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Lodgenet first day decl
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Lodgenet first day decl

  1. 1. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 DocketDocument Filed: 1/27/2013 Main #0003 Date Pg 1 of 78UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK---------------------------------------------------------------x :In re : Chapter 11 :LodgeNet Interactive Corporation, et al.,1 : Case No. 13-_____ (___) : : (Joint Administration Requested) Debtors. :---------------------------------------------------------------x AFFIDAVIT OF MARK WEINSTEN IN SUPPORT OF THE DEBTORS’ CHAPTER 11 PETITIONS AND REQUESTS FOR FIRST DAY RELIEF I, Mark Weinsten, being fully sworn, hereby declare that the following is true tothe best of my knowledge, information, and belief: I. INTRODUCTION 1. I am a Senior Managing Director of FTI Consulting, Inc. (“FTI”) and aCo-Strategic Planning Officer (“SPO”) of LodgeNet Interactive Corporation (“LodgeNetInteractive” and, collectively, with its affiliated debtors in the above-referenced cases, the“Debtors”). I submit this Affidavit (the “Affidavit”) to provide the Court and interested partieswith information regarding the recapitalization and reorganization of LodgeNet Interactive, aswell as information regarding the circumstances that led to the commencement of these chapter11 cases. 2. Simultaneously with the filing of this Affidavit, the Debtors have filedtheir chapter 11 plan of reorganization (the “Plan”), pursuant to which a group of investors ledby Col-L Acquisition, LLC, (“Colony”), a subsidiary of Colony Capital, LLC (“Colony1 The Debtors, together with the last four digits of each Debtor’s federal tax identification number, are:LodgeNet Interactive Corporation (1161), LodgeNet StayOnline, Inc. (3232), On Command Corporation (5194),The Hotel Networks, Inc. (4919), On Command Video Corporation (8458), Puerto Rico Video EntertainmentCorporation (6786), Virgin Islands Video Entertainment Corporation (6611), Spectradyne International, Inc. (9353),LodgeNet Healthcare, Inc. (0337), Hotel Digital Network, Inc. (7245), and LodgeNet International, Inc. (2811).US_ACTIVE:441276002259848.0004 ¨1¤?"F-!; #9« 1310238130127000000000003
  2. 2. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 2 of 78Capital”), will invest at least $60 million in exchange for 100% of the common stock ofreorganized LodgeNet Interactive (the “Colony Transaction”). The Colony Transaction wasselected by the Debtors following a thorough search for potential acquirers or investors by theDebtors and their advisors. 3. On January 4, 2013, prior to the commencement of these cases, theDebtors began the solicitation of votes on their Plan, which is the means for implementation ofthe proposed recapitalization of the Debtors and the Colony Transaction. Pursuant to the Plan,unsecured claims will be paid in full and the prepetition secured lenders will receive their prorata share of an amended and restated credit facility (the “Exit Term Loans”). The only creditorsentitled to vote under the Plan are the Prepetition Lenders under the Prepetition CreditAgreement (both defined below). As of the date hereof, over 56% of the Prepetition Lenders (asdefined below), who are the only creditors entitled to vote on the Plan, and over 73% of the totalamount of debt under the Prepetition Credit Agreement have voted to accept the Plan. As of thedate hereof, no Prepetition Lenders have voted against the Plan. The voting deadline isFebruary 4, 2013. 4. The Plan provides for an amendment to the terms of the Debtors’Prepetition Credit Agreement (as defined below) to, among other things, extend the maturitydate, adjust the interest rate, modify certain financial covenants, and potentially bifurcate theloan into a first lien and a second lien piece. The Plan also contemplates the Debtors’ entry intoa new agreement with DIRECTV pursuant to which DIRECTV will assume the cost ofinstallation of systems in hotels and healthcare facilities, alleviating the Debtors of this expensiveand cash intensive burden. Pursuant to the terms of the Plan, all allowed trade and other generalunsecured creditors will be paid in full in cash on or shortly after the effective date of the Plan 2US_ACTIVE:441276002259848.0004
  3. 3. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 3 of 78the “Effective Date”). Because the existing equity in LodgeNet Interactive will be cancelled andbecause the contemplated amendments to the Prepetition Credit Agreement require unanimousconsent of the Prepetition Lenders, an out-of-court restructuring was not feasible, and achapter 11 case is necessary to consummate the Colony Transaction. 5. Having already received the requisite votes in favor of the Plan, theDebtors have commenced these Chapter 11 Cases prior to the expiration of the voting deadline.The Debtors seek to proceed to confirmation and consummation of the Plan as soon aspracticable to enable the expeditious payment of all creditors’ claims and the Debtors’emergence from chapter 11. 6. Colony will bring significant experience in both the hospitality and theentertainment industries to the Debtors’ business. The Debtors seek to restructure their businessto enable the implementation of the Colony Transaction and a modified business plan. Colonyfurther intends to work with the Debtors to (a) improve the Debtors’ technology, systems andprogramming platforms, (b) offer multiple tiers of services to hotels, (c) work with hotels toenhance guest satisfaction and brand loyalty, and (d) increase advertising revenues. 7. In addition, I submit this Affidavit (the “Affidavit”) pursuant toRule 1007-2 of the Local Bankruptcy Rules for the Southern District of New York (the “LocalBankruptcy Rules”) to assist the Court and other parties in interest in support of (a) the Debtors’voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the“Bankruptcy Code”) filed on the date hereof and (b) the relief sought in the First Day Pleadings(as defined below). 8. Any capitalized term not expressly defined herein shall have the meaningascribed to that term in the relevant First Day Pleading. Any and all factual predicates for the 3US_ACTIVE:441276002259848.0004
  4. 4. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 4 of 78relief sought in any of the First Day Pleadings that are set forth in such pleadings and not setforth separately in this Affidavit are incorporated by reference herein. 9. In my current capacity, I am familiar with the day-to-day operations,business, and financial affairs of the Debtors. As of the date hereof (the “Petition Date”), each ofthe Debtors has filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code withthe United States Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”). To enable the Debtors to operate effectively and minimize potential adverse effectsfrom the commencement of their chapter 11 cases (the “Chapter 11 Cases”), the Debtors haverequested certain relief in “first day” motions and applications filed with the Bankruptcy Court(collectively, the “First Day Pleadings”). 10. The First Day Pleadings, described more fully below, seek, among otherthings, to (a) schedule a hearing for the confirmation of the Plan and establish procedures forobjections to the Plan, (b) enable the Debtors to obtain postpetition debtor in possessionfinancing and use of cash collateral, (c) ensure the continuation of the Debtors’ cashmanagement system and other business operations without interruption, (d) preserve valuablerelationships with suppliers and customers, (e) maintain employee morale and confidence, and(f) establish certain administrative procedures that will promote a seamless transition intochapter 11. This relief is critical to the Debtors’ restructuring efforts. 11. Except as otherwise indicated, all facts set forth in this Affidavit (orincorporated by reference herein) are based upon my personal knowledge, my discussion withother members of the Debtors’ senior management, my review of relevant documents and theDebtors’ books and records, or my opinion based upon my experience and knowledge of theDebtors’ operations and financial condition. I am authorized to submit this Affidavit on behalf 4US_ACTIVE:441276002259848.0004
  5. 5. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 5 of 78of the Debtors, and, if I were called to testify, I would testify competently to the facts set forth(and incorporated by reference) herein. 12. This Affidavit provides a summary overview of the Debtors’ business andtheir Chapter 11 Cases. Sections I through V of this Affidavit provide a description of theDebtors’ business, corporate history and organizational structure, capital structure, and thecircumstances giving rise to the commencement of the Debtors’ Chapter 11 Cases. Section VIsummarizes the First Day Pleadings and the relief they seek, which the Debtors believe is crucialto a successful reorganization. II. DEBTORS’ HISTORY AND BUSINESSA. Background 13. The Debtors are the leading provider of interactive media and connectivityservices to the hospitality and healthcare industries in the United States. The Debtors primarilyprovide in-room television programming through their television and mobile-based platform,including, on-demand movies, music, sports programming and video games to hotels. TheDebtors recently launched an application for use on mobile devices that connects users to theDebtors’ systems and programming. The Debtors provide interactive systems that enable hotelsto provide guests with information about the hotel property and on-site amenities, as well asapplications related to concierge services and travel related information, including updated flighttimes, weather and local entertainment. The Debtors sell advertising space within the televisionprogramming and on-demand content. 14. The Debtors also have a robust healthcare business providing interactiveand media services to healthcare facilities throughout the United Stated, including in-patient andout-patient education and self-management support. The Debtors systems are installed in 82healthcare facilities representing approximately 18,600 beds. 5US_ACTIVE:441276002259848.0004
