the Investment Company Act for the
Funds and their subsidiaries.
Since his appointment on December 5, 2002, Mr. Steinberg assumed all
management responsibilities for the Funds and formulated the First Amended Joint
Liquidating Plan of Reorganization (the "Plan") of IBF, the Funds and IBF Hotel
(collectively, the "Debtors").
On May 28, 2003, Mr. Steinberg, as ICA Trustee, filed the Plan, which was
the culmination of discussions and negotiations, and reflects the settlements
and compromises reached by Mr. Steinberg, the Debtors, the committee of
unsecured creditors appointed under the Bankruptcy Code and the staff of the
Commission.
The Plan provided for, among other things, the substantive consolidation
of the Funds and IBF Hotel. The Bankruptcy Court confirmed the Plan on August
14, 2003 and the Plan became effective with respect to the Funds and IBF Hotel
on December 10, 2003 (the "Effective
3
Date"). On the Effective Date, Mr. Steinberg, as ICA Trustee, made the initial
distributions required by the Plan. Assets of the Debtors remaining after this
distribution were assigned, depending on the Debtor, to either IBF Fund
Liquidating LLC (the "Company") or IBF Liquidating LLC ("IBF LLC"), along with
certain liabilities and pending claims against the Debtors. Both of these
entities are managed by Mr. Steinberg in his separate capacity as the Manager
and Liquidating Agent, and are monitored by the Bankruptcy Court and the
District Court pursuant to the Plan. On or about the Effective Date, membership
interests in the Company ("Membership Interests") were distributed to holders of
allowed general unsecured claims pro rata in accordance with the amount of their
claims (such holders, the "Members").
On the Effective Date, after the Funds' and IBF Hotel's assets were
transferred to the Company, all outstanding shares of the Funds were
automatically deemed canceled and the Debtors dissolved by operation of the
Plan.
The Manager maintains a registry of Membership Interests in the Company
and IBF LLC; no certificates representing ownership of the Membership Interests
have been or will be issued. The terms of the Company's operating agreement
provide that the Membership Interests of a Member may not be transferred;
provided, that the Membership Interests may be assigned or transferred by will,
intestate succession or operation of law or by order of a court of competent
jurisdiction, upon written notice to, and written approval of, the Manager,
which approval may be withheld or conditioned as the Manager deems necessary or
advisable in his sole discretion.
The Company was organized for the purposes of liquidating, collecting and
maximizing the cash value of its assets, making distributions in accordance with
the terms of the Plan and taking actions as are necessary or appropriate to
accomplish those purposes, including holding cash in the form of cash, money
market funds, treasury bills or other cash equivalents, holding assets for the
benefit of the Members, making limited additional investments in assets in
certain instances to preserve and maximize the value of the assets and permit
the orderly liquidation of those assets, enforcing the rights of the Members and
defending claims against such assets. With limited exceptions for pre-approved
investments specified in the Plan and also reflected in the Company's operating
agreement, and for additional investments in an asset of an aggregate of
$250,000 or less, which investments the Manager may make in the exercise of his
business judgment, all additional investments in assets held by the Company made
by the Manager are subject to oversight of the District Court or the liquidating
committee formed pursuant to the Plan (the "Liquidating Committee") as follows:
- If the aggregate additional investment would be for an amount
between $250,001 and $1,000,000, the Manager must obtain the prior
consent of the Liquidating Committee or, in the absence of such
consent, the Manager must receive the approval of the District Court
and provide notice to the Liquidating Committee and an opportunity
for hearing before the District Court.
- If the aggregate additional investment would equal or exceed
$1,000,000, the Manager must receive the approval of the District
Court and provide notice to all of the Members of the Company and an
opportunity for hearing before the District Court.
4
The Manager expects to terminate the Company and make final distributions
with respect to the Company pursuant to the Plan upon the earlier of (i) the
fifth anniversary of the Effective Date, and (ii) the date on which the Manager
determines, in his business judgment, that (a) all assets of the Company have
been liquidated, all causes of action have been resolved and there are no
potential sources of additional cash for distribution; (b) there remain no
claims against the applicable Debtor(s); (c) all debts and other obligations of
the Company have been paid or otherwise provided for; and (d) he is in a
position to make a final distribution in accordance with applicable law. The
existence of the Company may, however, be extended to more than five years if
the Manager applies for and obtains approval of the District Court and, prior to
such extension, the Manager has made a request for and has received additional
no-action assurances from the Commission.
Pursuant to oral no-action relief provided by the Office of Chief Counsel,
Division of Corporate Finance of the Commission (the "No-Action Relief"), the
Company is exempt from the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). However, pursuant to the No-Action
Relief, the Manager is required to issue reports to the Members annually and
upon termination of the Company showing the assets and liabilities of the
Company at the end of each year and upon termination and the receipts and
disbursements of the Manager for each such period and event. The annual reports
also will describe the changes in the Company's assets and liabilities during
the reporting period, and any action taken by the Manager during the period in
the performance of the Manager's duties that have not been previously reported.
The financial statements contained in such reports will be prepared in
accordance with generally accepted accounting principles; however, the financial
statements will not be audited by independent public accountants. The annual
reports are filed with the Commission under cover of Form 10-K using SLC's
Commission file number. Additionally, notice of the annual reports is provided
to the holders of Membership Interests and the annual report is posted on the
Company's website at www.ibffund.com. Pursuant to the No-Action Relief, these
annual reports will not be deemed filed pursuant to Section 13 of the Exchange
Act.
Pursuant to the No-Action Relief, the Manager will cause the Company to
file with the Commission a current report under cover of Form 8-K using SLC's
Commission file number whenever an event with respect to the Company occurs that
would require the filing of a Form 8-K by a company registered under the
Exchange Act or whenever a material event relating to the Company's assets or
liabilities has occurred, such as an interim distribution. The Plan contemplates
that the Company will make interim distributions approximately every 180 days,
so long as there are funds available for such purpose. Twenty days before each
proposed interim distribution, the ICA Trustee must file with the District
Court, and serve on each Member of the Company, a report detailing (i) all
actions taken during the prior six-month period, (ii) the financial condition of
the Company and (iii) the amount and source of the proposed distribution. All
interested parties will have an opportunity to object to the proposed
distribution, with any objection to be resolved by the District Court. A current
report under cover of Form 8-K will be filed in connection with each interim
distribution, disclosing the information required by the Plan. Pursuant to the
No-Action Relief, these current reports will not be deemed filed pursuant to
Section 13 of the Exchange Act. Copies of each current report filed under cover
of Form 8-K
5
also will be available on the Company's website, and notice of the filing of
each current report on Form 8-K will be provided to all holders of Membership
Interests.
RECENT DEVELOPMENTS
On February 18, 2005, the Company entered into an Acquisition Agreement
and Plan of Merger (the "Merger Agreement") with Sunset Brands, Inc. ("Sunset"),
a wholly-owned subsidiary of Sunset ("Merger Sub") and U.S. Mills, Inc. ("USM").
Pursuant to the Merger Agreement, Merger Sub will merge with and into USM, with
USM continuing as the surviving corporation (the "Merger"). The Company holds
approximately $7.5 million of USM debt and is the majority stockholder of USM
and, as a result of the liquidation preference to which the Company is entitled,
will receive all of the proceeds from the Merger after the repayment of debt,
the payment of the fees and expenses of USM incurred in connection with the
Merger and the payment of certain bonuses to management of USM.
At the effective time and as a result of the Merger, the outstanding
shares of capital stock of USM will be canceled and the holders thereof will
receive, in the aggregate, the following consideration (the "Merger
Consideration"): (i) $17 million in cash less any cash used to repay outstanding
indebtedness for borrowed money of USM, including approximately $7.5 million
owed to the Company and its affiliates, and (ii) a number of units of Sunset
("Units") having an aggregate value of $3 million, consisting of shares of
Series B preferred stock of Sunset ("Series B Preferred Stock") and warrants
("Warrants") exercisable into shares of common stock of Sunset ("Sunset Common
Stock"). The Merger Consideration is subject to adjustment, upward or downward,
dollar-for-dollar, by the amount (the "Working Capital Adjustment"), if any, by
which USM's working capital (as defined in the Merger Agreement) as of the
closing of the Merger is greater or less than a deficit of $750,000. Any upward
adjustment of the Merger Consideration may not exceed $500,000, and will be paid
through the issuance of additional Units. In addition, in the event that USM's
earnings before interest, taxes, depreciation and amortization as reported in
its audited financial statements for the fiscal year ended December 31, 2004,
less the dollar amount of certain bonuses, is less than $2.044 million, the
aggregate Merger Consideration will be reduced by the amount of such deficit
multiplied by ten.
Pursuant to the Merger Agreement, an aggregate of $1.3 million in cash and
Units having a value of $1.2 million will be withheld from the Merger
Consideration and deposited into escrow at the closing of the Merger to be held
by a third-party escrow agent pursuant to the terms of an escrow agreement to be
entered into by the parties to the Merger Agreement at the closing (the "Escrow
Agreement"). Pursuant to the terms of the Merger Agreement and the Escrow
Agreement, the amount deposited into escrow will secure the payment of any
Working Capital Adjustment and the indemnification obligations of the Company
and USM following the consummation of the Merger. The amounts held in escrow
will be retained by the escrow agent until the second business day following the
first anniversary of the closing of the Merger, unless earlier released in
payment of a Working Capital Adjustment, if any, or otherwise in accordance with
the terms of the Merger Agreement. Upon determination of the final Working
Capital Adjustment, all but $300,000 of the cash in escrow will be released to
the Company, leaving no more than $1.5 million in escrow ($1.2 million of Units
6
and $300,000 in cash) to cover any indemnification claims made by Sunset
following the closing.
The parties to the Merger Agreement have made customary representations,
warranties and covenants in the Merger Agreement, including, among others,
covenants by the Company and USM (i) to conduct the business of USM in the
ordinary course consistent with past practice during the interim period between
the execution of the Merger Agreement and consummation of the Merger, and (ii)
not to engage in certain kinds of transactions during such period. In addition,
the Company and USM have agreed not to: (x) solicit proposals relating to
alternative business combination transactions or (y) subject to certain
exceptions, enter into discussions concerning or provide confidential
information of USM in connection with alternative business combination
transactions.
Consummation of the Merger is subject to customary conditions, including
(i) approval by the holders of USM's capital stock, (ii) to the extent required
under applicable law, approval of holders of Sunset's capital stock, (iii)
absence of any law or order prohibiting the closing, (iv) subject to certain
exceptions, the accuracy of representations and warranties, (v) the absence of
any material adverse change in USM's business and (vi) the delivery of customary
opinions and closing documentation. In addition, the closing is conditioned upon
cancellation of any indebtedness of USM for borrowed money in excess of $17
million (which may include indebtedness held by the Company), and the entry of a
final, non-appealable order of the United States Bankruptcy Court for the
Southern District of New York approving the execution and delivery of the Merger
Agreement by the Company and the transactions contemplated thereby (the "Court
Approval"). The Court Approval was obtained on March 29, 2005.
Pursuant to the terms of the Merger Agreement, Sunset was required, within
five business days of the execution of the Merger Agreement, to deliver into
escrow $500,000 in cash and 500,000 shares of Sunset Common Stock (the
"Deposit"). Sunset did not make the Deposit within such time period.
Accordingly, the Merger Agreement was amended on March 7, 2005 (the "Amendment")
pursuant to which (i) the parties entered into an escrow agreement with a
third-party escrow agent on such date (the "Deposit Escrow Agreement") pursuant
to which the Deposit was made into an Escrow Account to be held and disbursed
pursuant to the terms of the Deposit Escrow Agreement and the Merger Agreement,
and (ii) the parties agreed that the Escrow Agreement would be entered into at
the closing of the Merger. Pursuant to the terms of the Merger Agreement and the
Deposit Escrow Agreement, if, after April 15, 2005, the conditions to Sunset's
obligation to consummate the Merger are satisfied and Sunset does not at that
time have the financing necessary to consummate the Merger, the Deposit will be
released to USM and Sunset will be obligated to repurchase from USM the shares
of Sunset Common Stock comprising a portion of the Deposit for a purchase price
of $1.00 per share. If the Merger is consummated, the escrow agent under the
Deposit Escrow Agreement will return the shares of Sunset Common Stock
comprising a portion of the Deposit to Sunset and will deposit the cash portion
of the
7
Deposit with the escrow agent under the Escrow Agreement to be held and
disbursed in accordance therewith.
In connection with the Merger, on February 18, 2005, the Company entered
into an agreement (the "Letter Agreement") with Charles T. Verde and Cynthia
Davis, the President and Executive Vice President, respectively, of USM,
pursuant to which the Company agreed to pay to each of Mr. Verde and Ms. Davis
(i) $410,000 following the effective time of the Merger, which represents the
amount of bonus compensation that each is entitled to receive from USM in
respect of his or her employment with USM during 2003 and 2004 and in connection
with the consummation of the Merger, and (ii) an amount in cash equal to 7% of
the net proceeds the Company receives from time to time in connection with any
sale of the shares of Series B Preferred Stock it receives in connection with
the Merger, or the shares of Sunset Common Stock into which such shares of
Series B Preferred Stock are convertible.
The Merger is scheduled to close not later than April 15, 2005. The Merger
Agreement contains certain termination rights of the Company, USM and Sunset.
As one of the conditions to the closing of the Merger, Sunset and the
Company will enter into an Investor Rights Agreement (the "Investor Rights
Agreement"), pursuant to which Sunset will provide certain registration rights
to the holders of the Units ("Holders") issued to the Company in connection with
the Merger (or shares of Sunset Common Stock issuable upon conversion or
exercise of the shares of the Series B Preferred Stock and Warrants underlying
the Units). In addition, the Investor Rights Agreement provides for certain
restrictions on the transfer and sale of the Series B Preferred Stock and
Warrants included in the Units issued in connection with the Merger and the
shares of Sunset Common Stock issuable upon conversion or exercise thereof for a
period of three years following the consummation of the Merger; provided, that
such restrictions will not apply to sales of shares of Sunset Common Stock
underlying the Units made after the earlier of (i) one year following the
effective date of the registration statement registering such shares of Sunset
Common Stock for resale, and (ii) 15 months following the consummation of the
Merger; provided, however, that certain trading price and average daily volume
thresholds must be met prior to any such sales. Further, the Investor Rights
Agreement provides for the repurchase by Sunset of the Series B Preferred Stock
and cancellation of all or part of the Warrants in certain circumstances.
Specifically, Sunset may, directly or through a designee, repurchase from the
Holders the shares of Series B Preferred Stock issued in connection with the
Merger at any time and must repurchase any such shares of Series B Preferred
Stock on the third anniversary of the consummation of the Merger. The repurchase
price for all Series B Preferred Stock issued pursuant to the Merger will be $3
million plus any accrued dividends. In the event Sunset does not repurchase the
Series B Preferred Stock prior to the first anniversary of the consummation of
the Merger, Sunset will be required to pay premiums (the "Repurchase Premiums"),
either in cash or in additional shares of Series B Preferred Stock, which
Repurchase Premiums will accrue on a quarterly basis and will be at a rate so
that the annual dividend rate payable on the Series B Preferred Stock when added
to the annual repurchase premium equals 8%, 14% and 20% in years one, two and
three, respectively. In addition, the Investor Rights
8
Agreement provides that a portion of the Warrants will vest over three years
following the consummation of the Merger, with the unvested portion being
canceled upon the repurchase, conversion or sale of the shares of Series B
Preferred Stock prior to the third anniversary thereof.
The foregoing description of the Investor Rights Agreement does not
purport to be complete and is qualified in its entirety by reference to the form
of Investor Rights Agreement, which is filed as Exhibit 99.5 hereto, and which
is incorporated into this Current Report by reference.
On February 22, 2005, the Company entered into an Asset Purchase Agreement
(the "Asset Purchase Agreement") with IBF V-Alternative Investment Holdings, LLC
("AIH"), pursuant to which the Company will acquire all of the assets of AIH for
a purchase price equal to $280,502.32 in cash plus the issuance to AIH of
membership interests in the Company (which, as of the date of execution of the
Asset Purchase Agreement, equaled 1.9339% of the membership interests in the
Company), plus the contribution to AIH of the interests owned by the Company in
AIH. The assets of AIH consist primarily of 130 shares of common stock of
American Benefit Resources, Inc. ("ABR") and 271,085 shares of common stock and
207,792 shares of Series B preferred stock of USM. The consummation of the
transactions contemplated by the Asset Purchase Agreement is subject to the
receipt of certain consents and approvals, including, without limitation, the
consent of members of AIH owning a majority of the membership interests of AIH,
which consent has been received.
In December 2003, the Company issued a note in the original principal
amount of $5 million (with an interest rate of 3.5% per annum) (the "Escrow
Note") payable to certain investors ("Escrow Investors") who had invested in the
Funds after the close of business on December 14, 2001 and whose monies were
deposited at the time into an escrow account created pursuant to discussions
with the staff of the Commission. On October 19, 2004, the ICA Trustee arranged
for the Escrow Note to be paid in full on or about such date, and to make a
distribution to investors in the Funds holding general unsecured claims
("General Investors"). The distribution made on or about October 19, 2005 of
approximately $9.2 million consisted of approximately $5.2 million, which was
used to repay the Escrow Note in full, and $4 million, which was distributed to
General Investors and Escrow Investors on account of their deficiency claim (the
"October Distribution").
On or about February 22, 2005, the Company distributed $7 million to
General Investors and Escrow Investors on account of their deficiency claim.
TAX TREATMENT
The Company will issue an annual information statement to the Members with
tax information for their tax returns. Members are urged to consult with their
own tax advisors as to their own filing requirements and the appropriate tax
reporting of this information on their returns.
9
DISTRIBUTIONS
During the fiscal year ended December 31, 2004, the Company made the
October Distribution.
