SlideShare a Scribd company logo
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 78



UNITED STATES BANKRUPTCY COURT
SOUTHERN 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 to

the best of my knowledge, information, and belief:

                                         I.       INTRODUCTION

                   1.        I am a Senior Managing Director of FTI Consulting, Inc. (“FTI”) and a

Co-Strategic Planning Officer (“SPO”) of LodgeNet Interactive Corporation (“LodgeNet

Interactive” 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 parties

with information regarding the recapitalization and reorganization of LodgeNet Interactive, as

well as information regarding the circumstances that led to the commencement of these chapter

11 cases.

                   2.        Simultaneously with the filing of this Affidavit, the Debtors have filed

their chapter 11 plan of reorganization (the “Plan”), pursuant to which a group of investors led

by Col-L Acquisition, LLC, (“Colony”), a subsidiary of Colony Capital, LLC (“Colony

1
        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 Entertainment
Corporation (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
13-10238        Doc 3       Filed 01/27/13    Entered 01/27/13 18:10:27       Main Document           Pg
                                                 2 of 78


Capital”), will invest at least $60 million in exchange for 100% of the common stock of

reorganized LodgeNet Interactive (the “Colony Transaction”). The Colony Transaction was

selected by the Debtors following a thorough search for potential acquirers or investors by the

Debtors and their advisors.

                   3.        On January 4, 2013, prior to the commencement of these cases, the

Debtors began the solicitation of votes on their Plan, which is the means for implementation of

the 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 pro

rata share of an amended and restated credit facility (the “Exit Term Loans”). The only creditors

entitled to vote under the Plan are the Prepetition Lenders under the Prepetition Credit

Agreement (both defined below). As of the date hereof, over 56% of the Prepetition Lenders (as

defined below), who are the only creditors entitled to vote on the Plan, and over 73% of the total

amount of debt under the Prepetition Credit Agreement have voted to accept the Plan. As of the

date hereof, no Prepetition Lenders have voted against the Plan. The voting deadline is

February 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 maturity

date, adjust the interest rate, modify certain financial covenants, and potentially bifurcate the

loan into a first lien and a second lien piece. The Plan also contemplates the Debtors’ entry into

a new agreement with DIRECTV pursuant to which DIRECTV will assume the cost of

installation of systems in hotels and healthcare facilities, alleviating the Debtors of this expensive

and cash intensive burden. Pursuant to the terms of the Plan, all allowed trade and other general

unsecured creditors will be paid in full in cash on or shortly after the effective date of the Plan


                                                     2
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27        Main Document          Pg
                                                   3 of 78


the “Effective Date”). Because the existing equity in LodgeNet Interactive will be cancelled and

because the contemplated amendments to the Prepetition Credit Agreement require unanimous

consent of the Prepetition Lenders, an out-of-court restructuring was not feasible, and a

chapter 11 case is necessary to consummate the Colony Transaction.

                   5.        Having already received the requisite votes in favor of the Plan, the

Debtors 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 as

practicable 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 the

entertainment industries to the Debtors’ business. The Debtors seek to restructure their business

to enable the implementation of the Colony Transaction and a modified business plan. Colony

further intends to work with the Debtors to (a) improve the Debtors’ technology, systems and

programming platforms, (b) offer multiple tiers of services to hotels, (c) work with hotels to

enhance guest satisfaction and brand loyalty, and (d) increase advertising revenues.

                   7.        In addition, I submit this Affidavit (the “Affidavit”) pursuant to

Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of New York (the “Local

Bankruptcy 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 meaning

ascribed to that term in the relevant First Day Pleading. Any and all factual predicates for the


                                                       3
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27         Main Document         Pg
                                                   4 of 78


relief sought in any of the First Day Pleadings that are set forth in such pleadings and not set

forth 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 of

the Debtors has filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with

the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy

Court”). To enable the Debtors to operate effectively and minimize potential adverse effects

from the commencement of their chapter 11 cases (the “Chapter 11 Cases”), the Debtors have

requested 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 other

things, to (a) schedule a hearing for the confirmation of the Plan and establish procedures for

objections to the Plan, (b) enable the Debtors to obtain postpetition debtor in possession

financing and use of cash collateral, (c) ensure the continuation of the Debtors’ cash

management system and other business operations without interruption, (d) preserve valuable

relationships with suppliers and customers, (e) maintain employee morale and confidence, and

(f) establish certain administrative procedures that will promote a seamless transition into

chapter 11. This relief is critical to the Debtors’ restructuring efforts.

                   11.       Except as otherwise indicated, all facts set forth in this Affidavit (or

incorporated by reference herein) are based upon my personal knowledge, my discussion with

other members of the Debtors’ senior management, my review of relevant documents and the

Debtors’ books and records, or my opinion based upon my experience and knowledge of the

Debtors’ operations and financial condition. I am authorized to submit this Affidavit on behalf


                                                        4
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document           Pg
                                                  5 of 78


of 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 and

their Chapter 11 Cases. Sections I through V of this Affidavit provide a description of the

Debtors’ business, corporate history and organizational structure, capital structure, and the

circumstances giving rise to the commencement of the Debtors’ Chapter 11 Cases. Section VI

summarizes the First Day Pleadings and the relief they seek, which the Debtors believe is crucial

to a successful reorganization.

                             II.     DEBTORS’ HISTORY AND BUSINESS

A.       Background

                   13.       The Debtors are the leading provider of interactive media and connectivity

services to the hospitality and healthcare industries in the United States. The Debtors primarily

provide in-room television programming through their television and mobile-based platform,

including, on-demand movies, music, sports programming and video games to hotels. The

Debtors recently launched an application for use on mobile devices that connects users to the

Debtors’ systems and programming. The Debtors provide interactive systems that enable hotels

to provide guests with information about the hotel property and on-site amenities, as well as

applications related to concierge services and travel related information, including updated flight

times, weather and local entertainment. The Debtors sell advertising space within the television

programming and on-demand content.

                   14.       The Debtors also have a robust healthcare business providing interactive

and media services to healthcare facilities throughout the United Stated, including in-patient and

out-patient education and self-management support. The Debtors systems are installed in 82

healthcare facilities representing approximately 18,600 beds.
                                                 5
US_ACTIVE:441276002259848.0004
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 Satellite

Movie Company, which initially provided basic and premium television programming to hotels

in the midwestern United States. Since that time, the Debtors have grown significantly and now

provide television programming, pay per view movies, video games and internet connectivity to

more than 1.5 million hotel rooms in over 6,800 hotels and reach more than 500 million guests

annually.

                   16.       The Debtors primarily operate in the United States. The Debtors also

operate in Mexico and Macau, and have a non-Debtor subsidiary operating in Canada. Plus, the

Debtors license their proprietary systems to third parties that provide services in 14 other

countries. The Debtors’ corporate headquarters are located in Sioux Falls, South Dakota.

                   17.       The Debtors maintain a critical office in New York City. Twelve

employees work out of the New York City office, including, one of the Debtors’ senior

executives, and President of LodgeNet Interactive’s Interactive & Media Networks division

(“I&MN”). I&MN, under the management of the executive in New York City, includes

operations 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 Command

Corporation, 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, the

Debtors’ management believes the advertising business has significant revenue growth potential

and will become a larger part of the Debtors’ overall business in the future. Location in New


                                                      6
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13    Entered 01/27/13 18:10:27       Main Document           Pg
                                                 7 of 78


York City is strategically important for the advertising business as it provides proximity to the

large 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 to

the moderate through luxury segments of the hospitality industry. The Debtors’ customers

include hotel chains, ownership groups and management companies representing some of the

finest hotels, including: Hilton Worldwide, Marriott International Inc., Ritz-Carlton, Starwood

Hotels & Resorts, Four Seasons, Fairmont, Wyndham Hotels & Resorts, and the Las Vegas

Sands Corporation, among others.

                   21.       The Debtors have one of the most advanced interactive television

distribution networks in the industry. The Debtors’ systems connect each hotel room television

to a digital server located in each hotel where content is stored and continuously updated via

satellite. The Debtors offer a variety of services of interest to hotels. Hotels can elect to receive

combinations of the free-to-guest television services, on-demand video and game rentals, and the

Debtors’ interactive and mobile platforms.

                   22.       The Debtors provide television programming primarily through satellite

services provided by DIRECTV and HBO and on-demand movie rentals through their

relationships with the major Hollywood studios. The Debtors’ contracts with the movie studios

enable them to offer guests newly released movies for viewing in an “early window,” when the

theatrical 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-demand

programming business represents approximately an 85% share of the video-on-demand services

within the hospitality industry.
                                                      7
US_ACTIVE:441276002259848.0004
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. The

Envision Platform provides for high-definition (“HD”) interactive on-screen information about

the hotel property and on-site amenities, as well as applications which link guests to hotel

services, such as concierge services, room service and travel related information. Through

Envision, the hotel customers are able to order from room service, check flight times and search

for 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 and

services. 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 older

analog systems to interactive HD systems. As of December, 2012, the HD systems are installed

in 379,600 rooms.

                   25.       The Debtors also provide interactive television services to healthcare

facilities with approximately 18,600 beds. In addition to television programming, the Debtors

provide the healthcare facilities with custom welcome channels, hospital information channels,

relaxation channels, music channels, interactive games, full length theatrical films, interfaces

with hospital electronic medical records system to provide patient-specific educational

programming and information about care providers, schedules and other information. Revenue

from healthcare facilities is primarily generated from the sale of system hardware, software

licenses annual content and programming fees and professional services. The Debtors’

healthcare facility platform is built on the same system architecture used in hotels, with




                                                       8
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document            Pg
                                                  9 of 78


additional 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 of

travelers. As indicated above, more than 500 million guests a year stay in hotel rooms that have

media services provided by the Debtors. Based on the type and location of specific hotels, the

Debtors are able to provide targeted advertising opportunities to companies seeking access to

desirable demographics of hotel guests. Through The Hotel Networks, Inc. (“THN”), which

does business under the name LodgeNet Interactive Media and Entertainment (“Lime”), the

Debtors provide traditional television advertising as well as on-screen advertising on certain

dedicated channels and menus. Lime maintains is own website and marketing strategy.

                   27.       The Debtors believe the advertising business has significant growth

potential. The Debtors are negotiating an agreement with various parties that will permit the

Debtors to insert a certain number of commercials into programming on certain channels on

televisions in hotels. Through their relationships and equipment, the Debtors have the unique

ability to target advertising which is tailored to the interests of the travelling public, which

typically includes a higher proportion of highly-educated and affluent consumers, who represent

a highly-desirable demographic to advertisers not reached as effectively by mass media

generally.

                   28.       Internet Access. The Debtors design, install and operate internet access

systems at hotel properties. These systems permit a guest to log on to the wireless internet

available in their room and access a LodgeNet Interactive provided webpage, on which the guest

must either provide required information or pay for internet access. These systems control

access to the internet and allow hotels to charge for and monitor usage. The Debtors provide


                                                      9
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27         Main Document       Pg
                                                  10 of 78


ongoing maintenance of these systems, help-desk services, system monitoring and repair and

maintenance 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 variety

of the Debtors, almost all of the Employees are employed by LodgeNet Interactive. The

Employees perform a variety of functions, including development of technologies and

intellectual property used in the Debtors’ operations, managing relationships with studios and

other content providers, as well as providing sales, accounting, marketing, field service,

customer service and legal services, among others. None of the Debtors’ Employees are

unionized. The Debtors also employ a limited number of independent contractors to install the

equipment in hotels and healthcare facilities and perform other tasks as necessary. As of the

Petition Date, the Debtors estimate that the aggregate amount of accrued, but unpaid wage

obligations for employees is approximately $1.3 million.

                   30.       In connection with the Debtors’ efforts to enter into a restructuring

transaction, the board of directors of LodgeNet Interactive determined it was in the best interests

of the Company to implement incentive and retention programs for those employees considered

critical to maintaining operations unabated until a transaction could be consummated. As a

result, on November 21, 2012, the compensation committee of the board of directors of

LodgeNet Interactive approved a key employee incentive plan (a “KEIP”), which provides for

payments to seven of LodgeNet Interactive’s senior executives, and a key employee retention

plan 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 –
                                              10
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document        Pg
                                                  11 of 78


25% of their respective salaries. Half of this amount was paid December 2012 and the other half

is 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 these

employees must remained employed by the Debtors, unless terminated without cause or the

employee 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 aggregate

amount of approximately $1.1 million would be paid to 7 employees. Similar to the KERP, the

KEIP contemplates two payments – one paid in December 2012 and the other upon the earlier to

occur of the closing of a restructuring transaction or July 31, 2013, so long as the employee

remains employed by the Debtors, unless terminated without cause or the employee resigns for

good 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 per

quarter and fluctuates by 2% for every 1% over or under the applicable EBITDA target. No

second payment is made if the Debtors do not achieve at least 85% of the EBITDA target and the

second payment is capped at 125% of the EBITDA target or $1,096,000.

                   33.       While the KEIP originally included 7 employees, after successfully

guiding the Debtors through a strategic review process culminating in entry into the Investment

Agreement, Richard Battista resigned as President and Chief Executive Officer of LodgeNet

Interactive, effective January 16, 2013. Following Mr. Battista’s resignation, Frank Elsenbast,

Chief Financial Officer, and James Naro, General Counsel, were named to concurrently serve as

interim Co-Chief Executive Officers. While there was no adjustment to their salaries, in

recognition of their increased duties, their payments under the KEIP were increased by $25,000




                                                     11
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13       Entered 01/27/13 18:10:27              Main Document               Pg
                                                    12 of 78


each. 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 the

Form 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 a

general 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 other

Debtors. LodgeNet Interactive is a publicly owned company. Each Debtor, other than Hotel

Digital Network, Inc., is a Delaware corporation. Hotel Digital Network, Inc. is a corporation

organized 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 Debtors

generally conduct their business through, and most contracts are held in the name of, LodgeNet

Interactive.

                                       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”, was

delisted from the NASDAQ on January 14, 2013. The common stock is currently traded on the

OTC Bulletin Board. As of December 31, 2012, there were approximately 27,943,018 shares of

common stock outstanding and 50,516 shares outstanding of LodgeNet Interactive’s 10% Series



2
 The description herein of the Debtors’ debt documents is for informational purposes only and is qualified in its
entirety by the actual terms of the referenced documents.

                                                         12
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document         Pg
                                                  13 of 78


B Cumulative Convertible Perpetual Preferred Stock. LodgeNet Interactive directly or indirectly

owns 100% of the equity of each of the other Debtors.