  6. 6. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 6 of 78 15. The Debtors’ businesses originated in 1980 under the name the SatelliteMovie Company, which initially provided basic and premium television programming to hotelsin the midwestern United States. Since that time, the Debtors have grown significantly and nowprovide television programming, pay per view movies, video games and internet connectivity tomore than 1.5 million hotel rooms in over 6,800 hotels and reach more than 500 million guestsannually. 16. The Debtors primarily operate in the United States. The Debtors alsooperate in Mexico and Macau, and have a non-Debtor subsidiary operating in Canada. Plus, theDebtors license their proprietary systems to third parties that provide services in 14 othercountries. The Debtors’ corporate headquarters are located in Sioux Falls, South Dakota. 17. The Debtors maintain a critical office in New York City. Twelveemployees work out of the New York City office, including, one of the Debtors’ seniorexecutives, and President of LodgeNet Interactive’s Interactive & Media Networks division(“I&MN”). I&MN, under the management of the executive in New York City, includesoperations that provide movie and other programming to hotels, the advertising and the Mobile(as defined below) application, and was responsible for approximately 49% of the Debtors’revenues in 2012. 18. Further, since 2007, when LodgeNet Interactive acquired On CommandCorporation, New York City has been the location of the primary office for The Hotel Networks,Inc. The President of I&MN makes the day-to-day operational decisions for the Debtors’advertising business, which is operated out of The Hotel Networks, Inc. As described below, theDebtors’ management believes the advertising business has significant revenue growth potentialand will become a larger part of the Debtors’ overall business in the future. Location in New 6US_ACTIVE:441276002259848.0004
  7. 7. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 7 of 78York City is strategically important for the advertising business as it provides proximity to thelarge advertising companies. 19. The Debtors also maintain offices in Georgia, California, and Mexico.B. Debtors’ Operations 20. Hotel and Healthcare Facility Services. The Debtors provide services tothe moderate through luxury segments of the hospitality industry. The Debtors’ customersinclude hotel chains, ownership groups and management companies representing some of thefinest hotels, including: Hilton Worldwide, Marriott International Inc., Ritz-Carlton, StarwoodHotels & Resorts, Four Seasons, Fairmont, Wyndham Hotels & Resorts, and the Las VegasSands Corporation, among others. 21. The Debtors have one of the most advanced interactive televisiondistribution networks in the industry. The Debtors’ systems connect each hotel room televisionto a digital server located in each hotel where content is stored and continuously updated viasatellite. The Debtors offer a variety of services of interest to hotels. Hotels can elect to receivecombinations of the free-to-guest television services, on-demand video and game rentals, and theDebtors’ interactive and mobile platforms. 22. The Debtors provide television programming primarily through satelliteservices provided by DIRECTV and HBO and on-demand movie rentals through theirrelationships with the major Hollywood studios. The Debtors’ contracts with the movie studiosenable them to offer guests newly released movies for viewing in an “early window,” when thetheatrical release has not yet been authorized for distribution from many pay-per-view sources,including prior to its availability for viewing as an at-home rental. The Debtors’ on-demandprogramming business represents approximately an 85% share of the video-on-demand serviceswithin the hospitality industry. 7US_ACTIVE:441276002259848.0004
  8. 8. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 8 of 78 23. In 2011, the Debtors introduced their Envision and Mobile platforms. TheEnvision Platform provides for high-definition (“HD”) interactive on-screen information aboutthe hotel property and on-site amenities, as well as applications which link guests to hotelservices, such as concierge services, room service and travel related information. ThroughEnvision, the hotel customers are able to order from room service, check flight times and searchfor local entertainment and activities, among other applications. As of December 31, 2012,Envision is installed on televisions in 98,900 rooms. The Debtors’ mobile platform (“Mobile”)enables travelers to download an app to their phones or tablets to control the in-room television,discover available on-demand programming, and access hotel and local area information andservices. As of December 31, 2012, 248,800 people have downloaded the Mobile application. 24. The Debtors are currently in the process of upgrading hotels from olderanalog systems to interactive HD systems. As of December, 2012, the HD systems are installedin 379,600 rooms. 25. The Debtors also provide interactive television services to healthcarefacilities with approximately 18,600 beds. In addition to television programming, the Debtorsprovide the healthcare facilities with custom welcome channels, hospital information channels,relaxation channels, music channels, interactive games, full length theatrical films, interfaceswith hospital electronic medical records system to provide patient-specific educationalprogramming and information about care providers, schedules and other information. Revenuefrom healthcare facilities is primarily generated from the sale of system hardware, softwarelicenses annual content and programming fees and professional services. The Debtors’healthcare facility platform is built on the same system architecture used in hotels, with 8US_ACTIVE:441276002259848.0004
  9. 9. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 9 of 78additional enhancements needed to meet the unique needs of the healthcare environment,including patient education applications and clinical system integrations. 26. Advertising. The Debtors’ scale enables them to reach large numbers oftravelers. As indicated above, more than 500 million guests a year stay in hotel rooms that havemedia services provided by the Debtors. Based on the type and location of specific hotels, theDebtors are able to provide targeted advertising opportunities to companies seeking access todesirable demographics of hotel guests. Through The Hotel Networks, Inc. (“THN”), whichdoes business under the name LodgeNet Interactive Media and Entertainment (“Lime”), theDebtors provide traditional television advertising as well as on-screen advertising on certaindedicated channels and menus. Lime maintains is own website and marketing strategy. 27. The Debtors believe the advertising business has significant growthpotential. The Debtors are negotiating an agreement with various parties that will permit theDebtors to insert a certain number of commercials into programming on certain channels ontelevisions in hotels. Through their relationships and equipment, the Debtors have the uniqueability to target advertising which is tailored to the interests of the travelling public, whichtypically includes a higher proportion of highly-educated and affluent consumers, who representa highly-desirable demographic to advertisers not reached as effectively by mass mediagenerally. 28. Internet Access. The Debtors design, install and operate internet accesssystems at hotel properties. These systems permit a guest to log on to the wireless internetavailable in their room and access a LodgeNet Interactive provided webpage, on which the guestmust either provide required information or pay for internet access. These systems controlaccess to the internet and allow hotels to charge for and monitor usage. The Debtors provide 9US_ACTIVE:441276002259848.0004
  10. 10. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 10 of 78ongoing maintenance of these systems, help-desk services, system monitoring and repair andmaintenance services.C. The Debtor’s Employees 29. As of the Petition Date, the Debtors have approximately 770 employees(collectively, the “Employees”). While the Employees perform tasks for the benefit of a varietyof the Debtors, almost all of the Employees are employed by LodgeNet Interactive. TheEmployees perform a variety of functions, including development of technologies andintellectual property used in the Debtors’ operations, managing relationships with studios andother content providers, as well as providing sales, accounting, marketing, field service,customer service and legal services, among others. None of the Debtors’ Employees areunionized. The Debtors also employ a limited number of independent contractors to install theequipment in hotels and healthcare facilities and perform other tasks as necessary. As of thePetition Date, the Debtors estimate that the aggregate amount of accrued, but unpaid wageobligations for employees is approximately $1.3 million. 30. In connection with the Debtors’ efforts to enter into a restructuringtransaction, the board of directors of LodgeNet Interactive determined it was in the best interestsof the Company to implement incentive and retention programs for those employees consideredcritical to maintaining operations unabated until a transaction could be consummated. As aresult, on November 21, 2012, the compensation committee of the board of directors ofLodgeNet Interactive approved a key employee incentive plan (a “KEIP”), which provides forpayments to seven of LodgeNet Interactive’s senior executives, and a key employee retentionplan a (“KERP”), which provides for payment to 44 additional employees. 31. Under the KERP, payments in the aggregate amount of approximately$1.4 million could be paid to 44 employees. The KERP amount represents approximately 20 – 10US_ACTIVE:441276002259848.0004