PROPERTY SALES
For a description of property sold by the Company during the fiscal year
ended December 31, 2004, see the First Interim Report Following Effective Date
of Joint Liquidating Plan with Respect to the Debtors, attached hereto as ANNEX
A (the "First Interim Report"), and the Second Interim Report Following
Effective Date of Joint Liquidating Plan with Respect to the Debtors, attached
hereto as ANNEX B (the "Second Interim Report"), each of which is incorporated
herein by reference.
EMPLOYEES
The Company had one part-time employee as of December 31, 2004.
ITEM 2. PROPERTIES.
The following is a description of the Company's assets as of December 31,
2004. The Company's assets can be categorized as investments in Operating
Businesses, Operating Hotels, Real Estate Development Properties and
Securitization Assets. Note that the dollar amounts of certain investments set
forth herein do not reflect the realizable value of such assets upon
disposition, but rather constitute the net investment in such assets made by the
Debtors. Many of these assets are subject to risks and many of the loans are in
default with the amount of recovery by the Company uncertain. The financial data
set forth in Items 6 and 8 below are based on estimates as of December 10, 2003
as adjusted for changes between December 10, 2003 and December 31, 2004. The
market for such assets is difficult to determine and is subject to significant
changes over time. There can be no assurance that the Company will be successful
in disposing of the assets for values approximating those currently estimated by
it.
OPERATING BUSINESSES
The Company holds the following:
- a promissory note with respect to Capstone Capital LLC ("Capstone"),
which is in default and had a balance owing as of December 31, 2004
of approximately $5.3 million; CFC also owned 50% of the equity of
Capstone as of December 31, 2004;
- a loan to ABR in the amount of approximately $17 million as of
December 31, 2004 and approximately $800,000 in equity of ABR; see
"Recent Developments" above for a description of the Company's
agreement to acquire an additional equity interest in ABR from AIH;
and
10
- loans to USM in the aggregate amount of approximately $7.5 million
as of December 31, 2004 and the following equity interests in USM as
of December 31, 2004: (i) 614,906 shares of USM Series D preferred
stock, (ii) 640,000 shares of USM senior preferred stock, (iii)
58,095 shares of USM Series C convertible preferred stock and (iv)
598,198 shares of USM common stock; see "Recent Developments" above
for a description of the Merger Agreement relating to the
disposition of USM and for a description of the Company's agreement
to acquire additional equity of USM from AIH.
For more information relating to the Company's Operating Businesses during
the fiscal year ended December 31, 2004, see the First Interim Report and the
Second Interim Report.
OPERATING HOTELS
The Company holds the following:
- a loan in the principal amount of approximately $2 million with
respect to the Fairfield Inn (loan to IBF Hotel to buy a 90% limited
partnership interest in Vinings Partners LP for the purchase of a
Fairfield Inn in Vinings, Georgia); and
- a first mortgage loan in the principal amount of approximately $2
million with respect to the Hilton Garden Inn (loan to IBF Hotel to
buy a 75% limited partnership interest in Chisholm Partners, Ltd.
for the purchase of a Hilton Garden Inn in Round Rock, Texas).
In addition, as of December 31, 2004, the Company held:
- a subordinated note and an equity interest in Ganesh Hospitality,
Inc. ("Ganesh") with respect to the Best Western Universal Inn. The
balance of the loan as of December 31, 2004 was approximately
$1,300,000. On February 2, 2005, Ganesh sold the Best Western
Universal Inn, resulting in proceeds to the Company of approximately
$506,000. The Company no longer holds any debt or equity of Ganesh.
- a subordinated note and an equity interest in Sita Resorts, Inc.
("Sita") with respect to a Comfort Inn hotel in Orlando, Florida.
The principal balance of the loan as of December 31, 2004 was
approximately $3,000,000. On January 28, 2005, Sita sold the Comfort
Inn, resulting in proceeds to the Company of approximately $472,000.
The Company no longer holds any debt or equity of Sita.
For more information relating to the Company's Operating Hotels during the
fiscal year ended December 31, 2004, see the First Interim Report and the Second
Interim Report.
REAL ESTATE DEVELOPMENT PROPERTIES
11
The Company holds the following:
- a loan in the amount of approximately $12.8 million as of December
31, 2004 to Cat Island Ventures, Ltd. with respect to property on
Anguilla Beach; and
- a 25% limited partnership interest in a joint venture with
Lumbermen's Investment Corp., the developer of a Marriott Resort in
San Antonio, Texas; the Company's likelihood of realizing any value
from this joint venture is remote.
For more information relating to the Company's Real Estate Development
Properties during the fiscal year ended December 31, 2004, see the First Interim
Report and the Second Interim Report.
SECURITIZATION ASSETS
- an equity investment interest of approximately $3.1 million in a
residential mortgage loan securitization transaction with Lehman
Brothers dated March 1, 2001 (ARC 2001-BC-1 (Lehman)); and
- equity investment interests of approximately $4.1 million (through
CFC) and approximately $450,000 (through SLC) in a residential
mortgage loan securitization transaction with DLJ Mortgage Corp. and
Credit Suisse First Boston dated November 2001 (CSFB ABS
2001-HE-25).
For more information relating to the Company's Securitization Assets
during the fiscal year ended December 31, 2004, see the First Interim Report and
the Second Interim Report.
OTHER ASSETS
The Company holds cash and other short-term investments, collection
assets, various litigation and similar claims against third parties, claims with
respect to certain insurance policies and a receivable from IBF Liquidating LLC.
For more information relating to the Company's Other Assets during the
fiscal year ended December 31, 2004, see the First Interim Report and the Second
Interim Report.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to legal claims and proceedings that arise in the
ordinary course of business. The Company is also involved in the legal
proceedings described in the First Interim Report and the Second Interim Report.
The Manager believes that the outcome of these claims and proceedings will not
have a material adverse effect on the estimated amount of future cash
distributions. However, there can be no assurance in this regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
12
No matters were submitted to a vote of the Members during the fiscal year
ended December 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
There is no public market for the Membership Interests.
HOLDERS
The Membership interests are not transferable except by will, intestate
succession, court order or operation of law. As of December 31, 2004, the
Company had 3,132 Members of record.
ITEM 6. SELECTED FINANCIAL DATA.
The unaudited selected financial data of the Company presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the notes thereto included elsewhere in this Annual
Report. The results for the fiscal year ended December 31, 2003 do not reflect a
full year of results because the Company began operations as of December 10,
2003, and such results are therefore not comparable to any other period.
DECEMBER 10, 2003
YEAR ENDED THROUGH
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
CHANGES IN NET ASSET DATA:
Total revenue.................................................... 2,553,196 $ 48,284
Total expenses................................................... 5,888,828 311,176
Net loss......................................................... (3,335,632) (262,892)
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------- -----------------
BALANCE SHEET DATA:
Total assets..................................................... 39,521,192 $ 51,156,714
Total liabilities................................................ 1,002,051 5,301,951
------------ ------------
Net assets in liquidation........................................ $ 38,519,141 $ 45,854,763
============ ============
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the Company's
consolidated financial statements appearing elsewhere in this Annual Report.
Actual values realized for assets and settlement of liabilities may differ
materially from the amounts estimated. Factors that may cause such variations
include, among other factors, the possibility that assets may not be sold on the
terms currently provided and the other risk factors discussed in this Annual
Report.
RESULTS OF OPERATIONS
The following describes the Company's results of operations for the fiscal
years ended December 31, 2004 and 2003. The results for the fiscal year ended
December 31, 2003 do not reflect a full year of results because the Company
began operations as of December 10, 2003, and such results are therefore not
comparable to any other period.
The Company recorded a net loss of $3,335,632 in 2004. The net loss
primarily resulted from the loss on sale of investment and general and
administrative expenses exceeding the Company's total revenue. General and
administrative expenses include consultants, legal fees, Member communication
and other general office expenses. During the year ended 2003, the Company
recorded a net loss of $262,892. This loss was primarily the result of general
and administrative expense exceeding total revenue.
NET ASSETS IN LIQUIDATION
Net Assets in Liquidation at December 31, 2004 were $38,519,141 as
compared to $45,854,763 at December 31, 2003. The valuation of Net Assets in
Liquidation is based on estimates as of December 10, 2003 as adjusted for
changes between December 10, 2003 and December 31, 2004. The actual values
realized for assets and settlement of liabilities may differ materially from
amounts estimated.
DISTRIBUTIONS
During the fiscal year ended December 31, 2004, the Company made a
liquidating distribution pursuant to the Plan to the Members of $9,075,187.
During the fiscal year ended December 31, 2003, the Company made a liquidating
distribution pursuant to the Plan to the Members of $19,210,651.
DISPOSITIONS
14
During the fiscal year ended December 31, 2004, the Company disposed of
certain assets, as described in the First Interim Report and the Second Interim
Report. No assets were sold during the fiscal year ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Manager anticipates that the combination of cash from asset sales,
cash flows from operating activities and current cash reserves will provide
adequate capital for all operating expenses of the Company.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in this Annual Report that are not historical
constitute "forward-looking statements." You can identify forward-looking
statements by the words "anticipate," "assume," "believe," "estimate," "expect,"
"plan," "intend," "project," "may," "will" and other similar expressions. These
statements are based upon the Company's current expectations, estimates and
projections, and they are not guarantees of future results. The forward-looking
statements involve known and unknown risks, uncertainties and other factors
which are, in some cases, beyond the control of the Company and could materially
affect the Company's actual results. Factors that could cause actual results to
differ materially from those expressed or implied by forward-looking statements
include, but are not limited to, the following risk factors.
THE COMPANY CANNOT ASSURE THE AMOUNTS OR TIMING OF DISTRIBUTIONS. If the
values of the Company's assets decline, or if the costs and expenses related to
selling the Company's remaining assets exceed its current estimates, then the
amounts of any future distributions to the Members may be materially adversely
affected. In addition, the ability to sell or dispose of certain assets depends,
in some cases, on the availability of financing to buyers on favorable terms. If
favorable financing is not available, it may take longer than expected to sell
the Company's remaining assets at desirable prices, and this may delay the
Company's ability to make distributions. There can be no assurance that the
Company will be successful in disposing of its remaining assets for value
approximating those currently estimated by the Company or as to the timing of
any related distributions.
THE AMOUNTS AND TIMING OF DISTRIBUTIONS MAY BE ADVERSELY AFFECTED BY
LIABILITIES AND INDEMNIFICATION OBLIGATIONS FOLLOWING ASSET SALES. In selling
its assets, the Company may be unable to negotiate agreements that provide for
the buyers to assume all of the known and unknown liabilities relating to the
assets, including, without limitation, environmental and structural liabilities.
In addition, if the Company agrees to indemnify the buyers for such liabilities,
the Company may be unable to limit the scope or duration of such indemnification
obligations to desirable levels or time periods. Certain acquisition agreements
the Company enters into, such as the Merger Agreement, may require the Company
to pay a termination fee to the buyer in certain circumstances. See "Recent
Developments." As a result, the Company has from time to time determined, and
may in the future determine, that it is necessary or appropriate to reserve cash
amounts or obtain insurance in order to attempt to cover the liabilities not
assumed by the buyers and to cover potential indemnifiable losses and
termination fees. There
15
can be no assurance that the reserves and insurance will be sufficient to
satisfy all liabilities and indemnification obligations arising from assets
previously sold by the Company, contemplated to be sold by the Company or
arising after the sale of its remaining assets, and any insufficiencies may have
a material adverse effect on the amounts and timing of any distributions. For a
description of potential liabilities and indemnification obligations of the
Company in connection with the proposed sale of USM, see "Recent Developments."
THE COMPANY MAY BE UNABLE TO OBTAIN ALL OF THE CONSENTS AND APPROVALS
NECESSARY TO TRANSFER ITS REMAINING ASSETS. In general, an agreement relating to
the purchase and sale of assets and other properties often provides that the
completion of the sale is subject to the satisfaction of certain conditions,
including the requirement to obtain consents and approvals of specified third
parties. The failure of the Company to obtain all consents and approvals that
are necessary to transfer its assets may result in a failure to consummate
dispositions and have a material adverse effect on the amount and timing of
distributions to the Members.
TERMS OF SALES OF ASSETS ARE NOT SUBJECT TO APPROVAL BY THE MEMBERS AND
MAY NOT BE SATISFACTORY TO ALL MEMBERS. The Manager has the authority to sell
any or all of the Company's assets on terms that he determines are appropriate,
subject in certain circumstances to court approval. The Members will have no
opportunity to vote on these matters and will, therefore, have no right to
approve or disapprove the terms of the sales except, in certain circumstances,
to file objections in court prior to a contemplated disposition. As a result,
the terms of sales of assets may not be satisfactory to all Members. Pursuant to
the Company's operating agreement and the Plan, the Manager has discretion to
cause the Company to invest certain amounts in assets and companies owned or
effectively controlled by the Company and may request and receive authorization
from the Liquidating Committee or the District Court to exceed such limits.
These investments and the terms on which the investments may be made are not
subject to the approval or disapproval of the Members and may not be
satisfactory to all Members. However, in certain instances, the Manager will be
required to obtain court approval prior to making any such investments.
THE COMPANY FACES RISKS ARISING FROM THE MARKETS IN WHICH IT HOLDS ASSETS.
The Company holds investments in a broad range of businesses in a variety of
markets. By virtue of this investment diversity, the Company faces risks which
may be unique to a particular business or market or to a particular investment.
Any such risk may materially affect the value that the Company receives with
respect to a particular asset upon disposition of such asset and may materially
and adversely affect the aggregate proceeds received by the Company upon the
disposition of the Company's assets in the aggregate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's non-cash assets consist primarily of debt and equity
investments in
16
operating companies, hotels and real estate development projects and investments
in certain securitization assets. Most of the debt investments are in default
and there is uncertainty as to how much the Company will recover from these
assets. Most of the equity investments have little or no value due to the high
levels of debt of the issuers. Much of that debt is in default. While changes in
interest rates may have an effect on the realizable value of many of the
Company's assets, most of these assets consist of distressed investments in
which factors other than interest rates (such as the creditworthiness of the
debtor) are more material to the ultimate realizable value of the assets. As a
result, the Company does not believe that it is possible to quantify or
otherwise meaningfully describe the effect on the net realizable value of such
assets of changes in interest rates or other market risk factors.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
IBF FUND LIQUIDATING LLC
CONSOLIDATED STATEMENT OF NET ASSETS (LIQUIDATION BASIS)
DECEMBER 31, 2004 AND 2003
(UNAUDITED)
2004 2003*
------------ ------------
ASSETS:
Cash........................................................... $ 9,858,111 $ 10,909,077
Investments:
Investment in Operating Businesses.................... 18,781,628 16,420,300
Investment in Operating Hotels....................... 645,000 1,040,000
Investment in Real Estate Development Properties...... 5,290,000 9,273,937
Investment in Securitization Assets................... 373,720 8,113,400
Investment in Collection Assets....................... 87,000 450,000
------------ ------------
Total Investments............................ 25,177,348 32,297,637
------------ ------------
Miscellaneous Assets........................................... 4,485,733 4,950,000
------------ ------------
Total Assets.......................................... $ 39,521,192 $ 51,156,714
============ ============
LIABILITIES:
Current Liabilities:
Accounts Payable...................................... $ 602,051 --
Accrued Expenses - Professional Fees.................. 400,000 291,883
------------ ------------
Total Current Liabilities.................... 1,002,051 291,883
Long-Term Liabilities:
Promissory Note....................................... -- 5,000,000
Accrued Liabilities................................... -- 10,068
------------
Total Long-Term Liabilities.................. -- 5,010,068
------------ ------------
Total Liabilities................... 1,002,051 5,301,951
============ ============
Equity:
Member Interest in LLC................................ 42,117,665 46,117,655
Retained Earnings..................................... (262,892) --
Net Loss.............................................. (3,335,632) (262,892)
------------ ------------
18
2004 2003*
------------ ------------
Total Equity................................................... 38,519,141 45,854,763
------------ ------------
Total Liabilities and Equity........................... $ 39,521,192 $ 51,156,714
============ ============
- -----------------
* The results for the fiscal year ended December 31, 2003 do not reflect a full
year of results because the Company began operations as of December 10, 2003,
and such results are therefore not comparable to any other period.
The accompanying notes to the Consolidated Financial Statements are an
integral part of these financial statements.
19
IBF FUND LIQUIDATING LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2004 AND 2003
(UNAUDITED)
DECEMBER 10, 2003
YEAR ENDED THROUGH
DECEMBER 31, 2004 DECEMBER 31, 2003*
----------------- -----------------
Cash flow from operating activities before reorganization
items:
Cash paid to vendors................................. $ (285,897) --
Payroll and benefits................................. (190,378) --
------------ -------------
Net cash (used) by operating activities before
reorganization items............... (476,275) --
------------ -------------
Cash flows from reorganization items:
Additional Investments............................... (4,140,888) (388,939)
Return on Investments................................ 15,435,816 --
Collection of Litigation Claims...................... 464,268 --
Interest Earned on Accumulated Cash.................. 80,961 21,360
Interest Earned on Investments....................... 202,071 26,924
Liquidating Distribution............................. (9,075,187) (19,210,651)
Professional Fees for Services Rendered.............. (3,541,732) (1,741,695)
------------ -------------
Net cash (used) by reorganization items....... (574,691) (21,293,001)
------------ -------------
Net cash (used) by operating activities....................... (1,050,966) (21,293,001)
------------ -------------
Net decrease in cash and cash equivalents..................... (1,050,966) (21,293,001)
Cash and cash equivalents at beginning of period.............. 10,909,077 32,202,078
------------ -------------
Cash and cash equivalents at end of period.................... $ 9,858,112 $ 10,909,077
============ =============
- -----------------
* The results for the fiscal year ended December 31, 2003 do not reflect a full
year of results because the Company began operations as of December 10, 2003,
and such results are therefore not comparable to any other period.
