1 2 3 4 MacCONAGHY & BARNIER, PLC JOHN H. MacCONAGHY, State Bar No. 83684 JEAN BARNIER, State Bar No. 231683 645 First St. West, Suite D Sonoma, California 95476 Telephone: (707) 935-3205 Facsimile: (707) 935-7051 Email: macclaw@macbarlaw.com 5 6 Attorneys for Debtor 7 8 UNITED STATES BANKRUPTCY COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 11 12 13 14 In re ) ) BR FESTIVALS, LLC ) a California limited liability company ) ) Debtor. ) ____________________________________) 15 16 Case No. 14-10175 (Chaper 11) DEBTOR’S STATUS CONFERENCE STATEMENT The Debtor and Debtor- in-possession BR Festivals, LLC hereby submit this Status Conference Statement: 17 1. Financial Information Concerning the Debtor. a) 18 19 Summary The Debtor is a California limited liability company organized in 2012 to produce the 20 “Bottlerock” music festival at the Napa EXPO site in southern Napa, CA starting in 2013. It was 21 hoped that the Debtor would produce this event annually for the foreseeable future. 22 Unfortunately, the Debtor sustained financial losses of approximately $8,000,000 for the initial 23 2013 event. The Debtor had no source of capital to pay its past creditors and/or fund the 24 production of a 2014 event. 25 26 Throughout the second half of 2013, the Debtor exhaustively pursued a number of potential buyers and joint venture partners without success. On the eve of losing all executory [10140.SCS] Case: 14-10175 PAGE 1 Doc# 5 Filed: 02/05/14 Entered: 02/05/14 13:29:26 Page 1 of 6 1 rights with Napa EXPO to produce the 2014 event, and near the deadline to book musical talent 2 for the critical 2014 window, a group of local investors stepped forward – none of whom were 3 previously affiliated with the Debtor – and agreed to buy the production rights, other intellectual 4 property, and miscellaneous trade fixtures. 5 The Debtor’s management is optimistic that this new group, Latitude 38 Entertainment, 6 LLC (“L38") will produce a quality event for local and regional music lovers for the foreseeable 7 future, bring annual business to downtown Napa during a seasonal “soft” time period, and 8 provide a source of profitable future business to the Debtor’s unpaid vendors. 9 The Debtor filed this case to avail itself of Title 11 avoidance rights to satisfy the balance 10 of its unpaid debts to its 2013 creditors, and expects to promptly promulgate a liquidating plan of 11 reorganization to do so. 12 b) The Bottlerock Festival Concept As is well known, the traditional market for recorded rock and other popular music has 13 14 come under assault in recent years by digital file sharing; and popular bands are increasingly 15 relying on music festivals and other live performances for revenues. There are a number of such 16 annual events in California such as the Coachella Valley Music Festival and Outside Lands in 17 San Francisco. The Debtor’s management recognized that there was no competitive event in 18 California scheduled for the late Spring/early Summer, that this was a time period where there 19 was typically excess hotel, restaurant, and other capacity in the Napa Valley, and that Napa 20 would be an extremely desirable place to conduct an outdoor music event during this time of 21 year. The concept quickly developed, and the Debtor was able to obtain the necessary 22 entitlements and bookings by early 2013. It produced the event over the period from May 8 - 12, 23 2013, bringing in approximately 60 bands, along with the famous wine and food of Napa Valley. 24 The event was widely considered to be a great artistic success and fan experience. 25 c) Financial Losses Unfortunately, there were a number of operational problems which led to the huge 26 [10140.SCS] Case: 14-10175 PAGE 2 Doc# 5 Filed: 02/05/14 Entered: 02/05/14 13:29:26 Page 2 of 6 1 financial losses described above. 2 First, the Debtor’s management believes that it booked too much musical talent at too 3 high a price, given the capacity of the event. Most of the musical talent required 100% advance 4 deposits, which crippled the Debtor’s available working capital leading up to the 2013 Festival. 5 Second, there was a problem with the financial controls over the food and beverage sales, 6 which were handled by outside contractors, leading to significant underpayment of sums due the 7 Debtor. 8 Third, there was likely excessive staffing of the event. 9 Fourth, and most importantly, one of the early investors in the Debtor named Jason 10 Johnson – a 35% LLC Member – pulled out over $3 Million in capital from the Debtor on the 11 eve of the 2013 Festival, leaving the Debtor unable to pay labor, the City of Napa, and the Napa 12 EXPO, and other vendors. There were other smaller avoidable transfers as well. 13 d) Unsuccessful Remediation Efforts As the size of the 2013 losses became apparent in the summer of that year, the Debtors’ 14 15 management made a number of efforts to locate an experienced, well funded buyer or joint 16 venture partner, such as Live Nation, to take over the concept. At one point the Debtor thought 17 it had a deal for funding sufficient to pay all 2013 creditors a 75% dividend. Unfortunately, as 18 each of these prospects performed their due diligence, they ultimately concluded that the 19 Debtor’s assets