                   37.       Indebtedness. LodgeNet Interactive is the obligor under a Credit

Agreement, dated as of April 4, 2007 (as may be amended, supplemented, restated or otherwise

modified prior to the Petition Date, the “Prepetition Credit Agreement”), among LodgeNet

Interactive, Gleacher Products Corp., as administrative agent (the “Administrative Agent”), and

the lenders that are parties thereto from time to time (the “Prepetition Lenders”). The

Prepetition Credit Agreement originally provided LodgeNet Interactive with up to $625,000,000

in 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 amount

of 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 of

revolving commitments available thereunder was reduced to $25,000,000 with the sublimit for

letters of credit reduced to $7,500,000. As of December 31, 2012, the approximate outstanding

principal, interest (accruing at the default rate) and fees owing under the Prepetition Credit

Agreement was $332,628,759 under the term loan (net of the portion owned by On Command

Video Corporation, one of the Debtors in these cases), and $21,492,008 in borrowings under the

revolver, with an additional $350,000 of issued and outstanding letters of credit. These amounts

exclude the $20,624,513 amount outstanding under the Prepetition Credit Agreement held by On

Command Video Corporation, which will be waived and disallowed under the Plan.

                   38.       To secure the obligations under the Prepetition Credit Agreement, the

Debtors entered into the Guarantee and Collateral Agreement, dated as of April 4, 2007, among

the Debtors (other than LodgeNet Interactive, each of the Debtors, in its capacity as guarantor


                                                     13
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document         Pg
                                                  14 of 78


under 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 of

LodgeNet Interactive under the Prepetition Credit Agreement, and (b) each of the Debtors

granted 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 financial

statements reflected assets totaling approximately $292 million and liabilities totaling

approximately $449 million. The Debtors’ total revenues for the three-month period ended on

September 30, 2012 amounted to approximately $91 million, a 15% decrease over total revenues

for the same period in 2011.

 VI.       CIRCUMSTANCES GIVING RISE TO THE DEBTORS’ CHAPTER 11 FILING

A.       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 hotel

rooms in which the Debtors’ systems are available and the revenue generated per room. The

Debtors’ room base has declined from a peak of 2 million in 2009 to 1.5 million as of today.
                                             14
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27        Main Document           Pg
                                                  15 of 78


Further, the average monthly revenue per room has declined from $24.53 in 2007 to $20.71

today. There are a variety of macro-economic and industry specific reasons for these declines.

                   42.       Declines in revenue are attributable to multiple causes, including declining

room base, source and cost of alternative source of programming and content, reduced demand

for full-length theatrical programming by business travelers with increasingly reduced in-room

“free-time,” higher quality mobile devices, reductions to discretionary spending by travelers due

to an uncertain economic environment, and inadequate capital to hasten the pace in upgrading

existing rooms to HD, which is necessary to meet consumer expectations for an “at home” HD

experience.

                   43.       In particular, the Debtors’ business has been negatively impacted by the

mobile device revolution. In the past few years, there has been a dramatic increase in the

number of hotel guests traveling with laptop computers, tablets, and other mobile devices. The

ability of guests to view programming on their individual devices on Netflix, Hulu, Amazon and

other streaming websites, at lower prices than the Debtors’ on-demand services, has decreased

the purchase rate per room. The Debtors believe that guests will usually gravitate to the largest

and best screen available for their media content, and therefore, with the upgrades to the HD

platform and the Debtors’ other programming options, they can reverse the trend of decreasing

revenue per room.

                   44.       The Debtors’ ability to maintain their room base is dependent largely on

the quality and breadth of service offered by the Debtors, the pricing of alternative television

providers, the extent to which the hotel brands consider video-on-demand to be a brand standard

for their franchisees, and the price-sensitivity of the hospitality market in relation to initial

installation and set-up costs. In recent periods, some hotels have replaced the Debtors’ services


                                                      15
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27        Main Document        Pg
                                                  16 of 78


with services obtained from local cable providers. Cable operators are able to offer lower fees

for television channels that are provided free to guests, and generally do not require capital

expenditures by the hotels to upgrade to HD systems. Moreover, hotels may believe that with

the large number and breadth of cable television channels, video on demand is not a necessary

service. Certain hotels have also replaced LodgeNet Interactive with services of competitors

which are much smaller in size than the Debtors but offer similar products and services. Certain

lower and mid-range hotels have been reluctant to share in the additional up-front costs

associated with HD video-on-demand upgrades and elected to no longer offer on-demand

movies, music or video game options to their guests.

                   45.       Hotels that have terminated the Debtors’ services have criticized the

Debtors’ complicated pricing structure and contracts, requirement for long-term contracts and

delays in the installation process. The Debtors’ management is diligently working to streamline

their 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 purchases

of programming from the Debtors. Declining occupancy rates in such period also hampered the

desire and ability of numerous hotels to upgrade their televisions and systems to offer the HD

platform, which further impaired revenue growth as rooms with the HD platform generate

approximately 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 been

unable 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
                                              16
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document         Pg
                                                  17 of 78


was caused by declining revenues, as well as significant prepayments to the Debtors’ lenders

under the Prepetition Credit Agreement.

                   48.       The Prepetition Credit Agreement includes certain financial covenants, the

violation of which constitute events of default. One of the financial covenants required the

Debtors to maintain a Consolidated Leverage Ratio of no more than 4.00:1.00 for the four fiscal

quarters ending September 30, 2012 and 3.75:1.00 for the four fiscal quarters ending

December 31, 2012. The Consolidated Leverage Ratio calculates the consolidated total debt

divided by the consolidated EBITDA for the applicable period. As the Debtors’ revenues have

declined, it has been more difficult for the Debtors to satisfy the covenant. To comply with the

financial covenant and avoid an event of default under the Prepetition Credit Agreement, the

Debtors made prepayments to the Prepetition Lenders, which reduced the total debt. The

Debtors 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 the

Prepetition 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 the

Debtors’ ability to make essential capital expenditures to enhance their business.

                   49.       The Debtors did not satisfy the Consolidated Leverage Ratio for the third

quarter of 2012. In addition, the Debtors did not make scheduled interest and principal payments

under the Prepetition Credit Agreement due to the Prepetition Lenders on December 31, 2012 in

the approximate amount of $10 million. The Prepetition Lenders agreed to forbear from

exercising remedies under the terms of the Prepetition Credit Agreement as a result of the breach

of the Consolidated Leverage Ratio and the failure to make interest and principal payments until

February 5, 2013.


                                                     17
US_ACTIVE:441276002259848.0004
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 certain

payments due to several of their vendors in 2012. Specifically, as of September 2012, the

Debtors had large overdue amounts due to DIRECTV and HBO. To prevent certain vendors

from terminating services that would have irreparably damaged the Debtors’ business, the

Debtors 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 Debtors

have payments in the amount of $36 million due to DIRECTV and HBO, in the aggregate, on or

before February 5, 2013. The Debtors do not have available funds to make these payments to

DIRECTV and HBO.

C.       Restructuring Efforts and Negotiations

         1.        Reduction in Costs and Management Changes

                   51.       In response to the declining revenues from on-demand guest

entertainment, in recent years, the Debtors have sought to diversify their revenue streams. The

Debtors have attempted to increase their room base in healthcare facilities and are working to

implement a network that will enable direct advertising. Further, the Debtors recently launched

the Envision platform to align their product offerings with increased customer focus on the

promotion of hotel services and the Mobile application to build consumer loyalty and offer

additional guest services before, during and after their hotel stays.

                   52.       Despite the recent attempts at diversification, the Debtors’ financial

situation continued to deteriorate. In response, the Debtors’ management took decisive action to

reduce costs and improve performance. The Debtors have decreased their head count, frozen

salaries, suspended issuance of bonuses, eliminated 401(k) match, imposed unpaid furloughs,
                                               18
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27      Main Document         Pg
                                                  19 of 78


and restricted other benefits, including vacation. Further, the Debtors’ senior management

became intimately involved with seeking to stem the decrease in the room base and reviewed

each termination notice and determined strategy for keeping the hotel and avoiding future

terminations. 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 the

business. Mr. Battista promptly reached out to important vendors and numerous customers to

smooth over the business relationships between LodgeNet Interactive and such parties. Mr.

Battista also accelerated negotiations with the lenders and potential investors. As discussed

above, on January 16, 2013, Mr. Battista resigned as LodgeNet Interactive’s CEO and a member

of the board of directors.

                   54.       In December 2010, the Debtors hired JPMorgan to explore strategic

opportunities, including refinancing, investments or sales. JPMorgan contacted numerous parties

regarding a potential transaction. Ten entities expressed interest and conducted diligence on the

Debtors’ business and in July and August 2012, one entity proposed a merger, one entity

proposed a debt restructuring, and Colony proposed an investment transaction. No transaction

was entered into during the term of JPMorgan’s engagement. The Debtors have continued to

work with Andrew Sriubas, who had been with JPMorgan and is now affiliated with Moorgate

Securities LLC (“Moorgate”) to search for potential opportunities.

                   55.       In August 2012, the Debtors retained Miller Buckfire & Co. (“Miller

Buckfire”) to seek and evaluate refinancing and other strategic alternatives. Miller Buckfire was




                                                     19
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27        Main Document          Pg
                                                  20 of 78


assisted in this effort by Mr. Sriubas and his knowledge of the prior process. The Debtors also

retained 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 were

determined to be the parties most likely to submit substantial and legitimate bids. Nine of such

parties expressed interest and were invited to conduct diligence and submit bids for a

refinancing, restructuring, or acquisition transaction. In light of the Debtors’ deteriorating

liquidity position, the Debtors and Miller Buckfire, assisted by Mr. Sriubas, conducted a process

pursuant to which interested parties were asked to submit an offer by October 19, 2012. The

Debtors received two offers in connection with such process, one from Colony Capital, and one

from a strategic company in the media business. The Debtors’ board of directors and

management considered both offers and decided the Colony Capital offer was significantly better

for 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 in

discussions with the Debtors for more than a year regarding a potential investment. On

December 30, 2012, the Debtors entered into an Investment Agreement with Colony and certain

other investors, a copy of which is attached to the Plan. The Colony Transaction described in the

Investment Agreement provides for the investment by a group of investors led by Colony of at

least $60 million of new capital in exchange for 100% of the common stock in LodgeNet

Interactive. The new capital will enable the Debtors to implement their business plan. Further,

Colony’s significant investments, experience and relationships in the hospitality and

entertainment industries, as well as direct investment in the healthcare sector, provide

opportunities for the growth of the Debtors’ business. More specifically, Colony has ownership
                                                20
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13    Entered 01/27/13 18:10:27     Main Document           Pg
                                                 21 of 78


interests 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 the

Prepetition 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 Plan

Support and Lock-Up Agreement (the “Plan Support Agreement”) with Prepetition Lenders

holding approximately 44% of the claims under the Prepetition Credit Agreement. Under the

Plan Support Agreement, the Prepetition Lenders party thereto agreed to support and vote in

favor of the Plan which incorporates the Colony Transaction.

                   59.       The Colony Transaction also contemplates an agreement between the

reorganized Debtors and DIRECTV that would replace the current DIRECTV agreement, create

more of a partnership relationship between the Debtors and DIRECTV and ensure the single

most important vendor continues to do business with the Debtors and supports the

reorganization. Colony has entered into a memorandum of understanding (the “MOU”)

regarding the terms of the ultimate agreement to be negotiated between such parties. The MOU

provides that under the agreement to be entered into upon the closing of the Colony Transaction

DIRECTV will (a) provide certain “free-to-guest” and pay-per-view programming, (b) allow

Reorganized LodgeNet Interactive to provide certain authorized transport services in respect of

DIRECTV programming, (c) allow Reorganized LodgeNet Interactive to remove and replace

certain advertising content contained in DIRECTV programming, (d) provide a financing facility

relating to the installation costs for equipment in hotels, (e) provide for collaboration between

Reorganized LodgeNet Interactive and DIRECTV with respect to upgrading and improving

guest entertainment systems; (f) provide for fees and revenue sharing arrangements between the


                                                    21
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27        Main Document          Pg
                                                   22 of 78


parties, (g) provide a schedule for the payment over time of pre-petition amounts due to

DIRECTV, and (h) include such other terms as mutually agreed by the parties. The terms of the

final agreement are subject to further negotiation between Colony and DIRECTV.

                   60.       The Debtors intend to implement the transaction with Colony through the

Plan 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

                                                       22
US_ACTIVE:441276002259848.0004
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 determined

that implementation of the Colony Transaction as set forth in the Investment Agreement through

the commencement of these Chapter 11 Cases was a prudent and necessary step to maximize the

value of the Debtors’ businesses and was in the best interest of the Debtors’ constituents. The

Debtors will consider any other proposal brought to their attention prior to the confirmation of

the Plan that in the Debtors’ opinion is higher and better than the Colony Transaction. The

Debtors continue to believe in their business judgment that the Colony Transaction is in the best

interest of all of the Debtors’ creditors.

         3.        DIP Credit Facility

                   62.       The Debtors may require additional liquidity to complete the chapter 11

Plan confirmation process and to implement the Colony Transaction. Therefore, the Debtors

have 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 the

continued operation of the Debtors’ businesses, avoid short-term liquidity concerns, and preserve

the going-concern value of the Debtors’ estates prior to consummation of the Colony

Transaction. The incremental availability under the DIP Loan provides added comfort to the

Debtors’ vendors and customers that the Debtors will have sufficient liquidity to continue to

operate in the ordinary course. The DIP Loan provides up to $15 million of new financing to the

Debtors. The Debtors have agreed to pay certain fees to the DIP Lenders in connection with

their agreement to provide the DIP Loan. These fees are reasonable and consistent with fees



                                                      23
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27        Main Document          Pg
                                                   24 of 78


paid 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;
                                                       24
US_ACTIVE:441276002259848.0004
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 the

following First Day Pleadings, which they believe, and I agree, are necessary to enable their

business to operate with a minimum of disruption and loss of productivity. The Debtors intend

to seek entry of Court orders approving each of the First Day Pleadings as soon as possible in

accordance 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 Debtors

request that the Court authorize and direct the joint administration of these Chapter 11 Cases and

the consolidation thereof for procedural purposes only.

                   65.       The Debtors believe that many, if not all, of the motions, applications, and

other pleadings filed in these Chapter 11 Cases will relate to relief sought jointly by all of the

Debtors. 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 allowing

these Chapter 11 Cases to be administered as a single joint proceeding instead of eleven

independent Chapter 11 Cases.