The accompanying notes to the Consolidated Financial Statements are an
integral part of these financial statements.
20
IBF FUND LIQUIDATING LLC
CONSOLIDATED STATEMENT OF PROFIT AND LOSS
FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2004 AND 2003
(UNAUDITED)
DECEMBER 10, 2003
YEAR ENDED THROUGH
DECEMBER 31, 2004 DECEMBER 31, 2003*
------------------- -----------------
Revenue:
Gain on sale of investment........................... $ 2,270,165 --
Interest income...................................... 283,031 $ 48,284
------------ ----------
Total revenue............................... $ 2,553,196 $ 48,284
============ ==========
Expense:
Professional Fees.................................... 4,112,498 300,571
Interest Expense..................................... 142,086 10,068
Office Expense....................................... 136,810 537
Payroll and Benefits................................. 190,377 --
Loss on Sale of Investment........................... 1,307,057 --
Total expense............................... 5,888,828 311,176
------------ ----------
Total loss......................... $ (3,335,632) $ (262,892)
============ ==========
- -----------------
* The results for the fiscal year ended December 31, 2003 do not reflect a full
year of results because the Company began operations as of December 10, 2003,
and such results are therefore not comparable to any other period.
The accompanying notes to the Consolidated Financial Statements are an
integral part of these financial statements.
21
IBF FUND LIQUIDATING LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 PURPOSE OF IBF FUND LIQUIDATING LLC
The Company was established for the sole purpose of liquidating,
collecting and maximizing the cash value of its assets, making distributions in
accordance with the terms of the Plan and taking actions as are necessary or
appropriate to accomplish those purposes, including holding cash in the form of
cash, money market funds, treasury bills or other cash equivalents; holding
assets for the benefit of the Members; making limited additional investment in
assets in certain instances to preserve and maximize the value of the assets and
permit the orderly liquidation of those assets; enforcing the rights of the
Members; and defending claims against such assets. With limited exceptions or
pre-approved investments specified in the Plan and also reflected in the
Company's operating agreement, and for additional investments in an asset of
$250,000 or less, which investments the Manager may make in the exercise of his
business judgment, all additional investments in assets held by the Company are
subject to oversight by the District Court and the Liquidating Committee of the
Company.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The asset values reflected in the Consolidated Statement of Net Assets are
based on valuations performed as of December 10, 2003, as adjusted by operating
activities from December 19, 2003 through December 31, 2004. The actual values
realized for assets and settlement of liabilities may differ materially from the
amounts estimated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Manager to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
INCOME TAXES
The Company will be treated as a partnership for tax purposes, and
accordingly, will not be subject to federal or state income tax on any income
earned or gain recognized by the Company. The Company will recognize taxable
gain or loss when an asset is disposed of for an amount greater or less than the
fair market value of such asset at the time it was transferred to the Company.
Each Member will be treated as the owner of a pro rata portion of each asset,
including cash, received and held by the Company, and will be required to report
on his or her federal and state income tax return his or her pro rata share of
taxable income, including gains
22
and losses recognized by the Company. Accordingly, there is no provision for
federal or state income taxes in the accompanying Consolidated Financial
Statements.
3 SALES OF ASSETS
During the fiscal year ended December 31, 2004, the Company disposed of
certain assets, as described in the First Interim Report and the Second Interim
Report. No assets were sold during the fiscal year ended December 31, 2003.
4 LIQUIDATING DISTRIBUTIONS
During the fiscal year ended December 31, 2004, the Company made a
liquidating distribution pursuant to the Plan to the Members of $9,152,153.
During the fiscal year ended December 31, 2003, the Company made a liquidating
distribution pursuant to the Plan to the Members of approximately $19,241,000.
5 SUBSEQUENT EVENTS
For a description of certain material events occurring after December 31,
2004, please see "Business -- Recent Developments."
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company did not employ independent accountants to perform an audit on
the financial statements contained in this Annual Report.
ITEM 9A. CONTROLS AND PROCEDURES.
Not applicable.
ITEM 9B. OTHER INFORMATION.
The Company has disclosed in a Current Report on Form 8-K all information
required to be so disclosed during the fourth quarter of the fiscal year ended
2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Arthur J. Steinberg Mr. Steinberg was appointed ICA Trustee on
December 5, 2002 and manages the Company in
his separate capacity as the Manager and
Liquidating Agent. Mr. Steinberg is a partner
at Kaye Scholer LLP and has been a member of
the Firm's Business Reorganization Group since
1979.
ITEM 11. EXECUTIVE COMPENSATION.
Arthur J. Steinberg(1) Legal fees and expenses paid to Kaye Scholer LLP
for the fiscal year ended December 31, 2004 and
for the period from December 10, 2003 through
December 31, 2003 were $3,338,298 and $92,834,
respectively. Legal expenses previously paid to
Kaye Scholer LLP during the period from December
5, 2002 through December 10, 2003 through the
bankruptcy process were approximately $2.5
million.
- ------------------
(1) Mr. Steinberg is serving as ICA Trustee and the Manager of the Company and,
when appropriate, as a lawyer. Mr. Steinberg is charging $500 per hour for
services in his capacity as ICA Trustee pursuant to discussions with the
Staff of the Commission. For all other work, he is charging his customary
rate of $665 per hour, which rate is subject to periodic adjustment. Because
in many instances it would be difficult to allocate between the two
categories of services, Mr. Steinberg's time has been allocated using a
formula of 40% lawyer-time and 60% ICA Trustee-time. In most instances, Mr.
Steinberg serves solely as lawyer, which would be at the higher rate, but
this methodology was proposed to avoid the burdensome and time consuming
exercise of providing a more exact allocation.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
There is no public market for the Membership Interests. The Membership
Interests are not transferable except by will, intestate succession, order of a
court or operation of law. No Members hold Membership Interests constituting 5%
or more of the aggregate Membership Interests of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Legal fees and expenses paid to Kaye Scholer LLP for the fiscal year ended
December 31, 2004 and for the period from December 10, 2003 through December 31,
2003 were $3,338,298 and $92,834, respectively. Legal expenses previously paid
to Kaye Scholer LLP during the period from December 5, 2002 through December 10,
2003 through the bankruptcy process were approximately $2.5 million. Mr.
Steinberg, appointed ICA Trustee and the Manager and Liquidating Agent of the
Company, is a partner at Kaye Scholer LLP in New York.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company did not employ independent accountants to perform an audit of
the financial statements contained in this Annual Report.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1)(2) The following financial statements are filed as part of this
Annual Report pursuant to Item 8 hereof, together with the notes thereto:
- The Company's Consolidated Statement of Net Assets as of December
31, 2004 and December 31, 2003;
- The Company's Consolidated Statement of Cash Flows for the fiscal
years ended December 31, 2004 and December 31, 2003; and
- The Company's Consolidated Statement of Profit and Loss for the
fiscal year ended December 31, 2004 and December 31, 2003.
(b) Exhibits
2.1 First Amended Joint Liquidating Plan of Reorganization with Respect To
InterBank Funding Corp., IBF Collateralized Finance Corporation, IBF VI -
Secured Lending Corporation and IBF Premier Hotel Group, Inc., declared
effective by the United States Bankruptcy Court for the Southern District
of New York by order dated August 14, 2003 and declared effective on
December 10, 2003*
25
2.2 IBF Fund Liquidating LLC Operating Agreement, dated September 24, 2003, by
and among IBF Fund Liquidating LLC and each person who becomes a Member of
the Company pursuant to the Plan*
10.1 Acquisition Agreement and Plan of Merger, dated as of February 18, 2005,
among IBF Fund Liquidating LLC, U.S. Mills, Inc., USM Acquisition Sub,
Inc. and Sunset Brands, Inc.**
10.2 Amendment No. 1 to Acquisition Agreement and Plan of Merger, dated as of
March 7, 2005, among IBF Fund Liquidating LLC, U.S. Mills, Inc., USM
Acquisition Sub, Inc. and Sunset Brands, Inc.**
10.3 Escrow Agreement, dated as of March 7, 2005, among Sunset Brands, Inc.,
U.S. Mills, Inc., IBF Fund Liquidating LLC and Continental Stock Transfer
& Trust Company, as escrow agent**
10.4 Letter Agreement, dated as of February 18, 2005, among IBF Fund
Liquidating LLC, Charles T. Verde and Cynthia Davis**
10.5 Form of Investor Rights Agreement to be entered into by Sunset Brands,
Inc. and IBF Fund Liquidating LLC**
10.6 Asset Purchase Agreement, dated as of February 22, 2005, among IBF Fund
Liquidating LLC and IBF V-Alternative Investment Holdings, LLC**
- -----------------
* Incorporated by reference from the Company's Annual Report on Form 10-K filed
on March 30, 2004.
** Incorporated by reference from the Company's Current Report on Form 8-K filed
on March 18, 2005.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IBF FUND LIQUIDATING LLC
By: /s/ Arthur J. Steinberg
---------------------------
Arthur J. Steinberg
Dated March 30, 2005 Manager
27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 First Amended Joint Liquidating Plan of Reorganization with Respect To
InterBank Funding Corp., IBF Collateralized Finance Corporation, IBF VI -
Secured Lending Corporation and IBF Premier Hotel Group, Inc., declared
effective by the United States Bankruptcy Court for the Southern District
of New York by order dated August 14, 2003 and declared effective on
December 10, 2003*
2.2 IBF Fund Liquidating LLC Operating Agreement, dated September 24, 2003, by
and among IBF Fund Liquidating LLC and each person who becomes a Member of
the Company pursuant to the Plan*
10.1 Acquisition Agreement and Plan of Merger, dated as of February 18, 2005,
among IBF Fund Liquidating LLC, U.S. Mills, Inc., USM Acquisition Sub,
Inc. and Sunset Brands, Inc.**
10.2 Amendment No. 1 to Acquisition Agreement and Plan of Merger, dated as of
March 7, 2005, among IBF Fund Liquidating LLC, U.S. Mills, Inc., USM
Acquisition Sub, Inc. and Sunset Brands, Inc.**
10.3 Escrow Agreement, dated as of March 7, 2005, among Sunset Brands, Inc.,
U.S. Mills, Inc., IBF Fund Liquidating LLC and Continental Stock Transfer
& Trust Company, as escrow agent**
10.4 Letter Agreement, dated as of February 18, 2005, among IBF Fund
Liquidating LLC, Charles T. Verde and Cynthia Davis**
10.5 Form of Investor Rights Agreement to be entered into by Sunset Brands,
Inc. and IBF Fund Liquidating LLC**
10.6 Asset Purchase Agreement, dated as of February 22, 2005, among IBF Fund
Liquidating LLC and IBF V-Alternative Investment Holdings, LLC**
- -----------------
* Incorporated by reference from the Company's Annual Report on Form 10-K filed
on March 30, 2004.
** Incorporated by reference from the Company's Current Report on Form 8-K filed
on March 18, 2005.
Annex A
Arthur J. Steinberg (AS 1298)
Heath D. Rosenblat (HR 6430)
Kaye Scholer LLP
425 Park Avenue
New York, NY 10022
212/836-8000 telephone
212/836-7157 facsimile
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION, )
)
Plaintiff, )
)
vs. ) Case No. 02-CV-5713-JES
)
IBF COLLATERALIZED FINANCE CORP., )
IBF-VI SECURED LENDING CORP., )
INTERBANK FUNDING CORP., AND )
SIMON A. HERSHON INDIVIDUALLY, )
)
Defendants. )
FIRST INTERIM REPORT FOLLOWING EFFECTIVE DATE OF
JOINT LIQUIDATING PLAN WITH RESPECT TO THE DEBTORS
July 26, 2004
This first interim report ("Report")(1) is submitted on behalf of IBF
Liquidating LLC ("IBF LLC") and IBF Fund Liquidating LLC ("Fund LLC" and,
together, the "Liquidating LLCs"), pursuant to Section 9.3 of the Plan and
Paragraph 1 of the Bankruptcy Court's "Post-confirmation Order and Notice" dated
August 28, 2003. This Report addresses the period from inception of Fund LLC on
December 10, 2003 through June 30, 2004 (the "First Interim Period").
Part I of this Report is an executive summary. Part II summarizes
significant events during the 12-month period from the ICA Trustee's appointment
on December 5, 2002 through final satisfaction or waiver of the conditions to
effectiveness of the Plan in December 2003. Part III summarizes significant
events during the First Interim Period and discusses the steps being taken to
liquidate the remaining investments from the Funds' portfolios. Part IV
incorporates Exhibit A, which summarizes the financial condition of the
Liquidating LLCs. Finally, Part V discusses the amount and source of the
distribution proposed to be made by Fund LLC.
I.
EXECUTIVE SUMMARY
A. INITIAL DISTRIBUTION UNDER THE PLAN
In December 2003, Fund LLC made its initial distribution under the Plan,
distributing cash of approximately $19,241,000, as follows: (a) investors with
Escrow Claims (Classes CFC-3 and SLC-3 under the Plan) received a total initial
distribution of $15,662,853, or approximately 58% of such Claims; and (b)
investors and other creditors with General Unsecured Claims against the Funds or
IBF Hotel (Classes CFC-4, CFC-5, SLC-4, SLC-5 and IBF Hotel-4) received a total
initial distribution of $3,578,553, or approximately 2% of such Claims.
The initial distribution was made from the SEC Escrow (as defined herein),
pursuant to
- ----------
(1) Capitalized terms used but not defined in this Report shall have the
meanings ascribed to them in the Joint Liquidating Plan with Respect to the
Debtors (as confirmed and as approved by this Court, the "Plan").
the settlement embodied in the Plan and discussed in Section 7.10 of the
Disclosure Statement. As of November 30, 2003, the balance of the SEC Escrow was
approximately $24,452,853. By operation of the Plan, approximately $5,000,000 of
the SEC Escrow was reserved by Fund LLC and is evidenced by a note, the Escrow
Note, payable to Escrow Claimants on or before the fifth (5th) anniversary of
the Effective Date. Interest is accruing on the Escrow Note at the rate of 3.5%
per annum. As of June 30, 2004, the balance owing on the Escrow Note, inclusive
of accrued interest, was approximately $5,096,849. According to the Plan, the
Escrow Note must be retired before any further distributions can be made to
non-escrow investors or other creditors.
B. LIQUIDATION OF THE FUNDS' PORTFOLIOS
During the First Interim Period, Fund LLC collected $4,704,202 and made
disbursements of $26,556,852, resulting in a net reduction to available cash of
($21,852,650). (As discussed above a substantial portion of the total
disbursements reported for the First Interim Period is attributable to the
initial distribution made to investors on the Effective Date of the Plan).
During the First Interim Period, cash flow was generated primarily by (i)
collections from the two residential mortgage securitizations assets
(approximately $3,737,462); (ii) the sale of the Travelodge Hotel in Portland,
Maine (approximately $330,000); (iii) the sale of a secured note issued by
BancCap Funding LLC ($190,000); (iv) settlement with the owners of one of the
parcels on the Tribeca project and recovery of 50% of a deposit escrow
($250,000); (v) immediate recoveries on several of the avoidance claims filed in
June 2004 ($44,740); and (vi) installment payments (to date, approximately
$200,000) under a negotiated settlement of certain litigation concerning 1970
Asset Management, discussed in Section III(F) below.
Pursuant to Section 8.7 of the Plan, Fund LLC has discretion to make
additional investments in certain portfolio assets in an effort to enhance
creditor recoveries. During the First Interim Period, Fund LLC invested an
additional $4,151,437 in three assets: $200,000 was
3
invested in US Mills (see Section III(C)(1) below); $3,305,000 was invested in
I&BS (see Section III(C)(1) below) and $646,437 was invested in Pinehills (of
which, approx. $400,000 was paid to bring association and common area fees
current, see Section III(C)(3) below).
C. PROPOSED DISTRIBUTION BY FUND LLC
Fund LLC is proposing to make the next distribution in August, its second
under the Plan, in the amount of approximately $3,096,849. Under the terms of
the Plan, the Escrow Note must be paid in full before further distributions can
be made to non-escrow investors or other unsecured creditors. (Plan Section
1.2.45) Because the distribution will not pay in full the Escrow Note, which as
of June 30, 2004, had a current balance of $5,096,849, the entire distribution
must be applied to the Escrow Note. The distribution will be applied (i) to
reduce the principal balance on the note by $3,000,000 (leaving a principal
balance of $2,000,000) and (ii) to pay in full the accrued and unpaid interest
on the Escrow Note as of the date of payment (as of June 30, 2004, approximately
$96,849). After giving effect to the distribution, investors with Escrow Claims
will have recovered a total of $18,759,702, or approximately 71.4% of their
Claims.
The proposed distribution is intended to be conservative, to account for
the fact that only seven (7) months have elapsed since the Effective Date of the
Plan. During that time, several assets were sold and substantial progress was
made towards the sale of a number of other assets. However, notwithstanding the
progress to date, the administration of the Liquidating LLCs is very much a work
in progress, and the bulk of the Funds' portfolio remains to be liquidated.
Barring unforeseen circumstances, it appears that a number of liquidation
events may occur over the next several months, in which event the ICA Trustee
hopes to make a distribution in late October 2004 in an amount sufficient to
retire the Escrow Note. The ICA Trustee further hopes to make a distribution in
December 2004 to non-escrow investors and other unsecured creditors. At present,
it appears that the liquidation of the Funds' portfolios is proceeding ahead of
schedule.
4
D. PROCEDURE FOR OBJECTING TO PROPOSED DISTRIBUTION
Pursuant to Section 9.3 of the Plan, parties in interest wishing to object
to the proposed distribution must do so by filing a written objection with the
Clerk of this Court and serving the objection on the ICA Trustee and the
Liquidating LLCs so as to be received at least five (5) days prior to the date
of the proposed distribution. For purposes hereof, the date of the proposed
distribution is August 13, 2004, so objections must be filed and served NO LATER
THAN AUGUST 9, 2004. In the absence of any such objections, the Liquidating LLCs
will make the distribution in the amount and manner so proposed on or as soon
after such date as may be practicable.