were of insufficient value to warrant a substantial pro rata payment to the 2013 20 creditors. All walked away. 21 e) The Latitude 38 Transaction By the end of 2013, the financial situation was dire. Napa EXPO advised the Debtor that 22 23 it would lose its annual space reservation for the May - June window unless the unpaid rent of 24 $310,000 for the 2013 season was cured by late January, 2014. The Debtor, or any other 25 promoter, only had a short window of time to book musical talent for this May - June period, and 26 the Debtor had no cash whatsoever. [10140.SCS] Case: 14-10175 PAGE 3 Doc# 5 Filed: 02/05/14 Entered: 02/05/14 13:29:26 Page 3 of 6 1 Rather than allow the event to be lost to the community, a group of local, well-capitalized 2 investors, L38, stepped forward and agreed to salvage the concept. After considerable back and 3 forth negotiation, on January 24, 2014, L38 and the Debtor executed an Asset Purchase 4 Agreement (the “APA”), which transferred the rights to L38. 5 L38 is not affiliated with the Debtor, and neither the Debtor nor its principals have any 6 control over L38's management, operations or finances. Having negotiated the terms of the APA 7 with L38 at arm’s length over a period of many weeks, the Debtor believes that the terms of the 8 APA are higly favorable to the Debtor’s estate and creditors. 9 Under the APA, L38 acquired limited assets of the Debtor, consisting of the rights to the 10 Bottlerock name and related intellectual property, certain ticket and site prepayments, and 11 festival equipment and fixtures. The APA does not call for L38 to assume any of the Debtor’s 12 vendor obligations or executory contracts arising out of the 2013 festival. The APA leaves the 13 Debtor in sole control of all assets not being transferred to L38. Among other things, the Debtor 14 has retained all rights to prosecute claims and causes of action against third parties who formerly 15 did business with the Debtor. Successful prosecution of these claims would potentially make 16 substantial amounts of cash available for alter distribution to creditors under a liquidating plan of 17 reorganization. 18 In keeping with the structure of the APA, and the status of L38 as an entirely separate 19 entity from the Debtor, this bankruptcy case is not expected to have any impact on L38's plans to 20 produce a 2014 Bottlerock Festival. However, the APA provides significant benefits to all 21 creditors of the Debtor. As part of the consideration provided to the Debtor under the APA, L38 22 is entering into separately negotiated agreements with certain vendors and other creditors of the 23 Debtor whose participation may be critical to the success of future Bottlerock festivals. Some of 24 those separate agreements provide for a reduction in the amount of Debtor’s outstanding 25 obligations to such creditors, and the Debtor is explicitly designated as an intended third party 26 beneficiary of these debt reduction provisions. Thus, L38's separately negotiated creditor [10140.SCS] Case: 14-10175 PAGE 4 Doc# 5 Filed: 02/05/14 Entered: 02/05/14 13:29:26 Page 4 of 6 1 agreements have had the effect of sharply reducing the overall pool of claims awaiting payment 2 from the Debtor’s estate. As of the date of this Status Conference Statement, the Debtor 3 understands that L38 has eliminated over half of the total amount of debt that was stated on the 4 Debtor’s books and records prior to the execution of the APA. 5 f) 6 Reorganization Goals The Debtor’s primary goals during this Chapter 11 Case are (a) to prosecute its 7 affirmative claims against third parties, including Mr. Johnson, arising out of its former business 8 operations so that the proceeds of those claims can be distributed to the Debtor’s creditors and 9 (b) to ensure that the Debtor’s creditors receive the greatest possible benefit from the 10 implementation of the APA. 11 2. Special Filing Status. Not applicable. 12 3. Cash Collateral Issues. None. 13 4. Professional Compensation. Counsel has received a $10,000 prepetition retainer, 14 and has been tentatively employed on a contingency fee basis as determined by litigation 15 recovery on avoidance claims and other matters. Counsel will timely file a Motion for 16 Employment upon the expiration of the 20 day waiting period. Counsel maintains professional 17 liability insurance coverage. 5 18 19 Suggested Deadline for Plan Confirmation. The Debtor suggests a confirmation deadline of May 31, 2014. 6. 20 Compliance With Obligations Under Chapter 11. The Debtor has filed all of its 21 schedules, statement of affairs, and other initial papers. The 341 meeting has not yet been held. 22 The Debtor believes that it is in compliance with all of its initial duties and obligations as a 23 Chapter 11 Debtor- in-Possession, and will continue to comply with those duties throughout the 24 case. 25 26 [10140.SCS] Case: 14-10175 PAGE 5 Doc# 5 Filed: 02/05/14 Entered: 02/05/14 13:29:26 Page 5 of 6 1 2 Dated: February 5, 2014 Respectfully submitted, MACCONAGHY & BARNIER, PLC 3 4 /s/ John H. MacConaghy John H. MacConaghy Attorneys for Debtor 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 [10140.SCS] Case: 14-10175 PAGE 6 Doc# 5 Filed: 02/05/14 Entered: 02/05/14 13:29:26 Page 6 of 6