                   66.       Joint administration of these Chapter 11 Cases will create a centralized

location for the numerous documents that are likely to be filed and served in these cases by the
3
  The summary of each First Day Pleading contained herein is for reference only. Please refer to the applicable
First 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 11
Cases




                                                        25
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13       Entered 01/27/13 18:10:27           Main Document            Pg
                                                    26 of 78


Debtors, creditors, and parties in interest, and for all notices and orders entered by the Court. A

single docket will also make it easier for all parties in each of the Chapter 11 Cases to stay

apprised of all of the various matters before the Court. The Debtors will also likely realize

substantial cost savings and reduced administrative burdens by sending notices to a single matrix

of 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 the

best interest of the Debtors, their estates and creditors, and other all parties in interest in these

Chapter 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”), the

Debtors 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 Kurtzman

Carson Consultants LLC as notice and claims processing agent (the “KCC”) in these Chapter 11

Cases. As soon as practicable after entry of an order granting the requested waiver of the

requirement to file a list of creditors, the Debtors will furnish their list of creditors to KCC so

that KCC may undertake the mailing of the Combined Notice (as defined below) to the parties on

the Debtors’ list of creditors. Creditors and equity security holders will be notified of the

commencement of these cases through their receipt of the Combined Notice.

                   69.       Given that KCC will receive a list of creditors and equity security holders

and 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 no

5
 Debtors’ Motion Pursuant to Sections 105(a), 342(a), and 521(a)(1) of the Bankruptcy Code, Bankruptcy
Rules 1007(a) and 2002(a), (f), (l) and (m), and 9007, and Local Bankruptcy Rule 1007-1 for A Waiver of the
Requirement to File a List of Creditors and Equity Security Holders


                                                       26
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27             Main Document            Pg
                                                   27 of 78


useful purpose. Pursuant to Standing Order 192, as incorporated by Local Bankruptcy

Rule 1007-1, the Debtors have consulted with the Clerk of the Bankruptcy Court who has

granted permission to forego the requirement that the Debtors file a list of creditors and equity

security holders and has instructed the Debtors to provide the list of creditors and equity security

holders to KCC, as proposed.

                   70.       For the foregoing reasons, the Debtors believe, and I agree, that it is in the

best interest of the Debtors, their estates and creditors, and other all parties in interest in these

Chapter 11 Cases that the Court grant the relief requested in the Creditor and Equity List Waiver

Motion.

                         Waiver of Requirement to File Schedules and Statements

                   71.       By this motion6 (the “Schedules Waiver Motion”), the Debtors request

the Bankruptcy Court conditionally waive the requirement for the Debtors to file schedules of

assets and liabilities, schedules of executory contracts and unexpired leases, and statements of

financial affairs (collectively, the “Schedules and Statements”) subject to the confirmation of the

Debtors’ Plan within sixty (60) days following the Petition Date or such later date as the

Bankruptcy Court may determine (“Deadline for Waiver”). Further, to the extent the Plan is not

confirmed within such time period, the Schedules Waiver Motion requests, an extension of the

deadline 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 and

Statements is appropriate in a case such as this, where the Debtors have already commenced

solicitation of a Plan. In general, a debtor is required to file the Schedules and Statements to

6
  Motion Pursuant to Sections 105(a) and 521 of the Bankruptcy Code, Fed. R. Bankr. P. 1007 (I) Waiving the
Requirement to File the Schedules of Assets and Liabilities and Statements of Financial Affairs Upon Confirmation
of Debtors’ Prepackaged Plan and (II) Extending Time for Debtors to File the Same
                                                       27
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27         Main Document           Pg
                                                   28 of 78


permit parties in interest to understand and assess the debtors’ assets and liabilities and thereafter

negotiate and confirm a plan of reorganization. In these Chapter 11 Cases, the Debtors have

already negotiated a plan of reorganization and are in the process of soliciting votes from those

parties entitled to vote thereon. Accordingly, one of the primary justifications for requiring the

filing of Schedules and Statements does not exist in these cases.

                   73.       In addition, much of the information that would be contained in the

Schedules and Statements is already available in the Disclosure Statement to the Plan. To require

the Debtors to file the Schedules and Statements would be duplicative and unnecessarily

burdensome and costly to the Debtors’ estates.

                   74.       For the foregoing reasons, the Debtors believe, and I agree, that it is in the

best interest of the Debtors, their estates and creditors, and other all parties in interest in these

Chapter 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 to

establish certain notice, case management and administrative procedures in these Chapter 11

Cases. 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 11

Cases will preserve value and ultimately inure to the benefit of the Debtors and their estates. For

the foregoing reasons, the Debtors believe, and I agree, that it is in the best interest of the

Debtors, their estates and creditors, and other all parties in interest in these Chapter 11 Cases that

the 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 Bankruptcy
Rules 1015(c) and 9007 Implementing Certain Notice and Case Management Procedures
                                                       28
US_ACTIVE:441276002259848.0004
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 and

noticing agent for the Debtors during these Chapter 11 Cases. Prior to selecting KCC, the

Debtors solicited bids from two other approved claims agents, all of whom have been approved

by this Court to serve as claims and noticing agents.

                   77.       Based on KCC’s experience in providing similar services in other

Chapter 11 Cases, I believe that KCC is qualified to serve as the claims and noticing agent in

these Chapter 11 Cases. A detailed description of the services that KCC has agreed to render and

the compensation and other terms of the engagement are provided in the KCC Retention

Application and the Affidavit of Albert Kass in Support of the Debtors’ Application for Authority

to Retain and Appoint Kurtzman Carson Consultants LLC attached to the KCC Retention

Application.

                   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 cost

effective methods and that retention of KCC is appropriate and in the best interest of the Debtors

and their estates.

                           Retention of Ordinary Course Professionals Motion

                   79.       By this motion,9 (the “OCP Motion”) the Debtors seek to establish

procedures 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 the
Debtors 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-409
9
  Motion of the Debtors for Authorization to Employ Professionals Used in the Ordinary Course of Business
Pursuant to Sections 105(a), 327, and 330 of the Bankruptcy Code

                                                      29
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13    Entered 01/27/13 18:10:27      Main Document            Pg
                                                 30 of 78


The proposed procedures would authorize the Debtors to compensate and reimburse such

professionals without individual fee applications, and authorize the Debtors’ insurance

companies to retain counsel to represent the Debtors in actions in which the insurance companies

typically retain and pay counsel on the Debtors’ behalf without further action or order of the

Court.

                   80.       The Debtors desire to continue to employ the Ordinary Course

Professionals to render a variety of professional services to their estates in the same manner and

for the same purposes as the Ordinary Course Professionals did prior to the Petition Date. In the

past, these professionals have rendered a range of professional legal services relating to matters,

including, but not limited to, litigation, intellectual property, corporate requirements, tax, real

estate, and employment. It is essential that the employment of these Ordinary Course

Professionals, many of whom are already familiar with the Debtors’ business and financial

affairs, be continued so as to avoid disruption of the Debtors’ normal business operations.

                   81.       The proposed employment of the Ordinary Course Professionals and the

payment of monthly compensation on the basis set forth below are in the best interest of the

Debtors’ estates. The relief requested will save the estates the substantial expenses that would be

associated with applying separately for the employment of each Ordinary Course Professional.

Further, the relief requested will avoid the incurrence of additional fees relating to the

preparation and prosecution of interim fee applications. As part of the procedures, the Debtors

propose that the Ordinary Course Professional’s total compensation and reimbursement shall not

exceed $35,000 for each three month period starting from the first full month following the

commencement of this chapter 11 case (the “Quarterly Cap”) and payment to any one Ordinary




                                                    30
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27         Main Document            Pg
                                                   31 of 78


Course Professional will not exceed $70,000 for the entire period in which this chapter 11 case is

pending, subject to further Order of the Court.

                   82.       In light of the additional costs associated with the preparation of

employment applications for professionals who will receive relatively small amounts of fees in

comparison to the size of this chapter 11 case, it is impractical and economically inefficient for

the Debtors to submit individual applications and proposed retention orders for each Ordinary

Course Professional as required by Bankruptcy Rules 2014 and 2016. Accordingly, the Debtors

request that the Court dispense with the requirement of individual employment applications and

retention orders with respect to each Ordinary Course Professional.

                   83.       For the foregoing reasons, the Debtors believe, and I agree, that

implementation of the procedures for retention and payment of Ordinary Course Professionals, is

in the best interest of the Debtors, their estates and creditors, and all parties in interest in these

Chapter 11 Cases.

                                       Interim Compensation Motion

                   84.       By this motion,10 (the “Interim Compensation Motion”) the Debtors seek

entry of an order implementing certain procedures (the “Interim Comp Procedures”) for the

orderly submission, review, and adjudication of applications for the interim compensation of fees

and reimbursement of expenses of attorneys and other professionals retained pursuant to sections

327 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 of
Professionals Pursuant to Sections 330 and 331 of the Bankruptcy Code and Bankruptcy Rule 2016


                                                       31
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27        Main Document       Pg
                                                  32 of 78


counsel to the Debtors, (iii) Miller Buckfire & Co., LLC, as financial advisor and investment

banker to the Debtors, (iv) FTI Consulting, Inc., as financial advisor and restructuring advisor to

the Debtors, (v) Moorgate Securities, LLC, as investment banker to the Debtors; (vi) Kurtzman

Carson Consultants, LLC, as claims agent and noticing agent to the Debtors; (vii)

PricewaterhouseCoopers LLP, as independent accountant to the Debtors; and (viii) Deloitte Tax

LLP, as tax advisor to the Debtors. The Debtors anticipate that, as these cases progress, they

may need to retain other professionals in connection with the administration of this case.

                   86.       To streamline the professional compensation process and enable the Court

and all other parties to more effectively monitor the professional fees incurred in these chapter

11 cases, the Debtors propose the Court implement the Procedures, which substantially conform

with the requirements of Rule 2016-1 of the Local Bankruptcy Rules for the Southern District of

New York and the Court’s standing General Order M-412, dated December 21, 2010.

                   87.       The proposed Interim Compensation Procedures will enable the Debtors to

closely monitor the costs of administration, forecast cash flows, and implement efficient cash

management procedures. They also will allow the Court and the key parties in interest, including

the U.S. Trustee, to ensure the reasonableness and necessity of the compensation and

reimbursement requested.

                   88.       For the foregoing reasons, the Debtors believe, and I agree, that

implementation of the Procedures for the submission, review and adjudication of applications for

the interim compensation of fees and reimbursement of the Professions, is in the best interest of

the Debtors, their estates and creditors, and all parties in interest in these Chapter 11 Cases.




                                                      32
US_ACTIVE:441276002259848.0004
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 Debtors

seek entry of an order (a) scheduling a hearing (the “Combined Hearing”) on (i) the adequacy of

the disclosure in the Disclosure Statement and the prepetition solicitation procedures used in

connection 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 Disclosure

Statement, solicitation procedures, and the Plan, (c) approving the form, manner and sufficiency

of notice (the “Combined Notice”) of the Combined Hearing, commencement of these

Chapter 11 Cases, and the scheduling and deferral of the meeting of creditors and equity holders

pursuant to section 341(a) of the Bankruptcy Code (the “Section 341(a) Meeting”) until

confirmation of the Plan; (d) directing that the Section 341(a) Meeting is deferred until

confirmation 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) establishing

procedures for noticing of, and objecting to, the Debtors’ possible assumption and proposed cure

of executory contracts and unexpired leases; (f) authorizing the Debtors to file the Notice

Affidavits of Service (as defined below) partially under seal; and (g) granting related relief.

                   90.       In connection with the Plan, the Debtors prepared the Disclosure

Statement which describes the terms of the Plan and the effect of the Plan on the holders of

claims against and interests in the Debtors. The Debtors, through KCC, distributed copies of the

Disclosure 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 Prepetition
Solicitation Procedures and Confirmation of Plan, (B) Establishing Procedures for Objecting to Disclosure
Statement, Solicitation Procedures, and Plan, (C) Approving Form, Manner, and Sufficiency of Notice of the
Combined 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 and
Proposed Cure of Executory Contracts and Unexpired Leases (F) Authorizing Debtors to File the Notice Affidavits
of Service Partially Under Seal; and (G) Granting Related Relief

                                                      33
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document       Pg
                                                  34 of 78


and a ballot to each of the Prepetition Lenders. For purposes of the solicitation, Gleacher

Products Corp, the Administrative Agent for the Prepetition Lenders, provided the Debtors with

list of Prepetition Lenders as of January 2, 2013 (the “Voting Record Date”). In accordance with

nonbankruptcy 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 or

rejection of the Plan. Other than the Prepetition Lenders, no other classes of creditors or interest

holders are entitled to vote on the Plan. As of the date hereof, votes accepting the Plan have

been cast in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy

Code 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 amount

and 73% in number of holders of claims in Class 2 voted to accept the Plan. Furthermore, all of

the holders of claims in Class 2 that voted on the Plan prior to the Petition Date voted to accept

the Plan.

                   91.       The Debtors will continue to accept votes on the Plan following the

Petition Date through the Voting Deadline. After expiration of the Voting Deadline, the Debtors

will file a declaration certifying the results and the methodology for tabulation of ballots

accepting or rejecting the Plan.

                   92.       The Investment Agreement contains a termination provision which

impacts the timeline of these Chapter 11 Cases. More specifically, the Investment Agreement

(as subsequently amended by the parties) may be terminated, and the transactions contemplated

thereunder, including the Investors’ investment on the Effective Date, abandoned, by the

Purchaser Representative if an order confirming the Plan is not entered by the Bankruptcy Court

within sixty (60) days after the Petition Date. (See Investment Agreement, at section 4.4(b)(ix)).


                                                     34
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13    Entered 01/27/13 18:10:27      Main Document          Pg
                                                 35 of 78


The Plan Support Agreement also contains a termination provision if the Plan is not confirmed

within sixty (60) days after the Petition Date (See Plan Support Agreement, at section 5(d)(iv)).

                   93.       Accordingly, the Confirmation Procedures Motion also asks the

Bankruptcy Court to schedule the Combined Hearing, subject to the Court’s schedule, on

March 8, 2013. The Debtors also request that the Bankruptcy Court set the deadline to file

objections to the adequacy of the Disclosure Statement, solicitation procedures, and confirmation

of the Plan, and approve the form, manner, and sufficiency of the Combined Notice, which sets

forth, among other things, notice of the commencement of the Debtors’ Chapter 11 Cases; the

date, time, and place of the Combined Hearing; instructions for obtaining copies of the

Disclosure Statement and Plan; a summary of the Plan, including a chart summarizing plan

distributions; and the deadline and procedures for objecting to the Disclosure Statement, the

Solicitation Procedures, and confirmation of the Plan. The Combined Notice also informs

parties in interest of (i) the scheduling and deferral of the Section 341(a) Meeting until

confirmation of the Plan; and (ii) the fact that such meeting will not be convened if the Plan is

confirmed within sixty (60) days after the Petition Date. Furthermore, the Debtors request in the

Confirmation Procedures Motion that the Bankruptcy Court defer the Section 341(a) Meeting

until confirmation of the Plan and direct that the Section 341(a) Meeting 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.