  11. 11. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 11 of 7825% of their respective salaries. Half of this amount was paid December 2012 and the other halfis payable upon the earlier to occur of the closing of a restructuring transaction or July 31, 2013.To be entitled to receive the second payment and keep the first payment, each of theseemployees must remained employed by the Debtors, unless terminated without cause or theemployee resigns for good reason, until the closing of a transaction or July 31, 2013. 32. Under the KEIP, it was originally estimated that payments in the aggregateamount of approximately $1.1 million would be paid to 7 employees. Similar to the KERP, theKEIP contemplates two payments – one paid in December 2012 and the other upon the earlier tooccur of the closing of a restructuring transaction or July 31, 2013, so long as the employeeremains employed by the Debtors, unless terminated without cause or the employee resigns forgood reason. One-third of this amount (approximately $365,200) was paid in December 2012.The remaining payment is subject to the Debtors meeting their cumulative EBITDA targets perquarter and fluctuates by 2% for every 1% over or under the applicable EBITDA target. Nosecond payment is made if the Debtors do not achieve at least 85% of the EBITDA target and thesecond payment is capped at 125% of the EBITDA target or $1,096,000. 33. While the KEIP originally included 7 employees, after successfullyguiding the Debtors through a strategic review process culminating in entry into the InvestmentAgreement, Richard Battista resigned as President and Chief Executive Officer of LodgeNetInteractive, effective January 16, 2013. Following Mr. Battista’s resignation, Frank Elsenbast,Chief Financial Officer, and James Naro, General Counsel, were named to concurrently serve asinterim Co-Chief Executive Officers. While there was no adjustment to their salaries, inrecognition of their increased duties, their payments under the KEIP were increased by $25,000 11US_ACTIVE:441276002259848.0004
  12. 12. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 12 of 78each. This adjustment is less than the amount originally estimated to be paid to Mr. Battista;thus, the potential payments under the KEIP will be less than the original estimates. 34. Additional information regarding the KEIP and KERP are available in theForm 8-Ks filed by LodgeNet Interactive with the SEC on November 28, 2012 and January 16,2013. III. ORGANIZATIONAL STRUCTURE 35. The corporate structure chart, attached hereto as Exhibit A, provides ageneral overview of the corporate structure for the Debtors. As demonstrated on Exhibit A,LodgeNet Interactive, directly or indirectly owns 100% of the equity in each of the otherDebtors. LodgeNet Interactive is a publicly owned company. Each Debtor, other than HotelDigital Network, Inc., is a Delaware corporation. Hotel Digital Network, Inc. is a corporationorganized under the laws of the State of California. LodgeNet Interactive (Canada) Corp.(“LNET Canada”), a Canadian company, is not a debtor in these Chapter 11 Cases. The Debtorsgenerally conduct their business through, and most contracts are held in the name of, LodgeNetInteractive. IV. CAPITAL STRUCTURE2 36. Equity. LodgeNet Interactive became a publicly traded company in 1993.LodgeNet Interactive’s common stock, which was traded under the symbol “LNET”, wasdelisted from the NASDAQ on January 14, 2013. The common stock is currently traded on theOTC Bulletin Board. As of December 31, 2012, there were approximately 27,943,018 shares ofcommon stock outstanding and 50,516 shares outstanding of LodgeNet Interactive’s 10% Series2 The description herein of the Debtors’ debt documents is for informational purposes only and is qualified in itsentirety by the actual terms of the referenced documents. 12US_ACTIVE:441276002259848.0004
  13. 13. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 13 of 78B Cumulative Convertible Perpetual Preferred Stock. LodgeNet Interactive directly or indirectlyowns 100% of the equity of each of the other Debtors. 37. Indebtedness. LodgeNet Interactive is the obligor under a CreditAgreement, dated as of April 4, 2007 (as may be amended, supplemented, restated or otherwisemodified prior to the Petition Date, the “Prepetition Credit Agreement”), among LodgeNetInteractive, Gleacher Products Corp., as administrative agent (the “Administrative Agent”), andthe lenders that are parties thereto from time to time (the “Prepetition Lenders”). ThePrepetition Credit Agreement originally provided LodgeNet Interactive with up to $625,000,000in aggregate principal amount of term loans (including a $400,000,000 initial term loan and a$225,000,000 delayed draw term loan) and $50,000,000 in aggregate maximum principal amountof revolving commitments, with a sublimit for letters of credit of $15,000,000. In March 2011,the Prepetition Credit Agreement was amended and the aggregate maximum principal amount ofrevolving commitments available thereunder was reduced to $25,000,000 with the sublimit forletters of credit reduced to $7,500,000. As of December 31, 2012, the approximate outstandingprincipal, interest (accruing at the default rate) and fees owing under the Prepetition CreditAgreement was $332,628,759 under the term loan (net of the portion owned by On CommandVideo Corporation, one of the Debtors in these cases), and $21,492,008 in borrowings under therevolver, with an additional $350,000 of issued and outstanding letters of credit. These amountsexclude the $20,624,513 amount outstanding under the Prepetition Credit Agreement held by OnCommand Video Corporation, which will be waived and disallowed under the Plan. 38. To secure the obligations under the Prepetition Credit Agreement, theDebtors entered into the Guarantee and Collateral Agreement, dated as of April 4, 2007, amongthe Debtors (other than LodgeNet Interactive, each of the Debtors, in its capacity as guarantor 13US_ACTIVE:441276002259848.0004
  14. 14. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 14 of 78under the Guarantee and Collateral Agreement, a “Guarantor”) and the Administrative Agent(the “Guarantee and Collateral Agreement”). Under the Guarantee and Collateral Agreement,(a) each of the other Debtors other than LodgeNet Interactive guaranteed the obligations ofLodgeNet Interactive under the Prepetition Credit Agreement, and (b) each of the Debtorsgranted to the lenders a security interest in substantially all of their assets, including all(i) accounts, (ii) chattel paper, (iii) contracts, (iv) deposit accounts, (v) documents,(vi) equipment, (vii) general intangibles, (viii) instruments, (ix) intellectual property,(x) inventory, (xi) investment property, (xii) letter of credit rights, (xiii) vehicles,(xiv) commercial tort claims, (xv) goods and other property, (xvi) books and records and(xvii) proceeds and products of any of the foregoing. LNET Canada is not a Guarantor. 39. In addition to the foregoing, the Debtors estimate that as of December 31,2012, they had approximately $60 million in outstanding accounts payable. V. RECENT FINANCIAL INFORMATION 40. As of September 30, 2012, the Debtors’ unaudited consolidated financialstatements reflected assets totaling approximately $292 million and liabilities totalingapproximately $449 million. The Debtors’ total revenues for the three-month period ended onSeptember 30, 2012 amounted to approximately $91 million, a 15% decrease over total revenuesfor the same period in 2011. VI. CIRCUMSTANCES GIVING RISE TO THE DEBTORS’ CHAPTER 11 FILINGA. Declining Room Base and Revenues Per Room 41. The Debtors have suffered declining revenues over the last several years.The Debtors’ financial difficulties primarily result from downward trends in the number of hotelrooms in which the Debtors’ systems are available and the revenue generated per room. TheDebtors’ room base has declined from a peak of 2 million in 2009 to 1.5 million as of today. 14US_ACTIVE:441276002259848.0004
  15. 15. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 15 of 78Further, the average monthly revenue per room has declined from $24.53 in 2007 to $20.71today. There are a variety of macro-economic and industry specific reasons for these declines. 42. Declines in revenue are attributable to multiple causes, including decliningroom base, source and cost of alternative source of programming and content, reduced demandfor full-length theatrical programming by business travelers with increasingly reduced in-room“free-time,” higher quality mobile devices, reductions to discretionary spending by travelers dueto an uncertain economic environment, and inadequate capital to hasten the pace in upgradingexisting rooms to HD, which is necessary to meet consumer expectations for an “at home” HDexperience. 43. In particular, the Debtors’ business has been negatively impacted by themobile device revolution. In the past few years, there has been a dramatic increase in thenumber of hotel guests traveling with laptop computers, tablets, and other mobile devices. Theability of guests to view programming on their individual devices on Netflix, Hulu, Amazon andother streaming websites, at lower prices than the Debtors’ on-demand services, has decreasedthe purchase rate per room. The Debtors believe that guests will usually gravitate to the largestand best screen available for their media content, and therefore, with the upgrades to the HDplatform and the Debtors’ other programming options, they can reverse the trend of decreasingrevenue per room. 44. The Debtors’ ability to maintain their room base is dependent largely onthe quality and breadth of service offered by the Debtors, the pricing of alternative televisionproviders, the extent to which the hotel brands consider video-on-demand to be a brand standardfor their franchisees, and the price-sensitivity of the hospitality market in relation to initialinstallation and set-up costs. In recent periods, some hotels have replaced the Debtors’ services 15US_ACTIVE:441276002259848.0004