II.
RELEVANT BACKGROUND
A. SEC LITIGATION; ICA TRUSTEE
On July 23, 2002, the United States Securities and Exchange Commission
("SEC") filed a complaint initiating this proceeding ("SEC Litigation") against
defendants InterBank Funding Corp. ("IBF"), IBF Collateralized Finance Corp.
("CFC"), IBF VI-Secured Lending Corp. ("SLC" and, with CFC, the "Funds") (IBF,
CFC and SLC, together, the "Corporate Defendants") and Simon A. Hershon
("Hershon"). In general, the SEC alleged that the Funds were operating as
unregistered investment companies in violation of the Investment Company Act of
1940, 15 U.S.C. Sections 80a-1 et seq. ("ICA") and that certain disclosures to
investors were misleading.
On December 5, 2002, on motion of the SEC, this Court entered an order
("December 5 Order") awarding partial summary judgment in favor of the SEC and
against the Corporate Defendants and Hershon and appointing Arthur J. Steinberg
to serve as ICA trustee ("ICA Trustee") for the Funds and their subsidiaries,
pursuant to 15 U.S.C. Section 80a-41(d). The ICA Trustee has since served in
that capacity and is supervising the liquidation of the Funds' assets.
5
B. SEC INVESTIGATION; DEBTORS ESTABLISH SEC ESCROW
In mid-2001, the Staff of the SEC initiated an inquiry into possible
securities violations involving IBF and its affiliates. The SEC advised IBF of
such in or around August 2001.
On December 3, 2001, the SEC issued a formal order of private
investigation.
On December 17, 2001, pursuant to discussions with the Staff of the SEC,
IBF entered into an escrow agreement ("Escrow Agreement"). Pursuant to its
terms, IBF agreed to establish an escrow account ("SEC Escrow") for the benefit
of investors who, after the close of business on December 14, 2001, purchased
notes, bonds or other securities issued by IBF's subsidiaries.
In January 2002, pursuant to discussions with the Staff of the SEC, IBF
suspended the sale of securities issued by the Funds. No further securities were
sold after January 31, 2002. Ultimately, total proceeds of approximately
$26,261,000 were deposited in the SEC Escrow.(2)
C. CHAPTER 11 FILINGS
On June 7, 2002 (the "Petition Date"), six weeks prior to the filing of the
SEC Litigation, the Corporate Defendants each filed a voluntary petition for
relief under chapter 11 of the Bankruptcy Code. On November 4, 2002, another
subsidiary of IBF, IBF Premier Hotel Group, Inc. ("IBF Hotel"), filed a
voluntary petition for relief under chapter 11 of the Bankruptcy Code. The four
chapter 11 cases were assigned to the Hon. Burton R. Lifland of the Bankruptcy
Court.
- ----------
(2) The Escrow Agreement gave IBF certain rights to manage and direct the
investment of the escrowed assets pursuant to guidelines in the Escrow
Agreement. Shortly after his appointment, the ICA Trustee learned that
certain of the assets were in the form of equity investments subject to
unacceptable levels of market risk. The ICA Trustee later determined that,
since inception in December 2001, the value of the assets in the SEC Escrow
had declined by more than $2,000,000. With the approval of the Staff of the
SEC and this Court, the ICA Trustee promptly liquidated all equity
investments in the SEC Escrow to prevent further deterioration in value.
The ICA Trustee subsequently sought and obtained an order from this Court
dated March 3, 2003, authorizing him to hold the escrowed assets in an
account at another financial institution pending further order of this
Court. The escrowed assets were thereafter held in the form of cash or cash
equivalents in a segregated account with a higher interest rate at Bank of
America until distributions were made in December 2003. As of November 30,
2003, the value of the cash and cash equivalents formerly held in the SEC
Escrow was $24,452,853.
6
D. ICA TRUSTEE'S INVESTIGATION, PRELIMINARY REPORT
In the ten (10) weeks following his appointment, the ICA Trustee and his
advisors completed an initial investigation and, on February 18, 2003, issued a
preliminary report, the "Preliminary Report of Arthur J. Steinberg, Trustee"
("Preliminary Report"). The Preliminary Report, inter alia, reported the ICA
Trustee's preliminary findings from the first ten (10) weeks of his
investigation; provided detail concerning the assets and liabilities of the
Corporate Defendants and certain of their affiliates; analyzed receipts and
disbursements by or for the benefit of the Corporate Defendants from January 1,
1997 forward; identified accounts and entities holding assets in which the
Corporate Defendants might hold an interest; and made certain recommendations on
how to maximize the value of the Corporate Defendants' assets.
The ICA Trustee's preliminary recommendations included that the Debtors'
chapter 11 cases proceed; that the ICA Trustee be allowed to continue his
investigation; and that the ICA Trustee and his advisors be allowed to pursue
the possibility of a consensual chapter 11 plan through discussions with the
Official Committee of Unsecured Creditors ("Committee") in the Corporate
Defendants' chapter 11 cases, on terms acceptable to the Staff of the SEC. The
recommendations were based on the ICA Trustee's determination that an immediate
liquidation or "forced sale" of the Corporate Defendants' assets - principally,
the Funds' investment portfolios - would not maximize value or be in the best
interests of the Funds' investors.(3)
E. LIQUIDATING PLAN CONFIRMED, APPROVED BY THE DISTRICT COURT
In May 2003, the ICA Trustee filed and served the Plan and Disclosure
Statement. The Plan and Disclosure Statement were the products of extensive
negotiation with the Committee
- ----------
(3) Reference is made to the Preliminary Report, filed with this Court on
February 18, 2003, for a more complete description of the ICA Trustee's
preliminary findings and recommendations. The Preliminary Report was also
made available for downloading or printing at no charge on the Liquidating
LLCs' website, (www.ibffund.com).
7
and reflected substantial input from the Staff of the SEC, as well as other
interested parties.
By order dated June 26, 2003, the Bankruptcy Court approved the adequacy of
the Disclosure Statement and approved procedures for soliciting and counting
votes on the Plan.
The Plan was approved by the overwhelming majority of investors and other
creditors who voted. Votes were due by August 7, 2003 (or, in the case of a
limited group of investors, August 11, 2003). 1,740 ballots were received on
time, representing total Allowed Claims of approximately $112,000,000. Of that
amount, 1,713 ballots, representing total Claims of approximately $110,000,000,
were cast in favor of the Plan, and only 27 ballots, representing total Claims
of approximately $1,300,000, voted against it. In terms of percentages, 98.5% of
those voting, holding approximately 98% of the total dollars voted, accepted the
Plan.
On August 14, 2003, the Bankruptcy Court held a hearing to consider
confirmation of the Plan, after which it entered findings of fact and
conclusions of law and an order confirming the Plan. On September 5, 2003, on
motion of the ICA Trustee, a hearing was held before this Court, at the close of
which this Court entered an order approving the Plan in its entirety and, in
particular, endorsing the Plan's proposed treatment of the proceeds of the SEC
Escrow.
F. CONSUMMATION OF THE LIQUIDATING PLAN
In the period from September 2003 through December 2003, the ICA Trustee
worked to satisfy the conditions required to go effective with the Plan and made
other necessary preparations. Those efforts included: forming the Liquidating
LLCs; preparing a management agreement that addresses governance issues between
the Liquidating LLCs; opening bank accounts and addressing other practical
considerations necessary to operate post-Effective Date; coordinating with the
disbursement agent to prepare for initial distributions and establish initial
reserves under the Plan; and continuing to analyze and object to Claims and
negotiating with holders of Disputed Claims in order to meet certain aggregate
claim thresholds in the Plan.
8
On November 13, 2003, the ICA Trustee filed with the Bankruptcy Court his
"Progress Report on Plan Consummation and Motion for Authority to Make Initial
Distributions in respect of Escrow Claims." There, the ICA Trustee summarized
the progress towards consummation of the Plan. By order that same date, the
Bankruptcy Court approved the list of Escrow Claims.
On December 10, 2003, the Plan went effective as to the Funds and IBF Hotel
and, on December 17, 2003, the Plan went effective as to IBF. Notices of the
Effective Dates were filed with the Bankruptcy Court and were made available for
downloading or printing at no charge from the Liquidating LLCs' website,
(www.ibffund.com). In general, the Plan provides for the orderly liquidation of
the Debtors' assets over the next five (5) years, with proceeds to be
distributed to creditors approximately every six (6) months as money is
available. The Plan further gives the ICA Trustee the discretion to direct Fund
LLC to make additional investments in assets from the Funds' portfolios in an
effort to enhance creditor recoveries. The Plan is being administered by the
Liquidating LLCs. The ICA Trustee is the manager and liquidating agent of each
of the Liquidating LLCs and is supervising the liquidation of the Funds'
portfolios.
III.
REPORT ON PROGRESS SINCE
EFFECTIVE DATE OF THE PLAN
A. INITIAL DISTRIBUTION UNDER THE PLAN
In December 2003, Fund LLC made the initial distribution required under the
Plan. Creditors entitled to receive equity in IBF LLC or Fund LLC on account of
their Claims were assigned Membership Interests in the appropriate Liquidating
LLC. In the case of Fund LLC, the total cash distributed to investors and other
creditors was approximately $19,241,000. Fund LLC's distribution was paid out of
the proceeds of the SEC Escrow, as discussed below.
IBF LLC has no material assets and has made no distributions to IBF's
creditors; nor does it appear that IBF LLC will recover any assets which could
be distributed to IBF's creditors. In
9
addition, the Plan requires that, before making any distributions to creditors
of IBF, IBF LLC first repay amounts advanced by the Funds during the Debtors'
chapter 11 cases to pay IBF's administrative expenses. As a result, based on
current projections, IBF LLC is not expected to make any distributions. Fund LLC
is paying IBF LLC's share of administrative costs, but the work presently being
done is minimal so the additional cost to Fund LLC is not material.
As of November 30, 2003, the balance of the SEC Escrow was $24,452,853.
Pursuant to the settlement discussed in Section 7.10 of the Disclosure
Statement, the proceeds of the SEC Escrow were disbursed as follows: (a) the 287
investors with Escrow Claims received a total initial distribution of
$15,662,853, or approximately 58% of such Claims; (b) investors with Non-Escrow
Claims (and other creditors with General Unsecured Claims against the Funds or
IBF Hotel) received a total initial distribution of $3,578,553, or approximately
2% of such Claims (or, in the case of creditors with claims of $10,000 or less,
or willing to reduce their claims to $10,000, and who elected to have their
claims treated as Cash-Out Claims in Class CFC-5 or SLC-5, such creditors
received a one-time payment of 20% of their Claim); and (c) approximately
$5,000,000 was reserved to fund the operations of Fund LLC, in exchange for
which Fund LLC issued the Escrow Note to Escrow Claimants, each according to
their pro rata share, payable on or before the fifth (5th) anniversary of the
Effective Date, with interest accruing at the rate of 3.5% per annum. The Escrow
Note must be paid in full, with accrued interest, before further distributions
to other unsecured creditors can be made. (Plan, Section 1.2.45).
B. TAX/REPORTING REQUIREMENTS
In January 2004, the Liquidating LLCs completed the tax valuation of the
Debtors' assets required under Section 7.13 of the Plan. Also in January 2004,
creditors receiving equity in Fund LLC under the Plan (i.e., investors with
non-Escrow Claims and Escrow Claimants to the extent of their Escrow Deficiency
Claims) were mailed statements notifying them of their
10
Membership Interests in Fund LLC as well as IRS Form 1099's (for those investors
who held retail, not pension or 401K plan, accounts) permitting them to value
their Membership Interests and, in most cases, recognize a tax loss for calendar
year 2003. Those packages were mailed during the week of January 26, 2004. The
documents established each investors' tax basis in Fund LLC or their new tax
basis on account of their prior investment in the Funds. The new tax basis
reflected a 31% value versus original investment amounts, or a 69% loss per
investment.
In March 2004, the ICA Trustee filed with the SEC a report on behalf of
Fund LLC under form 10-K, using SLC's former SEC file number. The report
addressed the period between Fund LLC's formation on December 10, 2003, and
December 31, 2003. The report generally describes the formation of Fund LLC and
the events that transpired in that three-week period. It further provides
financial information about Fund LLC, including the assets and liabilities
reported as of December 31, 2003 and receipts and disbursements by Fund LLC
during the period. Copies were made available to be downloaded or printed at no
charge from (www.ibffund.com).
C. INVESTMENT PORTFOLIO
The following is a summary of activities during the First Interim Period
concerning certain investments in the Funds' portfolios. Reference is made to
Exhibit D of the Preliminary Report for a more thorough description of the
amount and nature of each investment.
1. PLATFORM COMPANIES
A. I&BS/ABR
Investment & Benefit Services, Inc, d/b/a American Benefit Resources, Inc.
("I&BS") is in the business of third-party administration of pension and 401K
plans for employees. Prior to the Debtors' bankruptcy filings, CFC made loans to
I&BS of approximately $9,396,000, secured by a lien against all or substantially
all of I&BS's assets, and invested an additional $800,000 to acquire
approximately 30.4% of I&BS's equity. In addition, pursuant to Section 8.7 of
the Plan,
11
Fund LLC has discretion to invest up to an additional $5,000,000 in I&BS. To
date, Fund LLC has invested an additional $3,810,000 in I&BS, of which
$3,305,000 was during the First Interim Period.
First, Fund LLC has made loans of approximately $2,110,000 to I&BS to
finance two acquisitions intended to grow its business. In the first
acquisition, made after confirmation of the Plan but prior to the First Interim
Period, I&BS borrowed approximately $505,000 from Fund LLC to purchase a
third-party administration company in Houston, TX - ML Kerns Associates - that,
along with an investment advisory business (ML Kern Capital Management),
provides investment advisory services to plan fiduciaries and utilizes web-based
software to provide investment advice and allows plan participants to more
actively manage their accounts. In the second acquisition, made during the First
Interim Period, I&BS borrowed approximately $1,605,000 from Fund LLC to acquire
a third-party administration company in Seattle, WA - National Associates - to
build-out its West Coast business.
In addition, during the First Interim Period, Fund LLC loaned approximately
$1,700,000 to I&BS that was required to pay certain obligations, consisting of:
(i) $250,000 to pay accrued legal fees (which reflects a reduction negotiated by
the ICA Trustee); (ii) $1,200,000 to settle certain litigation with the former
seller, Frailey, of what is now part of the West Coast division of I&BS ; and
(iii) $250,000 towards a seller-financed note owed to the sellers of an entity
in the East Coast division of I&BS (which reflects a reduction negotiated by the
ICA Trustee). I&BS is beginning to repay the amounts advanced; to date Fund LLC
has been paid $200,000.
As of June 30, 2004, the loan balance owing to Fund LLC, inclusive of the
additional advances, is $16,635,095. The loan matured and was extended by
agreement to November 6, 2004. At present, it appears I&BS may be a material
source of recovery for Fund LLC.
B. BANCCAP
BancCap Funding LLC ("BancCap") was a mortgage securitization company
specializing
12
in the acquisition and resale of sub-prime loans that do not qualify for
conventional securitizations, also referred to as "scratch and dent" loans.
Prior to its bankruptcy filing, SLC loaned BancCap approximately $952,000,
evidenced by a secured note ("BancCap Note").
In June 2004, with the approval of the Bankruptcy Court, Fund LLC sold the
BancCap Note to Berkshire Group LP, which netted $190,000. BancCap has not
conducted any business for approximately one (1) year. Prior to the sale, no
recovery was expected by Fund LLC.
C. U.S. MILLS
U.S. Mills, Inc. ("USM") is a leading marketer of natural and organic
breakfast cereals and similar food items. Prior to its bankruptcy filing, CFC
made loans to USM of approximately $5,400,000, and invested approximately
$3,127,214 to acquire a mix of preferred and common stock. In addition, under
Section 8.7 of the Plan, Fund LLC has discretion to make additional investments
of up to $1,000,000 in USM, and so far has advanced an additional $200,000 to
USM. As of June 30, 2004, the balance on CFC's loan, inclusive of the additional
advance, is $6,129,649. CFC's debt is subordinate to debt of approximately
$5,700,000 held by Boston Private Bank & Trust Co. and Boston Federal Savings
Bank.
USM experienced a recent improvement in its business, as a result of which
it was able to modify its existing line of credit with its senior lenders and
improve its liquidity. The ICA Trustee was involved in the negotiations and, as
noted, provided a pledge of $200,000 to facilitate the modification. The loan
modification will give USM additional access to funding to assist in meeting the
recent substantial increase in the demand for certain of its products.
During the First Interim Period, the ICA Trustee renegotiated the
management incentive plan for USM. In addition, after a determination that a
change in direction was warranted, the ICA Trustee negotiated a separation
between USM and its former President and CEO. The separation and certain related
matters were documented by the ICA Trustee and his counsel.
13
Based on the recent improvement in the business, USM and the ICA Trustee
have agreed to explore opportunities to sell its operations. To that end, USM
and the ICA Trustee are planning to meet with a number of investment banking
firms in late July or early August. It is currently believed that a sale of USM
may result in a substantial recovery by Fund LLC.
D. TUNED IN SPORTS
Tuned In Sports, Inc. ("TiS") is a sporting goods company that specialized
in the manufacture and marketing of soft surfboards, body boards and camping
equipment. CFC made loans to TiS of approximately $11,359,000, and invested an
additional $1,732,600 to acquire approximately 74% of the equity of TiS. CFC's
loan has matured and is in default. The current loan balance is approximately
$13,836,681. In addition, in June 2003, the ICA Trustee loaned TiS approximately
$361,000 to purchase inventory in the hopes of generating additional sales and
enhancing Fund LLC's recovery. As collateral, the ICA Trustee took a second lien
against the equity in Hershon's office building in Washington, DC. That loan has
matured, is in default, and is expected to be repaid in full as part of the
settlement discussed in Section III(F)(4) below.
