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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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:
In re : Chapter 11
:
LodgeNet Interactive Corporation, et al.,1 : Case No. 13-_____ (___)
:
: (Joint Administration Requested)
Debtors. :
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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).
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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
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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
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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
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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.
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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
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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.
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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
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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
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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 –
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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
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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.
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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
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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.
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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
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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
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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.
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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,
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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
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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
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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
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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
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(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
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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;
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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)).
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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
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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 –
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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
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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.
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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
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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
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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
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