  16. 16. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 16 of 78with services obtained from local cable providers. Cable operators are able to offer lower feesfor television channels that are provided free to guests, and generally do not require capitalexpenditures by the hotels to upgrade to HD systems. Moreover, hotels may believe that withthe large number and breadth of cable television channels, video on demand is not a necessaryservice. Certain hotels have also replaced LodgeNet Interactive with services of competitorswhich are much smaller in size than the Debtors but offer similar products and services. Certainlower and mid-range hotels have been reluctant to share in the additional up-front costsassociated with HD video-on-demand upgrades and elected to no longer offer on-demandmovies, music or video game options to their guests. 45. Hotels that have terminated the Debtors’ services have criticized theDebtors’ complicated pricing structure and contracts, requirement for long-term contracts anddelays in the installation process. The Debtors’ management is diligently working to streamlinetheir contracts and pricing options and to expedite installations and upgrades. 46. The Debtors’ revenues have also been affected by the slowing economy.Declining hotel occupancy rates from 2008-2010 had a direct effect on the number of purchasesof programming from the Debtors. Declining occupancy rates in such period also hampered thedesire and ability of numerous hotels to upgrade their televisions and systems to offer the HDplatform, which further impaired revenue growth as rooms with the HD platform generateapproximately 60% greater average per-room revenue compared to analog systems.B. Financial Covenants 47. The Debtors’ revenues have also been adversely affected by the Debtors’decreased liquidity over the past year. Due to their liquidity position, the Debtors have beenunable to make the capital investments in their equipment, roll-out new services and products,and complete all requested hotel upgrades necessary to grow the business. The liquidity position 16US_ACTIVE:441276002259848.0004
  17. 17. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 17 of 78was caused by declining revenues, as well as significant prepayments to the Debtors’ lendersunder the Prepetition Credit Agreement. 48. The Prepetition Credit Agreement includes certain financial covenants, theviolation of which constitute events of default. One of the financial covenants required theDebtors to maintain a Consolidated Leverage Ratio of no more than 4.00:1.00 for the four fiscalquarters ending September 30, 2012 and 3.75:1.00 for the four fiscal quarters endingDecember 31, 2012. The Consolidated Leverage Ratio calculates the consolidated total debtdivided by the consolidated EBITDA for the applicable period. As the Debtors’ revenues havedeclined, it has been more difficult for the Debtors to satisfy the covenant. To comply with thefinancial covenant and avoid an event of default under the Prepetition Credit Agreement, theDebtors made prepayments to the Prepetition Lenders, which reduced the total debt. TheDebtors made prepayments to the Prepetition Lenders in the aggregate amount of approximately$200 million from 2008 through 2010 (net of amounts attributable to the portion of thePrepetition Credit Agreement debt owned by On Command Video), approximately $1.9 million(net) in 2011, and approximately $30 million (net) in 2012. These prepayments impaired theDebtors’ ability to make essential capital expenditures to enhance their business. 49. The Debtors did not satisfy the Consolidated Leverage Ratio for the thirdquarter of 2012. In addition, the Debtors did not make scheduled interest and principal paymentsunder the Prepetition Credit Agreement due to the Prepetition Lenders on December 31, 2012 inthe approximate amount of $10 million. The Prepetition Lenders agreed to forbear fromexercising remedies under the terms of the Prepetition Credit Agreement as a result of the breachof the Consolidated Leverage Ratio and the failure to make interest and principal payments untilFebruary 5, 2013. 17US_ACTIVE:441276002259848.0004
  18. 18. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 18 of 78 50. The Debtors’ decreased liquidity also caused them to delay certainpayments due to several of their vendors in 2012. Specifically, as of September 2012, theDebtors had large overdue amounts due to DIRECTV and HBO. To prevent certain vendorsfrom terminating services that would have irreparably damaged the Debtors’ business, theDebtors entered into forbearance agreements with DIRECTV and HBO in September 2012,under which the Debtors agreed to comply with payment schedules for outstanding amounts.DIRECTV and HBO have further agreed to extend the payment schedules from time to time.Under the terms of the DIRECTV and HBO forbearance agreements, as amended, the Debtorshave payments in the amount of $36 million due to DIRECTV and HBO, in the aggregate, on orbefore February 5, 2013. The Debtors do not have available funds to make these payments toDIRECTV and HBO.C. Restructuring Efforts and Negotiations 1. Reduction in Costs and Management Changes 51. In response to the declining revenues from on-demand guestentertainment, in recent years, the Debtors have sought to diversify their revenue streams. TheDebtors have attempted to increase their room base in healthcare facilities and are working toimplement a network that will enable direct advertising. Further, the Debtors recently launchedthe Envision platform to align their product offerings with increased customer focus on thepromotion of hotel services and the Mobile application to build consumer loyalty and offeradditional guest services before, during and after their hotel stays. 52. Despite the recent attempts at diversification, the Debtors’ financialsituation continued to deteriorate. In response, the Debtors’ management took decisive action toreduce costs and improve performance. The Debtors have decreased their head count, frozensalaries, suspended issuance of bonuses, eliminated 401(k) match, imposed unpaid furloughs, 18US_ACTIVE:441276002259848.0004
  19. 19. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 19 of 78and restricted other benefits, including vacation. Further, the Debtors’ senior managementbecame intimately involved with seeking to stem the decrease in the room base and reviewedeach termination notice and determined strategy for keeping the hotel and avoiding futureterminations. The Debtors also explored selling certain business units. 53. In May 2012, the board of directors changed the Debtors’ leadership,replacing CEO Scott Peterson with Philip Spencer, as interim CEO, pending an executive search.On September 12, 2012, Richard L. Battista was hired as Chief Executive Officer to stabilize thebusiness. Mr. Battista promptly reached out to important vendors and numerous customers tosmooth over the business relationships between LodgeNet Interactive and such parties. Mr.Battista also accelerated negotiations with the lenders and potential investors. As discussedabove, on January 16, 2013, Mr. Battista resigned as LodgeNet Interactive’s CEO and a memberof the board of directors. 54. In December 2010, the Debtors hired JPMorgan to explore strategicopportunities, including refinancing, investments or sales. JPMorgan contacted numerous partiesregarding a potential transaction. Ten entities expressed interest and conducted diligence on theDebtors’ business and in July and August 2012, one entity proposed a merger, one entityproposed a debt restructuring, and Colony proposed an investment transaction. No transactionwas entered into during the term of JPMorgan’s engagement. The Debtors have continued towork with Andrew Sriubas, who had been with JPMorgan and is now affiliated with MoorgateSecurities LLC (“Moorgate”) to search for potential opportunities. 55. In August 2012, the Debtors retained Miller Buckfire & Co. (“MillerBuckfire”) to seek and evaluate refinancing and other strategic alternatives. Miller Buckfire was 19US_ACTIVE:441276002259848.0004
  20. 20. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 20 of 78assisted in this effort by Mr. Sriubas and his knowledge of the prior process. The Debtors alsoretained FTI to collaborate on the development of the Debtors’ business plan. 56. Building on prior sales efforts, in late September and early October 2012,the Debtors and Miller Buckfire, assisted by Mr. Sriubas, contacted 23 parties that weredetermined to be the parties most likely to submit substantial and legitimate bids. Nine of suchparties expressed interest and were invited to conduct diligence and submit bids for arefinancing, restructuring, or acquisition transaction. In light of the Debtors’ deterioratingliquidity position, the Debtors and Miller Buckfire, assisted by Mr. Sriubas, conducted a processpursuant to which interested parties were asked to submit an offer by October 19, 2012. TheDebtors received two offers in connection with such process, one from Colony Capital, and onefrom a strategic company in the media business. The Debtors’ board of directors andmanagement considered both offers and decided the Colony Capital offer was significantly betterfor the Company’s constituents and represented the highest and best offer. 2. The Colony Transaction 57. Colony Capital, a private equity firm based on Los Angeles, has been indiscussions with the Debtors for more than a year regarding a potential investment. OnDecember 30, 2012, the Debtors entered into an Investment Agreement with Colony and certainother investors, a copy of which is attached to the Plan. The Colony Transaction described in theInvestment Agreement provides for the investment by a group of investors led by Colony of atleast $60 million of new capital in exchange for 100% of the common stock in LodgeNetInteractive. The new capital will enable the Debtors to implement their business plan. Further,Colony’s significant investments, experience and relationships in the hospitality andentertainment industries, as well as direct investment in the healthcare sector, provideopportunities for the growth of the Debtors’ business. More specifically, Colony has ownership 20US_ACTIVE:441276002259848.0004
  21. 21. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 21 of 78interests in hotels, including Fairmont Hotels, Accor Hotels, One & Only and Atlantis hotels,with more than 500,000 rooms, and is the owner of Miramax. 58. The Colony Transaction contemplates the amendment and extension of thePrepetition Credit Agreement on the terms set forth in the below summary of the transaction.Simultaneously with the entry into the Investment Agreement, the Debtors entered into a PlanSupport and Lock-Up Agreement (the “Plan Support Agreement”) with Prepetition Lendersholding approximately 44% of the claims under the Prepetition Credit Agreement. Under thePlan Support Agreement, the Prepetition Lenders party thereto agreed to support and vote infavor of the Plan which incorporates the Colony Transaction. 59. The Colony Transaction also contemplates an agreement between thereorganized Debtors and DIRECTV that would replace the current DIRECTV agreement, createmore of a partnership relationship between the Debtors and DIRECTV and ensure the singlemost important vendor continues to do business with the Debtors and supports thereorganization. Colony has entered into a memorandum of understanding (the “MOU”)regarding the terms of the ultimate agreement to be negotiated between such parties. The MOUprovides that under the agreement to be entered into upon the closing of the Colony TransactionDIRECTV will (a) provide certain “free-to-guest” and pay-per-view programming, (b) allowReorganized LodgeNet Interactive to provide certain authorized transport services in respect ofDIRECTV programming, (c) allow Reorganized LodgeNet Interactive to remove and replacecertain advertising content contained in DIRECTV programming, (d) provide a financing facilityrelating to the installation costs for equipment in hotels, (e) provide for collaboration betweenReorganized LodgeNet Interactive and DIRECTV with respect to upgrading and improvingguest entertainment systems; (f) provide for fees and revenue sharing arrangements between the 21US_ACTIVE:441276002259848.0004