Over the past twelve (12) months, the ICA Trustee and his advisors have
devoted substantial time to meeting with the management of TiS and monitoring
operations. The business is performing very poorly and the ICA Trustee has
concerns about its ability to continue as a going concern. Aside from the
$361,000 loan, no recovery is expected by Fund LLC.
E. CAPSTONE CAPITAL LLC
Capstone Capital LLC ("Capstone") was in the business of providing
financial support and investment services to companies by purchasing their
pre-sold inventory from domestic and offshore manufacturers, vendors or
suppliers and, upon shipment, re-selling to the client companies' factors. Prior
to its bankruptcy filing, CFC loaned Capstone approximately $5,000,000. The loan
is secured by a lien against all or substantially all of Capstone's assets,
14
which lien is junior to that of a lender, Northfork Bank, securing a loan with a
current balance of approximately $865,000. CFC and management also each own 50%
of the equity of Capstone. CFC's loan has matured, is in default, and has a
balance owing of approximately $5,265,051.
Capstone has ceased operations and is in the midst of an orderly
liquidation. Capstone's assets consist mainly of loan receivables, of which at
least 40% is tied to collection of medical reimbursables in the chapter 7
liquidation of one of its clients, Vista Optical. The ICA Trustee is monitoring
the liquidation of Vista Optical. Capstone is collecting out its receivables,
and is assisting the chapter 7 trustee in Vista Optical in an effort to collect
the medical reimbursables.
At present, it is difficult to predict whether Fund LLC's recovery will be
material.
2. OPERATING HOTELS
A. TRAVELODGE
In 2001, CFC acquired a 132-room Suisse Chalet Hotel in Portland, Maine
through a holding company, HIM Portland, LLC ("HIM Portland"). HIM Portland was
owned 99% by CFC and 1% by an affiliate of IBF, InterBank/Brener Brokerage
Services, Inc. HIM Portland renovated the hotel and reflagged it as a
Travelodge, completing the work in June 2002. Prior to its bankruptcy, CFC made
loans to HIM Portland of approximately $2,432,533. In January 2004, with the
approval of the Bankruptcy Court, HIM Portland sold the hotel. The ICA Trustee
and his advisors led the sale, which generated a recovery of approximately
$328,849 by Fund LLC.
B. HILTON GARDEN INN
The Hilton Garden Inn is a 122-room hotel in Round Rock, Texas, near the
headquarters of Dell Computers. The hotel is owned by Chisholm Partners, Ltd.
("Chisholm"). CFC owns a 75% limited partnership interest in Chisholm. The hotel
is subject to a first deed of trust held by Union Bank & Trust Company with a
balance of approximately $6,100,000. Union Bank's loan is in default and a
forbearance agreement is in place, pursuant to which it is being paid current
15
interest only. At present, it is difficult to predict whether Fund LLC's
recovery will be material.
C. FAIRFIELD INN
The Fairfield Inn (Marriott) is a 144-room hotel in Vinings, Georgia, near
the corporate headquarters of Home Depot. The hotel is owned by Vinings Partners
LP. ("Vinings"). CFC owns a 90% limited partnership interest in Vinings. The
hotel is subject to a first mortgage held by Union Bank & Trust Company with a
balance of approximately $5,600,000. At present, it appears that cash flow is
sufficient to meet the hotel's current obligations. The first mortgage matures
in 2009, and there have been preliminary discussions with the lender about
providing interest rate and other relief, but there is no agreement in place. It
is too early to accurately forecast whether there will be any material recovery
by Fund LLC.
D. COMFORT INN
The Comfort Inn is a 120-room hotel located in Orlando, Florida, near
Discovery Sea World. CFC financed the acquisition of the hotel, and over time
made loans prior to its bankruptcy of approximately $2,505,000 to the owner,
Sita Resorts, Inc. ("Sita"). Sita stopped making payments on the loan in October
2001, causing CFC to exercise its remedies and obtain ownership and control of
Sita. At present, the balance due and owing on CFC's loan is approximately
$3,000,000. The hotel is encumbered by a first mortgage in favor of Colonial
Bank, securing a loan, currently in default, with a balance due of approximately
$5,600,000. Fund LLC is in discussions with Colonial, and is seeking to sell the
hotel in the near term to avert a possible foreclosure by Colonial.
The hotel is currently the subject of litigation in state court in Orange
County, Florida, with the former owners and operators of the hotel, Stephen
Mullen and Grant Mullen.
Recently, an agreement was signed to sell the hotel to a third party,
Encore Enterprises, Inc. ("Encore"). At present, Encore is performing its due
diligence and seeking acquisition
16
financing to fund the purchase. Efforts are also underway by Fund LLC to satisfy
closing conditions. On July 8, 2004, Fund LLC filed a motion in the Bankruptcy
Court seeking authority to consent, as owner of 100% of the common stock of
Sita, to Sita's sale of the hotel on such terms as may be acceptable to Fund
LLC. If successful, the sale to Encore is expected to result in a recovery of
approximately $400,000 by Fund LLC. A sale will also cutoff further requests for
Fund LLC to fund the hotel's operating expenses.
E. BEST WESTERN UNIVERSAL INN
The Best Western Universal Inn is a 70-room hotel located in Orlando,
Florida, near Universal Studios. CFC financed the acquisition of the hotel, and
over time made loans prior to its bankruptcy of approximately $1,183,000 to the
owner Ganesh Hospitality, Inc. ("Ganesh") and the management company, Granjac
Resorts, Inc. ("Granjac"). Ganesh and Granjac stopped making payments on the
loan in October 2001, causing CFC to exercise its remedies under the loan
documents and obtain control over Ganesh and Granjac. At present, the balance
due and owing on CFC's loan is approximately $1,300,000. The hotel is encumbered
by a first mortgage in favor of Mercantile Bank, securing a loan with a balance
due of approximately $2,900,000. By agreement with Mercantile, Fund LLC is
seeking to sell the hotel in the near term.
The hotel is currently the subject of litigation in state court in Orange
County, Florida, with the former owners and operators of the hotel, Stephen
Mullen and Grant Mullen.
Recently, an agreement was signed to sell the hotel to Encore. At present,
Encore is performing its due diligence and seeking acquisition financing to fund
the purchase. Efforts are also underway by Fund LLC to satisfy closing
conditions. On July 8, 2004, Fund LLC filed a motion in the Bankruptcy Court
seeking authority to consent, as holder of the voting rights of Ganesh, to
Ganesh's sale of the hotel on such terms as may be acceptable to Fund LLC. If
successful, the sale to Encore is expected to result in a recovery of
approximately $500,000 by
17
Fund LLC. A sale will also end further requests for Fund LLC to fund the hotel's
expenses.
3. DEVELOPMENT PROPERTIES
A. TRIBECA
CFC advanced certain monies to IBF Hotel to initiate development of a
272-room hotel in the Tribeca section of lower Manhattan. In September 2002, IBF
Hotel assigned all right, title and interest in the project to AMJM Realty, LLC
("AMJM"), in exchange for which AMJM issued a promissory note for $4,500,000
payable to IBF, for the benefit of CFC. The rights assigned to AMJM included IBF
Hotel's rights under purchase and sale agreements signed with the owners of the
two primary parcels on which the hotel was supposed to be built. The AMJM note
has matured, is in default, and has a balance due and owing in excess of
$2,800,000.
Prior to the Effective Date, Fund LLC negotiated a settlement with the
owners of the primary development parcel, which settlement was approved by the
Bankruptcy Court. The settlement led to a recovery by Fund LLC of $227,996, plus
a sharing of future benefits respecting development and/or sale of the parcel.
In addition, recently, the ICA Trustee signed a term sheet outlining a
settlement negotiated with the owner of the secondary parcel, the United States
Postal Service ("USPS"). On July 16, 2004, Fund LLC filed a motion with the
Bankruptcy Court seeking approval of the settlement with the USPS. If approved,
the USPS settlement will result in an additional recovery of approximately
$250,000 by Fund LLC.
B. SAHR
CFC made advances to fund development of a Marriot Resort on a 50-acre site
in San Antonio, Texas, in a 2,855-acre mixed-use development being developed by
Lumbermen's Investment Corp. ("Lumberman's"). CFC made its loan to SAHR, LLC,
which was owned 100% by IBF Hotel, for the benefit of CFC. The loan matured and
is in default, with a balance owing to CFC of approximately $3,800,000. During
the First Interim Period, CFC contributed its
18
interest in SAHR (plans, architectural drawings, specifications, etc.) to a
joint venture partnership with Lumbermen's in exchange for a 24% limited
partnership interest in the joint venture. Lumbermen's contributed the
undeveloped land in exchange for its 76% limited partnership interest.
Discussions have been held between a major hotel franchise and Lumbermen's and
an agreement in principal has been reached to develop the site as a hotel &
resort. The hotel franchise has already begun to explore its ability to finance
the project.
It is too early to estimate with any accuracy the timing or amount of Fund
LLC's recovery.
C. PINEHILLS
CFC made certain advances to Plymouth Ventures, LLC ("Plymouth Venture") to
fund development of a hotel and convention resort on a 12-acre site in Plymouth,
Massachusetts. The hotel is proposed as part of a 3,037 acre master planned
community, and was to serve as the cornerstone for commercial development in the
area. The 12-acre parcel on which the hotel was to be built is owned by Plymouth
Venture, which is owned 100% by CFC. Over time, prior to its bankruptcy, CFC
made loans to Plymouth Venture of approximately $11,445,000. CFC's loan has
matured and is in default, with a balance due of approximately $15,978,463. Fund
LLC is seeking to sell the site and the work completed to date (plans, permits,
etc.) and, in February, hired a broker to find potential buyers. In the course
of maintaining the property for sale, Fund LLC is meeting monthly association
and common area fees, along with an infrastructure note payment that was part of
the original financing agreement. During the First Interim Period, Fund LLC
advanced an additional $646,437 to maintain the property, pursuant to Section
8.7 of the Plan, of which approximately $400,000 was paid to bring the
association and common area fees current. The cost to continue maintaining the
property for sale is approximately $20,000 per month. At present, it is believed
that a sale may result in a material recovery by Fund LLC but it is too
difficult at this stage to estimate with any accuracy the amount or timing of
the recovery.
19
D. ANGUILLA
CFC made certain advances to fund the development of a resort on 1,407
acres of land on Anguilla Beach, Cat Island, in the Bahamas. CFC's loan was made
through a special purpose company, IBF Bahamas, Ltd., to the developer, Cat
Island Ventures, Ltd. Over time, CFC loaned prior to its bankruptcy
approximately $5,200,000 to Cat Island Ventures, Ltd. The loan matured in 2001
and is in default, and the loan balance is approximately $12,785,832. The loan
was supposed to have been secured by a first mortgage, but a lien search by
IBF's former counsel in the Bahamas failed to disclose a prior first mortgage
held by Gulf Union Bank (Bahamas) and the owner did not disclose it.
Consequently, CFC's loan is secured by a junior mortgage. CFC commenced
litigation against its closing attorney's malpractice insurance, reportedly
subject to a cap on coverage of $2,000,000, and is contemplating suit against a
limited guaranty by the owner. The balance owing on Gulf Union's loan is
approximately $2,500,000.
Gulf Union Bank is in receivership, and its liquidator has been seeking a
buyer for the property for over twelve (12) months. At present, there is no
buyer and the sale efforts are continuing. At this stage, it is not possible to
predict what Fund LLC's recovery may be.
4. SECURITIZATIONS
The Funds invested in two (2) residential mortgage loan securitizations,
one underwritten by Lehman Brothers, ARC 2001-BC-1, and the other by DLJ
Mortgage Corp. and Credit Suisse First Boston, CSFB ABS 2001-HE-25. In the
former, CFC invested approximately $3,100,000, and in the latter, CFC and SLC
invested approximately $4,000,000 and $450,000 respectively - for a total
invested by the Funds in the two transactions of approximately $7,500,000.
The investments have been a source of significant cash flow. Specifically,
for the twelve (12) months ended June 30, 2004, Fund LLC collected approximately
$5,370,000 - $2,660,000 from CSFB and $2,710,000 from Lehman. However, the
future performance of these assets
20
cannot be assured. Currently, Fund LLC is exploring the possibility of selling
its positions. A sale of one or both could result in a significant realization
event. However, because the assets are performing, Fund LLC has not committed to
sell in the near term and, depending on the size of the bids it receives, may
postpone a sale and continue collecting monthly payments.
D. SETTLEMENT WITH INVESTORS IN AIH
IBF V-Alternative Investment Holdings LLC, or AIH, was an affiliate of the
Funds. AIH was similar in most regards to the Funds - i.e., it raised capital
from investors, invested the monies raised, net of expenses, in equity
securities of portfolio companies, and hoped to generate returns for its
investors.
AIH did not file a chapter 11 case and is not a defendant in this
litigation. However, there is a substantial overlap between AIH and the Funds.
First, AIH invested in the same platform companies as the Funds, so AIH's and
the Funds' interests are intertwined. AIH's portfolio contains only two
investments, an equity investment in I&BS and one in USM. The Funds invested
heavily in those two companies, and are owed not less than $22,700,000.
Second, Fund LLC is by far the largest creditor of AIH. AIH guaranteed over
$15 million of I&BS's debt to the Funds and, based on current information, it
appears that I&BS may not be able to pay its debts as they come due, meaning the
guaranty may be implicated. It further appears that the Funds were net creditors
of AIH by virtue of intercompany transfers made prior to the Petition Date, on
account of which AIH owes the Funds approximately $450,000. Finally, of the
$4,300,000 raised by AIH through the offering and sale of securities,
approximately $1,000,000 was purchased by IBF. As consideration under the Plan,
IBF assigned its $1,000,000 claim to Fund LLC, making Fund LLC the single
largest holder of securities issued by AIH.
Due to the extensive overlap between AIH and the Funds, the Staff of the
SEC asked the ICA Trustee to consider means to resolve investor claims against
AIH in the context of the Plan.
21
The issue was discussed with the Committee and it was ultimately agreed that the
ICA Trustee would purchase AIH's assets (the equity investments in the two
portfolio companies) in exchange for a pro rata percentage of Fund LLC,
calculated based on the initial investment by investors in AIH divided by the
allowed unsecured non-escrow claims against the Funds. The settlement is
embodied in Section 7.7 of the Plan and was approved by the Funds' investors
when they voted to approve the Plan. Section 7.7 gives the ICA Trustee the
authority to treat investor claims against AIH in the same manner as claims in
Classes CFC-4, SLC-4, CFC-5 or SLC-5.
The anticipated dilution to current members of Fund LLC that would result
from a settlement with AIH investors is not expected to be material (total
capital raised by AIH of approximately $4,300,000 (of which, $1,000,000 was
invested by IBF and is now held by Fund LLC), versus total non-escrow capital
raised by the Funds of approximately $164,000,000).
E. CLAIMS OBJECTIONS
1. MARTIN BINDER
During the First Interim Period, the ICA Trustee prevailed in an adversary
proceeding filed by an investor, Martin Binder ("Binder"), who was seeking to
have his General Unsecured Claim treated as an Escrow Claim by virtue of unique
circumstances surrounding the presentment of his check. At a hearing on February
2, 2004, the Bankruptcy Court ruled in the Liquidating LLC's favor, determining
that Binder's claim was properly classified in CFC-4. The litigation, if decided
against the ICA Trustee, would have had negative ramifications to the Funds'
estates with respect to other claimants.
2. DILLARD WINECOFF
During the First Interim Period, the ICA Trustee successfully objected to
two (2) proofs of claim filed by a former borrower, Dillard-Winecoff LLC
("Dillard"). Dillard asserted secured and priority claims in the amount of
approximately $5,400,000, ostensibly as damages on
22
account of the Debtors' 1998 foreclosure on a hotel project owned by Dillard.
Dillard proved to be excessively litigious, filing literally thousands of pages
of legal documents and requiring the ICA Trustee and his counsel to respond to a
myriad legal pleadings. Ultimately, the Bankruptcy Court ruled in favor of the
Liquidating LLCs on a dispositive motion and expunged the claims in their
entirety. The Bankruptcy Court also ordered an inquest specific to Dillard's
conduct, which may result in a further recovery by Fund LLC.
3. PROFESSIONAL CLAIMS
In several instances, the ICA Trustee determined that the compensation
sought by professionals who rendered services to the Debtors during the Chapter
11 Cases was excessive. Prior to the Effective Date, the ICA Trustee negotiated
a settlement with one firm which resulted in a significant cost savings. During
the Period, the ICA Trustee negotiated a settlement with a second firm, which
was also identified as the recipient of alleged preferential transfers. The
latter settlement was approved by the Bankruptcy Court and also resulted in a
significant cost savings.
4. REMAINING CLAIMS OBJECTIONS
The ICA Trustee and his counsel conducted an intensive claims review and
objection process prior to the Effective Date; expunging or reclassifying
approximately 630 claims. In addition, in connection with the initial
distribution, counsel to the ICA Trustee identified a number of additional
disputed claims. Subsequent to the initial distribution, the ICA Trustee filed
his "Third Omnibus Claims Objection," which was approved by the Bankruptcy Court
by order dated March 4, 2004. As of the date hereof, there are only a handful of
disputed claims remaining, all of which are the subject of an objection and are
in various stages of litigation.
The remaining claims consist of (i) claims for indemnification asserted by
two former directors and officers, which the ICA Trustee believes will be
withdrawn in connection with the global settlement discussed in greater detail
below; (ii) a claim asserted in connection with
23
Pinehills, which is expected to be resolved upon a sale of the project and is
not expected to have a material impact, and (iii) overlapping claims asserted by
Triarc essentially for unpaid developer fees and expenses, which claims the ICA
Trustee has investigated and determined have no merit and are in any event
subject to the various counterclaims being considered by the ICA Trustee.