                   94.       Moreover, the Confirmation Procedures Motion asks the Bankruptcy

Court to bless the procedures for notice of the Debtors’ possible assumption and proposed cure

of executory contracts and unexpired leases and the filing of objections thereto, such procedures

being consistent with the Debtors’ obligations under the Investment Agreement and the terms of


                                                    35
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document           Pg
                                                  36 of 78


the Plan. Specifically, pursuant to Section 7.2(c) of the Investment Agreement (as subsequently

amended by the parties), the Debtors must serve or caused to be served, within three (3) business

days after the entry of the Scheduling Order, a notice by first class mail on all counterparties to

executory contracts and unexpired leases to which the Debtors are party (with certain limited

exceptions). 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 that

any objections to the possible assumption, proposed cure, “adequate assurance of future

performance,” the proposed postpetition interest rate set based on the Federal Judgment Rate, or

other 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 a

reasonable means for the noticing of parties to executory contracts and unexpired with the

Debtors while also protecting the due process rights of such parties. Moreover, the deadline to

object to the possible assumption, proposed cure, proposed postpetition interest rate set based on

the Federal Judgment Rate or related issues is reasonable and allows parties to executory

contracts or unexpired leases that are served with an Assumption/Cure Notice with ample time to

object. These procedures were negotiated with Colony and are a critical part of the proposed

restructuring of the Debtors.

                   95.       Finally, the Confirmation Procedures Motion seeks authorization to file

the affidavits of service filed, or caused to be filed, by the Debtors in connection with the

Assumption/Cure Notice and Combined Notice (together, the “Notice Affidavits of Service”)

partially under seal. The identity of the Debtors’ customers is confidential commercial

information and is highly sensitive with respect to the Debtors’ business and ongoing

relationship with such parties. Accordingly, portions of the Notice Affidavits of Service –


                                                     36
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13      Entered 01/27/13 18:10:27           Main Document            Pg
                                                   37 of 78


namely, 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. The

disclosure of sensitive commercial information with respect to the Debtors’ relationship with

certain of their major customers would be detrimental to the Debtors’ competitive position in the

industry as it would harm the Debtors’ ability to negotiate for the best terms with commercial

partners and risk the Debtors’ competitors “poaching” their customers.

                   96.       For the foregoing reasons, the Debtors believe, and I agree, that the relief

requested in the Confirmation Procedures Motion, is in the best interest of the Debtors, their

estates 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”), the

Debtors seek authority to pay certain prepetition accrued, but unpaid, wages, salaries, other

compensation and benefits, and obligations related thereto and to continue their employee benefit

programs postpetition. The Debtors employ approximately 770 full-time employees on both a

salaried and hourly basis. In the ordinary course of business, the Debtors incur obligations

related to the payment of Wage Obligations, the Payroll Maintenance Fee, Withholding

Obligations, Reimbursement Obligations, Commission Obligations, Contract Worker

Obligations, Independent Director Obligations, and other compensation obligations (as such

terms are defined in the Employee Wages and Benefits Motion). Moreover, the Debtors incur

other obligations in the ordinary course of business related to the maintenance of certain
12
  Debtors’ Motion for Interim and Final Orders Pursuant to Sections 105(a), 363(b), and 507(a) of the Bankruptcy
Code and Bankruptcy Rules 6003 and 6004 Authorizing (A) Payment of Prepetition Wages, Salaries, and Other
Compensation and Benefits; (B) Maintenance of Employee Benefit Programs and Payment of Related
Administrative Obligations; and (C) Applicable Banks and Other Financial Institutions to Receive, Process, Honor
and Pay All Checks Presented for Payment and to Honor All Fund Transfer Requests Related to Such Obligations

                                                      37
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27        Main Document         Pg
                                                  38 of 78


Employee Benefits, including Health and Welfare Benefits, WF Insurance Services Fees,

Prepetition Severance Payments to Prepetition Severed Employees not to exceed the LodgeNet

Severance 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 Wages

and 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 that

their employees would suffer if they are not paid when due and to maintain the morale and

dedication of their workforce at this critical time. The Debtors’ employees and other personnel

maintain the Debtors’ daily operations, and the Debtors cannot successfully operate without the

continued support of their employees. The Debtors believe, and I agree, that any failure to pay

the Debtors’ outstanding obligations may lead to the deterioration of employee morale, which, at

this nascent stage of the Debtors’ Chapter 11 Cases, could negatively affect the value of the

Debtors’ 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, who

will be owed more than the $11,725 statutory limitation on prepetition compensation per

employee entitled to priority treatment under section 507(a) of the Bankruptcy Code.

                   99.       For the foregoing reasons, the Debtors believe, and I agree, that honoring

all prepetition obligations related to employee compensation and benefits, as well as obligations

incurred postpetition, is in the best interest of the Debtors, their estates and creditors, and all

parties in interest in these Chapter 11 Cases.




                                                      38
US_ACTIVE:441276002259848.0004
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 to

continue their Insurance Programs (as defined below and in the Insurance Motion) in the

ordinary course and pay all obligations related to the Insurance Programs whether arising

prepetition or postpetition. The Debtors also request that the Court modify the automatic stay

under section 362 of the Bankruptcy Code solely to allow the Debtors’ employees to proceed

with their claims arising from or related to their employment with the Debtors.

                   101.      In connection with the operation of their businesses, the Debtors maintain

workers’ compensation programs and various insurance programs for liabilities and losses

related to, among other things, breach of officers’ and directors’ duties, operation of commercial

automobiles, marine cargo, property, general liabilities, umbrella liability, cyber liability, and

excess liability (collectively, the “Insurance Programs”). The nature of the Debtors’ businesses

and the extent of their operations make it essential for them to maintain all Insurance Programs

on an ongoing and uninterrupted basis. If the Debtors fail to pay the obligations related to the

Insurance Programs, the insurance carriers may seek to terminate the existing Insurance

Programs or may decline to renew an Insurance Program. The Debtors could be exposed to

substantial liability should the Insurance Programs lapse without renewal, which would be to the

detriment of all parties in interest in these Chapter 11 Cases. Accordingly, the continuation of

the Insurance Programs and payment of all prepetition and postpetition obligations related

thereto 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’ Compensation
Claims

                                                      39
US_ACTIVE:441276002259848.0004
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 the

best interest of the Debtors, their estates and creditors, and all parties in interest in these

Chapter 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 of

their Proposed Adequate Assurance (as defined below and in the Utilities Motion) and that the

Court (i) establish procedures for resolving any objections by the Utility Companies (as defined

below 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, or

discriminating against, the Debtors solely on the basis of the commencement of these Chapter 11

Cases, as a result of any debt that is owed by the Debtors for services rendered prior to the

Petition Date, or as a result of the Debtors’ failure to provide adequate assurance of payment

other than the Proposed Adequate Assurance.

                   104.      To operate their business and manages their properties, the Debtors use

gas, heat, water, electricity, waste disposal, telephone, cable television, telecommunication,

internet and other services (collectively, the “Utility Services”) provided by utility companies, as

that 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 of

approximately $590,232 per month on account of Utility Services. Historically, the Debtors

have maintained an excellent track record regarding their payment history with the Utility

Companies. To the best of the Debtors’ knowledge, there are few, if any, defaults or arrearages


14
   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 Resolving
Obligations by Utility Companies; and (C) Prohibiting Utilities from Altering, Refusing, or Discontinuing Service

                                                        40
US_ACTIVE:441276002259848.0004
13-10238        Doc 3       Filed 01/27/13     Entered 01/27/13 18:10:27       Main Document         Pg
                                                  41 of 78


of any significance with respect to the Debtors’ undisputed invoices for Utility Services, other

than payment interruptions that may be caused by the commencement of these Chapter 11 Cases.

The Debtors estimate that the cost for Utility Services during the next thirty (30) days (not

including any deposits to be paid) will be approximately $598,000.

                   105.      The Debtors intend to timely pay all postpetition obligations owed to the

Utilities Companies. Nevertheless, to ensure that adequate assurance of payment to the Utility

Companies, pursuant to section 366 of the Bankruptcy Code, has been provided, the Debtors

propose to provide adequate assurance of payment in the form of a cash deposit. The Debtors

propose to provide a deposit to any requesting Utility Company no more than seven (7) business

days after the receipt of such request, which deposit will be equal to two (2) weeks of Utility

Service, calculated based on the historical average over the past 12 months (the “Adequate

Assurance Deposit”) provided that: (i) such request is made in accordance with the procedures

set forth in the Utilities Motion; (ii) the requesting Utility Company does not already hold a

deposit equal to or greater than the applicable Adequate Assurance Deposit; (iii) the requesting

Utility Company is not currently paid in advance for its Utility Services; and (iv) the requesting

Utility Company is not otherwise obligated to perform in accordance with an existing contract.

The Adequate Assurance Deposit, in conjunction with the Debtors’ ability to pay for future

Utility Services in the ordinary course of business (collectively, the “Proposed Adequate

Assurance”), constitutes adequate assurance to the Utility Companies as contemplated by

section 366 of the Bankruptcy Code.

                   106.      If, however, a Utility Company is not satisfied with the Proposed

Adequate Assurance, the Utilities Motion provides procedures pursuant to which a Utility




                                                      41
US_ACTIVE:441276002259848.0004
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl
Lodgenet first day decl

More Related Content

What's hot

Charge
ChargeCharge
10000000013
1000000001310000000013
10000000013
Randall Reese
 
Concentra agreement
Concentra agreementConcentra agreement
Concentra agreement
data brackets
 
Gmx resources plan support agreement
Gmx resources plan support agreementGmx resources plan support agreement
Gmx resources plan support agreement
Randall Reese
 
S. 2772
S. 2772S. 2772
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL DEPOSIT INSURANCE CORPORATIONFEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL DEPOSIT INSURANCE CORPORATION
Finance Magnates
 
Priority and alteration of priority
Priority and alteration of priorityPriority and alteration of priority
Priority and alteration of priority
Hafizul Mukhlis
 
25 No 1 J Bankr L And Prac NL Art 2
25 No 1 J Bankr L And Prac NL Art 225 No 1 J Bankr L And Prac NL Art 2
25 No 1 J Bankr L And Prac NL Art 2
Janine Lee
 
Security dealings charge
Security dealings   chargeSecurity dealings   charge
Security dealings charge
Hafizul Mukhlis
 
The Small Business Reorganization Act of 2019
The Small Business Reorganization Act of 2019The Small Business Reorganization Act of 2019
The Small Business Reorganization Act of 2019
Parsons Behle & Latimer
 
FindLaw | Madoff Trustee Report
FindLaw | Madoff Trustee ReportFindLaw | Madoff Trustee Report
FindLaw | Madoff Trustee Report
LegalDocs
 
Vermont Fraudulent Transfer Laws
Vermont Fraudulent Transfer LawsVermont Fraudulent Transfer Laws
Vermont Fraudulent Transfer Laws
Jordan K. Carpenter
 
Lien and lien holder's caveat
Lien and lien holder's caveatLien and lien holder's caveat
Lien and lien holder's caveat
Hafizul Mukhlis
 
AMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCED
AMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCEDAMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCED
AMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCED
Mukesh Chand
 
10000000032
1000000003210000000032
10000000032
Randall Reese
 
Statutory lien
Statutory lienStatutory lien
Statutory lien
Hafizul Mukhlis
 

What's hot (16)

Charge
ChargeCharge
Charge
 
10000000013
1000000001310000000013
10000000013
 
Concentra agreement
Concentra agreementConcentra agreement
Concentra agreement
 
Gmx resources plan support agreement
Gmx resources plan support agreementGmx resources plan support agreement
Gmx resources plan support agreement
 
S. 2772
S. 2772S. 2772
S. 2772
 
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL DEPOSIT INSURANCE CORPORATIONFEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL DEPOSIT INSURANCE CORPORATION
 
Priority and alteration of priority
Priority and alteration of priorityPriority and alteration of priority
Priority and alteration of priority
 
25 No 1 J Bankr L And Prac NL Art 2
25 No 1 J Bankr L And Prac NL Art 225 No 1 J Bankr L And Prac NL Art 2
25 No 1 J Bankr L And Prac NL Art 2
 
Security dealings charge
Security dealings   chargeSecurity dealings   charge
Security dealings charge
 
The Small Business Reorganization Act of 2019
The Small Business Reorganization Act of 2019The Small Business Reorganization Act of 2019
The Small Business Reorganization Act of 2019
 
FindLaw | Madoff Trustee Report
FindLaw | Madoff Trustee ReportFindLaw | Madoff Trustee Report
FindLaw | Madoff Trustee Report
 
Vermont Fraudulent Transfer Laws
Vermont Fraudulent Transfer LawsVermont Fraudulent Transfer Laws
Vermont Fraudulent Transfer Laws
 
Lien and lien holder's caveat
Lien and lien holder's caveatLien and lien holder's caveat
Lien and lien holder's caveat
 
AMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCED
AMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCEDAMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCED
AMENDMENTS TO SARFAESI ACT/RULES/DRT ACT AND RULES WHICH HAVE BEEN ENFORCED
 
10000000032
1000000003210000000032
10000000032
 
Statutory lien
Statutory lienStatutory lien
Statutory lien
 

Viewers also liked

10000001212
1000000121210000001212
10000001212
CourtReads
 
Lodgenet petition
Lodgenet petitionLodgenet petition
Lodgenet petition
CourtReads
 
Brown publishing schedules
Brown publishing schedulesBrown publishing schedules
Brown publishing schedules
CourtReads
 
Lodgenet disclosure statement
Lodgenet disclosure statementLodgenet disclosure statement
Lodgenet disclosure statement
CourtReads
 
Flat out crazy first day decl
Flat out crazy first day declFlat out crazy first day decl
Flat out crazy first day decl
CourtReads
 
Flat out crazy petition
Flat out crazy petitionFlat out crazy petition
Flat out crazy petition
CourtReads
 
10000001201
1000000120110000001201
10000001201
CourtReads
 

Viewers also liked (7)

10000001212
1000000121210000001212
10000001212
 
Lodgenet petition
Lodgenet petitionLodgenet petition
Lodgenet petition
 
Brown publishing schedules
Brown publishing schedulesBrown publishing schedules
Brown publishing schedules
 
Lodgenet disclosure statement
Lodgenet disclosure statementLodgenet disclosure statement
Lodgenet disclosure statement
 