  22. 22. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 22 of 78parties, (g) provide a schedule for the payment over time of pre-petition amounts due toDIRECTV, and (h) include such other terms as mutually agreed by the parties. The terms of thefinal agreement are subject to further negotiation between Colony and DIRECTV. 60. The Debtors intend to implement the transaction with Colony through thePlan filed simultaneously with this Affidavit. The material terms of the Colony Transaction are: (i) Colony and certain third parties will invest at least $60 million in exchange for 100% of the common stock of LodgeNet Interactive, and will have the option to invest an additional $30 million for additional common stock; (ii) Certain third parties, determined by Colony, will receive warrants for a warrant purchase price of $5,000 that exercisable for 27.5% of the common stock of LodgeNet Interactive, on a fully diluted basis; (iii) The Prepetition Credit Agreement will be amended to provide for a Term A loan in the amount of $346, 406,541.55 (plus (i) interest that accrues on the Prepetition Credit Facility before the Petition Date and (ii) interest that accrues on the Prepetition Credit Facility during the chapter 11 cases up to the earlier of the Effective Date or 90 days after the Petition Date, in each case at the non-default contract interest rate, plus any amounts drawn as of the Effective Date on the $350,000 of issued and outstanding letters of credit, less the amount of the Term B Loan (if any)) and a Term B loan in the amount of up to $125 million) with interest rates and terms agreed upon by the lenders; provided the blended interest rates may not exceed 6.75% per annum; (iv) The Debtors will enter into revolving credit facility upon the Effective Date with a maximum amount of $20 million; (v) LodgeNet Interactive will enter into a new agreement with DIRECTV which will replace the current agreement on terms consistent with a memorandum of understanding between Colony and DIRECTV; (vi) Claims of general unsecured creditors of the Debtors will be satisfied in full in cash on the Effective Date; (vii) Holders of the Series B Preferred Stock and common stock issued by LodgeNet Interactive will have their interests cancelled and will not receive any distributions; and 22US_ACTIVE:441276002259848.0004
  23. 23. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 23 of 78 (viii) The Debtors will comply with certain covenants or obtain the consent of Colony prior to, among other things, entering into new contracts or incurring new obligations, hiring employees and making certain capital expenditures. 61. Following careful consideration of all alternatives, the Debtors determinedthat implementation of the Colony Transaction as set forth in the Investment Agreement throughthe commencement of these Chapter 11 Cases was a prudent and necessary step to maximize thevalue of the Debtors’ businesses and was in the best interest of the Debtors’ constituents. TheDebtors will consider any other proposal brought to their attention prior to the confirmation ofthe Plan that in the Debtors’ opinion is higher and better than the Colony Transaction. TheDebtors continue to believe in their business judgment that the Colony Transaction is in the bestinterest of all of the Debtors’ creditors. 3. DIP Credit Facility 62. The Debtors may require additional liquidity to complete the chapter 11Plan confirmation process and to implement the Colony Transaction. Therefore, the Debtorshave negotiated the terms of a debtor-in-possession loan (the “DIP Loan”) with certain lenders(the “DIP Lenders”). The Debtors and the DIP Lenders entered into the DIP Loan to enable thecontinued operation of the Debtors’ businesses, avoid short-term liquidity concerns, and preservethe going-concern value of the Debtors’ estates prior to consummation of the ColonyTransaction. The incremental availability under the DIP Loan provides added comfort to theDebtors’ vendors and customers that the Debtors will have sufficient liquidity to continue tooperate in the ordinary course. The DIP Loan provides up to $15 million of new financing to theDebtors. The Debtors have agreed to pay certain fees to the DIP Lenders in connection withtheir agreement to provide the DIP Loan. These fees are reasonable and consistent with fees 23US_ACTIVE:441276002259848.0004
  24. 24. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 24 of 78paid to other lenders in the market for their agreements to extend debtor-in-possession financing.The salient terms of the DIP Loan are: (i) The DIP Loan consists of (a) non-amortizing new money term loans (the “DIP Term Loans”), of which up to $5 million in principal amount will be available to be drawn upon entry of the interim order and an additional $10 million will be available to be drawn following the entry of the final order and (b) a roll-up of $15 million of loans (the “DIP Roll-up Loan”) under the Prepetition Credit Agreement attributable to the lenders of the DIP Loan; (ii) The DIP Term Loans will bear interest at LIBOR plus 7.00% with a LIBOR floor of 1.50%. During the continuance of an event of default, the DIP Term Loans will bear interest at an additional 2.00% per annum. The DIP Roll-up Loan will bear interest at the rate provided under the Prepetition Credit Agreement; (iii) The DIP Loan will be due and payable upon termination of the DIP Loan; provided, however, that so long as the Plan Support Agreement has not been terminated, the DIP Roll-up Loan (and all accrued interest thereon) will be refinanced and deemed outstanding under the Exit Term Loan (defined below). (iv) The DIP Loan shall terminate upon the earliest of (a) 180 days after the Petition Date, (b) 30 days after the entry of the interim order if the final order has not been entered, (c) the consummation of any Section 363 sale, (d) the substantial consummation (as defined in section 1101 of the Bankruptcy Code and which for purposes hereof shall be no later than the Effective Date) of a plan of reorganization filed in the Cases that is confirmed pursuant to an order entered by the Bankruptcy Court and (e) the acceleration of the loans and the termination of the commitment with respect to the DIP Facility in accordance with the DIP Loan; (v) The proceeds of the DIP Loan will be used for general corporate purposes during the Bankruptcy Cases (including payment of fees and expenses in connection with the transactions contemplated hereby and working capital), certain transaction fees, costs and expenses and certain other costs and expenses with respect to the administration of the cases, all in accordance with a budget agreeable to the lenders; (vi) All amounts under the DIP Loan are secured, subject to a carveout for professional fees and expenses and fees of the United States Trustee, by a first priority lien on all assets owned by the Debtors; 24US_ACTIVE:441276002259848.0004
  25. 25. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 25 of 78 VII. SUMMARY OF FIRST DAY PLEADINGS3 63. Concurrently with the filing of the Petitions, the Debtors filed thefollowing First Day Pleadings, which they believe, and I agree, are necessary to enable theirbusiness to operate with a minimum of disruption and loss of productivity. The Debtors intendto seek entry of Court orders approving each of the First Day Pleadings as soon as possible inaccordance with the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure (the“Bankruptcy Rules”), and the Local Bankruptcy Rules. Joint Administration Motion 64. Pursuant to this motion4 (the “Joint Administration Motion”), the Debtorsrequest that the Court authorize and direct the joint administration of these Chapter 11 Cases andthe consolidation thereof for procedural purposes only. 65. The Debtors believe that many, if not all, of the motions, applications, andother pleadings filed in these Chapter 11 Cases will relate to relief sought jointly by all of theDebtors. Joint administration of the Debtors’ Chapter 11 Cases, for procedural purposes only,under a single docket entry, will also ease the administrative burdens on the Court by allowingthese Chapter 11 Cases to be administered as a single joint proceeding instead of elevenindependent Chapter 11 Cases. 66. Joint administration of these Chapter 11 Cases will create a centralizedlocation for the numerous documents that are likely to be filed and served in these cases by the3 The summary of each First Day Pleading contained herein is for reference only. Please refer to the applicableFirst Day Pleading for the details regarding the relief requested therein.4 Debtors’ Motion Pursuant To Fed. R. Bankr. P. 1015(B) Requesting Joint Administration Of The Chapter 11Cases 25US_ACTIVE:441276002259848.0004