F. LITIGATION
1. STEIN/1970 ASSET MGT
In January 2004, the ICA Trustee finalized a settlement concluding
litigation with a former borrower, 1970 Asset Management, over a defaulted loan.
The settlement was predicated on the determination that it would be difficult to
enforce a judgment due to the financial condition of the borrower and its
principal, Ed Stein, who guarantied the loan. The Bankruptcy Court approved the
settlement. So far, Fund LLC has collected approximately $200,000. If paid in
full, the settlement payments, over time, could be as much as $2,000,000.
2. PRESBERG LITIGATION
I&BS and Robert Presberg ("Presberg") are parties to a dispute pending in
state court in Los Angeles, California, involving competing claims stemming from
an I&BS acquisition in 1999. Presberg, essentially alleged that I&BS breached
the terms of the purchase agreement, while I&BS claims that it was misled by
Presberg when it acquired the businesses and that Presberg misappropriated
proprietary information and unlawfully solicited former clients.
In June 2004, Fund LLC, as the lender who provided acquisition financing to
I&BS, filed an adversary proceeding in the Bankruptcy Court seeking damages from
Presberg.
The parties recently signed a settlement agreement dated June 28, 2004,
which resolves the various claims involving Presberg. In essence, the settlement
requires I&BS to pay Presberg $750,000 over the next four (4) years. The initial
$350,000 will likely be funded by Fund LLC.
24
3. CLAIMS AGAINST THIRD PARTIES
On June 7, 2004, the two-year period for filing certain causes of action
expired. During the First Interim Period, the ICA Trustee and his advisors spent
considerable time reviewing the Debtors' books and records and analyzing
possible claims. The possible claims considered include avoidance claims under
chapter 5 of the Bankruptcy Code, claims based on representations made in public
filings or investor communications, and claims against broker/dealers to recover
commissions paid on account of proceeds raised that were deposited into the SEC
Escrow, never invested, and now, under the Plan, are being returned to
investors.
In those instances where a possible claim was identified, the ICA Trustee
sent the party a letter summarizing the claim and inviting the party to submit
its defenses for consideration. The ICA Trustee also offered to enter into
tolling agreements - in most cases, for six (6) months - to allow for further
investigation and, where appropriate, settlement discussions. As of the date
hereof, Fund LLC has recovered approximately $44,740 in respect of avoidance
claims.
On June 3-4, 2004, the ICA Trustee filed lawsuits against those parties
that did not respond to his inquiries or refused to enter into tolling
agreements. So far, the ICA Trustee has commenced 18 adversary proceedings.
Initial status conferences are set for September 8, 2004.
In addition to the avoidance claims filed, the ICA Trustee is continuing to
investigate non-bankruptcy specific claims to be asserted on the Debtors'
behalf. However, at this stage, it is too early to determine whether these
additional claims will result in additional lawsuits.
4. CLASS ACTIONS/D&O
In 2002, a class action was filed against the Funds and certain former
directors and officers in the United States District Court for the District of
Columbia. Two additional class actions were subsequently filed and have been
consolidated with the first. Attorneys for the lead plaintiff have participated
in discussions with the ICA Trustee, the class action defendants, and
25
the Debtors' insurance carrier, St. Paul. At issue is the coverage available
under two policies, a $5,000,000 directors & officers policy and a $5,000,000
banker's liability policy.
Through the effort of the ICA Trustee's an initial payment of approximately
$700,000 was recovered under the D&O policy. Recently, the ICA Trustee
negotiated a settlement in principle that will result in Fund LLC's recovery of
most of the balance under the D&O policy. That settlement is subject to, inter
alia, approval by the Court overseeing the class actions and an aggregate cap on
the number of investors who opt out of the settlement. If the settlement is
approved, recovery of the D&O proceeds will enhance the recovery by the Funds'
investors.
5. GLOBAL SETTLEMENT
On November 19, 2003, a consent judgment was entered between the Funds and
the SEC, ending the Funds' involvement as defendants in this lawsuit. In June
2004, Hershon and the ICA Trustee signed a term sheet reflecting an agreement in
principle that will conclude this lawsuit and a number of related proceedings.
The global settlement is still being documented but for purposes of this Report
contemplates a payment by Hershon to be distributed to investors and certain
injunctive relief. The settlement was approved on a preliminary basis by the
Staff of the SEC. The ICA Trustee believes that the settlement is in the
Liquidating LLCs' and investors' best interests, and will file a motion seeking
approval of its terms once it is fully documented.
IV.
FINANCIAL CONDITION
OF LIQUIDATING LLCS
Unaudited balance sheets and statements of operations summarizing the
Liquidating LLCs' financial condition as of June 30, 2004, are attached hereto
as Exhibit A.
26
V.
PROPOSED DISTRIBUTION
Fund LLC is proposing to make a distribution in August, its second under
the Plan, in the amount of approximately $3,096,849. Under the Plan, the entire
amount must be applied to the Escrow Note. Specifically, Section 1.2.45 of the
Plan requires that the Escrow Note be paid in full, with interest accrued
through the date of payment, prior to any further distributions on account of
non-Escrow Claims. Fund LLC is not proposing to make a distribution on account
of Non-Escrow Claims at this time. The distribution will be applied (i) to
reduce the principal balance on the Escrow Note by $3,000,000, leaving a
remaining principal balance of $2,000,000, and (ii) to pay in full accrued and
unpaid interest on the Escrow Note as of the date of payment (as of June 30,
2004, approximately $96,849). After giving effect to the distribution, investors
with Escrow Claims will have recovered $18,759,701.74, or 71.4% of their Claims.
The proposed distribution will leave Fund LLC with available cash of
$7,252,579 to cover the costs of administration and, if appropriate, make
limited further investments. The distribution is conservative, accounting for
the fact that only seven (7) months have elapsed since the Effective Date of the
Plan. During the First Interim Period, a few assets were sold and progress was
made towards the sale of a number of other assets, as set forth above. However,
the administration of the Liquidating LLCs is a work in progress and there is
much work left.
Based on current projections, it appears that a number of liquidation
events may occur in the next few months, from which the ICA Trustee hopes to
make a distribution in late October 2004 in an amount sufficient to retire the
Escrow Note. The ICA Trustee further hopes to make a distribution in December
2004 to non-escrow investors and other general unsecured creditors.
In general, the administration of the Liquidating LLCs is proceeding ahead
of schedule. There are a few exceptions, such as the liquidation of the Funds'
investment in Anquilla, but by and
27
large the liquidation of most assets is at or ahead of schedule. It is still too
early to accurately estimate what the ultimate recovery will be by investors and
other unsecured creditors. However, if the current progress continues, it
appears that the liquidation will be concluded in less than the five (5) years
allotted by the Plan for the ICA Trustee's administration of the Liquidating
LLCs.
Dated: New York, New York
July 26, 2004
IBF Liquidating LLC and
IBF Fund Liquidating LLC
By: /s/ Arthur J. Steinberg
------------------------------------
Arthur J. Steinberg, ICA Trustee, as
Manager and Liquidating Agent
Counsel to the ICA Trustee:
Arthur J. Steinberg (AS 1298)
Heath D. Rosenblat (HR 6430)
Kaye Scholer LLP
425 Park Avenue
New York, NY 10022
212/836-8000 telephone
212/836-7157 facsimile
28
Annex B
Arthur J. Steinberg (AS 1298)
Heath D. Rosenblat (HR 6430)
Kaye Scholer LLP
425 Park Avenue
New York, NY 10022
212/836-8000 telephone
212/836-7157 facsimile
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION, )
)
Plaintiff, )
)
vs. ) Case No.02-CV-5713-JES
)
IBF COLLATERALIZED FINANCE CORP., )
IBF-VI SECURED LENDING CORP., )
INTERBANK FUNDING CORP., AND )
SIMON A. HERSHON INDIVIDUALLY, )
)
Defendants. )
SECOND INTERIM REPORT FOLLOWING EFFECTIVE DATE OF
JOINT LIQUIDATING PLAN WITH RESPECT TO THE DEBTORS
February 1, 2005
This second interim report ("Report")(1) is submitted on behalf of IBF
Liquidating LLC ("IBF LLC") and IBF Fund Liquidating LLC ("Fund LLC" and,
collectively, the "Liquidating LLCs"), pursuant to Section 9.3 of the Plan and
Paragraph 1 of the Bankruptcy Court's "Post-Confirmation Order and Notice" dated
August 28, 2003. This Report is the second such update and addresses the period
from July 1, 2004 through January 31, 2005 (the "Second Interim Period"). For
information relating to events prior to the Second Interim Period, reference is
made to the First Interim Report Following Effective Date Of Joint Liquidating
Plan With Respect To The Debtors ("First Interim Report") covering the period
from December 10, 2003 (inception of Fund LLC) through June 30, 2004 ("First
Interim Period"). The First Interim Report was filed with the Clerk of the
District Court on July 26, 2004, and is also available at no cost for printing
or downloading at the Liquidating LLCs' website (www.ibffund.com).
Part I of this Report is an executive summary. Part II summarizes
significant events that occurred during the Second Interim Period and discusses
the steps being taken to liquidate the remaining assets in the Liquidating LLCs'
portfolios. Part III incorporates Exhibit A, which summarizes the financial
condition of the Liquidating LLCs. Finally, Part IV discusses the amount and
source of the next distribution, Fund LLC's third, proposed to be made in
February 2005.
I.
EXECUTIVE SUMMARY
A. RECEIPTS AND DISBURSEMENTS
In the Second Interim Period, Fund LLC collected roughly $13,014,494 and
disbursed roughly $12,055,050, for an increase to available cash of
approximately $959,444.
The cash flow for the period resulted primarily from (i) collections from
the two
- ----------
(1) Capitalized terms used but not defined in this Report shall have the
meanings ascribed to them in the Joint Liquidating Plan with Respect to the
Debtors (as confirmed and as approved by this Court, the "Plan").
residential mortgage securitizations assets ($7,651,710); (ii) the sale of the
Pinehills development in Plymouth, Massachusetts ($3,200,000); (iii) repayment
in full of a loan made to Tuned in Sports, Inc. ($372,000); (iv) settlement of
claims asserted against brokers to recover commissions paid on account of
capital raised that was deposited into the SEC Escrow (as defined herein)
(approximately $295,000); (v) recoveries on avoidance actions and other claims
asserted by Fund LLC (approximately $338,508); (vi) repayment in full of a
collateral deposit Fund LLC made on behalf of US Mills, Inc. ($200,000); (vii)
repayment in part of a loan made to I&BS (approximately $300,000); (viii)
settlement with the US Postal Service in connection with the Tribeca project
($250,000); (ix) further installment payments ($72,500) collected under a
settlement with a former borrower, 1970 Asset Management, and its principal and
guarantor, Ed Stein (bringing the total recovered so far to roughly $272,500);
and (x) closings of both the sales of the Comfort Inn and Best Western in
Orlando, Florida, which will net Fund LLC combined proceeds of approximately
$700,000 to $900,000.(2)
In terms of disbursements, in October 2004, Fund LLC made its second
distribution under the Plan, distributing about $9,152,153. Escrow Claimants
were paid $5,152,153, bringing their total recovery to approximately
$20,800,000, or about 78%, and Non-Escrow Claimants were paid $4,000,000,
bringing their total recovery to approximately $7,600,000, or about 4.5%. The
distribution was approved by the District Court, after notice to all investors
and a hearing. With the Escrow Note retired, future distributions will be
principally for the benefit of Non-Escrow Claimants.
Fund LLC continues to have discretion under Section 8.7 of the Plan to make
further investments in certain portfolio assets in an effort to enhance investor
recoveries. During the
- ----------
(2) The presentation assumes the Best Western transaction closed during the
Second Interim Period. In actuality, Best Western is scheduled to close on
February 2, 2005.
3
Second Interim Period, Fund LLC made two such investments: a loan of $350,000 to
I&BS to make the initial payment required under a settlement of litigation with
the owner of a business acquired by I&BS, discussed infra, and advances of
$28,390 to Pinehills to cover association fees, common area maintenance charges
and a payment on an infrastructure note, all of which were required to maintain
the status quo until the property could be sold (which it was).
B. PROPOSED THIRD DISTRIBUTION BY FUND LLC
Fund LLC is proposing to make the next distribution in February 2005, its
third under the Plan, in the amount of $7 million. Assuming that a distribution
is approved and is then made, Escrow Claimants' recovery to date will be
$21,183,867 or roughly 79%, and Non-Escrow Claimants' recovery to date will be
$13,954,549 or roughly 8.5%.
C. PROCEDURE FOR OBJECTING TO PROPOSED DISTRIBUTION
Pursuant to Section 9.3 of the Plan, parties in interest wishing to object
to the proposed distribution must do so by filing a written objection with the
Clerk of this Court and serving the objection on the ICA Trustee and the
Liquidating LLCs so as to be received at least five (5) days prior to the date
of the proposed distribution. For purposes hereof, the date of the proposed
distribution is February 22, 2005, so objections must be filed and served NO
LATER THAN FEBRUARY 16, 2005. In the absence of any such objections, the
Liquidating LLCs will make the distribution in the amount and manner so proposed
on or as soon after such date as may be practicable.
4
II.
PROGRESS REPORT FOR
SECOND INTERIM PERIOD
A. DISTRIBUTIONS TO INVESTORS
Fund LLC made its first distribution under the Plan in December 2003,
distributing approximately $19,241,000, as follows: (a) investors with Escrow
Claims (Classes CFC-3 and SLC-3 in the Plan) were paid $15,662,853, or roughly
58% of their Claims; and (b) investors and other creditors with General
Unsecured Claim against the Funds or IBF Hotel (Classes CFC-4, CFC-5, SLC-4,
SLC-5 and IBF Hotel-4) ("Non-Escrow Claimants") were paid $3,578,553, or roughly
2% of their Claims. Pursuant to the Plan, Fund LLC made the initial
distributions from the SEC Escrow, which, as of November 30, 2003, had a balance
of $24,452,853, and reserved $5,000,000 in exchange for a five-year note
("Escrow Note"), payable to Escrow Claimants.
In October 2004, Fund LLC made its second distribution, distributing about
$9,152,153.(3) Escrow Claimants were paid $5,152,153, bringing their total
recovery to approximately 78%, and Non-Escrow Claimants were paid $4,000,000,
bringing their total recovery to about 4.5%. The second distribution repaid in
full the Escrow Note, which at the time had a total balance of approximately
$5,152,153 (principal of $5,000,000, accrued interest of $152,153). The Escrow
Note was accruing interest at the rate of 3.5% per annum and was payable in full
at maturity in December 2008. Section 1.2.45 of the Plan specifically required
the Escrow Note to be repaid in full, with accrued interest, before any further
distributions to Non-Escrow Claimants.
With the Escrow Note paid in full, future distributions will be principally
for the benefit
- ----------
(3) When the First Interim Report was mailed to investors in July 2004, Fund
LLC was proposing to make two or three smaller distributions, starting in
August. However, letter objections were received from two of the
approximately 2400 investors served with the notice, so the distributions
were postponed to give Fund LLC time to address the objections with the
Court. Based on further discussions, both investors withdrew their
objections. As a result of the time delays, the proposed distributions were
combined into a single distribution made in October 2004.
5
of Non-Escrow Claimants, with two limited exceptions. First, Fund LLC is
asserting claims to recover commissions of roughly $3.79 million paid to brokers
who sold securities after December 14, 2001 - a cutoff date established by
agreement with the SEC. Proceeds raised from investors after that date were
deposited into an escrow account, the SEC Escrow, for the benefit of those later
investors. Under the Plan, the first $3.79 million recovered on those claims (so
far, Fund LLC has recovered roughly $295,000) must be distributed, net of
expenses, to Escrow Claimants. Second, under the Plan, investors with Escrow
Claims were also given General Unsecured Claims against the Funds, called
Deficiency Claims, calculated as the difference between the total amount of
their investments and the total consideration they have been paid to date. On
account of those Deficiency Claims, Escrow Claimants were given membership
interests in Fund LLC and are entitled to participate with Non-Escrow Claimants
in any distributions on account of those Fund LLC interests. The figure may
change depending on how much is recovered on the broker commission claims, but
currently, Deficiency Claims represent about 3.63% of the total General
Unsecured Claims against the Funds and IBF Hotel.
As previously reported, IBF LLC has no material assets and has made no
distributions to IBF's creditors; nor does it appear that IBF LLC will recover
any assets which could be distributed to IBF's creditors. The Plan further
requires that, before making any distributions to IBF's creditors, IBF LLC must
first repay amounts advanced by the Funds during the Debtors' chapter 11 cases
to pay IBF's share of administrative expenses. As a result, IBF LLC is still not
expected to make any distributions. Fund LLC is currently paying IBF LLC's share
of administrative costs, but the work required is minimal and the cost should
not be material.
B. TAX/REPORTING REQUIREMENTS
In October 2004, the Liquidating LLCs filed their tax returns for 2003. On
October 8, 2004, investors who received equity (i.e., membership interests) in
Fund LLC under the Plan (i.e. Non-
6
Escrow Claimants, plus Escrow Claimants to the extent of their Escrow Deficiency
Claims) were mailed IRS Form K-1s, reflecting their respective share of
allocable income or loss for 2003.
Previously, in January 2004, each investor receiving membership interests
in Fund LLC was mailed IRS Form 1099-B reflecting the membership interests
allocated to that investor in exchange for his or her Allowed Claim against the
Funds. Those documents established each investor's tax basis in Fund LLC. The
new tax basis reflected an approximate 31% value versus original investment
amounts, or an approximate 69% loss per investment. In the period between the
mailing of the 1099-Bs and K-1s, there was an adjustment to the assets and
liabilities reported by Fund LLC, resulting in a slightly lower starting value
for the enterprise and a slightly lower tax basis for investors of approximately
29.1% versus original investment amounts, or approximately 70.9% loss per
investment. Investors were notified of the change by letter dated October 19,
2004, mailed with the second distribution. Investors are encouraged to consult
with their own tax professionals to understand how that adjustment may affect
their personal situations and any possible recognition of a greater tax loss for
2003.