Flat out crazy first day decl
Flat out crazy first day declFlat out crazy first day decl
Flat out crazy first day decl
 
Flat out crazy petition
Flat out crazy petitionFlat out crazy petition
Flat out crazy petition
 
10000001201
1000000120110000001201
10000001201
 

Similar to Lodgenet first day decl

10000000012
1000000001210000000012
10000000012
Randall Reese
 
Patriot coal backstop purchase agreement
Patriot coal backstop purchase agreementPatriot coal backstop purchase agreement
Patriot coal backstop purchase agreement
Randall Reese
 
10000000015
1000000001510000000015
10000000015
Randall Reese
 
10000001202
1000000120210000001202
10000001202
CourtReads
 
10000001204
1000000120410000001204
10000001204
CourtReads
 
Rapid Rescore Compliance Infractions
Rapid Rescore Compliance InfractionsRapid Rescore Compliance Infractions
Rapid Rescore Compliance Infractions
NAMBLive
 
10000001208
1000000120810000001208
10000001208
CourtReads
 
10000001205
1000000120510000001205
10000001205
CourtReads
 
10000000050
1000000005010000000050
10000000050
Randall Reese
 
10000001203
1000000120310000001203
10000001203
CourtReads
 
10000001206
1000000120610000001206
10000001206
CourtReads
 
10000000008
1000000000810000000008
10000000008
Randall Reese
 
Distressed Securities Primer
Distressed Securities PrimerDistressed Securities Primer
Distressed Securities Primer
etzilianos
 
10000000007
1000000000710000000007
10000000007
Randall Reese
 
10000000028
1000000002810000000028
10000000028
Randall Reese
 
10000000010
1000000001010000000010
10000000010
Randall Reese
 
Lyon workspace employee motion
Lyon workspace employee motionLyon workspace employee motion
Lyon workspace employee motion
CourtReads
 
NBI, Inc. and William J. Amann, Esq. presents: The Automatic Stay and Bank...
NBI, Inc. and William J. Amann, Esq. presents:  The  Automatic  Stay and Bank...NBI, Inc. and William J. Amann, Esq. presents:  The  Automatic  Stay and Bank...
NBI, Inc. and William J. Amann, Esq. presents: The Automatic Stay and Bank...
William J. Amann
 
NBI Auto Stay April 2016
NBI Auto Stay April 2016NBI Auto Stay April 2016
NBI Auto Stay April 2016
William J. Amann
 
10000000011
1000000001110000000011
10000000011
Randall Reese
 

Similar to Lodgenet first day decl (20)

10000000012
1000000001210000000012
10000000012
 
Patriot coal backstop purchase agreement
Patriot coal backstop purchase agreementPatriot coal backstop purchase agreement
Patriot coal backstop purchase agreement
 
10000000015
1000000001510000000015
10000000015
 
10000001202
1000000120210000001202
10000001202
 
10000001204
1000000120410000001204
10000001204
 
Rapid Rescore Compliance Infractions
Rapid Rescore Compliance InfractionsRapid Rescore Compliance Infractions
Rapid Rescore Compliance Infractions
 
10000001208
1000000120810000001208
10000001208
 
10000001205
1000000120510000001205
10000001205
 
10000000050
1000000005010000000050
10000000050
 
10000001203
1000000120310000001203
10000001203
 
10000001206
1000000120610000001206
10000001206
 
10000000008
1000000000810000000008
10000000008
 
Distressed Securities Primer
Distressed Securities PrimerDistressed Securities Primer
Distressed Securities Primer
 
10000000007
1000000000710000000007
10000000007
 
10000000028
1000000002810000000028
10000000028
 
10000000010
1000000001010000000010
10000000010
 
Lyon workspace employee motion
Lyon workspace employee motionLyon workspace employee motion
Lyon workspace employee motion
 
NBI, Inc. and William J. Amann, Esq. presents: The Automatic Stay and Bank...
NBI, Inc. and William J. Amann, Esq. presents:  The  Automatic  Stay and Bank...NBI, Inc. and William J. Amann, Esq. presents:  The  Automatic  Stay and Bank...
NBI, Inc. and William J. Amann, Esq. presents: The Automatic Stay and Bank...
 
NBI Auto Stay April 2016
NBI Auto Stay April 2016NBI Auto Stay April 2016
NBI Auto Stay April 2016
 
10000000011
1000000001110000000011
10000000011
 

More from CourtReads

Flat out crazy ee motion
Flat out crazy ee motionFlat out crazy ee motion
Flat out crazy ee motion
CourtReads
 
Atari critical vendor motion
Atari critical vendor motionAtari critical vendor motion
Atari critical vendor motion
CourtReads
 
Atari petition
Atari petitionAtari petition
Atari petition
CourtReads
 
Lyon workspace petition
Lyon workspace petitionLyon workspace petition
Lyon workspace petition
CourtReads
 
Hostess arb cash collateral opinion
Hostess arb cash collateral opinionHostess arb cash collateral opinion
Hostess arb cash collateral opinion
CourtReads
 
10000001247
1000000124710000001247
10000001247
CourtReads
 
10000001246
1000000124610000001246
10000001246
CourtReads
 
10000001245
1000000124510000001245
10000001245
CourtReads
 
10000001244
1000000124410000001244
10000001244
CourtReads
 
10000001243
1000000124310000001243
10000001243
CourtReads
 
10000001242
1000000124210000001242
10000001242
CourtReads
 
10000001241
1000000124110000001241
10000001241
CourtReads
 
10000001240
1000000124010000001240
10000001240
CourtReads
 
10000001239
1000000123910000001239
10000001239
CourtReads
 
10000001237
1000000123710000001237
10000001237
CourtReads
 
10000001236
1000000123610000001236
10000001236
CourtReads
 
10000001235
1000000123510000001235
10000001235
CourtReads
 
10000001234
1000000123410000001234
10000001234
CourtReads
 
10000001233
1000000123310000001233
10000001233
CourtReads
 
10000001232
1000000123210000001232
10000001232
CourtReads
 

More from CourtReads (20)

Flat out crazy ee motion
Flat out crazy ee motionFlat out crazy ee motion
Flat out crazy ee motion
 
Atari critical vendor motion
Atari critical vendor motionAtari critical vendor motion
Atari critical vendor motion
 
Atari petition
Atari petitionAtari petition
Atari petition
 
Lyon workspace petition
Lyon workspace petitionLyon workspace petition
Lyon workspace petition
 
Hostess arb cash collateral opinion
Hostess arb cash collateral opinionHostess arb cash collateral opinion
Hostess arb cash collateral opinion
 