  26. 26. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 26 of 78Debtors, creditors, and parties in interest, and for all notices and orders entered by the Court. Asingle docket will also make it easier for all parties in each of the Chapter 11 Cases to stayapprised of all of the various matters before the Court. The Debtors will also likely realizesubstantial cost savings and reduced administrative burdens by sending notices to a single matrixof creditors and Bankruptcy Rule 2002 list, rather than maintaining several separate notice lists. 67. For the foregoing reasons, the Debtors believe, and I agree, that it is in thebest interest of the Debtors, their estates and creditors, and other all parties in interest in theseChapter 11 Cases that the Court grant the relief requested in the Joint Administration Motion. Waiver of Creditor and Equity List Motion 68. By this motion5 (the “Creditor and Equity List Waiver Motion”), theDebtors request a waiver of the requirement to file a list of creditors and equity security holders.Contemporaneously herewith, the Debtors have filed a motion to retain and employ KurtzmanCarson Consultants LLC as notice and claims processing agent (the “KCC”) in these Chapter 11Cases. As soon as practicable after entry of an order granting the requested waiver of therequirement to file a list of creditors, the Debtors will furnish their list of creditors to KCC sothat KCC may undertake the mailing of the Combined Notice (as defined below) to the parties onthe Debtors’ list of creditors. Creditors and equity security holders will be notified of thecommencement of these cases through their receipt of the Combined Notice. 69. Given that KCC will receive a list of creditors and equity security holdersand will use the list to furnish the Combined Notice to creditors and equity security holders,filing a list of creditors and equity security holders concurrently with the Petitions will serve no5 Debtors’ Motion Pursuant to Sections 105(a), 342(a), and 521(a)(1) of the Bankruptcy Code, BankruptcyRules 1007(a) and 2002(a), (f), (l) and (m), and 9007, and Local Bankruptcy Rule 1007-1 for A Waiver of theRequirement to File a List of Creditors and Equity Security Holders 26US_ACTIVE:441276002259848.0004
  27. 27. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 27 of 78useful purpose. Pursuant to Standing Order 192, as incorporated by Local BankruptcyRule 1007-1, the Debtors have consulted with the Clerk of the Bankruptcy Court who hasgranted permission to forego the requirement that the Debtors file a list of creditors and equitysecurity holders and has instructed the Debtors to provide the list of creditors and equity securityholders to KCC, as proposed. 70. For the foregoing reasons, the Debtors believe, and I agree, that it is in thebest interest of the Debtors, their estates and creditors, and other all parties in interest in theseChapter 11 Cases that the Court grant the relief requested in the Creditor and Equity List WaiverMotion. Waiver of Requirement to File Schedules and Statements 71. By this motion6 (the “Schedules Waiver Motion”), the Debtors requestthe Bankruptcy Court conditionally waive the requirement for the Debtors to file schedules ofassets and liabilities, schedules of executory contracts and unexpired leases, and statements offinancial affairs (collectively, the “Schedules and Statements”) subject to the confirmation of theDebtors’ Plan within sixty (60) days following the Petition Date or such later date as theBankruptcy Court may determine (“Deadline for Waiver”). Further, to the extent the Plan is notconfirmed within such time period, the Schedules Waiver Motion requests, an extension of thedeadline to file the Schedules and Statements to twenty (20) days after the Deadline for Waiver,without prejudice to the Debtors’ ability to request additional time should it become necessary. 72. The request for a waiver of the requirement to file Schedules andStatements is appropriate in a case such as this, where the Debtors have already commencedsolicitation of a Plan. In general, a debtor is required to file the Schedules and Statements to6 Motion Pursuant to Sections 105(a) and 521 of the Bankruptcy Code, Fed. R. Bankr. P. 1007 (I) Waiving theRequirement to File the Schedules of Assets and Liabilities and Statements of Financial Affairs Upon Confirmationof Debtors’ Prepackaged Plan and (II) Extending Time for Debtors to File the Same 27US_ACTIVE:441276002259848.0004
  28. 28. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 28 of 78permit parties in interest to understand and assess the debtors’ assets and liabilities and thereafternegotiate and confirm a plan of reorganization. In these Chapter 11 Cases, the Debtors havealready negotiated a plan of reorganization and are in the process of soliciting votes from thoseparties entitled to vote thereon. Accordingly, one of the primary justifications for requiring thefiling of Schedules and Statements does not exist in these cases. 73. In addition, much of the information that would be contained in theSchedules and Statements is already available in the Disclosure Statement to the Plan. To requirethe Debtors to file the Schedules and Statements would be duplicative and unnecessarilyburdensome and costly to the Debtors’ estates. 74. For the foregoing reasons, the Debtors believe, and I agree, that it is in thebest interest of the Debtors, their estates and creditors, and other all parties in interest in theseChapter 11 Cases that the Court grant the relief requested in the Schedules Waiver Motion. Case Management Motion 75. By this motion7 (the “Case Management Motion”), the Debtors seek toestablish certain notice, case management and administrative procedures in these Chapter 11Cases. The proposed procedures are designed to streamline the administration of the Debtors’Chapter 11 Cases. The streamlined and efficient administration of the Debtor’s Chapter 11Cases will preserve value and ultimately inure to the benefit of the Debtors and their estates. Forthe foregoing reasons, the Debtors believe, and I agree, that it is in the best interest of theDebtors, their estates and creditors, and other all parties in interest in these Chapter 11 Cases thatthe Court grant the relief requested in the Case Management Motion.7 Debtors’ Motion for Entry of an Order Pursuant to Section 105(a) of the Bankruptcy Code and BankruptcyRules 1015(c) and 9007 Implementing Certain Notice and Case Management Procedures 28US_ACTIVE:441276002259848.0004
  29. 29. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 29 of 78 Kurtzman Carson Consultants LLC Retention Application 76. By this application,8 the Debtors seek to retain KCC as claims andnoticing agent for the Debtors during these Chapter 11 Cases. Prior to selecting KCC, theDebtors solicited bids from two other approved claims agents, all of whom have been approvedby this Court to serve as claims and noticing agents. 77. Based on KCC’s experience in providing similar services in otherChapter 11 Cases, I believe that KCC is qualified to serve as the claims and noticing agent inthese Chapter 11 Cases. A detailed description of the services that KCC has agreed to render andthe compensation and other terms of the engagement are provided in the KCC RetentionApplication and the Affidavit of Albert Kass in Support of the Debtors’ Application for Authorityto Retain and Appoint Kurtzman Carson Consultants LLC attached to the KCC RetentionApplication. 78. I have reviewed the terms of the engagement and believe that the estates,creditors, parties in interest, and this Court will benefit as a result of KCC’s experience and costeffective methods and that retention of KCC is appropriate and in the best interest of the Debtorsand their estates. Retention of Ordinary Course Professionals Motion 79. By this motion,9 (the “OCP Motion”) the Debtors seek to establishprocedures to retain professionals used in the ordinary course of the Debtors’ business(“Ordinary Course Professionals”) on a postpetition basis, without formal retention applications.8 Application for an Order Appointing Kurtzman Carson Consultants LLC as Claims and Noticing Agent for theDebtors Pursuant to 28 U.S.C. § 156(c), 11 U.S.C. § 105(a), S.D.N.Y. LBR 5075-1 and General Order M-4099 Motion of the Debtors for Authorization to Employ Professionals Used in the Ordinary Course of BusinessPursuant to Sections 105(a), 327, and 330 of the Bankruptcy Code 29US_ACTIVE:441276002259848.0004
  30. 30. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 30 of 78The proposed procedures would authorize the Debtors to compensate and reimburse suchprofessionals without individual fee applications, and authorize the Debtors’ insurancecompanies to retain counsel to represent the Debtors in actions in which the insurance companiestypically retain and pay counsel on the Debtors’ behalf without further action or order of theCourt. 80. The Debtors desire to continue to employ the Ordinary CourseProfessionals to render a variety of professional services to their estates in the same manner andfor the same purposes as the Ordinary Course Professionals did prior to the Petition Date. In thepast, these professionals have rendered a range of professional legal services relating to matters,including, but not limited to, litigation, intellectual property, corporate requirements, tax, realestate, and employment. It is essential that the employment of these Ordinary CourseProfessionals, many of whom are already familiar with the Debtors’ business and financialaffairs, be continued so as to avoid disruption of the Debtors’ normal business operations. 81. The proposed employment of the Ordinary Course Professionals and thepayment of monthly compensation on the basis set forth below are in the best interest of theDebtors’ estates. The relief requested will save the estates the substantial expenses that would beassociated with applying separately for the employment of each Ordinary Course Professional.Further, the relief requested will avoid the incurrence of additional fees relating to thepreparation and prosecution of interim fee applications. As part of the procedures, the Debtorspropose that the Ordinary Course Professional’s total compensation and reimbursement shall notexceed $35,000 for each three month period starting from the first full month following thecommencement of this chapter 11 case (the “Quarterly Cap”) and payment to any one Ordinary 30US_ACTIVE:441276002259848.0004