Fund LLC is in the process of finalizing its financial records for the year
ended December 31, 2004 and is beginning preparation of its tax returns for
2004. It is anticipated that the 2004 return, and the mailing of IRS Form K-1
will be completed in the next few months.
C. INVESTMENT PORTFOLIO
The following is a summary of activities during the Second Interim Period
concerning certain investments in Fund LLC's portfolios. Reference is made to
Exhibit D of the Preliminary Report of Arthur J. Steinberg, Trustee
("Preliminary Report"), filed with this Court on February 18, 2003, for a more
thorough description of the amount and nature of each investment.
7
1. PLATFORM COMPANIES
A. I&BS/ABR
Investment & Benefit Services, Inc., d/b/a American Benefit Resources, Inc.
("I&BS"), is in the business of third-party administration of pension and 401K
plans for employees.
During the Second Interim Period, I&BS made payments reducing the principal
balance owing to Fund LLC by $300,000 ($320,000 inclusive of interest). That
$320,000, when added to the $200,000 collected in the First Interim Period,
represents the repayment in full of (i) $250,000 loaned to I&BS to pay accrued
legal fees (which reflects a discount negotiated by the ICA Trustee) and (ii) a
purchase money note for $250,000 owed in connection with the acquisition of the
East Coast division of I&BS (which also reflects a deferral negotiated by the
ICA Trustee). (See First Interim Report at p. 12).
Prior to the Second Interim Period, Fund LLC lent I&BS $2,110,000 to
finance two acquisitions intended to grow the business - (a) two companies in
Houston, Texas, ML Kerns Associates and ML Kern Capital Management, and (b) a
company in Seattle, Washington, National Associates. (See First Interim Report
at p. 12). In the Second Interim Period, the ICA Trustee continued to focus on
how I&BS was integrating the newly-acquired firms and establishing centralized
systems. In September 2004, I&BS borrowed an additional $350,000 from Fund LLC
to make the initial payment due under its settlement with Robert Presberg,
discussed in Section II(E)(2) below. Also, in October 2004, with Fund LLC's
consent, I&BS opened a $1,000,000 line of credit with a third-party lender,
EuroAmerican Investment Corp., to improve its liquidity situation.
Fund LLC is discussing exit strategies with I&BS, including selling the
business, refinancing the debt owed to Fund LLC, converting some of Fund LLC's
debt to equity or some combination of the three. I&BS may still be a material
source of recovery for Fund LLC.
8
B. US MILLS
U.S. Mills, Inc. ("US Mills") is a leading marketer of natural and organic
breakfast cereals, cookies and crackers. Its products are marketed principally
for their nutritional and health benefits. Currently, it has five brands in its
portfolio - Uncle Sam Cereal, Farina Mills, Skinner's, Erewhon and New Morning.
In the First Interim Period, Fund LLC exercised its discretion under
Section 8.7 of the Plan, which permits it to invest up to another $1 million in
US Mills, to extend further credit to US Mills in the form of a $200,000 pledge
in favor of US Mills' bank lenders. The pledge enabled US Mills to modify its
existing banking line and obtain additional liquidity to meet the increased
demand for its products. On December 16, 2004, US Mills retired the pledge by
paying Fund LLC the balance due, $200,672.26.
In terms of its business, US Mills launched a number of new products in
2003-2004 and experienced an increase in demand for other products, including as
a result of a recommendation of "Uncle Sam" brand cereals in the popular "South
Beach Diet" book. In June 2004, US Mills and the ICA Trustee agreed that, based
on these developments, it was an appropriate time to explore options to sell US
Mills. US Mills and the ICA Trustee subsequently conducted a search for an
investment banking firm to lead the marketing process and, after interviewing a
number of candidates, US Mills hired Gruppo, Levey & Co. ("GLC").
In mid-December 2004, USM entered into a non-binding letter of intent to
sell its business. The parties are negotiating a purchase agreement that, once
signed, will be presented for approval to the Bankruptcy Court. Barring any
setbacks, the parties are on track to close a transaction in the first half of
the 2005 year. US Mills will be a material source of recovery for Fund LLC.
9
C. TUNED IN SPORTS
Tuned In Sports, Inc. ("TiS") was a sporting goods company that specialized
in the manufacture and marketing of soft surfboards, body boards and camping
equipment.
As previously reported, prior to the Second Interim Period, the ICA Trustee
and his advisors devoted substantial time to meeting with the management of TiS
and monitoring operations. At the time, the business was performing poorly and
the ICA Trustee reported concerns about TiS's ability to continue as a going
concern. In June 2003, in an effort to boost investor recoveries, the ICA
Trustee loaned TiS $361,000 ($372,000 inclusive of advanced loan closing costs)
to purchase inventory for its busy season, in the hopes of generating additional
sales that would translate to a higher recovery. The loan was secured by a
second lien against Hershon's office building in Washington, DC.
In the Second Interim Period, TiS was unable to raise additional financing
or capital and ceased operations in the fall of 2004. In September 2004, the
office building in Washington, DC was refinanced and the proceeds were applied
to repay in full the $361,000 loan, which at the time had a balance of $398,208.
Moreover, in September 2004, the ICA Trustee, Hershon and TiS entered into a
Release and Consent Agreement, whereby Fund LLC gave, and Hershon received,
title to the TiS assets on account of his repayment of the $361,000 loan. Aside
from the recovery in full of the $361,000 loan, there will be no further
recovery from TiS.
D. CAPSTONE CAPITAL LLC
Capstone Capital LLC ("Capstone") was in the business of providing
financial support and investment services to companies by purchasing their
pre-sold inventory from domestic and offshore manufacturers, vendors or
suppliers and, upon shipment, re-selling to the client companies' factors. Prior
to the Petition Date, CFC loaned Capstone $5,000,000. The loan has matured, is
in default, and as of December 31, 2004, had a balance owing of about
$5,265,051.
10
The loan is secured by a lien against all or substantially all of Capstone's
assets, which lien is junior to that of a lender, Northfork Bank, securing a
loan that, as of December 31, 2004, had a balance of roughly $898,000. CFC also
owns 50% of the equity of Capstone.
As previously reported, Capstone ceased operations at the end of 2003 and
is being liquidated. Its assets consist mainly of loan receivables, the
overwhelming majority of which is tied to the collection of medical
reimbursables in the chapter 7 liquidation of one of its clients, Vista Optical.
Capstone is continuing to collect out its receivables and the ICA Trustee
continues to monitor Capstone and the liquidation of Vista Optical but no
material recovery is expected.
2. OPERATING HOTELS
A. HILTON GARDEN INN
There is nothing new to report concerning the Hilton Garden Inn, a 122-room
hotel in Round Rock, Texas, near the headquarters of Dell Computers. The hotel
is owned by Chisholm Partners, Ltd. ("Chisholm"). Fund LLC owns a 75% limited
partnership interest in Chisholm. The hotel is subject to a first deed of trust
held by Union Bank & Trust Company that, as of December 31, 2004, had a balance
of $6,300,000. A forbearance agreement is in place, pursuant to which Union Bank
is being paid current interest only at a reduced rate. It is still too difficult
to predict whether there will ever be a material recovery by Fund LLC.
B. FAIRFIELD INN
There is nothing new to report concerning the Fairfield Inn (Marriott), a
144-room hotel in Vinings, Georgia, near the corporate headquarters of Home
Depot. The hotel is owned by Vinings Partners LP. ("Vinings"). Fund LLC owns a
90% limited partnership interest in Vinings. The hotel is subject to a first
mortgage held by Union Bank & Trust Company that, as of December 31, 2004, had a
balance of roughly $5,600,000. At present, the hotel is meeting its
11
current obligations. The first mortgage matures in 2009. At one point there were
discussions with the lender about providing interest rate and other relief, but
no agreement was reached. It is still too difficult to predict whether there
will ever be a material recovery by Fund LLC.
C. COMFORT INN
The Comfort Inn is a 120-room hotel located in Orlando, Florida, near
Discovery Sea World. CFC financed the acquisition of the hotel and, prior to the
Petition Date, made loans of about $2,505,000 to the owner, Sita Resorts, Inc.
("Sita"). Sita stopped making payments on the loan in October 2001, causing CFC
to exercise its remedies and obtain ownership and control of Sita in early 2002.
As of December 31, 2004, the principal balance owing on CFC's loan was roughly
$3,000,000. The hotel is encumbered by a first mortgage in favor of Colonial
Bank, securing a loan, in default, that as of December 31, 2004, had a balance
due of roughly $5,800,000, including accrued and unpaid interest.
During the First Interim Period, efforts were made to sell the hotel and
Fund LLC located a stalking horse, Encore Enterprises, Inc. ("Encore"), for the
Comfort Inn and the Funds' other Orlando hotel, the Best Western Universal Inn.
As of the end of the First Interim Period, Sita was still engaged in
protracted litigation with the former owners of the hotel, Stephen and Grant
Mullen ("Mullens"), in state court in Orange County, Florida. The litigation -
essentially, a dispute over whether CFC's foreclosure on the stock of the two
holding companies for the hotels was proper - had been pending for several years
and proceeded through a number of rulings and appeals, all in Fund LLC's favor.
However, the Mullens were persisting and as the litigation dragged on, Encore
became increasingly concerned that the Mullens were creating a cloud on Fund
LLC's ownership and control of the two hotels. In July 2004, to address those
concerns, Fund LLC filed a motion with the Bankruptcy Court (i) seeking
confirmation that it does in fact control the stock of the owners
12
of the two hotels, i.e. that its foreclosure was proper, (ii) requesting
authority to vote the stock in favor of a sale of the two hotels to Encore or
another third party on such terms as may be acceptable to Fund LLC, and (iii)
seeking to expunge two notices of lis pendens filed by the Mullens with the
Orange County Recorder of Deeds. The Mullens filed responsive papers and a
contested hearing was held on September 15, 2004. The Bankruptcy Court ruled in
favor of the Liquidating LLCs on all counts and entered an order to that effect
on September 15, 2004. Following the hearing, Fund LLC, with the assistance of
local counsel in Florida, took the steps necessary to have the lis pendens
discharged by the recorder of deeds in Orange County.
On October 15, 2004, the Mullens filed a belated appeal from the Bankruptcy
Court's September 15, 2004 order. The Liquidating LLCs responded and, on
November 23, 2004, another hearing was held. The Bankruptcy Court again ruled in
favor of the Liquidating LLCs. As a result of those efforts, the Mullens
litigation is no longer clouding title to the hotels.
In terms of the exit strategy, in June 2004, Sita signed a purchase and
sale agreement to sell the hotel to Encore. Subsequently, Encore failed to
satisfy its financing contingency and Fund LLC terminated the contract and
turned to a second buyer. Those discussions fell through as well, so Fund LLC
initiated discussions with a third buyer. The transaction closed on January 28,
2005, and it is anticipated will net Fund LLC approximately $477,000.
D. BEST WESTERN UNIVERSAL INN
The Best Western Universal Inn is a 70-room hotel located in Orlando,
Florida, near Universal Studios. SLC financed the acquisition of the hotel, and
prior the Petition Date made loans of approximately $1,183,000 to the owner,
Ganesh Hospitality, Inc. ("Ganesh"), and the management company, Granjac
Resorts, Inc. ("Granjac"). Ganesh and Granjac stopped making payments on the
loan in October 2001, causing SLC to exercise its remedies under the loan
documents and obtain control over Ganesh and Granjac. As of December 31, 2004,
the balance
13
owing on SLC's loan is approximately $1,300,000. The hotel is encumbered by a
first mortgage in favor of Mercantile Bank, securing a loan with a balance of
about $2,900,000.
During the First Interim Period, efforts were made to sell the hotel and,
as noted above, Fund LLC located a stalking horse, Encore, for the Comfort Inn
and Best Western Universal Inn. Mercantile's mortgage is in default but there is
a forbearance agreement in place.
Reference is made to the prior discussion of litigation respecting the
Comfort Inn for a summary of the dispute over title to the two hotels and the
steps taken to address it. As a result of the ICA Trustee's efforts, the Mullens
litigation is no longer clouding title to the hotels.
In terms of the exit strategy, in June 2004, Ganesh signed a purchase and
sale agreement to sell the hotel to Encore. However, unlike the Comfort Inn,
Encore completed its due diligence and the transaction is due to close on
February 2, 2005, and is projected to net Fund LLC approximately $515,000.
3. DEVELOPMENT PROPERTIES
A. TRIBECA
CFC advanced monies to IBF Hotel to initiate development of a 272-room
hotel in the Tribeca section of lower Manhattan. In September 2002, IBF Hotel
assigned all right, title and interest in the project to AMJM Realty, LLC
("AMJM"), in exchange for which AMJM issued a promissory note for $4,500,000
payable to IBF, for the benefit of CFC. The rights assigned to AMJM included IBF
Hotel's rights under purchase and sale agreements signed with the owners of the
two primary parcels on which the hotel was supposed to be built. The AMJM note
matured and was not paid.
Prior to the Effective Date, the ICA Trustee negotiated a settlement with
the owners of the primary development parcel, approved by the Bankruptcy Court,
which led to a recovery by Fund LLC of $227,996, plus a sharing of future
benefits respecting development and/or sale of
14
the parcel. In the Second Interim Period, a settlement was completed with the
owner of the secondary parcel, the U.S. Postal Service, that enabled Fund LLC to
recover another $250,000. The settlement was approved by the Bankruptcy Court on
August 9, 2004.
B. SAHR
CFC made advances to fund development of a Marriot Resort on a 50-acre site
in San Antonio, Texas, in a 2,855-acre mixed-use development being developed by
Lumbermen's Investment Corp. ("Lumberman's"). CFC made its loan to SAHR, LLC,
which was owned 100% by IBF Hotel, for the benefit of CFC. In the First Interim
Period, CFC contributed its interest in SAHR (plans, architectural drawings,
specifications, etc.) to a joint venture partnership with Lumbermen's in
exchange for a 24% limited partnership interest in the joint venture.
Lumbermen's contributed the undeveloped land in exchange for its 76% limited
partnership interest. Lumbermen's continued its efforts during the Second
Interim Period to explore development opportunities, including discussions with
a major hotel franchise. Currently, it is impossible to estimate whether there
will be a recovery and, if so, when it will be realized.
C. PINEHILLS
CFC made certain advances to Plymouth Ventures, LLC ("Plymouth Venture") to
fund the purchase of raw land and for the development (plans, permits, etc.) of
a resort hotel project that was to be part of a 3,037 acre master planned
community. Prior to the Petition Date, CFC made loans to Plymouth Venture of
approximately $11,445,000. CFC's loan matured, went into default and, as of
September 30, 2004, had a balance due of approximately $15,978,463.
The project never made it out of the planning phase. Beginning shortly
after the ICA Trustee's appointment in December 2002, efforts were made to
market the land formally and informally. Those efforts included, inter alia: (i)
discussions with the master developer in an effort to salvage the project; (ii)
marketing from December 2002 through September 2004 by
15
former employees of certain IBF affiliates; (iii) ordering an MAI Appraisal; and
(iv) engaging an independent commercial real estate broker.
Faced with limited alternatives, including mounting carrying costs of
approximately $250,000 a year and the potential loss of a valuable tax
abatement, the ICA Trustee agreed in the Second Interim Period to sell the land
back to the master developer. The Bankruptcy Court approved the proposed sale on
September 15, 2004, and the sale closed on October 1, 2004.
Under the transaction, Fund LLC recovered approximately $3.2 million cash
and the developer assumed the infrastructure note obligations and common area
fees (approximately $1,000,000). As part of the sale, the master developer also
agreed to withdraw its proofs of claim at no further cost to Fund LLC. The
developer's two proofs of claim sought damages in an undetermined amount
stemming from CFC's alleged breach of contract, which otherwise would have been
resolved through litigation.
D. ANGUILLA
CFC made certain advances to fund the development of a resort on 1,407
acres of undeveloped land on Anguilla Beach, Cat Island, in the Bahamas. CFC's
loan was through a special purpose company, IBF Bahamas, Ltd., to the developer,
Cat Island Ventures, Ltd. Prior to the Petition Date, CFC loaned approximately
$5,200,000 to the developer. The loan matured in 2001, is in default, and as of
December 31, 2004 had a balance of roughly $12,785,832.
The loan was supposed to have been secured by a first mortgage, but a lien
search by IBF's former counsel in the Bahamas failed to disclose a prior first
mortgage for roughly 2,500,000 held by Gulf Union Bank (Bahamas) and the owner
never disclosed it. Consequently, CFC's loan is secured by a junior mortgage.
CFC commenced litigation against its closing attorney who has malpractice
insurance, reportedly subject to a cap on coverage of $2,000,000. On advice of
local counsel, the litigation was placed on inactive status pending a sale of
the
16
property and the fixing of CFC's damages.
Gulf Union is in receivership, and its liquidator is controlling the
efforts to sell the property. Currently, Gulf Union reports that it is in
discussions with a developer who cleared the initial stages of approval with the
local government office to acquire the property and develop a resort. Those
discussions reportedly began in the First Interim Period and are still on-going
but are not of public record.
With a potential buyer involved and in some level of discussions with the
government, Fund LLC has been reluctant to try to market the property
independently. The property is an undeveloped tract of land on a remote island
that has little or no infrastructure and is primarily accessed by boat, meaning
that any development project will be a large undertaking. In addition, given the
development's importance to the local economy, the government office is actively
involved, which has added delay to the process. During the First Interim Period,
the ICA Trustee instructed local counsel to move forward with the litigation
against the closing attorney's insurance carrier. The summary judgment hearing
was originally scheduled for September 2004 but a hurricane system struck the
area in September 2004 and so the hearing was continued to March 2005. It is
unclear whether at this stage in the sale process the Court will consider the
request for damages but at the very least Fund LLC will seek to establish
liability in order to advance the proceeding against the former counsel.