10000001247
1000000124710000001247
10000001247
 
10000001246
1000000124610000001246
10000001246
 
10000001245
1000000124510000001245
10000001245
 
10000001244
1000000124410000001244
10000001244
 
10000001243
1000000124310000001243
10000001243
 
10000001242
1000000124210000001242
10000001242
 
10000001241
1000000124110000001241
10000001241
 
10000001240
1000000124010000001240
10000001240
 
10000001239
1000000123910000001239
10000001239
 
10000001237
1000000123710000001237
10000001237
 
10000001236
1000000123610000001236
10000001236
 
10000001235
1000000123510000001235
10000001235
 
10000001234
1000000123410000001234
10000001234
 
10000001233
1000000123310000001233
10000001233
 
10000001232
1000000123210000001232
10000001232
 

Lodgenet first day decl

  • 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 78 UNITED STATES BANKRUPTCY COURT SOUTHERN 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 to the best of my knowledge, information, and belief: I. INTRODUCTION 1. I am a Senior Managing Director of FTI Consulting, Inc. (“FTI”) and a Co-Strategic Planning Officer (“SPO”) of LodgeNet Interactive Corporation (“LodgeNet Interactive” 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 parties with information regarding the recapitalization and reorganization of LodgeNet Interactive, as well as information regarding the circumstances that led to the commencement of these chapter 11 cases. 2. Simultaneously with the filing of this Affidavit, the Debtors have filed their chapter 11 plan of reorganization (the “Plan”), pursuant to which a group of investors led by Col-L Acquisition, LLC, (“Colony”), a subsidiary of Colony Capital, LLC (“Colony 1 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 Entertainment Corporation (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. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 2 of 78 Capital”), will invest at least $60 million in exchange for 100% of the common stock of reorganized LodgeNet Interactive (the “Colony Transaction”). The Colony Transaction was selected by the Debtors following a thorough search for potential acquirers or investors by the Debtors and their advisors. 3. On January 4, 2013, prior to the commencement of these cases, the Debtors began the solicitation of votes on their Plan, which is the means for implementation of the 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 pro rata share of an amended and restated credit facility (the “Exit Term Loans”). The only creditors entitled to vote under the Plan are the Prepetition Lenders under the Prepetition Credit Agreement (both defined below). As of the date hereof, over 56% of the Prepetition Lenders (as defined below), who are the only creditors entitled to vote on the Plan, and over 73% of the total amount of debt under the Prepetition Credit Agreement have voted to accept the Plan. As of the date hereof, no Prepetition Lenders have voted against the Plan. The voting deadline is February 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 maturity date, adjust the interest rate, modify certain financial covenants, and potentially bifurcate the loan into a first lien and a second lien piece. The Plan also contemplates the Debtors’ entry into a new agreement with DIRECTV pursuant to which DIRECTV will assume the cost of installation of systems in hotels and healthcare facilities, alleviating the Debtors of this expensive and cash intensive burden. Pursuant to the terms of the Plan, all allowed trade and other general unsecured creditors will be paid in full in cash on or shortly after the effective date of the Plan 2 US_ACTIVE:441276002259848.0004
  • 3. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 3 of 78 the “Effective Date”). Because the existing equity in LodgeNet Interactive will be cancelled and because the contemplated amendments to the Prepetition Credit Agreement require unanimous consent of the Prepetition Lenders, an out-of-court restructuring was not feasible, and a chapter 11 case is necessary to consummate the Colony Transaction. 5. Having already received the requisite votes in favor of the Plan, the Debtors 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 as practicable 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 the entertainment industries to the Debtors’ business. The Debtors seek to restructure their business to enable the implementation of the Colony Transaction and a modified business plan. Colony further intends to work with the Debtors to (a) improve the Debtors’ technology, systems and programming platforms, (b) offer multiple tiers of services to hotels, (c) work with hotels to enhance guest satisfaction and brand loyalty, and (d) increase advertising revenues. 7. In addition, I submit this Affidavit (the “Affidavit”) pursuant to Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of New York (the “Local Bankruptcy 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 meaning ascribed to that term in the relevant First Day Pleading. Any and all factual predicates for the 3 US_ACTIVE:441276002259848.0004
  • 4. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 4 of 78 relief sought in any of the First Day Pleadings that are set forth in such pleadings and not set forth 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 of the Debtors has filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). To enable the Debtors to operate effectively and minimize potential adverse effects from the commencement of their chapter 11 cases (the “Chapter 11 Cases”), the Debtors have requested 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 other things, to (a) schedule a hearing for the confirmation of the Plan and establish procedures for objections to the Plan, (b) enable the Debtors to obtain postpetition debtor in possession financing and use of cash collateral, (c) ensure the continuation of the Debtors’ cash management system and other business operations without interruption, (d) preserve valuable relationships with suppliers and customers, (e) maintain employee morale and confidence, and (f) establish certain administrative procedures that will promote a seamless transition into chapter 11. This relief is critical to the Debtors’ restructuring efforts. 11. Except as otherwise indicated, all facts set forth in this Affidavit (or incorporated by reference herein) are based upon my personal knowledge, my discussion with other members of the Debtors’ senior management, my review of relevant documents and the Debtors’ books and records, or my opinion based upon my experience and knowledge of the Debtors’ operations and financial condition. I am authorized to submit this Affidavit on behalf 4 US_ACTIVE:441276002259848.0004
  • 5. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 5 of 78 of 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 and their Chapter 11 Cases. Sections I through V of this Affidavit provide a description of the Debtors’ business, corporate history and organizational structure, capital structure, and the circumstances giving rise to the commencement of the Debtors’ Chapter 11 Cases. Section VI summarizes the First Day Pleadings and the relief they seek, which the Debtors believe is crucial to a successful reorganization. II. DEBTORS’ HISTORY AND BUSINESS A. Background 13. The Debtors are the leading provider of interactive media and connectivity services to the hospitality and healthcare industries in the United States. The Debtors primarily provide in-room television programming through their television and mobile-based platform, including, on-demand movies, music, sports programming and video games to hotels. The Debtors recently launched an application for use on mobile devices that connects users to the Debtors’ systems and programming. The Debtors provide interactive systems that enable hotels to provide guests with information about the hotel property and on-site amenities, as well as applications related to concierge services and travel related information, including updated flight times, weather and local entertainment. The Debtors sell advertising space within the television programming and on-demand content. 14. The Debtors also have a robust healthcare business providing interactive and media services to healthcare facilities throughout the United Stated, including in-patient and out-patient education and self-management support. The Debtors systems are installed in 82 healthcare facilities representing approximately 18,600 beds. 5 US_ACTIVE:441276002259848.0004
  • 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 Satellite Movie Company, which initially provided basic and premium television programming to hotels in the midwestern United States. Since that time, the Debtors have grown significantly and now provide television programming, pay per view movies, video games and internet connectivity to more than 1.5 million hotel rooms in over 6,800 hotels and reach more than 500 million guests annually. 16. The Debtors primarily operate in the United States. The Debtors also operate in Mexico and Macau, and have a non-Debtor subsidiary operating in Canada. Plus, the Debtors license their proprietary systems to third parties that provide services in 14 other countries. The Debtors’ corporate headquarters are located in Sioux Falls, South Dakota. 17. The Debtors maintain a critical office in New York City. Twelve employees work out of the New York City office, including, one of the Debtors’ senior executives, and President of LodgeNet Interactive’s Interactive & Media Networks division (“I&MN”). I&MN, under the management of the executive in New York City, includes operations 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 Command Corporation, 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, the Debtors’ management believes the advertising business has significant revenue growth potential and will become a larger part of the Debtors’ overall business in the future. Location in New 6 US_ACTIVE:441276002259848.0004
  • 7. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 7 of 78 York City is strategically important for the advertising business as it provides proximity to the large 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 to the moderate through luxury segments of the hospitality industry. The Debtors’ customers include hotel chains, ownership groups and management companies representing some of the finest hotels, including: Hilton Worldwide, Marriott International Inc., Ritz-Carlton, Starwood Hotels & Resorts, Four Seasons, Fairmont, Wyndham Hotels & Resorts, and the Las Vegas Sands Corporation, among others. 21. The Debtors have one of the most advanced interactive television distribution networks in the industry. The Debtors’ systems connect each hotel room television to a digital server located in each hotel where content is stored and continuously updated via satellite. The Debtors offer a variety of services of interest to hotels. Hotels can elect to receive combinations of the free-to-guest television services, on-demand video and game rentals, and the Debtors’ interactive and mobile platforms. 22. The Debtors provide television programming primarily through satellite services provided by DIRECTV and HBO and on-demand movie rentals through their relationships with the major Hollywood studios. The Debtors’ contracts with the movie studios enable them to offer guests newly released movies for viewing in an “early window,” when the theatrical 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-demand programming business represents approximately an 85% share of the video-on-demand services within the hospitality industry. 7 US_ACTIVE:441276002259848.0004
  • 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. The Envision Platform provides for high-definition (“HD”) interactive on-screen information about the hotel property and on-site amenities, as well as applications which link guests to hotel services, such as concierge services, room service and travel related information. Through Envision, the hotel customers are able to order from room service, check flight times and search for 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 and services. 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 older analog systems to interactive HD systems. As of December, 2012, the HD systems are installed in 379,600 rooms. 25. The Debtors also provide interactive television services to healthcare facilities with approximately 18,600 beds. In addition to television programming, the Debtors provide the healthcare facilities with custom welcome channels, hospital information channels, relaxation channels, music channels, interactive games, full length theatrical films, interfaces with hospital electronic medical records system to provide patient-specific educational programming and information about care providers, schedules and other information. Revenue from healthcare facilities is primarily generated from the sale of system hardware, software licenses annual content and programming fees and professional services. The Debtors’ healthcare facility platform is built on the same system architecture used in hotels, with 8 US_ACTIVE:441276002259848.0004
  • 9. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 9 of 78 additional 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 of travelers. As indicated above, more than 500 million guests a year stay in hotel rooms that have media services provided by the Debtors. Based on the type and location of specific hotels, the Debtors are able to provide targeted advertising opportunities to companies seeking access to desirable demographics of hotel guests. Through The Hotel Networks, Inc. (“THN”), which does business under the name LodgeNet Interactive Media and Entertainment (“Lime”), the Debtors provide traditional television advertising as well as on-screen advertising on certain dedicated channels and menus. Lime maintains is own website and marketing strategy. 27. The Debtors believe the advertising business has significant growth potential. The Debtors are negotiating an agreement with various parties that will permit the Debtors to insert a certain number of commercials into programming on certain channels on televisions in hotels. Through their relationships and equipment, the Debtors have the unique ability to target advertising which is tailored to the interests of the travelling public, which typically includes a higher proportion of highly-educated and affluent consumers, who represent a highly-desirable demographic to advertisers not reached as effectively by mass media generally. 28. Internet Access. The Debtors design, install and operate internet access systems at hotel properties. These systems permit a guest to log on to the wireless internet available in their room and access a LodgeNet Interactive provided webpage, on which the guest must either provide required information or pay for internet access. These systems control access to the internet and allow hotels to charge for and monitor usage. The Debtors provide 9 US_ACTIVE:441276002259848.0004
  • 10. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 10 of 78 ongoing maintenance of these systems, help-desk services, system monitoring and repair and maintenance 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 variety of the Debtors, almost all of the Employees are employed by LodgeNet Interactive. The Employees perform a variety of functions, including development of technologies and intellectual property used in the Debtors’ operations, managing relationships with studios and other content providers, as well as providing sales, accounting, marketing, field service, customer service and legal services, among others. None of the Debtors’ Employees are unionized. The Debtors also employ a limited number of independent contractors to install the equipment in hotels and healthcare facilities and perform other tasks as necessary. As of the Petition Date, the Debtors estimate that the aggregate amount of accrued, but unpaid wage obligations for employees is approximately $1.3 million. 30. In connection with the Debtors’ efforts to enter into a restructuring transaction, the board of directors of LodgeNet Interactive determined it was in the best interests of the Company to implement incentive and retention programs for those employees considered critical to maintaining operations unabated until a transaction could be consummated. As a result, on November 21, 2012, the compensation committee of the board of directors of LodgeNet Interactive approved a key employee incentive plan (a “KEIP”), which provides for payments to seven of LodgeNet Interactive’s senior executives, and a key employee retention plan 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 – 10 US_ACTIVE:441276002259848.0004
  • 11. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 11 of 78 25% of their respective salaries. Half of this amount was paid December 2012 and the other half is 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 these employees must remained employed by the Debtors, unless terminated without cause or the employee 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 aggregate amount of approximately $1.1 million would be paid to 7 employees. Similar to the KERP, the KEIP contemplates two payments – one paid in December 2012 and the other upon the earlier to occur of the closing of a restructuring transaction or July 31, 2013, so long as the employee remains employed by the Debtors, unless terminated without cause or the employee resigns for good 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 per quarter and fluctuates by 2% for every 1% over or under the applicable EBITDA target. No second payment is made if the Debtors do not achieve at least 85% of the EBITDA target and the second payment is capped at 125% of the EBITDA target or $1,096,000. 33. While the KEIP originally included 7 employees, after successfully guiding the Debtors through a strategic review process culminating in entry into the Investment Agreement, Richard Battista resigned as President and Chief Executive Officer of LodgeNet Interactive, effective January 16, 2013. Following Mr. Battista’s resignation, Frank Elsenbast, Chief Financial Officer, and James Naro, General Counsel, were named to concurrently serve as interim Co-Chief Executive Officers. While there was no adjustment to their salaries, in recognition of their increased duties, their payments under the KEIP were increased by $25,000 11 US_ACTIVE:441276002259848.0004
  • 12. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 12 of 78 each. 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 the Form 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 a general 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 other Debtors. LodgeNet Interactive is a publicly owned company. Each Debtor, other than Hotel Digital Network, Inc., is a Delaware corporation. Hotel Digital Network, Inc. is a corporation organized 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 Debtors generally conduct their business through, and most contracts are held in the name of, LodgeNet Interactive. 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”, was delisted from the NASDAQ on January 14, 2013. The common stock is currently traded on the OTC Bulletin Board. As of December 31, 2012, there were approximately 27,943,018 shares of common stock outstanding and 50,516 shares outstanding of LodgeNet Interactive’s 10% Series 2 The description herein of the Debtors’ debt documents is for informational purposes only and is qualified in its entirety by the actual terms of the referenced documents. 12 US_ACTIVE:441276002259848.0004
  • 13. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 13 of 78 B Cumulative Convertible Perpetual Preferred Stock. LodgeNet Interactive directly or indirectly owns 100% of the equity of each of the other Debtors. 37. Indebtedness. LodgeNet Interactive is the obligor under a Credit Agreement, dated as of April 4, 2007 (as may be amended, supplemented, restated or otherwise modified prior to the Petition Date, the “Prepetition Credit Agreement”), among LodgeNet Interactive, Gleacher Products Corp., as administrative agent (the “Administrative Agent”), and the lenders that are parties thereto from time to time (the “Prepetition Lenders”). The Prepetition Credit Agreement originally provided LodgeNet Interactive with up to $625,000,000 in 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 amount of 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 of revolving commitments available thereunder was reduced to $25,000,000 with the sublimit for letters of credit reduced to $7,500,000. As of December 31, 2012, the approximate outstanding principal, interest (accruing at the default rate) and fees owing under the Prepetition Credit Agreement was $332,628,759 under the term loan (net of the portion owned by On Command Video Corporation, one of the Debtors in these cases), and $21,492,008 in borrowings under the revolver, with an additional $350,000 of issued and outstanding letters of credit. These amounts exclude the $20,624,513 amount outstanding under the Prepetition Credit Agreement held by On Command Video Corporation, which will be waived and disallowed under the Plan. 38. To secure the obligations under the Prepetition Credit Agreement, the Debtors entered into the Guarantee and Collateral Agreement, dated as of April 4, 2007, among the Debtors (other than LodgeNet Interactive, each of the Debtors, in its capacity as guarantor 13 US_ACTIVE:441276002259848.0004
  • 14. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 14 of 78 under 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 of LodgeNet Interactive under the Prepetition Credit Agreement, and (b) each of the Debtors granted 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 financial statements reflected assets totaling approximately $292 million and liabilities totaling approximately $449 million. The Debtors’ total revenues for the three-month period ended on September 30, 2012 amounted to approximately $91 million, a 15% decrease over total revenues for the same period in 2011. VI. CIRCUMSTANCES GIVING RISE TO THE DEBTORS’ CHAPTER 11 FILING A. 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 hotel rooms in which the Debtors’ systems are available and the revenue generated per room. The Debtors’ room base has declined from a peak of 2 million in 2009 to 1.5 million as of today. 14 US_ACTIVE:441276002259848.0004