  31. 31. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 31 of 78Course Professional will not exceed $70,000 for the entire period in which this chapter 11 case ispending, subject to further Order of the Court. 82. In light of the additional costs associated with the preparation ofemployment applications for professionals who will receive relatively small amounts of fees incomparison to the size of this chapter 11 case, it is impractical and economically inefficient forthe Debtors to submit individual applications and proposed retention orders for each OrdinaryCourse Professional as required by Bankruptcy Rules 2014 and 2016. Accordingly, the Debtorsrequest that the Court dispense with the requirement of individual employment applications andretention orders with respect to each Ordinary Course Professional. 83. For the foregoing reasons, the Debtors believe, and I agree, thatimplementation of the procedures for retention and payment of Ordinary Course Professionals, isin the best interest of the Debtors, their estates and creditors, and all parties in interest in theseChapter 11 Cases. Interim Compensation Motion 84. By this motion,10 (the “Interim Compensation Motion”) the Debtors seekentry of an order implementing certain procedures (the “Interim Comp Procedures”) for theorderly submission, review, and adjudication of applications for the interim compensation of feesand reimbursement of expenses of attorneys and other professionals retained pursuant to sections327 or 1103 of the Bankruptcy Code (collectively, the “Professionals”). 85. The Debtors have filed, or intend to file, applications to retain (i) Weil,Gotshal & Manges, LLP, as counsel to the Debtors, (ii) Leonard, Street and Deinard, as co-10 Motion of the Debtors to Implement Procedures for the Interim Compensation and Reimbursement ofProfessionals Pursuant to Sections 330 and 331 of the Bankruptcy Code and Bankruptcy Rule 2016 31US_ACTIVE:441276002259848.0004
  32. 32. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 32 of 78counsel to the Debtors, (iii) Miller Buckfire & Co., LLC, as financial advisor and investmentbanker to the Debtors, (iv) FTI Consulting, Inc., as financial advisor and restructuring advisor tothe Debtors, (v) Moorgate Securities, LLC, as investment banker to the Debtors; (vi) KurtzmanCarson Consultants, LLC, as claims agent and noticing agent to the Debtors; (vii)PricewaterhouseCoopers LLP, as independent accountant to the Debtors; and (viii) Deloitte TaxLLP, as tax advisor to the Debtors. The Debtors anticipate that, as these cases progress, theymay need to retain other professionals in connection with the administration of this case. 86. To streamline the professional compensation process and enable the Courtand all other parties to more effectively monitor the professional fees incurred in these chapter11 cases, the Debtors propose the Court implement the Procedures, which substantially conformwith the requirements of Rule 2016-1 of the Local Bankruptcy Rules for the Southern District ofNew York and the Court’s standing General Order M-412, dated December 21, 2010. 87. The proposed Interim Compensation Procedures will enable the Debtors toclosely monitor the costs of administration, forecast cash flows, and implement efficient cashmanagement procedures. They also will allow the Court and the key parties in interest, includingthe U.S. Trustee, to ensure the reasonableness and necessity of the compensation andreimbursement requested. 88. For the foregoing reasons, the Debtors believe, and I agree, thatimplementation of the Procedures for the submission, review and adjudication of applications forthe interim compensation of fees and reimbursement of the Professions, is in the best interest ofthe Debtors, their estates and creditors, and all parties in interest in these Chapter 11 Cases. 32US_ACTIVE:441276002259848.0004
  33. 33. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 33 of 78 Confirmation Hearing Scheduling and Procedures Motion 89. By this motion11 (the “Confirmation Procedures Motion”) the Debtorsseek entry of an order (a) scheduling a hearing (the “Combined Hearing”) on (i) the adequacy ofthe disclosure in the Disclosure Statement and the prepetition solicitation procedures used inconnection with the prepetition solicitation of votes to accept or reject the Plan and(ii) confirmation of the Plan, (b) establishing procedures for objecting to the DisclosureStatement, solicitation procedures, and the Plan, (c) approving the form, manner and sufficiencyof notice (the “Combined Notice”) of the Combined Hearing, commencement of theseChapter 11 Cases, and the scheduling and deferral of the meeting of creditors and equity holderspursuant to section 341(a) of the Bankruptcy Code (the “Section 341(a) Meeting”) untilconfirmation of the Plan; (d) directing that the Section 341(a) Meeting is deferred untilconfirmation of the Plan and need not be convened unless the Plan is not confirmed by sixty (60)days after the Petition Date or such later date as may be determined by the Court; (e) establishingprocedures for noticing of, and objecting to, the Debtors’ possible assumption and proposed cureof executory contracts and unexpired leases; (f) authorizing the Debtors to file the NoticeAffidavits of Service (as defined below) partially under seal; and (g) granting related relief. 90. In connection with the Plan, the Debtors prepared the DisclosureStatement which describes the terms of the Plan and the effect of the Plan on the holders ofclaims against and interests in the Debtors. The Debtors, through KCC, distributed copies of theDisclosure Statement, all exhibits thereto (including the Plan and the Investment Agreement),11 Motion for an Order (A) Scheduling Combined Hearing on Adequacy of Disclosure Statement and PrepetitionSolicitation Procedures and Confirmation of Plan, (B) Establishing Procedures for Objecting to DisclosureStatement, Solicitation Procedures, and Plan, (C) Approving Form, Manner, and Sufficiency of Notice of theCombined Hearing and Commencement of These Chapter 11 Cases, (D) Directing Deferral of Section 341(a)Meeting Until Confirmation of the Plan; (E) Establishing Procedures for Objecting to Possible Assumption andProposed Cure of Executory Contracts and Unexpired Leases (F) Authorizing Debtors to File the Notice Affidavitsof Service Partially Under Seal; and (G) Granting Related Relief 33US_ACTIVE:441276002259848.0004
  34. 34. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 34 of 78and a ballot to each of the Prepetition Lenders. For purposes of the solicitation, GleacherProducts Corp, the Administrative Agent for the Prepetition Lenders, provided the Debtors withlist of Prepetition Lenders as of January 2, 2013 (the “Voting Record Date”). In accordance withnonbankruptcy law, the Debtors established 5:00 p.m. (Pacific Time) on February 4, 2013 (the“Voting Deadline”) as the deadline for the submission of ballots to KCC indicating acceptance orrejection of the Plan. Other than the Prepetition Lenders, no other classes of creditors or interestholders are entitled to vote on the Plan. As of the date hereof, votes accepting the Plan havebeen cast in excess of the statutory thresholds specified in section 1126(c) of the BankruptcyCode by holders of claims in Class 2 (Prepetition Lender Claims). Holders of claims in Class 2(Prepetition Lender Claims) voted to accept the Plan. More specifically, over 56% in amountand 73% in number of holders of claims in Class 2 voted to accept the Plan. Furthermore, all ofthe holders of claims in Class 2 that voted on the Plan prior to the Petition Date voted to acceptthe Plan. 91. The Debtors will continue to accept votes on the Plan following thePetition Date through the Voting Deadline. After expiration of the Voting Deadline, the Debtorswill file a declaration certifying the results and the methodology for tabulation of ballotsaccepting or rejecting the Plan. 92. The Investment Agreement contains a termination provision whichimpacts the timeline of these Chapter 11 Cases. More specifically, the Investment Agreement(as subsequently amended by the parties) may be terminated, and the transactions contemplatedthereunder, including the Investors’ investment on the Effective Date, abandoned, by thePurchaser Representative if an order confirming the Plan is not entered by the Bankruptcy Courtwithin sixty (60) days after the Petition Date. (See Investment Agreement, at section 4.4(b)(ix)). 34US_ACTIVE:441276002259848.0004
  35. 35. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 35 of 78The Plan Support Agreement also contains a termination provision if the Plan is not confirmedwithin sixty (60) days after the Petition Date (See Plan Support Agreement, at section 5(d)(iv)). 93. Accordingly, the Confirmation Procedures Motion also asks theBankruptcy Court to schedule the Combined Hearing, subject to the Court’s schedule, onMarch 8, 2013. The Debtors also request that the Bankruptcy Court set the deadline to fileobjections to the adequacy of the Disclosure Statement, solicitation procedures, and confirmationof the Plan, and approve the form, manner, and sufficiency of the Combined Notice, which setsforth, among other things, notice of the commencement of the Debtors’ Chapter 11 Cases; thedate, time, and place of the Combined Hearing; instructions for obtaining copies of theDisclosure Statement and Plan; a summary of the Plan, including a chart summarizing plandistributions; and the deadline and procedures for objecting to the Disclosure Statement, theSolicitation Procedures, and confirmation of the Plan. The Combined Notice also informsparties in interest of (i) the scheduling and deferral of the Section 341(a) Meeting untilconfirmation of the Plan; and (ii) the fact that such meeting will not be convened if the Plan isconfirmed within sixty (60) days after the Petition Date. Furthermore, the Debtors request in theConfirmation Procedures Motion that the Bankruptcy Court defer the Section 341(a) Meetinguntil confirmation of the Plan and direct that the Section 341(a) Meeting need not be convenedunless the Plan is not confirmed by sixty (60) days after the Petition Date or such later date asmay be determined by the Court. 94. Moreover, the Confirmation Procedures Motion asks the BankruptcyCourt to bless the procedures for notice of the Debtors’ possible assumption and proposed cureof executory contracts and unexpired leases and the filing of objections thereto, such proceduresbeing consistent with the Debtors’ obligations under the Investment Agreement and the terms of 35US_ACTIVE:441276002259848.0004