At this stage, it is impossible to estimate the amount or timing of Fund
LLC's recovery.
4. SECURITIZATIONS
Fund LLC is holding two (2) residential mortgage securitization assets, one
underwritten by Lehman Brothers, ARC 2001-BC-1, and the other by DLJ Mortgage
Corp. and Credit Suisse First Boston, CSFB ABS 2001-HE-25. In the former, CFC
invested approximately $3,100,000, and in the latter, CFC and SLC invested
approximately $4,000,000 and $450,000 respectively -
17
for a total invested by the Funds in the two transactions of approximately
$7,500,000.
The investments continue to be a source of significant cash flow. However,
because the performance of those assets cannot be assured, Fund LLC made the
decision to explore the possibility of selling them and filed a motion seeking
permission to do so with the Bankruptcy Court. The motion was granted on
September 28, 2004. As previously reported, Fund LLC made no commitment to sell
in the near term and contemplated that it could postpone a sale if it did not
receive sufficient interest from buyers and continue collecting monthly
payments.
In September 2004, with assistance from its advisors, the Berkshire Group
("Berkshire"), the ICA Trustee solicited interest in the securitization assets.
Berkshire prepared an information package and contacted a mix of banks and
dealers and end users to obtain preliminary expressions of interest. Preliminary
materials were sent to thirteen (13) parties and six (6) signed confidentiality
agreements entitling them to additional information.
Bids were received for the CSFB and the ARC assets. Following receipt of
the bids, Berkshire engaged in discussions with the parties in an effort to
increase the bids. While there was some movement, the bids did not come up to
the price levels supported by internal models so the ICA Trustee made the
decision to hold the assets.
The decision to hold was a good one, and the performance of the two
securitization assets exceeded the bids solicited in the Second Interim Period.
From September 2004 through January 2005, Fund LLC will have collected roughly
$6.55 million on the CSFB asset, and roughly $410,000 on the ARC asset. In
addition, Fund LLC still holds the rights to modest future collections on both
assets and a possible residual value therefrom. Specifically, after July 2005,
the cash flow on the CSFB asset will drop to de minimis amounts for several
years, and is projected to ramp back up in late 2007 or early 2008. Collections
under the ARC asset are also
18
expected to trickle off. Given the fact that the future cash streams,
particularly where they are several years off, are largely speculative, Fund LLC
is contemplating going back to the market with the two assets to find a buyer
more able to assume the risk of "long tail" collections.
D. CLAIMS OBJECTIONS
Prior to the Effective Date, the ICA Trustee's advisors performed a
thorough claims review and objection process, expunging or reclassifying roughly
630 claims. At the end of the First Interim Period, there were only a handful of
disputed claims left, all of which were the subject of objections and in various
stages of litigation in the Bankruptcy Court. It now appears that all disputed
claims have been resolved or will be resolved shortly, as set forth below.
1. PINEHILLS
As discussed above, the master developer filed two proofs of claim against
the Debtors' estates, both of which were withdrawn with prejudice in connection
with the sale of Pinehills.
2. TRIARC
Triarc, a developer engaged by the Debtors to manage a number of hotel
development projects, filed four overlapping proofs of claim with an aggregate
face amount of $2 million, essentially for unpaid developer fees and expenses.
In the First Interim Period, the ICA Trustee investigated Triarc's claims,
determined that they had no merit, and concluded that they were further subject
to a number of affirmative defenses and counterclaims. In October 2004, the ICA
Trustee met with Triarc and its counsel. Following those discussions, Triarc
agreed to withdraw all of its claims with prejudice and the parties agreed to
exchange mutual releases. Triarc is presently reviewing a draft release
agreement and stipulation and order, which the ICA Trustee anticipates will be
filed shortly with the Bankruptcy Court resolving the matter completely.
19
3. INDEMNIFICATION CLAIMS
There are four disputed proofs of claim filed by two former directors and
officers of the Debtors. The claims assert an entitlement to indemnification or
reimbursement for any personal liability incurred in the collateral litigation
surrounding the Debtors' chapter 11 cases. All four disputed claims are being
withdrawn as part of the global settlement discussed below.
E. LITIGATION
1. STEIN/1970 ASSET MGT
As previously reported, in the First Interim Period, the ICA Trustee
entered into a settlement concluding litigation with a former borrower, 1970
Asset Management, over a defaulted loan. The settlement calls for installment
payments and is predicated on a determination that a judgment against the
borrower or its principal, Ed Stein, who guarantied the loan, would be largely
uncollectible. The Bankruptcy Court approved the settlement on March 11, 2004.
In the Second Interim Period, Fund LLC collected an additional $72,500 under the
settlement, bringing the total recovery to date to approximately $272,500. Under
the terms of the settlement, the monthly payments increased to $12,500/mo. in
January 2005. If paid in full, Fund LLC could ultimately recover as much as $2
million under the settlement.
2. PRESBERG
Robert Presberg is the former owner of a business acquired by I&BS in 1999.
I&BS and Presberg subsequently found themselves in litigation in state court in
Los Angeles, California, Presberg claiming that I&BS breached the purchase and
sale agreement when it stopped making payments on a seller-financed note and
I&BS claiming that it was misled by Presberg when it acquired the businesses and
that Presberg misappropriated proprietary information and unlawfully solicited
former clients. In June 2004, Fund LLC, as the lender who financed the
acquisition for I&BS, filed an adversary proceeding in the Bankruptcy Court
seeking damages from Presberg.
20
The parties subsequently entered into a settlement agreement dated June 28,
2004. In essence, the settlement required I&BS to pay Presberg $750,000 over
four (4) years and allowed I&BS to keep the acquired business. The settlement
represents a discount from the installment payments I&BS refused to pay. As
contemplated in the First Interim Report, Fund LLC loaned I&BS the $350,000
required to make the initial settlement payment in September 2004.
3. BB&T
On June 4, 2004, the Liquidating LLCs filed a complaint against Branch
Banking & Trust Co. ("BBT"), commencing an adversary proceeding in the
Bankruptcy Court. Prior to filing, the ICA Trustee attempted to engage in
discussions with BBT to give BBT an opportunity to respond to his preliminary
findings, but BBT declined and so the ICA Trustee filed the complaint prior to
the two-year anniversary of the Petition Date to preserve his litigation rights.
The claims stem principally from a determination that the line of credit
provided by BBT was used in such a way that it overstated the Funds' financial
health and mislead investors. The ICA Trustee asserts from the transparent way
in which the line was manipulated that BBT knew or should have known and was
reckless in not knowing that the line was being used in that manner, and BBT has
offered nothing in recent discussions that would alter that conclusion.
Shortly after the complaint was filed, BBT filed a motion in the District
Court requesting that the reference be withdrawn from the Bankruptcy Court. The
ICA Trustee attended a pre-motion conference on January 11, 2005, and received a
briefing schedule from the District Court. Following the hearing in the District
Court, BBT filed a motion to dismiss in the Bankruptcy Court and the Bankruptcy
Court entered a briefing schedule on the motion to dismiss.
4. WEST WENDOVER
In August 2004, Fund LLC entered into a settlement agreement with the
defendants in a state court litigation filed by CFC in state court in Elko
County, Nevada, concerning a failed
21
development project in West Wendover, Nevada. Under the settlement, Fund LLC
recovered $125,000. The settlement was approved by the Bankruptcy Court on
September 15, 2004. As part of the settlement, Fund LLC also negotiated a
$25,000 reduction of the fee due to CFC's Nevada counsel in settlement of
apparent preference exposure of roughly $25,000.
The dispute arose when a borrower defaulted on a loan made by CFC. The loan
was made to West Wendover Associates ("WWA") for the purpose of developing a
housing and entertainment complex on 754 acres of undeveloped land in West
Wendover, Nevada. WWA stopped making payments on the loan and CFC filed a
lawsuit in California, where a stipulated judgment was entered against WWA and
others. Following that lawsuit, CFC learned that certain of the parties involved
in the foreclosure sale of the property in Nevada were related in such a way
that it gave the appearance that the foreclosure may have been a sham
transaction to terminate CFC's second lien, so CFC filed the litigation in Elko
County, Nevada. The Nevada action was the subject of a number of dispositive
motions decided in the First Interim Period. Upon review of the Nevada court's
rulings and a further examination of the claims asserted by CFC, the ICA Trustee
made the decision not to spend any more money pursuing the litigation, which was
entering the discovery phase, and negotiated the recovery of the $125,000.
5. CLAIMS AGAINST THIRD PARTIES
So far, the Liquidating LLCs have filed 19 adversary complaints in the
Bankruptcy Court, seeking to avoid and recover preferential payments or
fraudulent transfers the Debtors made prior to the Petition Date. Those
adversary proceedings are in various stages of pretrial litigation. In addition,
the Liquidating LLCs have entered into tolling agreements in another 21
instances and are in various stages of settlement discussions with those
parties.
Most of the claims asserted are against professionals and other parties who
received payments immediately prior to the Petition Date. Included also are
claims to recover
22
commissions withheld by brokers on account of securities sold after December 14,
2001 - the cutoff date established in discussions with the SEC, after which
proceeds raised from investors were deposited into the SEC Escrow. Those
proceeds were never invested in the manner intended and were returned to
investors under the Plan. The ICA Trustee is also in discussions with
professionals who may have been involved in the events that led to the Funds'
demise.
In the Second Interim Period, Fund LLC recovered approximately $590,000
from the settlement of such claims, of which roughly $250,000 was collected on
account of broker commission claims.
6. GLOBAL SETTLEMENT WITH HERSHON
In the Second Interim Period, the ICA Trustee finalized a global settlement
with Hershon that, when it closes, will resolve a number of pending matters and
result in the recovery of an additional $3.05 million by Fund LLC. In essence,
the settlement resolves (a) the SEC's charges against Hershon in this
litigation, (b) the allegations against Hershon in the various securities class
actions ("Class Actions") pending in the United States District Court for the
District of Columbia ("DC Court"); (c) claims the ICA Trustee or the Liquidating
LLCs could assert against Hershon, and (d) competing claims by the ICA Trustee
and certain former directors and officers of IBF for coverage under two
insurance policies issued on behalf of IBF and its subsidiaries by St. Paul
Mercury Insurance Company ("St Paul") - a $5,000,000 directors & officers policy
("D&O Policy") and (b) a $5,000,000 bankers professional liability policy ("BPL
Policy" and, with the D&O Policy, the "Policies").
The settlement is embodied in three agreements - (i) a settlement agreement
dated October 22, 2004 ("Hershon Settlement"), between the ICA Trustee and
Hershon; (ii) a settlement agreement dated October 25, 2004 ("Class Settlement")
between Hershon and the lead plaintiffs in the Class Actions; and (iii) a
release agreement between the ICA Trustee, St. Paul
23
and certain of the Debtors' former directors and officers ("St Paul
Settlement"). The agreements are cross-defaulted and each is an integral part of
the global deal.
In terms of mechanics, Fund LLC will recover $3.05 million under the global
settlement as follows. First, St. Paul is paying Fund LLC another $2.35 million
under the D&O Policy. That is in addition to roughly $700,000 recovered
initially from the D&O Policy by the ICA Trustee in August 2003,(4) bringing
Fund LLC's total recovery under the D&O Policy to roughly $3.05 million.(5) St
Paul is paying out $4.5 million of the $5 million in coverage under the D&O
Policy. St Paul is paying no consideration under the BPL Policy. In addition,
Hershon is paying total settlement consideration of $1.3 million to Fund LLC. Of
that amount, $398,000 has already been paid to Fund LLC as repayment in full of
the $361,000 loan Fund LLC made to TiS in an effort to enhance investor
recoveries, which loan was secured by a second lien against Hershon's office
building in Washington, DC. Giving effect to that payment, at closing of the
various settlements, Fund LLC will collect an additional $901,000 from Hershon.
The parties are in the process of obtaining the required court approvals.
The Hershon Settlement was approved by the Bankruptcy Court by order dated
January 20, 2005, and will be presented to the District Court on January 28,
2005. The St Paul Settlement was approved by the Bankruptcy Court on January 20,
2005. The Class Settlement received preliminary approval from the DC Court on
November 5, 2004, and in December 2004, the ICA Trustee mailed a notice approved
by the DC Court to all investors giving them the opportunity to object to the
- ----------
(4) Following his appointment, the ICA Trustee engaged in discussions with St.
Paul, Hershon and the lead plaintiffs in the class actions concerning the
extent of coverage available under the Policies and the competing claims to
such coverage. As a result of those discussions, it was agreed that St.
Paul would pay certain legal expenses under the D&O Policy, with equal
amounts to be paid to the Funds on the one hand and the former directors
and officers on the other. Under that initial agreement, the Funds received
an immediate payment from St. Paul of $698,028. The directors and officers
have received total payments from St. Paul of $779,569.
(5) The bulk of the remainder of the $4.5 million paid out by St. Paul is
attributable to: (i) roughly $780,000 paid to directors and officers to
cover legal expenses; (ii) an additional $200,000 set aside to pay the
legal fees of Hershon through closing, which fees are capped at $200,000;
and (iii) class action attorney fees of $450,000.
24
Class Settlement or elect not to participate thereunder and reserve their rights
against Hershon. The deadline for objections was January 13, 2005, no objections
were filed (timely or otherwise) and only one investor, with a claim for roughly
$216,000, elected not to participate in the Class Settlement. The DC Court held
a fairness hearing on January 28, 2005, at which time the Class Settlement was
approved.
Once the required court approvals are received, the next condition to be
met will be adoption of the settlement with AIH (discussed below), which should
go out to AIH investors shortly. Once all other conditions have been met, the
various settlements will then be submitted for final approval by the SEC. That
process will take a minimum of 30-60 days, meaning that, barring unforeseen
circumstances, the settlements if approved should close in the next few months.
7. SETTLEMENT WITH INVESTORS OF AIH
IBF V-Alternative Investment Holdings LLC ("AIH") is an affiliate of the
Funds. AIH is a private equity fund that invested in the equity of two of the
platform companies in the Funds' portfolios. AIH raised approximately $3,300,000
from investors and another $1,000,000 in equity from IBF. Currently, there are
72 investors holding 77% of the equity in AIH; by operation of the Plan, the
remaining 23% is now held by Fund LLC.
AIH did not file a chapter 11 case and is not a defendant in this
litigation but there is substantial overlap between AIH and the Funds, as
previously reported (see Interim Report at p. 21), so the Staff of the SEC asked
the ICA Trustee to consider means to resolve investor claims against AIH in the
context of the Plan. The issue was discussed with the Committee and it was
agreed that a transaction could be structured in which Fund LLC acquired AIH's
assets (equity investments in two entities, US Mills and I&BS), in exchange for
which AIH investors would receive membership interests in Fund LLC. The proposed
settlement with AIH is authorized in
25
Section 7.7 of the Plan and was approved by the Funds' investors when they voted
to approve the Plan. Specifically, Section 7.7 gives the ICA Trustee the
authority to treat investor claims against AIH in the same manner as claims in
Classes CFC-4, SLC-4, CFC-5 or SLC-5.
As previously reported, the anticipated dilution to current members of Fund
LLC that would result from a settlement with AIH investors should not be
material (total capital raised by AIH of approximately $4,300,000 (of which,
$1,000,000 was invested by IBF and is now held by Fund LLC), versus total
non-escrow capital raised by the Funds of roughly $164,000,000).
The ICA Trustee has prepared a draft stock purchase agreement and related
materials to implement the proposed settlement with AIH, which are being
reviewed by Hershon. The stock purchase agreement has gone through several
iterations and is close to final. Once in final, the stock purchase agreement
will be circulated to AIH investors for approval of the transaction. It is
anticipated that, from the date of mailing, the approval process should take
30-60 days. Upon closing of the transaction, Fund LLC will make catch-up
distributions to AIH investors to allow them to recover their ratable share of
prior distributions made to Fund LLC's members.
III.
FINANCIAL CONDITION
OF LIQUIDATING LLCS
Unaudited balance sheets and statements of operations summarizing the
Liquidating LLCs' financial condition as of January 31, 2005, are attached
hereto as Exhibit A.
26
IV.
PROPOSED DISTRIBUTION
Fund LLC is proposing to make a distribution in February, its third under
the Plan, in the amount of $7 million. Assuming that a distribution is approved
and is then made, Escrow Claimants' recovery to date will be $21,183,867 or 79%,
and Non-Escrow Claimants' recovery to date will be $13,954,549 or 8.5%.
The proposed distribution will leave Fund LLC with available of
approximately $4,345,000 to cover the costs of administration and, if
appropriate, make limited further investments under Section 8.7 of the Plan in
an effort to enhance investor recoveries. Efforts are continuing to liquidate
the remaining assets in an orderly manner that will maximize investor
recoveries.
Several liquidity events are expected to occur in next few months, chief
among them being a possible transaction involving US Mills, and the closing of
the global settlement with Hershon, which will net $3.05 million for Fund LLC.
Depending on the timing and amount of those recoveries, Fund LLC should be in a
position to make another distribution in June or July 2005. The administration
of the Liquidating LLCs is still ahead of schedule.
[Signature Page Immediately Follows]
27
Dated: New York, New York
February 1, 2005
IBF Liquidating LLC and
IBF Fund Liquidating LLC
By: /s/ Arthur J. Steinberg
------------------------------------
Arthur J. Steinberg, ICA Trustee, as
Manager and Liquidating Agent
Counsel to the ICA Trustee:
Arthur J. Steinberg (AS 1298)
Heath D. Rosenblat (HR 6430)
Kaye Scholer LLP
425 Park Avenue
New York, NY 10022
212/836-8000 telephone
212/836-7157 facsimile
28