  • 15. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 15 of 78 Further, the average monthly revenue per room has declined from $24.53 in 2007 to $20.71 today. There are a variety of macro-economic and industry specific reasons for these declines. 42. Declines in revenue are attributable to multiple causes, including declining room base, source and cost of alternative source of programming and content, reduced demand for full-length theatrical programming by business travelers with increasingly reduced in-room “free-time,” higher quality mobile devices, reductions to discretionary spending by travelers due to an uncertain economic environment, and inadequate capital to hasten the pace in upgrading existing rooms to HD, which is necessary to meet consumer expectations for an “at home” HD experience. 43. In particular, the Debtors’ business has been negatively impacted by the mobile device revolution. In the past few years, there has been a dramatic increase in the number of hotel guests traveling with laptop computers, tablets, and other mobile devices. The ability of guests to view programming on their individual devices on Netflix, Hulu, Amazon and other streaming websites, at lower prices than the Debtors’ on-demand services, has decreased the purchase rate per room. The Debtors believe that guests will usually gravitate to the largest and best screen available for their media content, and therefore, with the upgrades to the HD platform and the Debtors’ other programming options, they can reverse the trend of decreasing revenue per room. 44. The Debtors’ ability to maintain their room base is dependent largely on the quality and breadth of service offered by the Debtors, the pricing of alternative television providers, the extent to which the hotel brands consider video-on-demand to be a brand standard for their franchisees, and the price-sensitivity of the hospitality market in relation to initial installation and set-up costs. In recent periods, some hotels have replaced the Debtors’ services 15 US_ACTIVE:441276002259848.0004
  • 16. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 16 of 78 with services obtained from local cable providers. Cable operators are able to offer lower fees for television channels that are provided free to guests, and generally do not require capital expenditures by the hotels to upgrade to HD systems. Moreover, hotels may believe that with the large number and breadth of cable television channels, video on demand is not a necessary service. Certain hotels have also replaced LodgeNet Interactive with services of competitors which are much smaller in size than the Debtors but offer similar products and services. Certain lower and mid-range hotels have been reluctant to share in the additional up-front costs associated with HD video-on-demand upgrades and elected to no longer offer on-demand movies, music or video game options to their guests. 45. Hotels that have terminated the Debtors’ services have criticized the Debtors’ complicated pricing structure and contracts, requirement for long-term contracts and delays in the installation process. The Debtors’ management is diligently working to streamline their 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 purchases of programming from the Debtors. Declining occupancy rates in such period also hampered the desire and ability of numerous hotels to upgrade their televisions and systems to offer the HD platform, which further impaired revenue growth as rooms with the HD platform generate approximately 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 been unable 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 16 US_ACTIVE:441276002259848.0004
  • 17. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 17 of 78 was caused by declining revenues, as well as significant prepayments to the Debtors’ lenders under the Prepetition Credit Agreement. 48. The Prepetition Credit Agreement includes certain financial covenants, the violation of which constitute events of default. One of the financial covenants required the Debtors to maintain a Consolidated Leverage Ratio of no more than 4.00:1.00 for the four fiscal quarters ending September 30, 2012 and 3.75:1.00 for the four fiscal quarters ending December 31, 2012. The Consolidated Leverage Ratio calculates the consolidated total debt divided by the consolidated EBITDA for the applicable period. As the Debtors’ revenues have declined, it has been more difficult for the Debtors to satisfy the covenant. To comply with the financial covenant and avoid an event of default under the Prepetition Credit Agreement, the Debtors made prepayments to the Prepetition Lenders, which reduced the total debt. The Debtors 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 the Prepetition 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 the Debtors’ ability to make essential capital expenditures to enhance their business. 49. The Debtors did not satisfy the Consolidated Leverage Ratio for the third quarter of 2012. In addition, the Debtors did not make scheduled interest and principal payments under the Prepetition Credit Agreement due to the Prepetition Lenders on December 31, 2012 in the approximate amount of $10 million. The Prepetition Lenders agreed to forbear from exercising remedies under the terms of the Prepetition Credit Agreement as a result of the breach of the Consolidated Leverage Ratio and the failure to make interest and principal payments until February 5, 2013. 17 US_ACTIVE:441276002259848.0004
  • 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 certain payments due to several of their vendors in 2012. Specifically, as of September 2012, the Debtors had large overdue amounts due to DIRECTV and HBO. To prevent certain vendors from terminating services that would have irreparably damaged the Debtors’ business, the Debtors 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 Debtors have payments in the amount of $36 million due to DIRECTV and HBO, in the aggregate, on or before February 5, 2013. The Debtors do not have available funds to make these payments to DIRECTV and HBO. C. Restructuring Efforts and Negotiations 1. Reduction in Costs and Management Changes 51. In response to the declining revenues from on-demand guest entertainment, in recent years, the Debtors have sought to diversify their revenue streams. The Debtors have attempted to increase their room base in healthcare facilities and are working to implement a network that will enable direct advertising. Further, the Debtors recently launched the Envision platform to align their product offerings with increased customer focus on the promotion of hotel services and the Mobile application to build consumer loyalty and offer additional guest services before, during and after their hotel stays. 52. Despite the recent attempts at diversification, the Debtors’ financial situation continued to deteriorate. In response, the Debtors’ management took decisive action to reduce costs and improve performance. The Debtors have decreased their head count, frozen salaries, suspended issuance of bonuses, eliminated 401(k) match, imposed unpaid furloughs, 18 US_ACTIVE:441276002259848.0004
  • 19. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 19 of 78 and restricted other benefits, including vacation. Further, the Debtors’ senior management became intimately involved with seeking to stem the decrease in the room base and reviewed each termination notice and determined strategy for keeping the hotel and avoiding future terminations. 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 the business. Mr. Battista promptly reached out to important vendors and numerous customers to smooth over the business relationships between LodgeNet Interactive and such parties. Mr. Battista also accelerated negotiations with the lenders and potential investors. As discussed above, on January 16, 2013, Mr. Battista resigned as LodgeNet Interactive’s CEO and a member of the board of directors. 54. In December 2010, the Debtors hired JPMorgan to explore strategic opportunities, including refinancing, investments or sales. JPMorgan contacted numerous parties regarding a potential transaction. Ten entities expressed interest and conducted diligence on the Debtors’ business and in July and August 2012, one entity proposed a merger, one entity proposed a debt restructuring, and Colony proposed an investment transaction. No transaction was entered into during the term of JPMorgan’s engagement. The Debtors have continued to work with Andrew Sriubas, who had been with JPMorgan and is now affiliated with Moorgate Securities LLC (“Moorgate”) to search for potential opportunities. 55. In August 2012, the Debtors retained Miller Buckfire & Co. (“Miller Buckfire”) to seek and evaluate refinancing and other strategic alternatives. Miller Buckfire was 19 US_ACTIVE:441276002259848.0004
  • 20. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 20 of 78 assisted in this effort by Mr. Sriubas and his knowledge of the prior process. The Debtors also retained 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 were determined to be the parties most likely to submit substantial and legitimate bids. Nine of such parties expressed interest and were invited to conduct diligence and submit bids for a refinancing, restructuring, or acquisition transaction. In light of the Debtors’ deteriorating liquidity position, the Debtors and Miller Buckfire, assisted by Mr. Sriubas, conducted a process pursuant to which interested parties were asked to submit an offer by October 19, 2012. The Debtors received two offers in connection with such process, one from Colony Capital, and one from a strategic company in the media business. The Debtors’ board of directors and management considered both offers and decided the Colony Capital offer was significantly better for 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 in discussions with the Debtors for more than a year regarding a potential investment. On December 30, 2012, the Debtors entered into an Investment Agreement with Colony and certain other investors, a copy of which is attached to the Plan. The Colony Transaction described in the Investment Agreement provides for the investment by a group of investors led by Colony of at least $60 million of new capital in exchange for 100% of the common stock in LodgeNet Interactive. The new capital will enable the Debtors to implement their business plan. Further, Colony’s significant investments, experience and relationships in the hospitality and entertainment industries, as well as direct investment in the healthcare sector, provide opportunities for the growth of the Debtors’ business. More specifically, Colony has ownership 20 US_ACTIVE:441276002259848.0004
  • 21. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 21 of 78 interests 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 the Prepetition 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 Plan Support and Lock-Up Agreement (the “Plan Support Agreement”) with Prepetition Lenders holding approximately 44% of the claims under the Prepetition Credit Agreement. Under the Plan Support Agreement, the Prepetition Lenders party thereto agreed to support and vote in favor of the Plan which incorporates the Colony Transaction. 59. The Colony Transaction also contemplates an agreement between the reorganized Debtors and DIRECTV that would replace the current DIRECTV agreement, create more of a partnership relationship between the Debtors and DIRECTV and ensure the single most important vendor continues to do business with the Debtors and supports the reorganization. Colony has entered into a memorandum of understanding (the “MOU”) regarding the terms of the ultimate agreement to be negotiated between such parties. The MOU provides that under the agreement to be entered into upon the closing of the Colony Transaction DIRECTV will (a) provide certain “free-to-guest” and pay-per-view programming, (b) allow Reorganized LodgeNet Interactive to provide certain authorized transport services in respect of DIRECTV programming, (c) allow Reorganized LodgeNet Interactive to remove and replace certain advertising content contained in DIRECTV programming, (d) provide a financing facility relating to the installation costs for equipment in hotels, (e) provide for collaboration between Reorganized LodgeNet Interactive and DIRECTV with respect to upgrading and improving guest entertainment systems; (f) provide for fees and revenue sharing arrangements between the 21 US_ACTIVE:441276002259848.0004
  • 22. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 22 of 78 parties, (g) provide a schedule for the payment over time of pre-petition amounts due to DIRECTV, and (h) include such other terms as mutually agreed by the parties. The terms of the final agreement are subject to further negotiation between Colony and DIRECTV. 60. The Debtors intend to implement the transaction with Colony through the Plan 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 22 US_ACTIVE:441276002259848.0004
  • 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 determined that implementation of the Colony Transaction as set forth in the Investment Agreement through the commencement of these Chapter 11 Cases was a prudent and necessary step to maximize the value of the Debtors’ businesses and was in the best interest of the Debtors’ constituents. The Debtors will consider any other proposal brought to their attention prior to the confirmation of the Plan that in the Debtors’ opinion is higher and better than the Colony Transaction. The Debtors continue to believe in their business judgment that the Colony Transaction is in the best interest of all of the Debtors’ creditors. 3. DIP Credit Facility 62. The Debtors may require additional liquidity to complete the chapter 11 Plan confirmation process and to implement the Colony Transaction. Therefore, the Debtors have 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 the continued operation of the Debtors’ businesses, avoid short-term liquidity concerns, and preserve the going-concern value of the Debtors’ estates prior to consummation of the Colony Transaction. The incremental availability under the DIP Loan provides added comfort to the Debtors’ vendors and customers that the Debtors will have sufficient liquidity to continue to operate in the ordinary course. The DIP Loan provides up to $15 million of new financing to the Debtors. The Debtors have agreed to pay certain fees to the DIP Lenders in connection with their agreement to provide the DIP Loan. These fees are reasonable and consistent with fees 23 US_ACTIVE:441276002259848.0004
  • 24. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 24 of 78 paid 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; 24 US_ACTIVE:441276002259848.0004
  • 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 the following First Day Pleadings, which they believe, and I agree, are necessary to enable their business to operate with a minimum of disruption and loss of productivity. The Debtors intend to seek entry of Court orders approving each of the First Day Pleadings as soon as possible in accordance 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 Debtors request that the Court authorize and direct the joint administration of these Chapter 11 Cases and the consolidation thereof for procedural purposes only. 65. The Debtors believe that many, if not all, of the motions, applications, and other pleadings filed in these Chapter 11 Cases will relate to relief sought jointly by all of the Debtors. 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 allowing these Chapter 11 Cases to be administered as a single joint proceeding instead of eleven independent Chapter 11 Cases. 66. Joint administration of these Chapter 11 Cases will create a centralized location for the numerous documents that are likely to be filed and served in these cases by the 3 The summary of each First Day Pleading contained herein is for reference only. Please refer to the applicable First 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 11 Cases 25 US_ACTIVE:441276002259848.0004
  • 26. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 26 of 78 Debtors, creditors, and parties in interest, and for all notices and orders entered by the Court. A single docket will also make it easier for all parties in each of the Chapter 11 Cases to stay apprised of all of the various matters before the Court. The Debtors will also likely realize substantial cost savings and reduced administrative burdens by sending notices to a single matrix of 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 the best interest of the Debtors, their estates and creditors, and other all parties in interest in these Chapter 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”), the Debtors 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 Kurtzman Carson Consultants LLC as notice and claims processing agent (the “KCC”) in these Chapter 11 Cases. As soon as practicable after entry of an order granting the requested waiver of the requirement to file a list of creditors, the Debtors will furnish their list of creditors to KCC so that KCC may undertake the mailing of the Combined Notice (as defined below) to the parties on the Debtors’ list of creditors. Creditors and equity security holders will be notified of the commencement of these cases through their receipt of the Combined Notice. 69. Given that KCC will receive a list of creditors and equity security holders and 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 no 5 Debtors’ Motion Pursuant to Sections 105(a), 342(a), and 521(a)(1) of the Bankruptcy Code, Bankruptcy Rules 1007(a) and 2002(a), (f), (l) and (m), and 9007, and Local Bankruptcy Rule 1007-1 for A Waiver of the Requirement to File a List of Creditors and Equity Security Holders 26 US_ACTIVE:441276002259848.0004
  • 27. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 27 of 78 useful purpose. Pursuant to Standing Order 192, as incorporated by Local Bankruptcy Rule 1007-1, the Debtors have consulted with the Clerk of the Bankruptcy Court who has granted permission to forego the requirement that the Debtors file a list of creditors and equity security holders and has instructed the Debtors to provide the list of creditors and equity security holders to KCC, as proposed. 70. For the foregoing reasons, the Debtors believe, and I agree, that it is in the best interest of the Debtors, their estates and creditors, and other all parties in interest in these Chapter 11 Cases that the Court grant the relief requested in the Creditor and Equity List Waiver Motion. Waiver of Requirement to File Schedules and Statements 71. By this motion6 (the “Schedules Waiver Motion”), the Debtors request the Bankruptcy Court conditionally waive the requirement for the Debtors to file schedules of assets and liabilities, schedules of executory contracts and unexpired leases, and statements of financial affairs (collectively, the “Schedules and Statements”) subject to the confirmation of the Debtors’ Plan within sixty (60) days following the Petition Date or such later date as the Bankruptcy Court may determine (“Deadline for Waiver”). Further, to the extent the Plan is not confirmed within such time period, the Schedules Waiver Motion requests, an extension of the deadline 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 and Statements is appropriate in a case such as this, where the Debtors have already commenced solicitation of a Plan. In general, a debtor is required to file the Schedules and Statements to 6 Motion Pursuant to Sections 105(a) and 521 of the Bankruptcy Code, Fed. R. Bankr. P. 1007 (I) Waiving the Requirement to File the Schedules of Assets and Liabilities and Statements of Financial Affairs Upon Confirmation of Debtors’ Prepackaged Plan and (II) Extending Time for Debtors to File the Same 27 US_ACTIVE:441276002259848.0004
  • 28. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 28 of 78 permit parties in interest to understand and assess the debtors’ assets and liabilities and thereafter negotiate and confirm a plan of reorganization. In these Chapter 11 Cases, the Debtors have already negotiated a plan of reorganization and are in the process of soliciting votes from those parties entitled to vote thereon. Accordingly, one of the primary justifications for requiring the filing of Schedules and Statements does not exist in these cases. 73. In addition, much of the information that would be contained in the Schedules and Statements is already available in the Disclosure Statement to the Plan. To require the Debtors to file the Schedules and Statements would be duplicative and unnecessarily burdensome and costly to the Debtors’ estates. 74. For the foregoing reasons, the Debtors believe, and I agree, that it is in the best interest of the Debtors, their estates and creditors, and other all parties in interest in these Chapter 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 to establish certain notice, case management and administrative procedures in these Chapter 11 Cases. 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 11 Cases will preserve value and ultimately inure to the benefit of the Debtors and their estates. For the foregoing reasons, the Debtors believe, and I agree, that it is in the best interest of the Debtors, their estates and creditors, and other all parties in interest in these Chapter 11 Cases that the 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 Bankruptcy Rules 1015(c) and 9007 Implementing Certain Notice and Case Management Procedures 28 US_ACTIVE:441276002259848.0004
  • 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 and noticing agent for the Debtors during these Chapter 11 Cases. Prior to selecting KCC, the Debtors solicited bids from two other approved claims agents, all of whom have been approved by this Court to serve as claims and noticing agents. 77. Based on KCC’s experience in providing similar services in other Chapter 11 Cases, I believe that KCC is qualified to serve as the claims and noticing agent in these Chapter 11 Cases. A detailed description of the services that KCC has agreed to render and the compensation and other terms of the engagement are provided in the KCC Retention Application and the Affidavit of Albert Kass in Support of the Debtors’ Application for Authority to Retain and Appoint Kurtzman Carson Consultants LLC attached to the KCC Retention Application. 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 cost effective methods and that retention of KCC is appropriate and in the best interest of the Debtors and their estates. Retention of Ordinary Course Professionals Motion 79. By this motion,9 (the “OCP Motion”) the Debtors seek to establish procedures 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 the Debtors 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-409 9 Motion of the Debtors for Authorization to Employ Professionals Used in the Ordinary Course of Business Pursuant to Sections 105(a), 327, and 330 of the Bankruptcy Code 29 US_ACTIVE:441276002259848.0004