  36. 36. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 36 of 78the Plan. Specifically, pursuant to Section 7.2(c) of the Investment Agreement (as subsequentlyamended by the parties), the Debtors must serve or caused to be served, within three (3) businessdays after the entry of the Scheduling Order, a notice by first class mail on all counterparties toexecutory contracts and unexpired leases to which the Debtors are party (with certain limitedexceptions). The Debtors, by the Confirmation Procedures Motion seeks authorization to serve,or cause to be served, the Assumption/Cure Notice and asks the Bankruptcy Court to direct thatany objections to the possible assumption, proposed cure, “adequate assurance of futureperformance,” the proposed postpetition interest rate set based on the Federal Judgment Rate, orother issues related to the assumption of the contract or lease be filed by a date that is fifteen (15)calendar days after the date of such Assumption/Cure Notice. These procedures provide areasonable means for the noticing of parties to executory contracts and unexpired with theDebtors while also protecting the due process rights of such parties. Moreover, the deadline toobject to the possible assumption, proposed cure, proposed postpetition interest rate set based onthe Federal Judgment Rate or related issues is reasonable and allows parties to executorycontracts or unexpired leases that are served with an Assumption/Cure Notice with ample time toobject. These procedures were negotiated with Colony and are a critical part of the proposedrestructuring of the Debtors. 95. Finally, the Confirmation Procedures Motion seeks authorization to filethe affidavits of service filed, or caused to be filed, by the Debtors in connection with theAssumption/Cure Notice and Combined Notice (together, the “Notice Affidavits of Service”)partially under seal. The identity of the Debtors’ customers is confidential commercialinformation and is highly sensitive with respect to the Debtors’ business and ongoingrelationship with such parties. Accordingly, portions of the Notice Affidavits of Service – 36US_ACTIVE:441276002259848.0004
  37. 37. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 37 of 78namely, the exhibits to the Affidavits of Service containing information regarding the Debtors’customers – will contain the very type of confidential information that, if publicly disclosed,could negatively impact the Debtors’ business and their relationship with such parties. Thedisclosure of sensitive commercial information with respect to the Debtors’ relationship withcertain of their major customers would be detrimental to the Debtors’ competitive position in theindustry as it would harm the Debtors’ ability to negotiate for the best terms with commercialpartners and risk the Debtors’ competitors “poaching” their customers. 96. For the foregoing reasons, the Debtors believe, and I agree, that the reliefrequested in the Confirmation Procedures Motion, is in the best interest of the Debtors, theirestates and creditors, and all parties in interest in these Chapter 11 Cases. Employee Wages and Benefits Motion 97. By this motion12 (the “Employee Wages and Benefits Motion”), theDebtors seek authority to pay certain prepetition accrued, but unpaid, wages, salaries, othercompensation and benefits, and obligations related thereto and to continue their employee benefitprograms postpetition. The Debtors employ approximately 770 full-time employees on both asalaried and hourly basis. In the ordinary course of business, the Debtors incur obligationsrelated to the payment of Wage Obligations, the Payroll Maintenance Fee, WithholdingObligations, Reimbursement Obligations, Commission Obligations, Contract WorkerObligations, Independent Director Obligations, and other compensation obligations (as suchterms are defined in the Employee Wages and Benefits Motion). Moreover, the Debtors incurother obligations in the ordinary course of business related to the maintenance of certain12 Debtors’ Motion for Interim and Final Orders Pursuant to Sections 105(a), 363(b), and 507(a) of the BankruptcyCode and Bankruptcy Rules 6003 and 6004 Authorizing (A) Payment of Prepetition Wages, Salaries, and OtherCompensation and Benefits; (B) Maintenance of Employee Benefit Programs and Payment of RelatedAdministrative Obligations; and (C) Applicable Banks and Other Financial Institutions to Receive, Process, Honorand Pay All Checks Presented for Payment and to Honor All Fund Transfer Requests Related to Such Obligations 37US_ACTIVE:441276002259848.0004
  38. 38. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 38 of 78Employee Benefits, including Health and Welfare Benefits, WF Insurance Services Fees,Prepetition Severance Payments to Prepetition Severed Employees not to exceed the LodgeNetSeverance Limit, postpetition Severance Payments not to exceed the LodgeNet Severance Limit,the 401(k) Plan, and Other Employee Benefits (as such terms are defined in the Employee Wagesand Benefits Motion). As of the Petition Date, the Debtors have certain accrued, but unpaid,prepetition obligations related to the foregoing Employee programs. 98. The Debtors seek this authority to minimize the personal hardship thattheir employees would suffer if they are not paid when due and to maintain the morale anddedication of their workforce at this critical time. The Debtors’ employees and other personnelmaintain the Debtors’ daily operations, and the Debtors cannot successfully operate without thecontinued support of their employees. The Debtors believe, and I agree, that any failure to paythe Debtors’ outstanding obligations may lead to the deterioration of employee morale, which, atthis nascent stage of the Debtors’ Chapter 11 Cases, could negatively affect the value of theDebtors’ assets and cause the Debtors to suffer immediate and irreparable harm. Furthermore,the Debtors do not believe that they have any employees, including directors and officers, whowill be owed more than the $11,725 statutory limitation on prepetition compensation peremployee entitled to priority treatment under section 507(a) of the Bankruptcy Code. 99. For the foregoing reasons, the Debtors believe, and I agree, that honoringall prepetition obligations related to employee compensation and benefits, as well as obligationsincurred postpetition, is in the best interest of the Debtors, their estates and creditors, and allparties in interest in these Chapter 11 Cases. 38US_ACTIVE:441276002259848.0004
  39. 39. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 39 of 78 Insurance Motion 100. By this motion13 (the “Insurance Motion”), the Debtors seek authority tocontinue their Insurance Programs (as defined below and in the Insurance Motion) in theordinary course and pay all obligations related to the Insurance Programs whether arisingprepetition or postpetition. The Debtors also request that the Court modify the automatic stayunder section 362 of the Bankruptcy Code solely to allow the Debtors’ employees to proceedwith their claims arising from or related to their employment with the Debtors. 101. In connection with the operation of their businesses, the Debtors maintainworkers’ compensation programs and various insurance programs for liabilities and lossesrelated to, among other things, breach of officers’ and directors’ duties, operation of commercialautomobiles, marine cargo, property, general liabilities, umbrella liability, cyber liability, andexcess liability (collectively, the “Insurance Programs”). The nature of the Debtors’ businessesand the extent of their operations make it essential for them to maintain all Insurance Programson an ongoing and uninterrupted basis. If the Debtors fail to pay the obligations related to theInsurance Programs, the insurance carriers may seek to terminate the existing InsurancePrograms or may decline to renew an Insurance Program. The Debtors could be exposed tosubstantial liability should the Insurance Programs lapse without renewal, which would be to thedetriment of all parties in interest in these Chapter 11 Cases. Accordingly, the continuation ofthe Insurance Programs and payment of all prepetition and postpetition obligations relatedthereto are essential to preserve the Debtors’ business and the value of these estates.13 Debtors’ Motion for Entry of Interim and Final Orders Pursuant to Sections 105(a), 362(d), 363(b), and 503(b)of the Bankruptcy Code (I) Authorizing, But Not Directing, Debtors to (A) Continue Their Insurance Programs, and(B) Pay All Insurance Obligations, and (II) Modifying the Automatic Stay With Respect to Workers’ CompensationClaims 39US_ACTIVE:441276002259848.0004
  40. 40. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 40 of 78 102. For the foregoing reasons, the Debtors believe, and I agree, that it is in thebest interest of the Debtors, their estates and creditors, and all parties in interest in theseChapter 11 Cases that the Court grant the relief requested in the Insurance Motion. Utilities Motion 103. By this motion14 (the “Utilities Motion”), the Debtors request approval oftheir Proposed Adequate Assurance (as defined below and in the Utilities Motion) and that theCourt (i) establish procedures for resolving any objections by the Utility Companies (as definedbelow and in the Utilities Motion) that the Proposed Adequate Assurance is not adequate, and(ii) prohibit the Utility Companies from altering, refusing, or discontinuing service to, ordiscriminating against, the Debtors solely on the basis of the commencement of these Chapter 11Cases, as a result of any debt that is owed by the Debtors for services rendered prior to thePetition Date, or as a result of the Debtors’ failure to provide adequate assurance of paymentother than the Proposed Adequate Assurance. 104. To operate their business and manages their properties, the Debtors usegas, heat, water, electricity, waste disposal, telephone, cable television, telecommunication,internet and other services (collectively, the “Utility Services”) provided by utility companies, asthat term is used in section 366 of the Bankruptcy Code (collectively, the “Utility Companies”).In the twelve-month period prior to the Petition Date, the Debtors paid an average ofapproximately $590,232 per month on account of Utility Services. Historically, the Debtorshave maintained an excellent track record regarding their payment history with the UtilityCompanies. To the best of the Debtors’ knowledge, there are few, if any, defaults or arrearages14 Debtors’ Motion for Interim and Final Orders Pursuant to Sections 105(a) and 366 of the Bankruptcy Code(A) Approving the Debtors’ Proposed Form of Adequate Assurance; (B) Establishing Procedures for ResolvingObligations by Utility Companies; and (C) Prohibiting Utilities from Altering, Refusing, or Discontinuing Service 40US_ACTIVE:441276002259848.0004

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