  • 30. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 30 of 78 The proposed procedures would authorize the Debtors to compensate and reimburse such professionals without individual fee applications, and authorize the Debtors’ insurance companies to retain counsel to represent the Debtors in actions in which the insurance companies typically retain and pay counsel on the Debtors’ behalf without further action or order of the Court. 80. The Debtors desire to continue to employ the Ordinary Course Professionals to render a variety of professional services to their estates in the same manner and for the same purposes as the Ordinary Course Professionals did prior to the Petition Date. In the past, these professionals have rendered a range of professional legal services relating to matters, including, but not limited to, litigation, intellectual property, corporate requirements, tax, real estate, and employment. It is essential that the employment of these Ordinary Course Professionals, many of whom are already familiar with the Debtors’ business and financial affairs, be continued so as to avoid disruption of the Debtors’ normal business operations. 81. The proposed employment of the Ordinary Course Professionals and the payment of monthly compensation on the basis set forth below are in the best interest of the Debtors’ estates. The relief requested will save the estates the substantial expenses that would be associated with applying separately for the employment of each Ordinary Course Professional. Further, the relief requested will avoid the incurrence of additional fees relating to the preparation and prosecution of interim fee applications. As part of the procedures, the Debtors propose that the Ordinary Course Professional’s total compensation and reimbursement shall not exceed $35,000 for each three month period starting from the first full month following the commencement of this chapter 11 case (the “Quarterly Cap”) and payment to any one Ordinary 30 US_ACTIVE:441276002259848.0004
  • 31. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 31 of 78 Course Professional will not exceed $70,000 for the entire period in which this chapter 11 case is pending, subject to further Order of the Court. 82. In light of the additional costs associated with the preparation of employment applications for professionals who will receive relatively small amounts of fees in comparison to the size of this chapter 11 case, it is impractical and economically inefficient for the Debtors to submit individual applications and proposed retention orders for each Ordinary Course Professional as required by Bankruptcy Rules 2014 and 2016. Accordingly, the Debtors request that the Court dispense with the requirement of individual employment applications and retention orders with respect to each Ordinary Course Professional. 83. For the foregoing reasons, the Debtors believe, and I agree, that implementation of the procedures for retention and payment of Ordinary Course Professionals, is in the best interest of the Debtors, their estates and creditors, and all parties in interest in these Chapter 11 Cases. Interim Compensation Motion 84. By this motion,10 (the “Interim Compensation Motion”) the Debtors seek entry of an order implementing certain procedures (the “Interim Comp Procedures”) for the orderly submission, review, and adjudication of applications for the interim compensation of fees and reimbursement of expenses of attorneys and other professionals retained pursuant to sections 327 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 of Professionals Pursuant to Sections 330 and 331 of the Bankruptcy Code and Bankruptcy Rule 2016 31 US_ACTIVE:441276002259848.0004
  • 32. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 32 of 78 counsel to the Debtors, (iii) Miller Buckfire & Co., LLC, as financial advisor and investment banker to the Debtors, (iv) FTI Consulting, Inc., as financial advisor and restructuring advisor to the Debtors, (v) Moorgate Securities, LLC, as investment banker to the Debtors; (vi) Kurtzman Carson Consultants, LLC, as claims agent and noticing agent to the Debtors; (vii) PricewaterhouseCoopers LLP, as independent accountant to the Debtors; and (viii) Deloitte Tax LLP, as tax advisor to the Debtors. The Debtors anticipate that, as these cases progress, they may need to retain other professionals in connection with the administration of this case. 86. To streamline the professional compensation process and enable the Court and all other parties to more effectively monitor the professional fees incurred in these chapter 11 cases, the Debtors propose the Court implement the Procedures, which substantially conform with the requirements of Rule 2016-1 of the Local Bankruptcy Rules for the Southern District of New York and the Court’s standing General Order M-412, dated December 21, 2010. 87. The proposed Interim Compensation Procedures will enable the Debtors to closely monitor the costs of administration, forecast cash flows, and implement efficient cash management procedures. They also will allow the Court and the key parties in interest, including the U.S. Trustee, to ensure the reasonableness and necessity of the compensation and reimbursement requested. 88. For the foregoing reasons, the Debtors believe, and I agree, that implementation of the Procedures for the submission, review and adjudication of applications for the interim compensation of fees and reimbursement of the Professions, is in the best interest of the Debtors, their estates and creditors, and all parties in interest in these Chapter 11 Cases. 32 US_ACTIVE:441276002259848.0004
  • 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 Debtors seek entry of an order (a) scheduling a hearing (the “Combined Hearing”) on (i) the adequacy of the disclosure in the Disclosure Statement and the prepetition solicitation procedures used in connection 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 Disclosure Statement, solicitation procedures, and the Plan, (c) approving the form, manner and sufficiency of notice (the “Combined Notice”) of the Combined Hearing, commencement of these Chapter 11 Cases, and the scheduling and deferral of the meeting of creditors and equity holders pursuant to section 341(a) of the Bankruptcy Code (the “Section 341(a) Meeting”) until confirmation of the Plan; (d) directing that the Section 341(a) Meeting is deferred until confirmation 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) establishing procedures for noticing of, and objecting to, the Debtors’ possible assumption and proposed cure of executory contracts and unexpired leases; (f) authorizing the Debtors to file the Notice Affidavits of Service (as defined below) partially under seal; and (g) granting related relief. 90. In connection with the Plan, the Debtors prepared the Disclosure Statement which describes the terms of the Plan and the effect of the Plan on the holders of claims against and interests in the Debtors. The Debtors, through KCC, distributed copies of the Disclosure 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 Prepetition Solicitation Procedures and Confirmation of Plan, (B) Establishing Procedures for Objecting to Disclosure Statement, Solicitation Procedures, and Plan, (C) Approving Form, Manner, and Sufficiency of Notice of the Combined 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 and Proposed Cure of Executory Contracts and Unexpired Leases (F) Authorizing Debtors to File the Notice Affidavits of Service Partially Under Seal; and (G) Granting Related Relief 33 US_ACTIVE:441276002259848.0004
  • 34. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 34 of 78 and a ballot to each of the Prepetition Lenders. For purposes of the solicitation, Gleacher Products Corp, the Administrative Agent for the Prepetition Lenders, provided the Debtors with list of Prepetition Lenders as of January 2, 2013 (the “Voting Record Date”). In accordance with nonbankruptcy 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 or rejection of the Plan. Other than the Prepetition Lenders, no other classes of creditors or interest holders are entitled to vote on the Plan. As of the date hereof, votes accepting the Plan have been cast in excess of the statutory thresholds specified in section 1126(c) of the Bankruptcy Code 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 amount and 73% in number of holders of claims in Class 2 voted to accept the Plan. Furthermore, all of the holders of claims in Class 2 that voted on the Plan prior to the Petition Date voted to accept the Plan. 91. The Debtors will continue to accept votes on the Plan following the Petition Date through the Voting Deadline. After expiration of the Voting Deadline, the Debtors will file a declaration certifying the results and the methodology for tabulation of ballots accepting or rejecting the Plan. 92. The Investment Agreement contains a termination provision which impacts the timeline of these Chapter 11 Cases. More specifically, the Investment Agreement (as subsequently amended by the parties) may be terminated, and the transactions contemplated thereunder, including the Investors’ investment on the Effective Date, abandoned, by the Purchaser Representative if an order confirming the Plan is not entered by the Bankruptcy Court within sixty (60) days after the Petition Date. (See Investment Agreement, at section 4.4(b)(ix)). 34 US_ACTIVE:441276002259848.0004
  • 35. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 35 of 78 The Plan Support Agreement also contains a termination provision if the Plan is not confirmed within sixty (60) days after the Petition Date (See Plan Support Agreement, at section 5(d)(iv)). 93. Accordingly, the Confirmation Procedures Motion also asks the Bankruptcy Court to schedule the Combined Hearing, subject to the Court’s schedule, on March 8, 2013. The Debtors also request that the Bankruptcy Court set the deadline to file objections to the adequacy of the Disclosure Statement, solicitation procedures, and confirmation of the Plan, and approve the form, manner, and sufficiency of the Combined Notice, which sets forth, among other things, notice of the commencement of the Debtors’ Chapter 11 Cases; the date, time, and place of the Combined Hearing; instructions for obtaining copies of the Disclosure Statement and Plan; a summary of the Plan, including a chart summarizing plan distributions; and the deadline and procedures for objecting to the Disclosure Statement, the Solicitation Procedures, and confirmation of the Plan. The Combined Notice also informs parties in interest of (i) the scheduling and deferral of the Section 341(a) Meeting until confirmation of the Plan; and (ii) the fact that such meeting will not be convened if the Plan is confirmed within sixty (60) days after the Petition Date. Furthermore, the Debtors request in the Confirmation Procedures Motion that the Bankruptcy Court defer the Section 341(a) Meeting until confirmation of the Plan and direct that the Section 341(a) Meeting 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. 94. Moreover, the Confirmation Procedures Motion asks the Bankruptcy Court to bless the procedures for notice of the Debtors’ possible assumption and proposed cure of executory contracts and unexpired leases and the filing of objections thereto, such procedures being consistent with the Debtors’ obligations under the Investment Agreement and the terms of 35 US_ACTIVE:441276002259848.0004
  • 36. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 36 of 78 the Plan. Specifically, pursuant to Section 7.2(c) of the Investment Agreement (as subsequently amended by the parties), the Debtors must serve or caused to be served, within three (3) business days after the entry of the Scheduling Order, a notice by first class mail on all counterparties to executory contracts and unexpired leases to which the Debtors are party (with certain limited exceptions). 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 that any objections to the possible assumption, proposed cure, “adequate assurance of future performance,” the proposed postpetition interest rate set based on the Federal Judgment Rate, or other 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 a reasonable means for the noticing of parties to executory contracts and unexpired with the Debtors while also protecting the due process rights of such parties. Moreover, the deadline to object to the possible assumption, proposed cure, proposed postpetition interest rate set based on the Federal Judgment Rate or related issues is reasonable and allows parties to executory contracts or unexpired leases that are served with an Assumption/Cure Notice with ample time to object. These procedures were negotiated with Colony and are a critical part of the proposed restructuring of the Debtors. 95. Finally, the Confirmation Procedures Motion seeks authorization to file the affidavits of service filed, or caused to be filed, by the Debtors in connection with the Assumption/Cure Notice and Combined Notice (together, the “Notice Affidavits of Service”) partially under seal. The identity of the Debtors’ customers is confidential commercial information and is highly sensitive with respect to the Debtors’ business and ongoing relationship with such parties. Accordingly, portions of the Notice Affidavits of Service – 36 US_ACTIVE:441276002259848.0004
  • 37. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 37 of 78 namely, 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. The disclosure of sensitive commercial information with respect to the Debtors’ relationship with certain of their major customers would be detrimental to the Debtors’ competitive position in the industry as it would harm the Debtors’ ability to negotiate for the best terms with commercial partners and risk the Debtors’ competitors “poaching” their customers. 96. For the foregoing reasons, the Debtors believe, and I agree, that the relief requested in the Confirmation Procedures Motion, is in the best interest of the Debtors, their estates 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”), the Debtors seek authority to pay certain prepetition accrued, but unpaid, wages, salaries, other compensation and benefits, and obligations related thereto and to continue their employee benefit programs postpetition. The Debtors employ approximately 770 full-time employees on both a salaried and hourly basis. In the ordinary course of business, the Debtors incur obligations related to the payment of Wage Obligations, the Payroll Maintenance Fee, Withholding Obligations, Reimbursement Obligations, Commission Obligations, Contract Worker Obligations, Independent Director Obligations, and other compensation obligations (as such terms are defined in the Employee Wages and Benefits Motion). Moreover, the Debtors incur other obligations in the ordinary course of business related to the maintenance of certain 12 Debtors’ Motion for Interim and Final Orders Pursuant to Sections 105(a), 363(b), and 507(a) of the Bankruptcy Code and Bankruptcy Rules 6003 and 6004 Authorizing (A) Payment of Prepetition Wages, Salaries, and Other Compensation and Benefits; (B) Maintenance of Employee Benefit Programs and Payment of Related Administrative Obligations; and (C) Applicable Banks and Other Financial Institutions to Receive, Process, Honor and Pay All Checks Presented for Payment and to Honor All Fund Transfer Requests Related to Such Obligations 37 US_ACTIVE:441276002259848.0004
  • 38. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 38 of 78 Employee Benefits, including Health and Welfare Benefits, WF Insurance Services Fees, Prepetition Severance Payments to Prepetition Severed Employees not to exceed the LodgeNet Severance 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 Wages and 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 that their employees would suffer if they are not paid when due and to maintain the morale and dedication of their workforce at this critical time. The Debtors’ employees and other personnel maintain the Debtors’ daily operations, and the Debtors cannot successfully operate without the continued support of their employees. The Debtors believe, and I agree, that any failure to pay the Debtors’ outstanding obligations may lead to the deterioration of employee morale, which, at this nascent stage of the Debtors’ Chapter 11 Cases, could negatively affect the value of the Debtors’ 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, who will be owed more than the $11,725 statutory limitation on prepetition compensation per employee entitled to priority treatment under section 507(a) of the Bankruptcy Code. 99. For the foregoing reasons, the Debtors believe, and I agree, that honoring all prepetition obligations related to employee compensation and benefits, as well as obligations incurred postpetition, is in the best interest of the Debtors, their estates and creditors, and all parties in interest in these Chapter 11 Cases. 38 US_ACTIVE:441276002259848.0004
  • 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 to continue their Insurance Programs (as defined below and in the Insurance Motion) in the ordinary course and pay all obligations related to the Insurance Programs whether arising prepetition or postpetition. The Debtors also request that the Court modify the automatic stay under section 362 of the Bankruptcy Code solely to allow the Debtors’ employees to proceed with their claims arising from or related to their employment with the Debtors. 101. In connection with the operation of their businesses, the Debtors maintain workers’ compensation programs and various insurance programs for liabilities and losses related to, among other things, breach of officers’ and directors’ duties, operation of commercial automobiles, marine cargo, property, general liabilities, umbrella liability, cyber liability, and excess liability (collectively, the “Insurance Programs”). The nature of the Debtors’ businesses and the extent of their operations make it essential for them to maintain all Insurance Programs on an ongoing and uninterrupted basis. If the Debtors fail to pay the obligations related to the Insurance Programs, the insurance carriers may seek to terminate the existing Insurance Programs or may decline to renew an Insurance Program. The Debtors could be exposed to substantial liability should the Insurance Programs lapse without renewal, which would be to the detriment of all parties in interest in these Chapter 11 Cases. Accordingly, the continuation of the Insurance Programs and payment of all prepetition and postpetition obligations related thereto 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’ Compensation Claims 39 US_ACTIVE:441276002259848.0004
  • 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 the best interest of the Debtors, their estates and creditors, and all parties in interest in these Chapter 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 of their Proposed Adequate Assurance (as defined below and in the Utilities Motion) and that the Court (i) establish procedures for resolving any objections by the Utility Companies (as defined below 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, or discriminating against, the Debtors solely on the basis of the commencement of these Chapter 11 Cases, as a result of any debt that is owed by the Debtors for services rendered prior to the Petition Date, or as a result of the Debtors’ failure to provide adequate assurance of payment other than the Proposed Adequate Assurance. 104. To operate their business and manages their properties, the Debtors use gas, heat, water, electricity, waste disposal, telephone, cable television, telecommunication, internet and other services (collectively, the “Utility Services”) provided by utility companies, as that 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 of approximately $590,232 per month on account of Utility Services. Historically, the Debtors have maintained an excellent track record regarding their payment history with the Utility Companies. To the best of the Debtors’ knowledge, there are few, if any, defaults or arrearages 14 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 Resolving Obligations by Utility Companies; and (C) Prohibiting Utilities from Altering, Refusing, or Discontinuing Service 40 US_ACTIVE:441276002259848.0004
  • 41. 13-10238 Doc 3 Filed 01/27/13 Entered 01/27/13 18:10:27 Main Document Pg 41 of 78 of any significance with respect to the Debtors’ undisputed invoices for Utility Services, other than payment interruptions that may be caused by the commencement of these Chapter 11 Cases. The Debtors estimate that the cost for Utility Services during the next thirty (30) days (not including any deposits to be paid) will be approximately $598,000. 105. The Debtors intend to timely pay all postpetition obligations owed to the Utilities Companies. Nevertheless, to ensure that adequate assurance of payment to the Utility Companies, pursuant to section 366 of the Bankruptcy Code, has been provided, the Debtors propose to provide adequate assurance of payment in the form of a cash deposit. The Debtors propose to provide a deposit to any requesting Utility Company no more than seven (7) business days after the receipt of such request, which deposit will be equal to two (2) weeks of Utility Service, calculated based on the historical average over the past 12 months (the “Adequate Assurance Deposit”) provided that: (i) such request is made in accordance with the procedures set forth in the Utilities Motion; (ii) the requesting Utility Company does not already hold a deposit equal to or greater than the applicable Adequate Assurance Deposit; (iii) the requesting Utility Company is not currently paid in advance for its Utility Services; and (iv) the requesting Utility Company is not otherwise obligated to perform in accordance with an existing contract. The Adequate Assurance Deposit, in conjunction with the Debtors’ ability to pay for future Utility Services in the ordinary course of business (collectively, the “Proposed Adequate Assurance”), constitutes adequate assurance to the Utility Companies as contemplated by section 366 of the Bankruptcy Code. 106. If, however, a Utility Company is not satisfied with the Proposed Adequate Assurance, the Utilities Motion provides procedures pursuant to which a Utility 41 US_ACTIVE:441276002259848.0004